EXECUTIVE SUMMARY
On 23 August 2023, the US Securities and Exchange Commission (the SEC) adopted a new set of private fund adviser rules (each a Rule and, collectively, the Rules, and the related release, the Adopting Release)1 that materially increase the regulatory burden placed on investment advisers to private funds2 under the Investment Advisers Act of 1940, as amended (the Advisers Act), while also providing new rights to investors. While not as extensive as the rule package originally proposed by the SEC in February 2022 (the Proposal),3 the Rules will nevertheless have a significant impact on private fund advisers, the investors in their funds and the private funds industry as a whole.4 We expect the Rules' disclosure- and consent-based framework and audit and quarterly reporting requirements will both expand the scope of and add to the substantial regulatory burden faced by advisers to private funds and, together with other rulemaking affecting private fund sponsors (e.g., the Marketing Rule,5 Form PF Amendments,6 and the proposed Safeguarding Rule7 ), act as the most significant change in private fund regulation since the Dodd-Frank Act mandated the registration of most private fund advisers in 2010. Compared to recent rulemaking activities, the Rules are more expansive in scope and apply to SEC-registered, exempted, and nonregistered advisers.
Many investors—particularly investors without significant negotiation leverage when facing large private fund managers—may welcome the additional disclosure and consent rights provided by the new Rules, as well as the additional information (such as detailed quarterly statements) the Rules entitle them to receive going forward. However, investors and advisers alike may find that, counterintuitively, the sunlight afforded by the Rules effectively chills their relations.
The Rules dramatically change certain hallmarks of the private fund space, with regulatory restrictions imposed on the sorts of terms private fund industry participants are able to negotiate, their pathways of communication, and the information they are entitled (or required) to share. The recalibration of adviser-investor interactions that will likely follow may prove to be the most enduring impact of the Rules. And, while the Rules allow for grandfathering of certain existing private fund arrangements, the Rules still impose a number of new operational and compliance obligations on investment advisers, including requirements to provide very prescriptive quarterly reports. Certain of the Rules also apply only to investment advisers registered with the SEC (Registered Investment Advisers, or RIAs), while others apply to both RIAs and private fund advisers that are exempt from registration. All RIAs (including those that do not advise private funds) will also be required to comply with the Rules' mandates on compliance reviews.8 Consequently, all investment advisers will need to familiarize themselves with the Rules to ensure compliance in advance of the SEC's implementation deadlines.
This guide contains a detailed summary of the Rules, along with practical considerations for both advisers and investors relating to compliance and implementation. In Part 1: Scope of the Private Fund Adviser Rules, we have detailed the applicability of the Rules to the different types of investment advisers and funds. In Parts 2, 3, and 4, we have outlined how the Rules apply to all private fund advisers, registered private fund advisers, and all RIAs, respectively. A reference chart summarizing implementation deadlines for each of the Rules can be found in Part 5: Key Dates for Implementation.
PART 1: SCOPE OF THE NEW PRIVATE FUND ADVISER RULES
The applicability of each Rule will depend on what types of funds an adviser advises, its registration status, its geographic location, and other factors. We explore the applicability of the Rules to the different types of advisers in Part 1, Section A; Applicability to Different Types of Advisers and to the different types of funds in Part 1, Section B; and Applicability to Different Types of Funds, below. A reference chart summarizing the applicability of each Rule to the different types of advisers can also be found below; see Table 1 below.
Additionally, the timeline in which advisers will need to implement the Rules will depend on whether an adviser is a "small adviser" or a "large adviser;" see Part 5: Key Dates for Implementation for further details.
A. APPLICABILITY TO DIFFERENT TYPES OF ADVISERS
While reviewing the applicability of the Rules to different types of advisers, advisers should bear in mind that, in each instance, the Rules are equally applicable to their related persons. The SEC defines a "related person" as (1) all officers, partners, or directors (or any person performing similar functions) of the adviser; (2) all persons directly or indirectly controlling or controlled by the adviser; (3) all current employees (other than employees performing only clerical, administrative, support or similar functions) of the adviser; and (4) any person under common control with the adviser.9 The Rules are consequently equally applicable to those separate entities formed by an adviser in connection with a specific fund, such as the general partner or an affiliated management company.
