On August 23, 2023, a divided U.S. Securities and Exchange Commission (SEC) issued new rules (the Rules) relating to the regulation of private fund advisers.1 The Rules aim to help protect investors in private funds (including venture capital funds) from being treated dissimilarly, address conflicts of interest faced by fund advisers and increase transparency in funds’ operations, including the charging of fees. This overview focuses on the Rules that impact all private fund advisers, regardless of whether the fund adviser is a registered or unregistered (exempt reporting) fund adviser.
Certain Key Rules Affecting All Advisers:
Private fund advisers cannot (collectively, the Restricted Activities Rule):
- Charge fees associated with an investigation of the adviser without disclosure to and consent from investors
- Charge fees for regulatory-, examination- or compliance-related expenses of the adviser, unless such fees are disclosed to investors promptly following the end of the quarter when such charge occurs
- Reduce the amount of the investor clawback for certain taxes, unless the adviser discloses the pretax and post-tax amounts of the clawback to investors promptly following the end of the quarter when such clawback occurs
- Charge fees related to a portfolio investment on a non-pro rata basis, unless the allocation is fair and equitable and the adviser distributes advance written notice of the non-pro rata charge and a description of how the allocation approach is fair and equitable to all investors
- Borrow or receive credit from a private fund client without disclosure and consent
In addition, private fund advisers cannot (collectively, the Preferential Treatment Rule)
- Provide preferential treatment to any investor relating to:
- Certain redemption rights from the relevant fund, unless required by law or such redemption is offered to all investors in the fund without qualification
- Certain preferential information about portfolio holdings, unless such information is provided to all investors
Furthermore, with regard to preferential treatment provided to any investor (i.e., investor side letters), certain terms of such treatment must be disclosed to every investor in advance of any investment into the fund by such investor (and all terms must be timely disclosed to all investors following investments by such investors).
Who the Rules Impact:
The Rules impact all private fund advisers, provided that the SEC is providing “legacy status” for prohibited acts under the Preferential Treatment Rule and certain aspects of the Restricted Activities Rule that otherwise would require consent. Such status applies to fund governance documents that are entered into prior to the applicable compliance date of the final rules, if the rules would require such documents to be amended.
When the Rules Take Effect:
The foregoing rules take effect as follows: (1) with respect to advisers with $1.5 billion or more in assets under management, 12 months from the date of publication of the final rules in the Federal Register and (2) with respect to advisers with less than $1.5 billion in assets under management, 18 months from the date of publication of the final rules in the Federal Register.
What You Should Do:
Consult with your Manatt professional to ensure that you are prepared to comply with the new adviser rules, and continue to follow Manatt’s corporate newsletters for updates on these and other private fund adviser rules and regulations in the future.
1 Private fund advisers are individuals and entities that generally have broad discretion in the strategy and investment decisions that relate to a private fund, including a venture capital fund.