The New SEC Rules for Private Funds: What to Know

In our previous post, we provided preliminary analysis of the SEC’s final rule. The rule is 660 pages and is considered to be the industry’s largest set of changes since Dodd-Frank.

The rules mostly apply to SEC registered investment advisers, but two apply to all private funds. Here’s what you should know.

The preferential treatment rule

All private fund advisers are prohibited from offering preferential redemption terms and portfolio holdings or exposure information when the adviser reasonably expects a material, negative effect on other investors. The SEC rule indicates this is being implemented, in part, to increase transparency regarding preferred terms granted to certain investors in the same private fund.

There are a few exceptions — an adviser can still offer preferential redemption rights if it’s required by the applicable laws/rules, or if the adviser has offered the same redemption ability to all existing and future investors in the private fund. Preferential rights should be communicated to current investors and disclosed to prospective investors via written notice.

The restricted activities rule

All private fund advisers are prohibited from:

• Charging or allocating to the private fund fees or expenses associated with an investigation of the adviser or its related persons by a governmental or regulatory authority
• Charging or allocating fees and expenses related to a portfolio investment on a non-pro rata basis when multiple private funds or other clients advised by the adviser have invested in the same portfolio investment
• Borrowing from a client without disclosure and consent from fund investors

From a timing perspective, the legacy or grandfathering provisions apply to:

• The portion of the first rule above prohibiting preferential redemption and information rights and
• The portion of the second rule above prohibiting an adviser from borrowing from a client and charging investigation fees and expenses to a fund.

Depending on the size of the adviser, the SEC requires compliance within 12-18 months after publication.

How we can help

It’s important to verify you are appropriately following the new disclosure requirements and complying with the new rules. Our industry-specialized professionals can review your existing fund documents and side letter agreements. We can also help review your approach on allocating fees to your portfolio investments.

Written by Bobby Dormanesh