A reference chart summarizing the applicability of the Rules can be found at the end of this Part 1.
I. Non-US Fund Advisers
In the Adopting Release, the SEC emphasized that they do not apply substantive provisions of the Advisers Act and the rules promulgated thereunder—which would include the Rules—to the nonUnited States (non-US) clients of SEC-registered investment advisers whose principal office and place of business is outside of the United States (i.e., "offshore advisers"). The SEC additionally clarified that the Preferential Treatment Rule and the Restricted Activities Rule (as each term is defined below)10 would generally not apply to offshore advisers with respect to their offshore funds, regardless of whether the advisers are RIAs or if such offshore funds have United States (US) investors.
However, as discussed further in "Similar Pools of Assets" below, if an offshore fund operates in a parallel fund structure with a US-based fund, or is a feeder fund in a master-feeder structure with a US-based private fund, then the adviser to such fund will need to carefully consider the redemption, information and other preferential treatment rights granted to investors in the offshore fund, as
investors in such an offshore fund will be entitled to the same treatment as investors in the onshore fund(s) if such offshore fund is deemed a "similar pool of assets" to the onshore fund(s).11
Registered offshore investment advisers advising only offshore funds will consequently need to comply only with the Compliance Rule12 amendments. Unregistered offshore investment advisers advising only offshore funds are not subject to any of the Rules.
Practical Considerations
Potential Extraterritorial EffectPotential Extraterritorial Effect
These clarifications were helpful for many offshore advisers that were uncertain as to the application of the Rules, as proposed in 2022. However, while not technically applicable to the non-US clients of registered offshore advisers, we expect that there will be an extraterritorial effect of these Rules going forward as investors come to expect private fund documents—irrespective of jurisdiction—to include certain of the substantive provisions of these Rules. Non-US advisers would consequently be welladvised to familiarize themselves with the requirements of the Rules nevertheless, particularly those Rules concerning which terms can and cannot be granted to investors, going forward (see Part 2: Rules Applicable to All Private Fund Advisers).
Jurisdictions of Funds
As registered offshore advisers are generally subject to lower regulatory (and other) burdens with respect to their offshore funds, the additional compliance burdens of the Rules may result in such advisers increasingly domiciling their US-targeted funds in offshore jurisdictions such as the Cayman Islands or British Virgin Islands, despite the increased financial costs associated with forming and operating funds in such jurisdictions.
II. Registered Investment Advisers
All RIAs will be required to comply with the new amendments to the Compliance Rule amendments (as discussed further in Part 4: Rules Applicable to All Registered Investment Advisers, below).
Whether an RIA needs to comply with the other Rules13 will depend on whether it is advising private funds, whether the RIA is US-based, as well as where its funds are located. All RIAs to "private funds"14 will need to comply with the Compliance Rule amendments and all of the other Rules, with respect to private funds they advise that are based in the United States (as well as any offshore fund that is a "similar pool of assets" of any such US private fund, in which case, certain parts of the Preferential Treatment Rule will apply to such funds). However, the compliance requirements for certain Rules will vary, depending on whether such advisers are advising liquid or illiquid private funds.15
RIAs that are based in the United States or that are advising US private funds will consequently need to familiarize themselves with all of the Rules.
III. Unregistered Advisers (Including ERAs, Foreign Private Advisers, and StateRegistered Advisers)
With the exception of offshore advisers advising offshore private funds (as discussed in Section I. Non-US Advisers, above), two of the Rules, the Preferential Treatment Rule and Restricted Activities Rule, apply to all investment advisers to private funds, regardless of whether they are RIAs. This includes those advisers who qualify as "exempt reporting advisers" (ERA) for purposes of the Advisers Act, including "private fund advisers" and "venture capital fund advisers."16
However, advisers that are excluded from the definition of "investment adviser" under the Advisers Act pursuant to section 202(a)(11) thereof are not required to comply with the Rules. Examples of such non-"investment adviser" advisers include banks and bank holding companies, government securities advisers, and certain real estate fund managers and single-family offices.17 Because such advisers are not technically deemed investment advisers, they are exempted from compliance with the Rules, even if such advisers, in practice, advise private funds.
