Key Takeaways
- • The SEC adopted two new rules in August 2023—the "Restricted Activities Rule" and the "Preferential Treatment Rule"—representing the most substantial overhaul of private funds regulation since Dodd-Frank 2010.
- • The Restricted Activities Rule prohibits advisers from charging investors for regulatory or compliance fees, clawing back taxes, allocating portfolio-level fees on a non-pro-rata basis, and borrowing assets from private fund clients without appropriate disclosure or consent.
- • New rules require advisers to obtain majority consent from private fund investors before charging clients for fees or expenses associated with governmental or regulatory investigations, excluding adviser and related-party interests.
- • All investment advisers, including real estate fund managers, must comply with these enhanced regulations designed to increase transparency, competition, and efficiency in the private funds market.
- • The rules apply broadly to all private fund advisers and registered investment advisers, fundamentally reshaping adviser-investor relationships and operational compliance frameworks.
Summary
In August 2023, the Securities and Exchange Commission adopted a comprehensive set of new rules and amendments governing private fund advisers, marking the most significant regulatory overhaul of the private funds sector since the passage of Dodd-Frank in 2010. The regulatory package introduces two foundational rules applicable to all advisers: the "Restricted Activities Rule" and the "Preferential Treatment Rule," both designed to enhance investor protection through increased transparency, competition, and market efficiency.
The Restricted Activities Rule establishes clear prohibitions on adviser conduct unless specific conditions are met. Most notably, advisers are barred from charging investors for regulatory or compliance fees and expenses unless such charges are disclosed to investors in advance. The rule further prohibits the clawing back of taxes from funds and prevents advisers from allocating or charging portfolio-level fees and expenses on a non-pro-rata basis without disclosure. A critical provision requires that advisers obtain majority consent from private fund investors—excluding the adviser's own interests and related parties—before charging clients for fees or expenses tied to governmental or regulatory investigations. Additionally, the rule prohibits advisers from borrowing assets from their private fund clients without investor consent.
The scope of these new rules extends beyond traditional private equity and hedge funds to encompass all investment advisers, including real estate investment managers. This broad application underscores the SEC's intent to establish uniform standards across the alternative investment industry and ensure consistent investor protections regardless of investment strategy or fund type. Real estate fund managers and other alternative asset classes must now evaluate their fee structures, governance practices, and investor documentation to ensure compliance with these enhanced requirements.
The regulatory framework reflects the SEC's stated objective to modernize private fund adviser oversight while addressing investor protection concerns that have accumulated over more than a decade since Dodd-Frank. By requiring enhanced disclosures and explicit investor consent for certain practices previously conducted without restriction, the SEC seeks to reduce information asymmetries between advisers and investors and curb potentially abusive fee and expense allocation practices that had developed in unregulated corners of the private funds market.
The Restricted Activities Rule establishes clear prohibitions on adviser conduct unless specific conditions are met. Most notably, advisers are barred from charging investors for regulatory or compliance fees and expenses unless such charges are disclosed to investors in advance. The rule further prohibits the clawing back of taxes from funds and prevents advisers from allocating or charging portfolio-level fees and expenses on a non-pro-rata basis without disclosure. A critical provision requires that advisers obtain majority consent from private fund investors—excluding the adviser's own interests and related parties—before charging clients for fees or expenses tied to governmental or regulatory investigations. Additionally, the rule prohibits advisers from borrowing assets from their private fund clients without investor consent.
The scope of these new rules extends beyond traditional private equity and hedge funds to encompass all investment advisers, including real estate investment managers. This broad application underscores the SEC's intent to establish uniform standards across the alternative investment industry and ensure consistent investor protections regardless of investment strategy or fund type. Real estate fund managers and other alternative asset classes must now evaluate their fee structures, governance practices, and investor documentation to ensure compliance with these enhanced requirements.
The regulatory framework reflects the SEC's stated objective to modernize private fund adviser oversight while addressing investor protection concerns that have accumulated over more than a decade since Dodd-Frank. By requiring enhanced disclosures and explicit investor consent for certain practices previously conducted without restriction, the SEC seeks to reduce information asymmetries between advisers and investors and curb potentially abusive fee and expense allocation practices that had developed in unregulated corners of the private funds market.
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