SEC Adopts New Private Fund Advisor Rules

Posted on Sep 14, 2023 by Chris Barsness


By: Kamden Crawford, Esq.

On August 23, 2023, the Securities and Exchange Commission (“SEC”) finalized new rules under the Investment Advisers Act of 1940 (“Advisers Act”) for advisers of private funds (“New Rules”) with the purpose of enhancing protections to investors in private funds. The New Rules can be broken down into five categories: (1) restricted activities; (2) no preferential treatment; (3) quarterly statements; (4) annual audits; and (5) adviser led secondary transactions. All advisers of private funds, registered and unregistered, need to be aware of the New Rules pertaining to restricted activities and no preferential treatment. Certain terms in side letters may be limited or require greater disclosure to all investors. This article seeks to provide clarity on the advisers covered and simplify the implications of the New Rules.

Who is Covered?

Private fund advisers are the primary focus of the New Rules. However, two of the New Rules also impact exempt reporting advisers, state registered investment advisers, and unregistered investment advisers. The table below depicts who is covered under each of the New Rules:

Restricted Activities No Preferential Treatment Quarterly Statements Annual Audits Adviser Led Secondary Transactions
SEC Registered Private Fund Advisers


Exempt Reporting Advisers


State Registered Private Fund Advisers


Unregistered Private Fund Advisers



The New Rules do not apply to advisers with respect to any securitized asset funds, meaning funds with a primary purpose of issuing asset-backed securities and investors who are primarily debt holders, or to funds outside the United States. The New Rules are also inapplicable to existing contractual agreements governing private funds such as existing company agreements and side letters.

Breakdown of the New Rules

  1. Restricted Activities (Applicable to all Advisers) – Rule 211(h)(2)-1

Under the New Rule pertaining to restricted activities, certain practices are restricted unless the private adviser includes certain disclosures and/or obtains certain consents. These restricted activities apply to investigation fees, regulatory or compliance fees, adviser clawbacks, fees and expenses related to portfolio investments, and borrowing from clients of private funds. Advisers of private funds are restricted from:

  • Charging or allocating investigation fees for governmental or regulatory investigations of the adviser or its affiliates unless consent is obtained from a majority of disinterested investors and no sanctions for violations are imposed;
  • Charging or allocating regulatory or compliance fees or expenses unless a written notice is distributed, with dollar amounts, within 45 days of the end of the fiscal quarter that charges occur;
  • Reducing clawback obligations by actual, potential, or hypothetical taxes applicable to the adviser unless a written notice is distributed to the investors with the dollar amount of the adviser clawback, before and after any reduction for taxes, within 45 days after the end of the fiscal quarter in which the adviser clawback occurs;
  • Charging or allocating fees or expenses related to portfolio investments on a non-pro rata basis when multiple private funds or clients advised by the same adviser have invested in the same portfolio unless the non-pro rata charge is fair and equitable and, prior to charging such fees, the adviser distributes a written notice to each investor with the non-pro rata charge or allocation along with a description of how it is fair and equitable; and
  • Borrowing money, securities, and other private fund assets, or receiving a loan or extension of credit from a client of a private fund unless the adviser provides written disclosure to each investor with the material terms and obtains written consent from a majority of the private fund’s disinterested investors.
  1. No Preferential Treatment (Applicable to All Advisers) – Rule 211(h)(2)-3

Under the New Rule restricting preferential treatment, advisers are restricted from favoring certain investors over others unless an exception applies or certain disclosure and/or notice is provided. Specifically, advisers are prohibited from:

  • Granting preferential redemptions to investors in the private fund on terms that the adviser reasonably expects to have a material, negative effect on other investors unless such redemption is required by applicable law or the adviser has offered the same redemption right to all other existing and future investors;
  • Providing preferential information regarding the fund portfolio to certain investors if the adviser reasonably believes that providing such preferential transparency would have a material, negative effect on the other investors, unless the adviser offers the same information to all other existing investors at the same time or substantially the same time;
  • Accepting prospective investors with less preferential terms unless such prospective investors are provided written disclosure of the preferential treatment related to material economic terms held by current investors;
  • Providing preferential treatment to new investors in an illiquid fund unless the adviser discloses, in writing, as soon as reasonably practicable following the end of the fund’s capital raise period, all preferential economic and noneconomic terms to current investors; and
  • Providing preferential treatment to new investors in a liquid fund unless the adviser discloses in writing, as soon as reasonably practicable following the investor’s investment, all preferential economic and noneconomic treatment provided to other investors.

Beyond the above prohibitions, advisers must also provide written notice on at least an annual basis to investors with disclosure of any preferential treatment to other investors in the same fund since the last written notice provided. The notice requirements set forth in these rules apply to all funds currently operating even if operations began after the New Rules became effective. Advisers are required to retain copies of all written notices sent along with the dates such notices were sent.

Notably, under this rule against preferential treatment, advisers will be able to continue to offer side letters to fund investors, but only if the material economic terms of such side letters are disclosed in advance and all other terms subsequently are disclosed to all investors in the fund. Despite being allowed, requiring disclosure of material terms may make side letters less attractive for advisers to issue.

