{"id":706,"date":"2024-03-18T02:24:16","date_gmt":"2024-03-18T02:24:16","guid":{"rendered":"http:\/\/ics-compliance.com\/?p=706"},"modified":"2024-03-18T02:49:22","modified_gmt":"2024-03-18T02:49:22","slug":"sec-risk-alert-to-investment-advisers-assessing-risks-scoping-examinations-and-requesting-documents-2","status":"publish","type":"post","link":"https:\/\/ics-compliance.com\/es\/2024\/03\/18\/sec-risk-alert-to-investment-advisers-assessing-risks-scoping-examinations-and-requesting-documents-2\/","title":{"rendered":"Overview of New Private Fund Rules’ Scope and Compliance Dates"},"content":{"rendered":"

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Yesterday, the SEC finally approved the proposed changes to the Private Funds regulations.\u00a0<\/span>Below you will find the official news release and an attachment with the Key Changes.\u00a0<\/span><\/div>\n
<\/div>\n
Most of the changes\/updates will become effective in 12 to 18 months; however, the SEC is providing “legacy status” for existing funds solely for the prohibitions aspect of the Preferential Treatment Rule and the aspects of the Restricted Activities Rule that require\u00a0<\/span>investor consent.<\/span><\/div>\n
\u00a0<\/span><\/div>\n
We will be providing updates and guidance on how to comply with the new rule shortly.<\/span><\/div>\n
\u00a0<\/span><\/div>\n
Thanks, JC<\/span><\/div>\n

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The SEC recently adopted new rules (the \u201cPrivate Fund Rules<\/em>\u201d)\u00a0that will require additional reporting requirements and impose restrictions on certain activities of investment advisers to private funds (\u201cPrivate Funds<\/em>\u201d).\u00a0While the Private Fund Rules, as adopted, are less restrictive than the version originally proposed by the SEC, there a number of new requirements that private fund advisers (\u201cPrivate Fund Advisers<\/em>\u201d)\u00a0will need to incorporate into their business and fund management practices, regardless of whether they are registered with the SEC.<\/p>\n

A brief summary of the key components of the Private Fund Rules is set forth below, including a description of which types of Private Fund Advisers each requirement applies to (i.e.<\/em>, all Private Fund Advisers or only those registered with the SEC) and applicable compliance dates. As noted below, compliance dates for certain components are earlier for Private Fund Advisers with $1.5 billion or more in private fund assets under management (\u201cLarge Private Fund Advisers<\/em>\u201d).<\/p>\n

1.\u00a0Quarterly Statements<\/u><\/strong><\/p>\n

Scope: SEC-registered Private Fund Advisers only<\/em><\/p>\n

Compliance Date: March 14, 2025<\/em><\/p>\n

SEC-registered Private Fund Advisers must prepare, for each Private Fund managed by the Private Fund Adviser, a quarterly statement that details information regarding fees and expenses (at both fund and portfolio company levels) and the Private Fund\u2019s performance. Each statement must be delivered to investors by the following dates:<\/p>\n

a. If the Private Fund is a fund-of-funds, within 75 days after the first three fiscal quarter ends of each fiscal year and 130 days after the end of the Private Fund\u2019s fiscal year; and<\/p>\n

b. If the Private Fund is\u00a0not<\/u>\u00a0a fund-of-of funds, within 45 days after the first three fiscal quarter ends of each fiscal year and 90 days after the end of each fiscal year.<\/p>\n

A Private Fund Adviser will need to prepare consolidated reporting for similar pools of assets where doing so would provide more meaningful information to investors and not be misleading (e.g.<\/em>, master-feeder structures).<\/p>\n

2.\u00a0Annual Audits<\/u><\/strong><\/p>\n

Scope: SEC-registered Private Fund Advisers only<\/em><\/p>\n

Compliance Date: March 14, 2025<\/em><\/p>\n

Private Fund Advisers that are registered with the SEC may no longer rely on the Custody Rule\u2019s surprise exam requirement with respect to the Private Funds for which the Private Fund Adviser directly or indirectly provides investment advice. Instead, Private Fund Advisers must cause an annual audit to be performed for these Private Funds by an independent public accountant that is registered with, and subject to regular inspection by, the PCAOB. The audited financial statements must be delivered to the Private Fund\u2019s investors within 120 days of the end of the Private Fund\u2019s fiscal year and promptly upon liquidation.<\/p>\n

3.\u00a0Secondary Transactions<\/u><\/strong><\/p>\n

Scope: SEC-registered Private Fund Advisers only<\/em><\/p>\n

Compliance Date: September 14, 2024 for Large Private Fund Advisers; March 14, 2025 for all other Private Fund Advisers<\/em><\/p>\n

If a Private Fund Adviser conducts an adviser-led secondary\u00a0with respect to any Private Fund it manages, the Private Fund Adviser must provide the Private Fund\u2019s investors with the following, prior to the due date for each such investor\u2019s election to participate in the transaction:<\/p>\n

a. A fairness or valuation opinion from an independent opinion provider; and<\/p>\n

b. A summary of any material business relationship between the Private Fund Adviser or any of its related persons, on the one hand, and with the independent opinion provider, on the other, that has existed at any time within the two-year period immediately preceding the opinion issuance date.<\/p>\n

