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A PDF version of this publication is attached here: SEC proposes rules impacting private funds and advisers (PDF 216kb)
At a glance

The SEC recently proposed sweeping reforms of regulations over investment advisers and the private funds they advise aimed at investor protection. If adopted as proposed, the new rules could have a significant impact on private fund disclosures, reporting, fees and expenses, and operations

What happened?
On February 9, the SEC proposed a rule aimed at providing additional regulation and enhancing private fund investor protection under the Investment Advisers Act of 1940. This proposal followed the SEC’s January 26 proposed rule to enhance private fund reporting on Form PF.
Why is this important?
The SEC proposed private fund reforms intended to enhance the regulation of private fund advisers by proposing the following new regulations and requirements:
  • Annual audit requirement of private funds: The proposal would require registered private fund advisers to obtain annual and liquidation audits for each private fund they advise. Further, it would require that the auditor comply with SEC independence rules defined in rule 2-01(b) and (c) of Regulation S-X with respect to the audits, and that the auditor be registered with and subject to regular inspection by the Public Accounting Oversight Board (PCAOB). In addition to the audit requirements, the proposal would require the auditor to promptly report to the SEC in the event of issuing a modified opinion and within four business days of the resignation, dismissal, termination from an engagement or if the auditor declines to stand for reappointment.
  • Quarterly statements: The proposal would require private fund advisers registered with the Commission to provide investors with quarterly statements within 45 days after quarter end detailing information about private fund performance, fees, and expenses. Specifically, the proposal would require the preparation and distribution of a statement to private fund investors that includes the following:
    • Fund expense table including all compensation and other payments to the private fund adviser or any of its related persons from the fund; all other fees and expenses paid by the fund; and offsets and rebates carried forward to subsequent periods to reduce future payments or allocations to the adviser and/or its related persons.
    • Portfolio investment table including a detailed accounting of all portfolio investment compensation allocated or paid to the adviser or any of its related persons by the covered portfolio investment during the reporting period and the fund’s ownership percentage of each investment
    • Prominent disclosure of how expenses, payments, allocations, rebates, waivers, and offsets are calculated, including cross references to the organizational and offering documents
    • Performance information depending on the liquidity of the fund, including guidance on the calculation of such information:
      • Performance for liquid funds - annual net total returns for each calendar year since inception, average annual returns for one, five, and ten calendar year periods, and cumulative net total return for the calendar quarter
      • Performance for illiquid funds - total gross and net internal rate of return (IRR) and multiple of invested capital (MOIC), along with gross IRR and MOIC separated by realized and unrealized performance. Additionally, illiquid funds would be required to provide a statement of contributions and distributions for the fund.
  • Fairness opinion: The proposal would require registered private fund advisers, in connection with certain adviser-led secondary transactions, to distribute to investors a fairness opinion from an independent opinion provider opining on the fairness of the price being offered to the private fund for any assets being sold as part of the transaction. The proposal would also require the adviser to prepare and distribute a written summary of certain material business relationships between the adviser and the opinion provider.  
  • Written annual review of compliance programs for all registered advisers: Currently, investment advisers are not required to document the annual review of their compliance policies and procedures. The proposal would require written documentation to evidence that an annual review was completed for all registered advisers, including advisers that do not manage private funds.
  • Private fund prohibitions: Under the proposal, private fund advisers, including those that are not registered (e.g., exempt reporting advisers), would be prohibited from:
    • charging a private fund or portfolio investment monitoring, servicing, consulting, or other fees for any services the adviser does not, or does not reasonably expect to, provide to the private fund or portfolio investment;
    • charging the private fund fees or expenses associated with an examination or investigation of the adviser or related person by any government or regulatory authority;
    • charging the private fund for any regulatory or compliance fees or expenses of the adviser or related person;
    • charging or allocating fees and expenses related to a portfolio investment on a non-pro rata basis when multiple clients and adviser have invested in the same portfolio investment;
    • reducing the amount of any adviser clawback by actual, potential, or hypothetical taxes applicable to the adviser or related person;
    • seeking reimbursement, indemnification, exculpation, or limitation of its liability by the private fund or its investors for a breach of fiduciary duty, willful malfeasance, bad faith, negligence, or recklessness in providing services to the fund; and
    • borrowing money, securities, or other assets or receiving a loan from the private fund client.
  • Preferential treatment: The proposal would prohibit all private fund advisers from providing certain types of preferential treatment that have a material, negative effect on other investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors. This includes preferential treatment related to investor redemptions, transparency about portfolio holdings or exposures, and fees.
Separately, the SEC proposed amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, which include:
  • requiring current reporting of certain significant events (e.g., extraordinary investment losses, significant margin and counterparty defaults, material changes in prime broker relationships, changes in unencumbered cash, and certain withdrawals and redemptions) within one business day for large hedge fund advisers;
  • requiring all advisers of private equity funds to report events such as the execution of adviser-led secondary transactions, implementation of general partner or limited partner clawbacks, removal of a fund’s general partner, termination of a fund’s investment period, or termination of a fund within one business day;
  • lowering the reporting threshold for large private equity advisers from $2 billion in assets under management to $1.5 billion;
  • revising reporting requirements for large private equity advisers on Form PF to include more information regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies and their borrowings, fund investments in different levels of a single portfolio company’s capital structure, and portfolio company restructurings or recapitalizations; and
  • revising Form N-MFP to capture information from large liquidity fund advisers similar to what already exists for money market funds.
What’s next?
Public comments on the proposal to enhance private fund reporting on Form PF are due March 21, 2022. Public comments on the proposal to provide additional regulation and enhance private fund investor protection under the Investment Advisers Act of 1940 will be due the later of 30 days after it is published in the Federal Register or April 11, 2022.
To have a deeper discussion, contact:
Chris Brabham
Pete Driscoll
For more PwC accounting and reporting content, visit us at On the go? Take our podcast series with you at the Viewpoint podcasts page
1 Defined as any adviser having at least $1.5 billion in regulatory assets under management attributable to hedge funds as of the end of any month in the prior fiscal quarter
2 Defined as any adviser managing a liquidity fund and having at least $1 billion in combined regulatory assets under management attributable to liquidity funds and registered money market funds as of the end of any month in the prior fiscal quarter

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