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SEC Adopts Rules For Private Fund Advisers

23 DECEMBER 2023 | Lizbeth Flores and Felipe Saraiva

Earlier this year, the U.S. Securities and Exchange Commission (the “SEC”) adopted several new rules affecting private fund advisers. This article discusses changes applicable to illiquid funds, which are those in which investors may not redeem their interests at will. Most venture capital, private equity and other similar closed-end funds would be considered illiquid funds so long as opportunities to redeem are limited.
Here are some of the most frequent questions our fund manager clients have asked us concerning the new rules:

Preferential Treatment of Certain Investors (Preferential Treatment Rule)

Q:  Can I still issue side letters giving preferential treatment to certain investors?

A:  Preferential information rights are still generally allowed. If the letter offers redemption rights, it should (a) be offered to all other existing investors and (b) not have a material negative effect on other investors.

Q:  Can I limit the information disclosed to certain investors prior to their investment (discriminatory disclosure)?

A:  No. All disclosures made to any investor prior to investment, must be made to all. The SEC has not specified a prescribed format for such disclosures; however, it emphasizes the necessity for advisers to provide a detailed description of any preferential treatment to ensure its meaningful communication. Alternatively, advisers may opt to furnish copies of pertinent side letters or terms, redacting any investor-identifying information for confidentiality.

Q:  Do I need to disclose any side letters to other investors?

A:  Yes, you must disclose any side letters “as soon as reasonably practicable” after the end of the fundraising period.

Q:  By when must I comply with the above rules?

A:  March 14, 2025.

Restricted Activities of Investment Advisers

Q:  Will the Fund Manager be liable for fees and expenses related to an investigation that results in a sanction for violating the Advisers Act?

A:  Yes. Such fees and expenses cannot be charged to the fund. If these expenses have already been charged to the fund, the Fund Manager must reimburse the fund for these expenses.

Q:  Can I charge the fund for regulatory, examination, or compliance fees or expenses of the adviser?

A:  Yes, but the investors must receive written notice of any such fees or expenses within 45 days after the end of the relevant fiscal quarter. However, if the expenses relate to an investigation that results in a sanction, they must be reimbursed.

Q:  Can there be a reduction of a Fund Manager’s clawback for the Fund Manager’s tax expenses?

A: Yes, provided that the Fund Manager sends a written notice to the investors with the aggregate amounts of such clawback before and after any tax reduction for actual, potential, or hypothetical taxes, within 45 days after the end of the relevant fiscal quarter.

Q:  Can I charge investors fees or expenses related to a portfolio investment on a non-pro rata basis?

A:  You can do so upon written notice to investors showing that the allocation approach is fair and equitable.

Q:  Can I charge or allocate to the private fund fees or expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority?

A: You can, upon the written consent from at least a majority in interest of the fund’s investors that are not related persons of the adviser, and provided the adviser is not sanctioned.

Q:  Can I borrow money, securities, or other private fund assets, or receive a loan or an extension of credit, from a private fund client?

A: You can, upon written notice to the investors including a description of the material terms, as well as the written consent from at least a majority in interest of the fund’s investors that are not related persons of the adviser.

Q:  By when must I comply with the above rules?

A: For advisers with (i) $1.5 billion or more in AUM, September 14, 2024; and (ii) less than $1.5 billion in AUM, March 14, 2025.

Compliance Rule Amendments

Q: Are the relevant changes applicable to both registered and unregistered private fund advisers?

A: Certain additional rules apply to registered private fund advisers, including additional information in quarterly statements provided to investors (Quarterly Statement Rule), fund audits (Audit Rule) and fairness or valuation opinions and disclosure of potential conflicts of interest in adviser-led secondary sales (Adviser-Led Secondaries Rule). Registered advisers will have to document in writing the required annual review of their compliance policies and procedures. Compliance with the amended Advisers Act compliance rule started to be required on November 13, 2023.

Additionally, advisers who are or are required to be registered will have to retain books and records related to the Quarterly Statement Rule, the Audit Rule, the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule.

Legacy Status

Q:  What about the side letters and written agreements I already have in place in an existing fund?

A:  Existing agreements and funds that began operations before the compliance date are exempted from the new rules related to: (a) preferential redemption rights; (b) preferential information rights; (c) restrictions on borrowing from a private fund; and (d) restrictions on charging of expenses related to certain investigations, if compliance with the new rules would require changes to existing fund documents. However, existing funds will need to disclose preferential treatment previously granted to investors.

Conclusion*

At PAG Law, we are keeping a close eye on all the details about how these changes will impact private fund managers. For any specific questions regarding compliance with the new set of rules enacted by the SEC, please do not hesitate to contact our team.
*The information provided in this article is for general informational purposes only and is not intended to constitute legal advice. The content is not tailored to your specific circumstances, and its application to any particular situation may vary. We strongly advise that you consult with a qualified legal professional to obtain advice tailored to your specific needs and circumstances, and to ensure that you receive current and accurate legal guidance. No warranty, representation, or guarantee is made regarding the accuracy, completeness, or appropriateness of the information provided.