4.\u00a0Preferential Treatment<\/u><\/strong><\/p>\n

Scope: All Private Fund Advisers<\/em><\/p>\n

Compliance Date: September 14, 2024 for Large Private Fund Advisers; March 14, 2025 for all other Private Fund Advisers<\/em><\/p>\n

With certain exceptions, Private Fund Advisers (even those who are exempt reporting advisers) are generally prohibited from doing any of the following, directly or indirectly, if the Private Fund Adviser reasonably believes that doing so would have a material, negative effect on other Private Fund investors:<\/p>\n

a. Providing preferential redemption terms to any one investor in the Private Fund; or<\/p>\n

b. Providing certain information about portfolio holdings or exposures to any one investor in the Private Fund.<\/p>\n

However, it is permissible under the Private Fund Rules to offer other preferential rights to particular Private Fund Investors if such preferential treatment is disclosed in a written notice to both current investors (delivered as soon as reasonably practicable following (a) the end of the Private Fund\u2019s fundraising period (for illiquid funds) or (b) the investor\u2019s investment (for liquid funds), as well as certain annual disclosures) and prospective investors (delivered prior to the investor\u2019s investment in the private fund if pertaining to certain material economic terms).<\/p>\n

5.\u00a0Restricted Activities<\/u><\/strong><\/p>\n

Scope: All Private Fund Advisers<\/em><\/p>\n

Compliance Date: September 14, 2024 for Large Private Fund Advisers; March 14, 2025 for all other Private Fund Advisers<\/em><\/p>\n

No Private Fund Adviser may participate in any of the following activities unless they comply with certain disclosure and\/or consent requirements outlined in the Private Fund Rules:<\/p>\n

a. Charging or allocating fees and expenses related to an actual or potential portfolio investment (including dead deal costs) on a non-pro rata basis where multiple persons advised by the Private Fund Adviser or its affiliate have invested in the same portfolio investment;<\/p>\n

b. Reducing the amount of any adviser clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders;<\/p>\n

c. Charging or allocating to a Private Fund any regulatory or compliance fees or expenses, or fees or expenses associated with an examination, of the Private Fund Adviser or its related persons;<\/p>\n

d. Charging or allocating to a Private Fund fees or expenses related to an investigation of the Private Fund Adviser or its related persons by any governmental or regulatory authority; or<\/p>\n

e. Borrowing money, securities, or other assets of the Private Fund, or receiving a loan or an extension of credit, from any Private Fund managed by the Private Fund Adviser.<\/p>\n

***<\/strong><\/p>\n

The status of the Private Fund Rules is currently in flux, as industry groups filed a lawsuit last month against the SEC, challenging the validity and enforceability of the Private Fund Rules. However, the Private Fund Rules\u2019 effective date and compliance dates have not been affected by this litigation, and Private Fund Advisers should continue to operate under the assumption that they will need to comply with the various components of the Private Fund Rules by the applicable compliance dates outlined above.<\/p>\n

Compliance with the Private Fund Rules will require consideration of numerous issues related to the current structure and operation of Private Fund Advisers\u2019 businesses, as well as the drafting of clear and thoughtful disclosures in connection with the various reports, notices, and consents required by the Private Fund Rules. As such, Private Fund Advisers should consider with the effect of the Private Fund Rules on their existing Private Fund structures and developing a plan to comply with the new requirements.<\/p>\n

Credits: Link<\/a><\/p>\n

\u00a0<\/div>\n

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The SEC recently adopted new rules (the \u201cPrivate Fund Rules\u201d)[1] that will require additional reporting requirements and impose restrictions on certain activities of …<\/p>\n","protected":false},"author":1,"featured_media":587,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"

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Yesterday, the SEC finally approved the proposed changes to the Private Funds regulations.\u00a0<\/span>Below you will find the official news release and an attachment with the Key Changes.\u00a0<\/span><\/div>
\u00a0<\/div>
Most of the changes\/updates will become effective in 12 to 18 months; however, the SEC is providing \"legacy status\" for existing funds solely for the prohibitions aspect of the Preferential Treatment Rule and the aspects of the Restricted Activities Rule that require\u00a0<\/span>investor consent.<\/span><\/div>
\u00a0<\/span><\/div>
We will be providing updates and guidance on how to comply with the new rule shortly.<\/span><\/div>
\u00a0<\/span><\/div>
Thanks, JC<\/span><\/div>

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On Sept. 6, 2023, the Securities and Exchange Commission\u2019s Division of Examinations issued a\u00a0Risk Alert<\/a>\u00a0detailing the Division\u2019s examination selection process for SEC-registered investment advisers (Advisers). The Risk Alert highlights the Division\u2019s risk-based approach for both (A) selecting Advisers to examine and (B) determining examination focus areas and documents. The Division heavily uses technology to analyze industry- and firm-level data to identify risks and better understand an Adviser\u2019s business, and also reviews disclosure documents (such as the Form ADV) and other regulatory filings. The Risk Alert also attaches a list of typical initial information requested in examinations, identifying 69 specific items organized in four broad areas.<\/p>

Below is a substantive overview of the Division\u2019s examination selection process and risk factors for Advisers to help prepare for examination<\/p>

A. Selecting Firms to Examine<\/strong><\/h2>

Some of the reasons the Division may select an Adviser for examination include:<\/p>