Securities Exchange Commission Approves Private Fund Adviser Rules

Quarterly Statement Rule RIAs Only 18 months

Requires RIAs to provide quarterly statements to private fund investors with detailed information on:

· private fund fees and expenses;

· compensation received by the RIA and its affiliates and personnel from the fund and from portfolio investments, and any related fee offsets; and

· standardized fund performance.

Statements must be delivered within 45 days (Q1-Q3) or 90 days (Q4) of quarter-end.  For funds of funds, the deadlines are 75 days (Q1-Q3) and 120 days (Q4).

Expenses to be reported now include expenses allocated to the fund, in addition to expenses paid by the fund.

Statement no longer needs to list the fund’s ownership percentage of any portfolio investment.

Illiquid funds must now report investment performance with and without (as opposed to just without) the effect of fund-level subscription facilities.

Liquid funds are now not required to report investment returns since inception if inception is more than 10 years ago.

Advisers to Funds of Funds will have additional time to distribute quarterly reports.

Timing of reporting now keyed off of the fund’s fiscal year, not calendar year.

Private Fund Audit Rule RIAs Only 18 months RIAs must ensure that each fund undergoes an annual financial statement audit.

Audit must now adhere to the same standards as the Custody Rule’s audit requirements.

If adviser is not in a control relationship with the fund (e.g., because it is an unaffiliated sub‑adviser to the fund), the adviser must now maintain records documenting its attempts to undergo an annual audit.

Auditors will not be required to notify the SEC in connection with issues arising under audits.

Adviser-Led Secondaries Rule RIAs Only

12 months for “larger” private fund advisers ($1.5BN or more in private fund AUM)

18 months for “smaller” private fund advisers (less than $1.5BN in private fund AUM)

RIAs causing a fund to undergo an adviser-led secondaries transaction must (i) obtain a fairness opinion or a valuation opinion and (ii) disclose any material business relationships the adviser has, or has had within the prior two years, with the opinion provider.

Advisers will have the option to obtain a fairness opinion or a valuation opinion.

Opinion and summary of material business relationships must now be delivered prior to the due date of the investors’ election form (instead of prior to closing).

Definition of “adviser-led secondary transaction” now revised to exclude tender offers.

Restricted Activities Rule All Advisers, Whether Registered or Not

12 months for “larger” private fund advisers ($1.5BN or more in private fund AUM)

18 months for “smaller” private fund advisers (less than $1.5BN in private fund AUM)

Restricts all private fund advisers from the following activities unless, in certain cases, disclosed to or, in other cases, disclosed to and consented by, the fund investors.

Disclosure is required before the fact in some cases, and after the fact in others.

“Consent” means approval by a majority in interest of fund investors that are not related persons of the adviser.  The Adopting Release specifies that LPAC approval is not sufficient.

Permitted With Disclosure:

· Causing fund to bear regulatory or compliance fees/expenses (must be disclosed after the fact, quarterly, which can be done through the Quarterly Reports).

· Reducing GP clawback for taxes (pre-tax and post-tax clawback amounts must be disclosed after the fact).

· Non-pro rata allocations of investment-related expenses across different funds investing in the same investment (fee/expense amounts must be disclosed before the fact, with accompanying explanation as to why the fund’s allocation is fair and equitable).

Permitted With Disclosure And Consent:

· Causing a fund to bear fees/expenses relating to government or regulatory investigations (other than in cases where the adviser is sanctioned for violating the Advisers Act or the Rules thereunder).

· Adviser borrowing from a fund.

· Grandfathering applies (i.e., no need for consent) for all “legacy” agreements in-place as of the Compliance Date (see below).

Initially proposed as outright prohibitions, these activities are now permitted if disclosed to, or if disclosed to and consented by, the fund investors (as applicable).

The SEC also added the grandfathering provision described herein.

Preferential Treatment Rule All Advisers, Whether Registered or Not

12 months for “larger” private fund advisers ($1.5BN or more in private fund AUM)

18 months for “smaller” private fund advisers (less than $1.5BN in private fund AUM)

Prohibits all advisers from providing preferential redemption or information rights that would have a material negative effect on other investors in the fund or in other funds with similar portfolios, except for (i) preferential redemption rights that are required by applicable law or (ii) preferential redemption rights or information rights that are offered to all other investors in the fund (and in all funds with similar portfolios).  Grandfathering applies for all “legacy” preferential redemption and information rights agreements in-place as of the Compliance Date (see below).

Requires all advisers to disclose other preferential material economic terms to all investors in the fund (and in all funds with similar portfolios).

Initially proposed as outright prohibitions, preferential redemption and information rights are now permitted if required by applicable law (redemption rights only) or offered to all other investors (redemption and information rights). The SEC also added the grandfathering provision described herein.

Notice of other preferential terms now limited to material economic terms. Timing of notice delivery has also been changed:  (i) for illiquid funds, delivery after the end of fund raising; and (ii) for liquid funds, delivery after the relevant investor has been admitted to the fund.