Key Takeaways
- • The SEC adopted the most comprehensive overhaul of private fund adviser regulation since Dodd-Frank 2010, effective August 2023, introducing two primary new rules: the Restricted Activities Rule and the Preferential Treatment Rule that apply to all private fund advisers.
- • The Restricted Activities Rule prohibits advisers from charging investors for regulatory compliance fees, clawing back taxes from funds, allocating portfolio-level fees on a non-pro-rata basis, and borrowing assets from private fund clients—unless specific disclosures or investor consent are obtained.
- • The Preferential Treatment Rule restricts advisers from providing material preferential treatment to certain investors without disclosure to current and prospective investors, directly addressing fee structures and allocation practices that disadvantage certain fund participants.
- • New regulations mandate quarterly account statements and standardized fee and expense disclosures to enhance transparency and efficiency in the private funds market, strengthening investor protections across all investment adviser categories including real estate managers.
- • The rules represent a fundamental shift in private fund governance, requiring advisers to obtain majority investor consent (excluding adviser interests) before charging clients for governmental or regulatory investigation expenses.
Summary
In August 2023, the Securities and Exchange Commission adopted a comprehensive regulatory framework governing private fund advisers, marking the most substantial revision to private funds rules since the Dodd-Frank Act of 2010. The new rules and amendments are designed to address longstanding investor protection concerns by increasing transparency, competition, and operational efficiency within the private funds market. The regulatory update applies across all investment adviser categories, including private equity, hedge funds, and real estate investment managers.
The SEC implemented two foundational rules applicable to all private fund advisers. The Restricted Activities Rule establishes a prohibition framework on certain adviser practices unless accompanied by appropriate investor disclosure or consent. Specifically, advisers are prohibited from charging investors regulatory or compliance fees and expenses, implementing tax clawbacks from fund assets, or allocating and charging portfolio-level expenses on a non-pro-rata basis. Additionally, advisers cannot charge clients for fees or expenses related to governmental or regulatory investigations without obtaining affirmative consent from a majority of private fund investors (calculated by interest, excluding adviser and related-party holdings). The rule further restricts advisers from borrowing assets from their private fund clients without explicit investor consent.
The Preferential Treatment Rule operates as a complementary safeguard, prohibiting advisers from extending certain types of preferential treatment that produce material negative effects on other investors. Other preferential arrangements are permitted only if disclosed transparently to both current and prospective investors. This framework directly targets fee differentiation, side letter arrangements, and allocation practices that historically favored certain limited partners at the expense of others.
The regulatory overhaul requires private fund advisers to furnish investors with quarterly account statements and standardized disclosures regarding fees and expenses, establishing consistent informational standards across the industry. These transparency requirements are central to the SEC's stated objective of enhancing market efficiency while protecting investor interests. The rules apply comprehensively to registered investment advisers managing private funds, with limited exceptions for non-U.S. private fund clients of non-U.S. advisers. The August 2023 adoption represents a significant shift in private fund governance structures, requiring advisers to reassess compensation practices, fee allocation methodologies, and disclosure protocols to achieve compliance.
The SEC implemented two foundational rules applicable to all private fund advisers. The Restricted Activities Rule establishes a prohibition framework on certain adviser practices unless accompanied by appropriate investor disclosure or consent. Specifically, advisers are prohibited from charging investors regulatory or compliance fees and expenses, implementing tax clawbacks from fund assets, or allocating and charging portfolio-level expenses on a non-pro-rata basis. Additionally, advisers cannot charge clients for fees or expenses related to governmental or regulatory investigations without obtaining affirmative consent from a majority of private fund investors (calculated by interest, excluding adviser and related-party holdings). The rule further restricts advisers from borrowing assets from their private fund clients without explicit investor consent.
The Preferential Treatment Rule operates as a complementary safeguard, prohibiting advisers from extending certain types of preferential treatment that produce material negative effects on other investors. Other preferential arrangements are permitted only if disclosed transparently to both current and prospective investors. This framework directly targets fee differentiation, side letter arrangements, and allocation practices that historically favored certain limited partners at the expense of others.
The regulatory overhaul requires private fund advisers to furnish investors with quarterly account statements and standardized disclosures regarding fees and expenses, establishing consistent informational standards across the industry. These transparency requirements are central to the SEC's stated objective of enhancing market efficiency while protecting investor interests. The rules apply comprehensively to registered investment advisers managing private funds, with limited exceptions for non-U.S. private fund clients of non-U.S. advisers. The August 2023 adoption represents a significant shift in private fund governance structures, requiring advisers to reassess compensation practices, fee allocation methodologies, and disclosure protocols to achieve compliance.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.