On August 23, the U.S. Securities and Exchange Commission ("SEC") voted 3-2 to finalize a package of rules and amendments under the Investment Advisers Act of 1940 (the "Advisers Act") that will significantly change the private funds industry (the “Adopting Release”). The Adopting Release finalizes new rules and amendments that were proposed in February 2022 (the “Proposal”). The SEC made meaningful changes in the Adopting Release that mitigated some of the most onerous effects of the new requirements and cited AIMA/ACC comments on 104 different occasions. Nevertheless, significant concerns remain regarding the final wording of key clauses and how the new requirements will be applied in practice.
Information on Key Sections:
Restricted Activities ("Prohibited Activities" under the Proposal)
- The Adopting Release prohibits outright all private fund advisers from charging fees or expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for a violation of the Advisers Act.
- All private fund advisers also will be prohibited, unless either (i) disclosed to or (ii) disclosed to and consented to by investors, as applicable, from charging certain fees and expenses to the fund, e.g., an adviser may charge or allocate to the private fund fees or expenses associated with an investigation of the adviser by any governmental or regulatory authority, unless the adviser requests each investor of the private fund consents to such charge or allocation and obtains written consent from at least a majority in interest of the private fund’s investors, and provided the fees and expenses do not meet those outright prohibited (as above). See the link to our initial high-level summary below for further details on how and what fees and expenses may be passed onto the private fund.
- The Adopting Release did not include the proposed prohibition for charging for unperformed services, and it did not require a change to the liability standard from gross to simple negligence. However, the Adopting Release does contain some discussion that suggests these requirements are not entirely gone.
- The Adopting Release permits certain forms of preferential treatment regarding redemption rights and the sharing of information on the fund’s portfolio holdings/exposures (which the Proposal would have prohibited outright) if the requirements of one of the limited exceptions are satisfied.
- The new rule requires the private fund adviser to provide to any prospective investor in the private fund, prior to the investor’s investment in the private fund, a written notice regarding specific information that pertains to preferential treatment related to any material economic terms that the adviser provides to other investors in the same private fund.
- In a change from the Proposal, all private fund advisers will be required to distribute to current investors a written notice of all preferential treatment the adviser or its related persons has provided to other investors in: (i) a liquid fund as soon as reasonably practicable following the investor’s investment in the private fund; or (ii) an illiquid fund as soon as reasonably practicable following the end of the fund's fundraising period.
- As proposed, all private fund advisers will be required to provide current investors comprehensive, annual disclosure of all preferential treatment provided by the adviser or its related persons since the last annual notice.
Adviser-led Secondary Transactions
- The Proposal would have required registered investment advisers to private funds to obtain and distribute to investors a fairness opinion from an independent opinion provider along with a summary of any business relationships with the opinion provider. Tender offers would have qualified as adviser-led secondary transactions under the Proposal.
- Consistent with our recommendation, the final rule allows registered investment advisers to provide either a fairness opinion or a less expensive valuation opinion from an independent opinion provider and excludes tender offers from the scope of adviser-led secondary transactions.
Private Fund Audits
- The Adopting Release harmonizes this annual audit requirement with the audit provisions established in the custody rule that are applicable to pooled investment vehicles. Because compliance with the new rule is in part predicated on an adviser complying with the current custody rule’s audit provision, the proposed modifications to the audit provision in the proposed amendments to the custody rule (i.e., the Safeguarding Rule issued in February 2023) would also apply to advisers subject to the private fund audit requirements.
- Accordingly, the SEC has reopened the comment period for the Safeguarding Rule so that commenters may consider the proposed modifications to the audit provisions vis-à-vis the new private fund audit rule.
- For illiquid funds, the Proposal would have required calculation of performance only without the impact of subscription facilities. However, the Adopting Release allows calculation of performance both with and without the impact of subscription facilities, rather than only without. The Adopting Release refined the definition of an illiquid fund to be based primarily on withdrawal and redemption capability.
- The Adopting Release, in a change from the Proposal, limits the required lookback period to 10 years for advisers to present liquid fund performance.
- The Proposal required registered investment advisers to distribute the required quarterly reports within 45 days of each calendar quarter. The Adopting Release adds more time for fourth quarter reports (90 days rather than 45) and for reports by funds of funds (75 days for the first three quarters and 120 for the fourth quarter). The reporting requirement for any private fund was also changed from two full calendar quarters of operating to two full fiscal quarters of operating.
Compliance Program Rule
- As proposed, all registered investment advisers (including those that do not advise private funds), will be required to document in writing the annual review of their compliance policies and procedures required by the compliance program rule.
- The Proposal offered no grandfathering, but the Adopting Release offers “legacy status” (i.e., grandfathering), although the coverage may be incomplete and lead to some disparate outcomes.
