Rules approved by the SEC under the Investment Advisers Act of 1940


U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has accelerated an aggressive regulatory agenda that focuses on private fund advisers. On February 9, 2022, SEC commissioners approved several proposed rules under the Investment Advisers Act of 1940 (the Proposed Rules) that, if passed, would have significant effects on the operation of private funds. Proposed rules will include new requirements for quarterly investor filings, private fund audits, adviser-led secondaries, side letter practices and annual reviews, as well as outright bans on certain activities . Many of the proposed rules will also apply to non-SEC registered investment advisers, including venture capital fund advisers, small private fund advisers and many non-US advisers.

Below is a summary of the significant changes to the proposed rules. Comments on the proposed rules are due no later than (a) 30 days after the publication of the proposed version in the Federal Register or (b) April 11, 2022.



Under the proposed rules, advisers to private fund managers (including SEC registered and non-SEC registered advisers) would be subject to the following:

  • Recovery requirements for deferred interest or incentive fees cannot be reduced by tax distributions;

  • Advisors may not seek reimbursement, indemnification, exoneration or limitation of liability from the private fund or its investors for any breach of fiduciary dutywillful misconduct, bad faith, negligence or recklessness in the provision of services to the private fund;

  • Advisors may not charge private funds certain accelerated surveillance fees and other similar unearned fees, as well as advisor regulatory and compliance expenses (including for SEC reviews and investigations);

  • Advisors cannot borrow from a private fund; and

  • Advisors may not charge or allocate fees and expenses related to a portfolio investment (or potential portfolio investment) on a disproportionate basis among multiple private funds and other clients.

Some of the prohibited activities appear to be items that the SEC and its staff have highlighted in past OCIE risk alerts, while others represent a significant departure from market conditions traded in the securities industry. private funds.


SEC registered and non-registered advisers, if providing preferential treatment to certain investors through side letters or otherwise, would be required to:

  • Disclose to investors before investing in a private fund any preferential treatment that the advisor gives to any other investor; and

  • Provide information on this processing to all investors each year.

Private fund advisers would be prohibited from providing preferential terms to certain investors in connection with fund withdrawals/redemptions and current portfolio/investment information if the adviser reasonably expects the provision of the information to have a significant negative effect on other investors.


The proposed rules would require SEC-registered investment advisers to prepare a quarterly statement that includes certain information about the fees, expenses, and performance of any private fund they advise; advisors should distribute the quarterly statement to private fund investors within 45 days of the end of each calendar quarter. Although most private funds may already follow quarterly reporting practices, the proposed rules would require reporting to be presented in a specific manner, for example:

  • A schedule of fees and expenses that includes:

    • Remuneration, fees and other amounts awarded or paid to the advisor or any of its related persons by the private fund during the reporting period (for examplemanagement, advisory, sub-advisory or other similar fees or payments, and performance-based compensation);

    • All fund fees and expenses paid by the private fund during the reporting period (for example, organizational, accounting, legal, administrative, audit, tax, due diligence and travel); and

    • The amount of any compensation or rebate deferred during the reporting period to subsequent quarterly periods to reduce future payments or allocations to the advisor or its related persons.

  • A table with a detailed account of all compensation awarded or paid to the advisor or its related persons by each holding company, including origination, management, advice, monitoring, service, transaction, administration , advice, closing, disposition, directors, trustees or similar fees or payments.

  • Specific information and performance measures, which are different for liquid and illiquid private funds.


Under the proposed rules, any secondary transaction of private fund interests conducted by a sponsor/advisor would require an SEC-registered adviser to obtain a fairness opinion from a third-party firm. The adviser must also prepare and distribute to investors in the private fund a summary of any material business relationship that the independent opinion provider has or has had within the last two years with the adviser or any of its related persons.


Although most private funds distribute audited financial statements to investors pursuant to Rule 206(4)-2 of the Advisors Act (the Custody Rule), the proposed rules would require all private funds managed by advisors registered with the SEC are subject to a financial statement audit. More importantly, the auditor would be required to promptly notify the SEC of its termination or issuance of a modified opinion.

The SEC press release and proposal release are available at the following link:


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