In the first months of 2022, the Securities and Exchange Commission (“SEC”) has announced a number of rule proposals that, in final form, will likely have an effect on our clients and our industry. Below are summaries of the relevant proposed rules.

Private Fund Proposed Reforms

In recent years, and in response to an increase to $18 billion in gross assets of private funds, the SEC has seen a need to enhance regulation and transparency in an area that had previously remained more private to the general public. The proposed reforms are meant to increase visibility, establish requirements on certain practices and prohibit activity that is contrary to the best interest of investors and the public. The proposed rule will require the following of private fund advisors:

• Distribute quarterly statements to private fund investors which would:
  • Provide details related to all fees and expenses paid by the private fund during the reporting period.
  • Disclose information regarding compensation or other amounts paid by the private fund’s portfolio investments to the adviser.
  • Inform investors on the private fund’s performance (specific to liquid or illiquid funds).
• Remove the permissibility to conduct surprise audits and require private funds to be audited at least annually and upon liquidation and distributed to investors promptly after the completion of the audit.
• Obtain a fairness opinion from an independent, third-party provider in connection with an adviser-led secondary transaction. The adviser would also be required to distribute to investors a summary of any material business relationships the independent opinion provider has or had within the past two years with the adviser.
• Prohibit practices which may be contrary to public interest, including charging of certain fees and expenses, seeking reimbursement of limitation of liability, reducing clawback or borrowing from an investor.
• Prohibit provision of preferential terms to certain investors regarding redemptions or information about portfolio holdings, unless disclosed to current and prospective investors.
• Document annual reviews in writing for all registered advisers.

The SEC fact sheet can be found here.

Cybersecurity Risk Management

Private fund advisers, like many other businesses, increasingly rely on technology to operate their funds, which leaves them vulnerable to cybersecurity failures and attacks that could harm investors. The proposed rule will require the following:

• Adoption and implementation of policies reasonably designed to address cybersecurity risks with certain elements that advisers would be required to address in these policies.
• Reporting of significant cybersecurity incidents by submitting a new Form ADV-C.
• Amendment of Form ADV Part 2A to disclose cybersecurity risks and incidents to an adviser’s clients.
• Maintenance of certain records regarding cybersecurity under the Books and Records Rule.

The SEC fact sheet can be found here.

Modernization of Beneficial Ownership Reporting

The SEC Exchange Act (the “Exchange Act”) Sections 13(d) and 13(g) require that an investor who beneficially owns more than 5% of a covered class of securities must report such beneficial ownership through a Schedule 13D or 13G, and the SEC is considering changes to the filing deadlines embedded in the rule.

The proposed amendments in this area would:

• Shorten the initial filing deadline from 10 days to 5 days, and require that amendments be filed within one business day, among other filing deadline requirements for certain 13G filers.
• Provide that holders of certain derivative securities will be “deemed” beneficial owners of the referenced equity securities.
• Clarify the circumstances under which two or more persons have formed a “group” under the Exchange Act and provide new exemptions to permit investors to:
  • Communicate and consult with each other.
  • Jointly engage with issuers.
  • Execute certain transactions without being subject to regulation.

The SEC fact sheet can be found here.