Yesterday, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) adopted rules and rule amendments (the “PFA Rules”) under the Investment Advisers Act of 1940 (the “Advisers Act”) that impose new requirements and obligations on investment advisers to private funds.¹ The Commission’s adoption of the PFA Rules, which were initially proposed in early 2022, follows an extensive period of commentary from across the private fund industry.

Robinson, Bradshaw & Hinson, P.A. attorneys are reviewing the SEC’s 660-page Release announcing the PFA Rules, and we will provide further analysis of the PFA Rules in the coming weeks. In general, the requirements of the PFA Rules include the following:

• Registered Investment Advisers (“RIAs”)
  • RIAs must provide quarterly statements to all private fund investors disclosing certain fund-level performance information and certain information regarding fees and expenses. The foregoing requirement largely codifies prevailing market practice for large private fund advisers and is intended to standardize such disclosures across funds.
  • RIAs must cause each of their private funds to undergo an annual audit, which newly codifies what is already standard practice among most (if not all) RIAs.
  • Each RIA must obtain fairness opinions or valuation opinions when causing the private funds they manage to enter into continuation funds and other GP-led secondary transactions, and they must report to investors on any material business relationships between such RIA and the provider of any such opinions.
  • The PFA Rules include enhancements to existing Advisers Act requirements for recordkeeping by RIAs.
  • All RIAs (including those that do not advise private funds) are required by the PFA Rules to enhance the documentation of their internal compliance reviews (the “Documentation Requirement”).
• All Advisers of Private Funds (including non-RIAs)
  • The PFA Rules prohibit private fund advisers from engaging in certain activities that the SEC believes represent material conflicts of interest, including the following: (i) charging fees or expenses associated with an adviser’s regulatory investigations without investors’ prior consent or charging expenses related to governmental sanctions; (ii) charging or allocating regulatory, examination or compliance expenses to investors without disclosure; and (iii) adjusting any “general partner clawback” amounts to account for taxes, unless the adviser discloses the pre- and post-tax amounts of the clawback to investors.
  • The PFA Rules more closely scrutinize and regulate side letter and similar arrangements offering preferential terms to certain investors in private funds and specifically prohibit side letter terms regarding the following: (i) certain preferential fund redemption provisions (other than in legally required situations or where the adviser has offered such terms to all investors); (ii) certain preferential information rights unless such rights are offered to all investors in a private fund; and (iii) any preferential terms (which would ostensibly include all investor side letter arrangements) unless such terms are disclosed before each investor’s investment in a private fund and all such terms are disclosed after such fund holds its last closing at which an investors is admitted or permitted to increase its commitment to the private fund.
  • The Commission is providing legacy status for the prohibitive aspects of the PFA Rules that apply to all private fund advisers and as to which compliance would require investor consent. Accordingly, governing documents such as limited partnership agreements and side letters that were entered into prior to the applicable compliance date for the PFA Rules (discussed below) are not required by the PFA Rules to be amended in connection with such prohibitive aspects.

The compliance date for PFA Rules related to quarterly reporting and mandatory annual audits is 18 months after the date of publication of the PFA Rules in the Federal Register (such date of publication, the “Publication Date”); however, the compliance date for the Documentation Requirement for RIAs is 60 days after the Publication Date. For other PFA Rules, the compliance dates are (i) 12 months after the Publication Date for advisers with $1.5 billion or more in private fund assets under management or (ii) 18 months after the Publication Date for advisers with less than $1.5 billion in private fund assets under management.

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¹ The PFA Rules will not apply to investment advisers with respect to private funds established to hold securitized assets, such as collateralized loan obligation (CLO) vehicles.