  1. Quarterly Statements (Applicable to Registered Advisers) – Rule 206(4)-10

Under the New Rule pertaining to quarterly statements, registered advisers must prepare quarterly statements that disclose fees, expenses, and performance for each private fund the registered adviser advises. Each statement must include disclosure on how expenses, payments, allocations, rebates, waivers and offsets are calculated and include cross references to the private fund’s organizational and offering documents where the method of calculation is stated. Furthermore, the criteria and assumptions relied on in calculating performance must also be disclosed. Copies of quarterly statements along with records of when records were sent, the calculation method, and books and records substantiating the fund’s liquidity or illiquidity must be retained. Quarterly statements must disclose the following:

  • Detailed accounting of all compensation, fees, and other amounts allocated or paid to the adviser during the reporting period;
  • Detailed accounting of all fees and expenses allocated or paid towards fund expenses including organizational fees, accounting, legal, administrative fees, audit, tax, due diligence, and travel during the reporting period;
  • Detailed accounting of the amount of offsets or rebates carried forward during the reporting period to subsequent periods to reduce future payments or allocations to the adviser; and
  • Statement of contributions and distributions for an illiquid fund.

In addition, performance for liquid private funds must be disclosed based on net total return on an annual basis, over prescribed time periods and on a quarterly basis for the current year. For such liquid funds, registered advisers must disclose: (1) annual net total returns for each fiscal year the last ten fiscal years or since inception (whichever is shorter); (2) average annual net total returns over one, five, and ten fiscal year periods; and (3) cumulative net total return for the current fiscal year as of the end of the most recent fiscal quarter covered by the quarterly statement. Performance for illiquid private funds must be disclosed based on the internal rate of return and a multiple of invested capital on both a net and gross basis. For such illiquid private funds, registered advisers must disclose: (1) the gross internal rate of return and gross multiple of invested capital; (2) net internal rate of return and net multiple of invested capital; and (3) gross internal rate of return and gross multiple of invested capital for the realized and unrealized portions of the portfolio with the realized and unrealized performance shown separately.

The quarterly statements for most private funds must be prepared and distributed within 45 days after the first three fiscal quarter ends of the fiscal year and 90 days after the end of each fiscal year. Quarterly statements for private funds of funds must be prepared and distributed within 75 days after the first three fiscal quarter ends of each year and 120 days after the fiscal year end. For new private funds, quarterly statements must be prepared and distributed after two full calendar quarters of operations and continuously each quarter thereafter.

  1. Annual Audits (Applicable to Registered Advisers) – Rule 211(h)(1)-2

Under the New Rule pertaining to audits, registered advisers of private funds must obtain annual audits of financial statements. Copies of any audited financial statements as well as records of when, and to who, such audits were sent must be retained. Such audits must comply with the following requirements:

  • Be performed by an independent public accountant that meets certain standards of independence and is registered by the Public Company Accounting Oversight Board;
  • Prepared in accordance with generally accepted accounting principles; and
  • Delivered to investors within 120 days of the private fund’s fiscal year end and promptly upon liquidation.
  1. Adviser Led Secondary Transactions (Applicable to Registered Advisers) – Rule 211(h)(2)-2

Under the New Rule applicable to adviser led secondary transactions, registered private fund advisers must: (1) obtain and distribute a fairness opinion or valuation opinion from an independent opinion provider; and (2) distribute a written summary of any material business relationships the adviser has or have had within a two year period immediately prior to the issuance of the fairness or valuation opinion with the independent opinion provider. Adviser led secondary transactions are any transaction initiated by the adviser that offers private fund investors the choice between: (i) selling all or a portion of their interests in the private fund; and (ii) converting or exchanging all or a portion of their interests in the private fund for interests in another vehicle advised by the adviser.

Timeline to Comply

The New Rules are effective sixty days from publication in the Federal Register, however the different rules have different compliance dates. Below is timeline for when advisers of private funds must ensure compliance with the New Rules:

  • Restricted Activities Rule, No Preferential Treatment Rule, and Adviser Led Secondary Transaction Rule:
    • For private funds advisers with less than $1.5 billion assets under management:
      • 18 months from date of publication in the Federal Register
    • For private fund advisers with equal to or greater than $1.5 billion assets under management:
      • 12 months from the date of publication in the Federal Register.
    • Quarterly Statement Rule and Annual Audit Rule:
      • 18 months after publication in the Federal Register


These New Rules, while increasing transparency for investors, impose substantial requirements and may significantly increase compliance costs for advisers of private funds. Advisers of all private funds are now restricted from certain activities and prohibited from offering preferential treatment without issuing certain disclosures and/or obtaining certain consents. Registered advisers are now required to issue quarterly statements, annual audits, and fairness opinions or valuation opinions for adviser led secondary transactions. Advisers will need to understand and consider these rules when issuing side letters in the future and when thinking through the terms they offer to investors.

If you wish to discuss the information contained in this article further, how the New Rules impact your business, or would like to have any organizational documents, agreements, or side letters pertinent to your private fund reviewed, please do not hesitate to contact us.