Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews

As previously announced by the U.S. Securities and Exchange Commission (SEC) on its website (EventID 22812), the Commission has now published its final rules in relation to obligations of private fund advisers under the Investment Advisers Act of 1940 in the Federal Register (FR).
The final rules follow a corresponding consultation in February 2022 where the SEC proposed various amendments and additions to existing rules and regulations governing private funds in an effort to enhance transparency, competition, and efficiency within the private funds market so as to better protect investors in private funds. The consultation back then encompassed a wide range of proposed adjustments, including increased disclosure requirements concerning fees and fund performance, annual audit obligations, and the prohibition of specific activities.
The final version now published by the SEC incorporates the feedback received during the consultation process, modifications made by the Commission in response to that feedback, and outlines the final upcoming obligation of private fund advisers with respect to the publication of quarterly investor statements, the performance of annual audits, the seeking of opinions on adviser-led secondary transactions, the facilitation of preferential treatment of individual investors, or the performance of otherwise prohibited activities. The below summary briefly describes the key content of the final rules; for a very detailed description, please refer to above noted Event or enclosed legal document:
##### Rules that will apply to private fund advisers who are registered with the Commission:
– Private fund advisers will have to provide quarterly statements to investors containing performance information and details about fees and expenses.
– Advisers will have to conduct annual audits for each private fund they manage and distribute audited financial statements to investors, ensuring transparency and accountability.
– Advisers will have to obtain a fairness or valuation opinion when offering specific secondary investments / alternative investments to existing investors (adviser-led secondary transaction rule).
##### Rules that will apply to all private fund advisers:
– Advisers will be prohibited from engaging in certain activities that could harm investors, such as charging specific fees, reducing clawback amounts, or borrowing money from private fund clients.
– Advisers will be prohibited to provide preferential treatment to certain investors when such would adversely affects other investors. Furthermore, forms of preferential treatment will have to be disclosed to all investors (with certain exemptions).
##### Rules that will apply to all registered advisers, including those not exclusively advising private funds:
– All registered advisers will have maintain written documentation of their annual review of compliance policies and procedures and require them to perform such review, if they are not doing so yet.