The SEC’s New Rules for Private Fund Advisers: A Dose of Transparency for the Private Markets

By: Ken Holston, TJ Bright, Pablo Man, Matthew Mangan, Chris Phillips-Hart, Annabelle North

On August 23, 2023, the SEC adopted sweeping new rules that will impose substantial regulation on the management and operation of private funds by investment advisers.  The rules appear to be somewhat less burdensome than the rules originally proposed in February 2022.  

In summary, the final rules will impose new requirements on private fund advisers but roll back some of the proposed prescriptive prohibitions in favor of a restrictive framework based on disclosure and consent. For example, the proposed “Prohibited Activities Rule” has become the “Restricted Activities Rule” in the final rules, in recognition that certain limited activities may be undertaken with appropriate disclosure or investor consent.  Furthermore, certain of the proposed Prohibited Activities were not expressly included in the final rules, such as the proposed restriction on advisers’ ability to seek indemnification for negligence.  The final rules also pare back the proposal to require pre-disclosure to investors of preferential terms granted to other investors—such as those granted via side letter arrangements—by limiting such pre-disclosure requirements to material economic terms, rather than requiring all such terms to be pre-disclosed to investors. Certain of the adopted rules apply solely to SEC-registered investment advisers, while others apply to both SEC-registered advisers and private fund advisers that are exempt from registration (including exempt reporting advisers).  In addition, the final rules allow for certain grandfathering of existing private funds arrangements, which is designed to limit the significant amount of “repapering” of fund agreements that would otherwise have been needed under the original proposal.

The compliance date for the rules will be staggered with different implementation dates depending on the size of the adviser, with smaller advisers being afforded additional time to comply with the rule. An in-depth client alert on the Adopting Rules will be published in the coming weeks.