All other investment advisers exempted from registration with the SEC pursuant to section 203(b) of the Advisers Act, including "foreign private advisers"18 and investment advisers registered only at the state (versus federal) level, must comply with the Preferential Treatment Rule and Restricted Activities Rule, to the extent they advise US private funds.19
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Footnotes
1. Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, SEC Release No. IA-6368 (Aug. 23, 2023). The Rules were officially published to the Federal Register, Vol. 88, No. 177 (the Federal Register) on September 14, 2023. Any citations to the Rules herein are made with respect to the Rules as published in the Federal Register. Any citations to the Adopting Release herein are made with respect to the Adopting Release as republished on September 14, 2023 (i.e., as "[c]onfirmed to the Federal Register version").
2. In its Adopting Release, the SEC clarified that the Rules are intended to apply to "private funds" as such term is defined in section 202(a)(29) of the Advisers Act (i.e., for purposes of the Rules, a private fund is any issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that Act). Adopting Release, footnote 4, page 7.
3. Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, SEC Release No. IA-5955 (Feb. 9, 2022).
4. While the Rules will take effect in accordance with the timeframes set out in Part 5: Key Dates for Implementation, below, we note that a number of private fund industry groups have filed a petition for review in the United States Court of Appeals for the Fifth Circuit seeking to vacate and invalidate the Rules. The petition for review alleges, among other things, that the Rules exceed the SEC's statutory authority and that the SEC adopted the Rules in violation of the Administrative Procedure Act. As of the date of publication, the petition for review has not affected the implementation timeframe for the Rules, as set forth in Part 5, below. As the petition for review was only recently filed, and may not be resolved before the first of the Rules' compliance dates is reached (see Part 5 for details), advisers to private funds should currently proceed as though the Rules will be implemented as published.
5. Advisers Act, section 206(4)-1. See also Investment Adviser Marketing, SEC Release No. IA-5653 (December 22, 2020).
6. See Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, SEC Release No. IA-6297 (May 3, 2023).
7. See Safeguarding Advisory Client Assets, SEC Release No. IA-6240 (February 15, 2023).
8. The Rules impact three categories of investment advisers: (i) all registered investment advisers; (ii) registered investment advisers that advise private funds; and (iii) advisers (both registered and unregistered) that advise private funds (including exempt reporting advisers). See Table 1 in Part 1 for a summary of the applicability of the Rules.
9. The Rules, section 211(h)(1)-1 (definition of "related person").
10. See Part 2: Rules Applicable to All Private Fund Advisers for details of the Restricted Activities Rule and Preferential Treatment Rule.
11. See "Similar Pools of Assets" in Part 1 for further discussion; see also Part 2: Rules Applicable to All Private Fund Advisers.
12. See Part 4: Rules Applicable to All Registered Investment Advisers for further details of the Compliance Rule.
13. I.e., the Preferential Treatment Rule, the Restricted Activities Rule, the Quarterly Statement Rule, the Private Fund Audit Rule, and the Advisers-Led Secondaries Rule.
14. As such term is used in the Rules; see endnote 2, above, and Section I. Private Funds, Generally in Section B: Applicability to Different Types of Funds, below.
15. See Part 2: Rules Applicable All Private Fund Advisers for further details.
16. See footnotes i and ii to Table 1. Applicability of the Rules to the Different Types of Investment Advisers in Part 1 for further details.
17. The above is a high-level summary of exclusions from the definition of "investment adviser"; see section 202(a)(11) of the Advisers Act for details.
18. See footnote iii to Table 1. Applicability of the Rules to the Different Types of Investment Advisers in Part 1 for further details.
19. See Part 2: Rules Applicable to All Private Fund Advisers for further details on the Preferential Treatment Rule and Restricted Activities Rule.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
