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Private capital managers saw a major change set into motion this summer – on August 23, 2023, the Securities and Exchange Commission (SEC) adopted new rules and amendments under the Investment Advisers Act of 1940 (Advisers Act) that affect private funds and their advisers.
These rules are designed to protect investors by improving transparency and addressing potential conflicts of interest while also prohibiting preferential treatment and restricting certain activities without disclosure or disclosure and consent. The new rules will require advisers to re-evaluate their existing practices and modify or enhance operational procedures and disclosures. The limitations and requirements of the new rules are expected to increase the cost and complexity of compliance for registered and non-registered advisers.
This new set of rules sets a crucial new tone for regulation in the private fund industry. After allowing it to grow largely unchecked for decades in the U.S., the SEC is now sending the signal that it feels the private capital space has ballooned to a point where it requires guardrails in order to provide a fair experience to investors.
So what does this mean for the average private fund manager? Read on for our primer of the new rules, and to learn why these transitions make capable accounting and reporting software more crucial than ever.
Registered private fund advisers must distribute a quarterly statement to private fund investors that includes detailed information on the following:
Private fund advisers are required to obtain an annual financial statement audit of the private funds they advise, directly or indirectly.
Funds undertaking an adviser-led secondary transaction are required to do the following:
Restricts all private fund advisers from engaging in activities that are contrary to the public interest and protection of investors. Advisers are required to either disclose or obtain consent and disclose certain activities to investors either before or after an event.
Permitted with Disclosure
Permitted with Disclosure and Consent
Restricts activities that private fund advisers can engage in which may result in a conflict of interest and potentially lead to investor harm. Requires additional disclosures and/or consent from investors. Will result in more time spent preparing required disclosures and in tracking information such as pre-tax and post-tax clawback values.
Prohibits all private fund advisers from providing preferential treatment terms to investors regarding:
Other preferential terms must be disclosed to current and prospective investors.
Side letters and/or any other preferential agreements must be disclosed to all investors. Private agreements will no longer be applicable unless grandfathered under “Legacy Status.”
Legacy status applies to governing agreements entered into prior to the Compliance Date if the applicable rule would require the parties to amend the agreements. Legacy status is provided under the prohibition’s aspect of the Preferential Treatment Rule and the aspects of the Restricted Activities Rule that require investor consent. Legacy status does not permit advisers fees or expenses related to “sanctioned matters.”
All registered advisers, including those without private client funds, must document in writing the required annual review of their compliance policies and procedures.
With these new rules emerging, it becomes more important than ever for private fund managers to run integrated data operations. Mistakes and delays may have had a negative impact on the investor experience before, but now come at a higher cost if they go against regulatory agencies.
Luckily, Allvue offers a full suite of technology that answers the top challenges that these new rules pose. With all of this important information in one system, back-office teammates can stay in the loop rather than getting blocked by siloed technology when seeking out key data.
These new rules inarguably place new burdens on private fund managers in how they set up investor relationships and communicate fund information to them. But with the right technology on their side, managers can significantly ease the transition.
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