SEC’s New Rules for Private Fund Advisers: Enhancing Oversight in the US

5th September 2023

Overview of the SEC’s Regulatory Changes for Private Fund Advisers

In order to improve oversight for the Private Fund market in the US, the SEC has recently adopted new rules aimed to enhance the regulation of Private Fund Advisers.

The SEC purports that the enhanced rules will help promote greater competition and thereby efficiency in the private fund market. Unless specified otherwise, the rules discussed in this post apply to Registered Private Fund Advisers in the US. Since the enactment of the Dodd-Frank Act in 2010, the SEC’s oversight in the private fund industry has steadily increased. The new rules demonstrate the SEC’s continuing intention to increase oversight and disclosure across the financial services industry. 

Key Components of the SEC’s New Rules

The SEC’s new rules for Private Fund Advisers can be summarized into six distinct parts:  

  • Quarterly Statement Rule 
  • Private Fund Audit Rule 
  • Adviser-Led Secondaries Rule 
  • Restricted Activities Rule 
  • Preferential Treatment Rule 
  • Compliance Rule Amendments  
Quarterly Statement Rule: Transparency in Fund Reporting

The Quarterly Statement Rule will require private fund advisers to provide quarterly disclosure statements to investors including key information regarding fund fees, expenses, and performance.

Private Fund Audit Rule: Annual Financial Audits for Transparency

The Private Fund Audit Rule will also require private fund advisers that are registered with the SEC to provide investors with annual financial statement audits of each private fund that the adviser advises. 

Adviser-Led Secondaries Rule: Ensuring Fairness and Disclosure

The Adviser-Led Secondaries Rule requires that all registered private fund advisers to obtain a fairness opinion or a valuation opinion from an independent third party when offering existing investors the option between selling their interests or converting their current interests into shares of another investment vehicle that is managed by the private fund adviser. Additionally, this rule requires the private fund adviser to disclose any relationship the adviser has had, if any, within the last two years with the independent third party.

To reiterate, the theme of the new rules is disclosure, disclosure, disclosure.  

Restricted Activities Rule: Prohibiting Certain Practices

The Restricted Activities Rule provides that certain activities will be prohibited unless the private fund adviser discloses the activities to their current investors. These activities include charging certain fees or expenses of the adviser to the investors, reducing the amount of adviser claw back, charging or allocating fees or expenses related to an investment on a non-pro rata basis, or borrowing or receiving an extension of credit from a private fund client. The conflict of interest that may interfere with investors’ interests is a key concern for private funds the SEC aims to address. 

Preferential Treatment Rule: Addressing Investor Fairness

Another key component of the new rules is a prohibition against private fund advisers providing certain types of preferential treatment that have a material negative impact on other investors, as well as prohibiting any preferential treatments without disclosing the treatment to other current and prospective investors. In part, the Preferential Treatment Rule requires certain preferential information about portfolio holdings or exposures to be offered to all investors, otherwise it is prohibited.

Compliance Rule Amendments: Strengthening Compliance Policies

In addition, there are Compliance Rule Amendments being implemented across all registered advisers under the Advisers Act. The reforms require all registered advisers to document in writing the required annual review of their compliance policies and procedures. This is intended to help the SEC with reviewing compliance with SEC rules and identify potential industry weaknesses. 

Enforcement Timeline: Implementation of New Rules

As planned, compliance with most of the new rules will be enforced on a rolling basis, depending on the type and size of the fund, from 23 August 2023, when the finalized rule was published on the federal registrar. The Compliance Rule Amendments takes effect in 60 days after the publication on the federal registrar. 

What’s Next: Anticipated Litigation and Impact on Compliance

In short, likely a lot of litigation. Multiple private fund industry associations collectively filed suit against the SEC on 01 September 2023 in the Fifth Circuit on behalf of the interests of private fund advisers and associated parties. The complaint alleges that the new rules “exceed the Commission’s statutory authority,” and are arbitrary, capricious, an abuse of discretion, and contrary to law. Furthermore, the complaint alleges that compliance with the rules would interfere with existing contractual terms between investors and their private fund advisers. 

While not the first of its kind, the lawsuit comes within the first few weeks after the SEC published its new rules to the federal registrar. As far as moving forward with the new rules in mind, their applicability and compliance requirements may be delayed while the matter is litigated, though, at such early stages of the process, it may be too soon to tell. The enforcement of the new private fund adviser rules will certainly be a space to watch moving forward.

Stay Informed: Future Developments in Private Fund Adviser Regulations

If you have any questions or require support, reach out to our global team and stay up to date on the latest regulatory compliance changes affecting the asset management industry.



Madeline Gegg


Alex Mercer