The SEC recently proposed new rules that would impose additional practice and disclosure requirements on private fund advisers which, if adopted in their current form, could collectively have severe consequences for such advisers. Among other things, the proposed rules would require SEC-registered advisers to:
- provide quarterly reporting to fund investors including detailed and standardized disclosures about fund expenses and performance; and
- obtain and deliver audited financial statements for each advised private fund annually and upon liquidation.
Importantly, the proposed rules would prohibit all private fund advisers (including exempt reporting advisers) from:
- entering into side letter arrangements granting preferential redemption rights or certain portfolio information rights if such rights would have a material adverse effect on fund investors;
- requiring reimbursement from investors for the adviser’s breach of its fiduciary duties including situations involving simple negligence;
- Charging private funds for certain fees and expenses;
- deducting taxes owed from any clawback they must provide to investors; and
- Borrowing funds or securities from a fund or receiving an extension of credit from a fund.
Very importantly, the proposed rules do not have a grandfathering provision, and, therefore, if the rules are adopted as proposed, advisers would need to assess whether existing private fund documents must be amended, which can be challenging given that the adviser and fund investors negotiated fund terms based on circumstances prior to the existence of the new requirements.
