The SEC's much anticipated private fund reforms were adopted on August 23, 2023. The reforms include:
- Several quarterly reporting requirements with respect to performance and fees and expenses.
- Increased transparency regarding side letters and other “preferential treatment” for fund investors.
- Prohibitions on certain liquidity rights and information sharing with fund investors.
- Limitations on the ability of fund managers to obtain reimbursement from private funds for costs associated with government investigations.
Nevertheless, taken as a whole, the reforms are less transformational than originally proposed in February 2022.
Rather than the proposed “prohibited activities rule,” the SEC adopted a “restricted activities rule.” This rule addresses many of the practices covered by the initial SEC proposal, such as fee and expense allocation practices and treatment of adviser clawbacks. However, for the most part, the restricted activities rule creates disclosure obligations for advisers along with, in some cases, consent requirements, in place of per se prohibitions.
One item from the proposed rule that is noticeably absent from the final rule: the provision that would have dictated by rule an adviser’s standard of care under private fund agreements. The finalized reforms, unlike the proposed rules, also include “legacy” provisions that exempt existing fund governing agreements from certain aspects of the preferential treatment and restricted activities rules.
We have produced a briefing that summarizes the requirements imposed by the new rules. Please click here to read it.
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