SEC Adopts Rules For Private Fund Advisers

23 DECEMBER 2023 | Lizbeth Flores and Felipe Saraiva

Earlier this year, the U.S. Securities and Exchange Commission (the “SEC”) adopted several new rules affecting private fund advisers. This article discusses changes applicable to illiquid funds, which are those in which investors may not redeem their interests at will. Most venture capital, private equity and other similar closed-end funds would be considered illiquid funds so long as opportunities to redeem are limited.
Here are some of the most frequent questions our fund manager clients have asked us concerning the new rules:

Preferential Treatment of Certain Investors (Preferential Treatment Rule)

Q:  Can I still issue side letters giving preferential treatment to certain investors?

A:  Preferential information rights are still generally allowed. If the letter offers redemption rights, it should (a) be offered to all other existing investors and (b) not have a material negative effect on other investors.

Q:  Can I limit the information disclosed to certain investors prior to their investment (discriminatory disclosure)?

A:  No. All disclosures made to any investor prior to investment, must be made to all. The SEC has not specified a prescribed format for such disclosures; however, it emphasizes the necessity for advisers to provide a detailed description of any preferential treatment to ensure its meaningful communication. Alternatively, advisers may opt to furnish copies of pertinent side letters or terms, redacting any investor-identifying information for confidentiality.

Q:  Do I need to disclose any side letters to other investors?

A:  Yes, you must disclose any side letters “as soon as reasonably practicable” after the end of the fundraising period.

Q:  By when must I comply with the above rules?

A:  March 14, 2025.

Restricted Activities of Investment Advisers

Q:  Will the Fund Manager be liable for fees and expenses related to an investigation that results in a sanction for violating the Advisers Act?

A:  Yes. Such fees and expenses cannot be charged to the fund. If these expenses have already been charged to the fund, the Fund Manager must reimburse the fund for these expenses.

Q:  Can I charge the fund for regulatory, examination, or compliance fees or expenses of the adviser?

A:  Yes, but the investors must receive written notice of any such fees or expenses within 45 days after the end of the relevant fiscal quarter. However, if the expenses relate to an investigation that results in a sanction, they must be reimbursed.

Q:  Can there be a reduction of a Fund Manager’s clawback for the Fund Manager’s tax expenses?

A: Yes, provided that the Fund Manager sends a written notice to the investors with the aggregate amounts of such clawback before and after any tax reduction for actual, potential, or hypothetical taxes, within 45 days after the end of the relevant fiscal quarter.

Q:  Can I charge investors fees or expenses related to a portfolio investment on a non-pro rata basis?

A:  You can do so upon written notice to investors showing that the allocation approach is fair and equitable.

Q:  Can I charge or allocate to the private fund fees or expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority?

A: You can, upon the written consent from at least a majority in interest of the fund’s investors that are not related persons of the adviser, and provided the adviser is not sanctioned.

Q:  Can I borrow money, securities, or other private fund assets, or receive a loan or an extension of credit, from a private fund client?

A: You can, upon written notice to the investors including a description of the material terms, as well as the written consent from at least a majority in interest of the fund’s investors that are not related persons of the adviser.

Q:  By when must I comply with the above rules?

A: For advisers with (i) $1.5 billion or more in AUM, September 14, 2024; and (ii) less than $1.5 billion in AUM, March 14, 2025.

Compliance Rule Amendments

Q: Are the relevant changes applicable to both registered and unregistered private fund advisers?

A: Certain additional rules apply to registered private fund advisers, including additional information in quarterly statements provided to investors (Quarterly Statement Rule), fund audits (Audit Rule) and fairness or valuation opinions and disclosure of potential conflicts of interest in adviser-led secondary sales (Adviser-Led Secondaries Rule). Registered advisers will have to document in writing the required annual review of their compliance policies and procedures. Compliance with the amended Advisers Act compliance rule started to be required on November 13, 2023.

Additionally, advisers who are or are required to be registered will have to retain books and records related to the Quarterly Statement Rule, the Audit Rule, the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule.

Legacy Status

Q:  What about the side letters and written agreements I already have in place in an existing fund?

A:  Existing agreements and funds that began operations before the compliance date are exempted from the new rules related to: (a) preferential redemption rights; (b) preferential information rights; (c) restrictions on borrowing from a private fund; and (d) restrictions on charging of expenses related to certain investigations, if compliance with the new rules would require changes to existing fund documents. However, existing funds will need to disclose preferential treatment previously granted to investors.

Conclusion*

At PAG Law, we are keeping a close eye on all the details about how these changes will impact private fund managers. For any specific questions regarding compliance with the new set of rules enacted by the SEC, please do not hesitate to contact our team.
*The information provided in this article is for general informational purposes only and is not intended to constitute legal advice. The content is not tailored to your specific circumstances, and its application to any particular situation may vary. We strongly advise that you consult with a qualified legal professional to obtain advice tailored to your specific needs and circumstances, and to ensure that you receive current and accurate legal guidance. No warranty, representation, or guarantee is made regarding the accuracy, completeness, or appropriateness of the information provided.

