Following a 3-2 vote by a five-member panel of the US Securities Exchange Commission, the regulator will implement new rules in the country’s private funds industry, which currently manages about $20 trillion in assets. In general, the new rules are looking into making the industry more transparent (advocacy groups have long criticised the US PE funds market for its opacity), fair and accountable through regular reporting requirements and banning of special terms with investors.
The fact sheet of the final rules reads: “The reforms are designed to protect those who directly or indirectly invest in private funds by increasing visibility into certain practices, establishing requirements to address practices that have the potential to lead to investor harm, and prohibiting or restricting adviser activity that is contrary to the public interest and the protection of investors.”
The SEC introduced the proposed changes in February of last year and has amended the same over time, considering recommendations from the funds industry. The final rules (applicable only to new agreements; legacy contracts stay intact) were announced last 23 August and will be in effect in 60 days. In some cases, depending on the fund’s size, the rules’ application will be staggered over a one- to two-year period.
Highlight of the new US PE fund rules
- The commission will require quarterly fee and performance reports of private funds using a set of standardised metrics for fund comparison.
- The new rules will require all funds to perform annual audits.
- The new rules prohibit providing investors with favourable redemption rights, exclusive information about the private funds and portfolio exposure unless such information is offered to everyone. Additionally, ‘side letters’, which provide investors with special terms, are not allowed under the new rules. Managers must disclose these agreements when they are financially material. In essence, the commission outrightly bans preferential treatment to investors.
- The new rules do not allow certain activities and practices not aligned with the public interest and investor protection unless there are disclosures and investor consent.
- All registered private fund advisers must put or document the annual review of their compliance policies and procedures into writing.
- Other restrictions under the new rules include charging the fund with fees related to the investigation of the manager and compliance, fund regulatory and examination fees without disclosure to and consent from the investors.
Requirements for registered PE fund advisers in the US
- Disclosure and distribution of quarterly fund performance reports, including information on the fund’s investment cost, fees and expenses of the fund and compensation paid to the adviser.
- Performance of annual financial statement audit of the fund to assess the valuation of the fund’s assets and protect investors from misuse of the funds.
- Fairness or valuation opinion shall be obtained and given to fund investors when managers offer to sell or swap shares to check against potential conflicts of interest when managers initiate such transactions.
|Rule||Compliance Date for Advisers with $1.5B+ AUM||Compliance Date for Advisers with < $1.5B AUM|
|Private Fund Audit Rule||18 months after publication in the Federal Register||18 months after publication in the Federal Register|
|Quarterly Statement Rule||18 months after publication in the Federal Register||18 months after publication in the Federal Register|
|Adviser-Led Secondaries Rule||12 months after publication in the Federal Register||18 months after publication in the Federal Register|
|Preferential Treatment Rule||12 months after publication in the Federal Register||18 months after publication in the Federal Register|
|Restricted Activities Rule||12 months after publication in the Federal Register||18 months after publication in the Federal Register|
What the new rules mean for PE fund managers in the US
The reforms to the private funds industry in the US bring about significant changes in the way that private funds and managers operate. The new regulations and requirements may mean a more burdensome administrative responsibility for managers.
At Bolder Group, we understand the challenges that PE fund managers face when it comes to compliance in this ever-evolving regulatory environment. Our comprehensive funds and compliance solutions include:
• Generating reports to meet requirements and ensure that fund managers and the funds they manage are in good standing and compliant with the latest regulatory development
• Guiding fund managers in the most recent legislative changes and assisting them with creating up-to-date compliance and reporting procedures
If you have questions regarding the SEC’s new requirements, compliance rules and restrictions, contact our US team, so we can assist you in your compliance obligations for your private funds in the US.