Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews

The Securities and Exchange Commission (“Commission” or “SEC”) is adopting new rules under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”). The rules are designed to protect investors who directly or indirectly invest in private funds by increasing visibility into certain practices involving compensation schemes, sales practices, and conflicts of interest through disclosure; establishing requirements to address such practices that have the potential to lead to investor harm; and restricting practices that are contrary to the public interest and the protection of investors. These rules are likewise designed to prevent fraud, deception, or manipulation by the investment advisers to those funds. Specifically, the new rules require registered investment advisers to private funds to provide transparency to their investors regarding the fees and expenses and other terms of their relationship with private fund advisers and the performance of such private funds. The new rules also require a registered private fund adviser to obtain an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion from an independent opinion provider. In addition, the new rules restrict all private fund advisers, including those that are not registered with the Commission, from engaging in certain activities unless they provide specified disclosure to and, for certain restricted activities, obtain consent from investors. All private fund advisers are also prohibited from providing certain types of preferential treatment that would have a material, negative effect on other investors, subject to certain exceptions; and other types of preferential treatment to any investor in a private fund, unless the adviser satisfies certain disclosure obligations. The Commission is adopting corresponding amendments to the Advisers Act books and records rule to facilitate compliance with these new rules and assist our examination staff. Finally, the Commission is adopting amendments to the Advisers Act compliance rule, which affect all registered investment advisers, to better enable our staff to conduct examinations.