SEC Proposes New Rules to Encourage Private Fund Transparency and Address Certain Conflicts of Interest

Client Alert
February 25, 2022

The U.S. Securities and Exchange Commission (the “SEC”) published on February 9, 2022 a release (the “Proposing Release”) in which it proposed new rules (collectively, the “Proposed Rules”) that would apply to investment advisers to “private funds,” that is, issuers that satisfy the conditions of either exclusion from the definition of an investment company in Section 3(c)(1) or Section 3(c)(7) of the U.S. Investment Company Act of 1940, as amended (the “1940 Act”), and thus indirectly to those private funds themselves. The Proposed Rules, if adopted as proposed, would be the first significant amendments to the rules under the U.S. Investment Advisers Act of 1940, as amended (the “Advisers Act”), that apply to investment advisers that manage private funds since the rules adopted in 2011 and 2012 under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).[1]

The purposes of the Proposed Rules, as stated in the Proposing Release, are to (a) promote transparency, especially as it relates to private fund expenses, performance, and preferential terms given to some investors but not others, and (b) eliminate or manage certain conflicts of interest of private fund investment advisers that may not be transparent to investors, especially in adviser-led secondary transactions. Whereas all of the Proposed Rules would apply to registered investment advisers to private funds (“registered private fund advisers”), only those Proposed Rules that prohibit certain activities would apply to “exempt reporting advisers” to private funds.[2] In addition, all registered investment advisers, including registered investment advisers to clients other than private funds, would be required to document in writing their annual review of their compliance policies and procedures.

    Subject Investment Advisers
Proposed Rule Proposed Rule Section Number Registered Private Fund Advisers Exempt Reporting Advisers to Private Funds All Registered Investment Advisers
Quarterly Statements Rule 211(h)(1)-2 Yes No  
Mandatory Private Fund Audits Rule 206(4)-10 Yes No  
Adviser-Led Secondary Transactions Rule 211(h)(2)-2 Yes No  
Prohibited Activities Rule 211(h)(2)-1 Yes Yes  
Preferential Treatment Rule 211(h)(2)-3 Yes Yes  
Books & Records Rule 204-2(a)(7)(v)

Rule 204-2(a)(20)-(23)
Yes No  
Written Annual Compliance Reviews Rule 206(4)-7(b) Yes No Yes

The period for public comments to the Proposed Rules ends 30 days following publication of the Proposing Release in the Federal Register, or April 11, 2022, whichever is later. As of the date of this Client Alert, the Proposing Release had not been published in the Federal Register.

Summary of the Proposed Rules

The Proposed Rules comprise five principal sections: a new requirement to provide fund investors with quarterly statements relating to fund fees and expenses as well as fund performance; a requirement that all funds provide investors audited annual financial statements and audited financial statements at liquidation; new rules relating to adviser-led secondary transactions; newly articulated prohibitions of certain investment adviser activities relating to their managed private funds; and new prohibitions and disclosure obligations relating to preferential treatment provided to some private fund investors but not all. Below are brief summaries of those principal sections of the Proposed Rules.

Other Proposed Rule Provisions

The Proposed Rules also include amendments to Rule 204-2 under the Advisers Act, which requires all registered investment advisers to maintain certain books and records. The amended rules generally would require registered investment advisers to maintain adequate records to support their compliance with the Proposed Rules.

The Proposed Rules also include an amendment to Rule 206(4)-7, which requires registered investment advisers to maintain certain compliance policies and procedures. Pursuant to the Proposed Rules, all registered investment advisers, not just those registered investment advisers to private funds, would be required to review and document in writing, no less frequently than annually, the adequacy of its compliance policies and procedures and the effectiveness of their implementation.

For more information

This summary of the Proposing Release, including the Proposed Rules, has been prepared by John Hunt, a Partner in the Investment Management Group of the international law firm of Sullivan & Worcester, LLP, and the co-head of its Private Fund Formation Practice. For more information, Mr. Hunt may be reached in our Boston office by calling +1 (617) 338-2961 or by email at

[1] 124 Stat. 1376-2223 (July 21, 2010). The SEC has adopted final rules for 67 rulemaking provisions of the Dodd-Frank Act, including eight rules specific to private funds and their investment advisers. Of the rules specific to private funds, the last was adopted in February 2012.

[2] “Exempt reporting advisers” are investment advisers that are exempt from registering with the SEC but which file reports with the SEC, primarily Form ADV, Part 1A. There are two types of exempt reporting advisers. First, there are those investment advisers that provide investment advice only to private funds under Advisers Act Section 203(m) and which have less than $150 million in assets under management. Second, there are those investment advisers that provide investment advice only to “venture capital funds” under Advisers Act Section 203(l) - generally, to private funds that meet certain conditions relating to their investments as well as other funds that invest in securities issued by small businesses - and which have less than $250 million in assets under management. Those rules are applied slightly differently to non-U.S. investment advisers serving funds with U.S. investors.

[3] The Proposed Rules define a “related person” to include (a) all officers, partners, or directors (or any person performing similar functions) of the adviser, (b) all persons directly or indirectly controlling or controlled by the adviser, (c) all current employees (other than employees performing only clerical, administrative, support or similar functions) of the adviser; and (d) any person under common control with the adviser. The term “control” would be defined to mean the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract, or otherwise. These definitions are substantially similar to the corresponding definitions used in Form ADV and in Rule 206(4)-2.

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