SEC Adopts Rules For Private Fund Advisers

23 DECEMBER 2023 | Lizbeth Flores and Felipe Saraiva

Earlier this year, the U.S. Securities and Exchange Commission (the “SEC”) adopted several new rules affecting private fund advisers. This article discusses changes applicable to illiquid funds, which are those in which investors may not redeem their interests at will. Most venture capital, private equity and other similar closed-end funds would be considered illiquid funds so long as opportunities to redeem are limited.
Here are some of the most frequent questions our fund manager clients have asked us concerning the new rules:

Preferential Treatment of Certain Investors (Preferential Treatment Rule)

Q:  Can I still issue side letters giving preferential treatment to certain investors?

A: Preferential information rights are still generally allowed. If the letter offers redemption rights, it should (a) be offered to all other existing investors and (b) not have a material negative effect on other investors.

Q:  Can I limit the information disclosed to certain investors prior to their investment (discriminatory disclosure)?

A:  No. All disclosures made to any investor prior to investment, must be made to all. The SEC has not specified a prescribed format for such disclosures; however, it emphasizes the necessity for advisers to provide a detailed description of any preferential treatment to ensure its meaningful communication. Alternatively, advisers may opt to furnish copies of pertinent side letters or terms, redacting any investor-identifying information for confidentiality.

Q:  Do I need to disclose any side letters to other investors?

A:  Yes, you must disclose any side letters “as soon as reasonably practicable” after the end of the fundraising period.

Q:  By when must I comply with the above rules?

A:  March 14, 2025.  

Restricted Activities of Investment Advisers

Q:  Will the Fund Manager be liable for fees and expenses related to an investigation that results in a sanction for violating the Advisers Act?

A:  Yes. Such fees and expenses cannot be charged to the fund. If these expenses have already been charged to the fund, the Fund Manager must reimburse the fund for these expenses.

Q:  Can I charge the fund for regulatory, examination, or compliance fees or expenses of the adviser?

A:  Yes, but the investors must receive written notice of any such fees or expenses within 45 days after the end of the relevant fiscal quarter. However, if the expenses relate to an investigation that results in a sanction, they must be reimbursed.

Q:  Can there be a reduction of a Fund Manager’s clawback for the Fund Manager’s tax expenses?

A: Yes, provided that the Fund Manager sends a written notice to the investors with the aggregate amounts of such clawback before and after any tax reduction for actual, potential, or hypothetical taxes, within 45 days after the end of the relevant fiscal quarter.

Q:  Can I charge investors fees or expenses related to a portfolio investment on a non-pro rata basis?

A:  You can do so upon written notice to investors showing that the allocation approach is fair and equitable.

Q:  Can I charge or allocate to the private fund fees or expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority?

A: You can, upon the written consent from at least a majority in interest of the fund’s investors that are not related persons of the adviser, and provided the adviser is not sanctioned.

Q:  Can I borrow money, securities, or other private fund assets, or receive a loan or an extension of credit, from a private fund client?

A: You can, upon written notice to the investors including a description of the material terms, as well as the written consent from at least a majority in interest of the fund’s investors that are not related persons of the adviser.

Q:  By when must I comply with the above rules?

A: For advisers with (i) $1.5 billion or more in AUM, September 14, 2024; and (ii) less than $1.5 billion in AUM, March 14, 2025.

Compliance Rule Amendments

Q: Are the relevant changes applicable to both registered and unregistered private fund advisers?

A: Certain additional rules apply to registered private fund advisers, including additional information in quarterly statements provided to investors (Quarterly Statement Rule), fund audits (Audit Rule) and fairness or valuation opinions and disclosure of potential conflicts of interest in adviser-led secondary sales (Adviser-Led Secondaries Rule). Registered advisers will have to document in writing the required annual review of their compliance policies and procedures. Compliance with the amended Advisers Act compliance rule started to be required on November 13, 2023.

Additionally, advisers who are or are required to be registered will have to retain books and records related to the Quarterly Statement Rule, the Audit Rule, the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule.

Legacy Status

Q:  What about the side letters and written agreements I already have in place in an existing fund?

A:  Existing agreements and funds that began operations before the compliance date are exempted from the new rules related to: (a) preferential redemption rights; (b) preferential information rights; (c) restrictions on borrowing from a private fund; and (d) restrictions on charging of expenses related to certain investigations, if compliance with the new rules would require changes to existing fund documents. However, existing funds will need to disclose preferential treatment previously granted to investors.

Conclusion*

At PAG Law, we are keeping a close eye on all the details about how these changes will impact private fund managers. For any specific questions regarding compliance with the new set of rules enacted by the SEC, please do not hesitate to contact our team.
*The information provided in this article is for general informational purposes only and is not intended to constitute legal advice. The content is not tailored to your specific circumstances, and its application to any particular situation may vary. We strongly advise that you consult with a qualified legal professional to obtain advice tailored to your specific needs and circumstances, and to ensure that you receive current and accurate legal guidance. No warranty, representation, or guarantee is made regarding the accuracy, completeness, or appropriateness of the information provided.