The Securities and Exchange Commission (SEC) voted on February 9, 2022, to propose new rules for private fund advisors. The 341-page SEC proposal covers a myriad of topics, but the ultimate goal is to provide investors with more clarity and transparency.

The proposal adds broad disclosure rules for private investment funds that would require managers to provide statements on fund performance, compensation, fees and expenses. The proposed rules would create new requirements for private equity advisors related to fund audits, books and records, and advisor-led secondary transactions.

One of the bigger takeaways in the document is a move to prohibit private fund advisors, including those not registered with the SEC, from providing certain types of preferential treatment to investors in their funds. Other types of preferential treatment would have to be disclosed to current and prospective investors, according to the release. This means the side letters agreed to behind closed doors will be shared with all limited partners. If enacted, this requirement is going to change the way side letters are negotiated.

Limited partners have been pushing for these rules through the Institutional Limited Partners Association. The proposed rules include:

• Requiring registered investment advisors to private funds to provide transparency to their investors regarding the full cost of investing in private funds and the performance of such private funds.
• Requiring a registered private fund advisor to obtain an annual financial statement audit of each private fund it advises and, in connection with an advisor-led secondary transaction, a fairness opinion from an independent opinion provider.
• Prohibiting all private fund advisors, including those that are not registered with the SEC, from engaging in certain sales practices, conflicts of interest and compensation schemes that are contrary to the public interest and the protection of investors.
• Prohibiting all private fund advisors from providing preferential treatment to certain investors in a private fund, unless the advisor discloses such treatment to other current and prospective investors.
• Amending the Advisors Act compliance rule to require all registered advisors, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

The SEC will accept comments on the proposed rule for 30 days following publication of the release in the Federal Register or until April 11, 2022, whichever is later.

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