Regulatory change is here for Private Fund Advisers. As of August 23, 2023, the SEC implemented new regulations and updates known as the “Private Fund Adviser Rules” (Rules) under the Investment Advisers Act of 1940. The Rules represent the most notable regulatory influence on Private Funds since 2010. These regulations impact both SEC-registered and unregistered private fund managers.
The Rules will require advisers to reassess their operations, modify their existing procedures to enhance transparency and restrict certain activities considered detrimental to the investors. As a result, the rules introduce added responsibilities and restrictions, increasing administrative burdens for both registered and exempt private funds.
What are the SEC Rules for Private Equity?
The Private Fund Adviser Rules are comprised of five sets of rules and are categorized into two sections: Registered Private Fund Advisers and All Private Fund Advisers. A brief overview of the new rule requirements and descriptions are as follows:
Registered Private Fund Advisers
- Quarterly Statement Rule: A registered private fund adviser must distribute quarterly statements to private fund investors and must disclose in detail compensation, fund expenses, and offsets or rebates.
- Private Fund Audit Rule: For all private funds, the registered private fund adviser which advises the funds must undergo a financial statement audit to meet the audit provision requirements of the Advisers Act custody rule.
- Adviser-Led Secondaries Rule: A registered fund adviser is required to obtain a fairness opinion or valuation opinion and distribute the opinion to private fund investors when a transaction is initiated. This will provide investors with the option to sell all or a portion of their interests in a private fund and exchange or convert them for new interests in a different vehicle.
All Private Fund Advisers
- Restricted Activities Rule: All private fund advisers are restricted from engaging in various activities that are considered conflicts of interest and could lead to investor harm.
- Preferential Treatment Rule: Prohibits all private fund advisers from providing preferential treatment to investors unless the adviser discloses information in advance of the investor’s investment in a private fund.
The new rules will go into effect at various times. Private fund advisers with an AUM of $1.5B or more must comply with the adviser-led secondaries, restricted activities, and preferential treatment rules within 12 months of the publication in the federal register. Smaller private fund advisers with an AUM less than $1.5B must comply with all new rules within 18 months after the SEC ruling publication.
How Ultimus LeverPoint is Responding
Fund administrators that provide services for registered and exempt private funds must be cognizant of and accommodate for the added responsibilities and restrictions that will apply due to the new SEC rule changes.
Ultimus LeverPoint Private Fund Solutions (Ultimus) formed an internal Regulatory Rule Committee (the Committee) to actively assess and discuss the regulatory amendments and will adapt processes and enhance best practices accordingly. In addition to internal conversations, Ultimus has held discussions with some clients, audit firms, vendors, and other industry influencers to best understand the rule changes from various industry perspectives. Based on these conversations, the Committee developed an internal Private Fund Rules Specification Sheet outlining a list of impacted clients and key implementation dates for the rule.
A significant focus has been placed on quarterly statements, which will be fully enforced beginning March 14, 2025. Therefore, Ultimus has developed a streamlined quarterly statement format devised to break out compensation, fund expenses, and offsets/rebates, and has also reviewed the standard chart of accounts to identify reportable fund-level expenses. The Committee will be overseeing the testing of the new quarterly statement format in Q3 and Q4 of this year.
These initiatives aim to comprehensively evaluate each client’s operational, compliance, and reporting structures against the newly proposed SEC Private Fund Rules’ requirements. Leveraging our tailored solutions and team of professionals, Ultimus will support your firm’s lead on regulatory changes, ensuring compliance and readiness for future regulations.
The new SEC regulatory enhancements carry significant weight for both SEC-registered and unregistered private fund managers, intending to safeguard private fund investors through increased transparency, competition, and operational efficiency. In light of these new SEC regulations, it is crucial for fund managers to evaluate their current compliance capabilities and review their existing compliance strategy, both present and future orientated. Entrusting your fund administration to a third-party provider like Ultimus helps to reduce potential disruptions. Our proactive stance on current and future compliance standards can ease the administrative and cost burden of continuous compliance and regulatory adherence.
For more information on Ultimus’ private fund services, please visit us at https://www.ultimusfundsolutions.com/our-services/private-funds/
ULP 18053195 04/24/2024