- Legacy status was given for the prohibitions aspect of the preferential treatment rule (i.e., preferential redemption rights and information about portfolio holdings) and for aspects of the five restricted activities rule requiring investor consent (i.e., restrictions on borrowing from a private fund and from charging for certain investigation fees and expenses).
- Legacy status provisions apply to “governing agreements” (which include side letters) that were in writing and entered into prior to the compliance date if the rule would require the parties to amend such an agreement and only if the fund has already commenced operations (includes any bona fide activity directed towards operating a private fund, including investment, fundraising or operational activity) as of the compliance date.
- Legacy status will not apply to the disclosure portions of the preferential treatment rule or to the aspects of the restricted activities rule bearing only disclosure-based exceptions.
Treatment of Non-U.S. Advisers and Funds
- The quarterly statement rule, audit rule and adviser-led secondaries rule “will not apply to the non-U.S. private fund clients of an SEC-registered offshore adviser (regardless of whether they have U.S. investors).”
- The restricted activities requirements and preferential treatments requirements will apply to all advisers regardless of their registration status – i.e., they will apply to registered investment advisers and any adviser relying on an exemption from the requirement to register. However, there are two major caveats:
- Consistent with the Proposal, the restricted activities rule and the preferential treatment rule “would not apply with respect to a registered offshore adviser’s non-U.S. private funds, regardless of whether they have U.S. investors.”
- According to the Adopting Release, the restricted activities rule and the preferential treatment rule “do not apply to offshore unregistered advisers with respect to their offshore funds (regardless of whether the funds have U.S. investors),” despite those rules generally applying to exempt advisers.
An analysis of the application of the PFA Rules to non-U.S. advisers can be accessed here.
Compliance Dates/Transition Periods
- The compliance program rule amendments will be required from November 13, 2023.
- Compliance with the private fund audit rule and the quarterly statement rule will be required for all private fund advisers from March 14, 2025.
- Compliance with the adviser-led secondaries rule, the preferential treatment rule and the restricted activities rule will vary between small and large advisers
- Small advisers (Less than $1.5 billion of private fund RAUM): from March 14, 2025.
- Large advisers ($1.5 billion or more of private fund RAUM): from September 14, 2024.
If you would like to read more about the Adopting Release, you can access our initial high-level summary here. We have also summarized the requirements in much gretaer depth with the summary for registereed investment advisers available here and the version for private fund advisers exempt from SEC registration available here.
Please contact Jennifer Wood with any questions regarding these proposals.
Managing Director, Global Head of Asset Management Regulation & Sound Practices
AIMA has categorized this proposal as High Priority/High Impact and it is therefore represented in bright orange in the AIMA Regulatory Horizon Scan gantt chart.
|Compliance Date for Adviser-led Secondaries Rule,
Preferential Treatment Rule and the Restricted Activities Rule
March 14, 2025
September 14, 2024
|Compliance Date for the Private Fund Audit Rule and
the Quarterly Statement Rule
|March 14, 2025
|Compliance Date for Compliance Program Rule Amendments
|November 13, 2023
|Final rules published in the Federal Register
|September 14, 2023
|Final rules adopted
|August 23, 2023
|AIMA supplemental response filed
|September 7, 2022
|April 25, 2022
|AIMA/ACC response to proposal filed
|April 25, 2022
|Joint trades request for extension submitted
|March 1, 2022
|AIMA summary for members published
|February 15, 2022
|Proposal published by SEC
|February 9, 2022
1 Large private fund advisers ($1.5 billion or more in regulatory assets under management attributable to private funds it advises, calculated as of the last day of the adviser’s most recently completed fiscal year). Small private fund advisers (< $1.5 billion in regulatory assets under management attributable to private funds it advises, calculated as of the last day of the adviser’s most recently completed fiscal year).
AIMA Implementation Work
Past AIMA Work
An initial high level summary of the final rules was published August 23, 2023, and members can access it here. An analysis of the application of the PFA Rules to non-U.S. advisers can be accessed here. Subsequently, we published more in depth summaries of the requirements, one for registered investment advisers available here, and another for private fund advisers exempt from SEC registration avialable here.
AIMA hosted a “what’s required” webinar on August 25 to discuss the final rules, what may have changed from what was proposed and more. Members can access the replay below.
On September 6, AIMA hosted a webinar focused on the private funds adviser rule requirements that apply to non-U.S. exempt reporting advisers. Members can replay that session below. Members that are non-U.S. registered investment advisers will find the replay of the What's Required webinar to be more helpful than this session but may benefit from some of the discussion in the webinar for ERAs regarding the complications arising when some private fund clients are in the U.S.
AIMA's September issue of the Government and Regulatory Affairs Newsletter featured an article that explained the final rules' harm to investors and advisers, why challenging PFAR is necessary and what PFAR and other pending SEC proposed rules (if adopted as proposed) could mean for the private funds industry in the U.S. Click here to read the full article.
