The Securities and Exchange Commission (“SEC”) adopted new private fund adviser rules and amendments (the “Amendments”) to the Investment Advisers Act of 1940 (the “Advisers Act”). These Amendments create new obligations for private fund advisers, including exempt reporting advisers. The obligations largely fall into two categories: 1) reporting requirements and 2) prohibited activities. The Amendments are designed to give investors more details regarding fund performance, fund expenses, and preferential rights that other investors may have. The Amendments increase regulatory obligations for all investment advisers, including exempt reporting advisers. However, depending upon the amount of assets under management, compliance with certain Amendments may be required within 12 months after the Federal Register publication date as opposed to 18 months as more fully discussed below.

Reporting Requirements

Compliance is required within 18 months after the Federal Register publication date, except that advisers with $1.5 billion or more in private funds assets under management are required to comply with activities three and four below within 12 months after the Federal Register publication date. The Amendments require that private fund advisers (excluding exempt reporting advisers and foreign private advisors) do each of the following:

• Distribute a quarterly statement to private fund investors that discloses (i) fund-level information regarding performance, (ii) costs of investing in the private fund, (iii) fees and expenses paid by the private fund, and (iv) certain compensation and other amounts paid to the adviser by the private fund
• Cause the private funds to obtain a financial statement audit that meets the requirements of the audit provision in the Advisers Act custody rule
• Obtain a fairness or valuation opinion when offering existing fund investors the option between selling their interests in a private fund and converting or exchanging their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons
• Provide existing fund investors who have the option of selling their interests in a private fund and converting or exchanging their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons with a summary of any material business relationship the adviser has or has had within the last two years with the opinion provider

Prohibited Activities

Compliance is required within 18 months after the Federal Register publication date, except that advisers with $1.5 billion or more in private funds assets under management are required to comply within 12 months after the Federal Register publication date. The Amendments prohibit private fund advisers (including exempt reporting advisers and foreign private advisers) from engaging in any of the following activities:

• Charging or allocating to the private fund any fees or expenses regarding an investigation of the adviser without disclosure and consent from fund investors or that are 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
• Charging or allocating to the private fund any regulatory, examination, or compliance fees or expenses of the adviser unless such fees and expenses are disclosed to investors
• Reducing the amount of an adviser clawback by the amount of certain taxes unless the adviser discloses the pre-tax and post-tax amount of the clawback to the investors
• Charging or allocating fees or expenses related to a portfolio investment on a non-pro rata basis unless the allocation approach is fair and equitable and the adviser distributes advance written notice of the non-pro rata charge with a description of how the allocation approach is fair and equitable under the circumstances
• Providing preferential terms to investors regarding certain (i) redemptions of the fund unless the ability to redeem is required by applicable law or the redemption rights are offered to all other investors, (ii) preferential information about portfolio holdings or exposures unless such preferential information is offered to all investors, and (iii) preferential terms unless those terms are disclosed in advance of an investor’s investment in the private fund and all terms are disclosed after the investor’s investment

Importantly, for governing agreements that were entered into prior to the compliance date, those private funds will be given legacy status if the disclosure rules regarding preferential terms outlined above would require an amendment to the governing agreements. This legacy exemption applies to funds that have governing documents that were or are entered into prior to compliance dates provided that the fund at issue had already commenced operations (including fundraising, holding an initial closing, conducting diligence on potential investments, or making an investment among other activities) as of the compliance date. This legacy status only applies to activities that are consent related, not disclosure related. For example, preferential terms in side letters that existed before the compliance date must be revealed to investors investing after the compliance date before their admission to the fund.

Additionally, all registered advisers, even those that do not advise private funds, are required to document in writing the annual review of their compliance policies and procedures. Compliance with this requirement will be required within 60 days after publication in the Federal Register.