Future AIMA Work
In the weeks to come, AIMA will be presenting a series of webinars delving more deeply into the various components of the new rules. See the "Upcoming Sessions and Replays" section of this webpage, below, for program announcements and replays of past sessions.
AIMA will also launch a series of podcasts on some of the thornier aspects of the rules’ requirements with topics to be determined based on the terms of the final rules.
Finally, in December or early January, AIMA will publish an implementation guide to assist members with the changes mandated by the final rules.
If you have any questions about the above roadmap, the proposed rules and what the rules could mean for investment advisers and investors, or any other inquiries, please reach out to [email protected].
PFAR Peer Group
Members who would like to join the PFAR Peer Group, which will convene periodically during the compliance period to discuss implementation challenges, can sign up here.
AIMA CEO, Jack Inglis, video message
AIMA is challenging the U.S. SEC. Do you know why?
AIMA, along with the National Association of Private Fund Managers and four other business trade associations, filed suit in the U.S. Court of Appeals for the Fifth Circuit on September 1, asking the court to set aside the final Private Fund Advisers Rules (PFAR), adopted by the SEC on 23rd August 2023 on the grounds that they exceed the agency’s statutory authority and are arbitrary, capricious, and otherwise unlawful.
AIMA has chosen to form part of this coalition of associations after an extensive review of the final text of the PFAR proposal and the choice reflects the need to protect our global membership from the negative consequences of these rules. Private funds are a major driver of economic growth and provide significant benefits for investors.
The new rules are unambiguously harmful to the industry and the choices that are available to investors. A detailed review of the text of the SEC’s order adopting the rules has shown that the level of restrictions being imposed is damaging to innovation and investment and that the basis of the SEC’s claimed authority to adopt them is without legal merit.
In this public address, AIMA CEO Jack Inglis explains the necessity to safeguard the interests of our global members, including private fund managers and investors.
AIMA, along with the National Association of Private Fund Managers and four other business trade associations, filed suit on September 1, 2023 in the U.S. Court of Appeals for the Fifth Circuit. This petition for review, accessible here, asks the court to set aside the final Private Fund Advisers Rules ("PFAR"), adopted by the SEC on August 23, 2023, on the grounds that they exceed the agency’s statutory authority and are arbitrary, capricious and otherwise unlawful.
On September 15, 2023, a motion to expedite was additionally filed, which can be accessed here. This motion requests that the Court consider an expedited schedule for reviewing and deciding on the case. The motion, which was not opposed by the SEC, was granted by the Court on September 27th. The Court subsequently set the following briefing schedule, to which we have added the deadline for amicus briefs supporting the petitioners:
November 1, 2023
Petitioners’ opening brief
November 8, 2023
Amicus briefs in support of Petitioners
December 15, 2023
January 22, 2024
Petitioners’ reply brief
February 5, 2024
On this schedule, it is hoped that a decision could be published by the end of May 2024 or early June, although this remains in the sole discretion of the Court.
As noted in the schedule, the Petitioners’ Opening Brief was filed in the U.S. Court of Appeals for the Fifth Circuit on November 1. On November 8, five (5) amicus curiae briefs were filed in support of the petitioners by the following parties:
- Chamber of Commerce
- Committee on Capital Markets Regulation
- Investor Choice Advocates Network and the California Alternative Investments Association
- Securities Law Scholars and the New Civil Liberties Alliance
The Respondent's Opening Brief was filed in the U.S. Court of Appeals for the Fifth Circuit on December 15. On December 22, four (4) amicus curiae briefs were filed in support of the respondent by the following parties:
- Constitutional Accountability Center
- Better Markets, Inc.
- Americans for Financial Reform Education Fund
- The following:
- Institutional Limited Partners Association
- California State Teachers’ Retirement System
- Council of Institutional Investors
- Chartered Alternative Investment Analyst Association
- Public School Teachers’ Pension and Retirement Fund of Chicago
- District of Columbia Retirement Board
- Fire and Police Pension Association of Colorado
- Fort Worth Employees’ Retirement Fund
- Los Angeles City Employees’ Retirement System
- Los Angeles Fire and Police Pension System
- Louisiana Municipal Police Employees’ Retirement System
- Missouri Department of Transportation and Highway Patrol Employees’ Retirement System
- State Board of Administration of Florida on behalf of the Florida Retirement System Trust Fund
- Washington State Investment Board
On January 22, 2024, the coalition of petitioners filed a reply brief in accordance with the schedule set out by the Court.
Oral argument was made on February 5, 2024. A summary of the oral argument session is accessible to members here. The Court will now deliberate.
Please check back for further developments; we will provide updates as they occur.
Upcoming Sessions and Replays
The SEC’s New Requirements for Advisers to Private Funds
Date: 25 August 2023
Check back periodically for updates.
Ep. 4 PFAR 360| Subs-advisers