New SEC rules pertinent to investment advisers

Funds that integrate ESG factors alongside non-ESG factors in investment decisions.

These funds would be required to describe how ESG factors are incorporated into their investment processes.

Funds for which ESG factors are a significant or main consideration.

These funds would be required to provide detailed disclosure, including a standardized ESG strategy overview table.

A subset of ESG-Focused Funds that seek to achieve a particular ESG impact.

Beyond the requirements of ESG-Focused Funds, these funds would be required to provide additional information on the impact(s) they seek to achieve and the key metrics being used to measure progress.

The Quarterly Statement Rule requires all SEC-registered private fund advisers to provide investors with quarterly statements detailing information about private fund performance, fees and expenses. The statement would include, in table format at both fund and portfolio level:

• Detailed accounting of all fees and expenses paid to the private fund adviser and/or its related persons, including any management fee offsets
• Any other fees and expenses that portfolio investments pay to the private fund adviser and its related persons
• Certain portfolio company ownership and performance information

The Private Fund Audit Rule requires registered private fund advisers to obtain an annual audit for each private fund they advise and cause the private fund’s auditor to notify the SEC upon certain events

The Adviser-Led Secondaries Rule requires registered private fund advisers, in connection with an adviser-led secondary transaction, to distribute to investors a fairness opinion (on the price offered by the adviser) from an independent opinion provider, supported by a written summary of any material business relationships held between the adviser and the opinion provider or its related persons over the past two years

The Prohibited Activities Rule prohibits all private fund advisers (including unregistered advisers) from engaging in certain activities and practices that are contrary to public interest and the protection of investors, including:

• Seeking reimbursement, indemnification, exculpation or limited liability for a breach of fiduciary duty, willful misfeasance, bad faith, negligence or recklessness in providing services to the private fund
• Charging certain fees and expenses related to a portfolio investment on a non-pro rata basis when multiple private funds or other clients advised by the private fund adviser have invested or propose to invest in the same
• Charging fees for unperformed services, e.g. accelerated monitoring, servicing, consulting or other fees that the adviser has yet to perform and/or does not reasonably expect to perform for the portfolio investment
• Reducing clawback amounts by taxes, i.e. providing for a clawback of carried interest net of taxes, whether net of actual taxes or of a set rate of tax
• Borrowing any assets or otherwise seeking an extension of credit from a private fund client
• Charging private funds for fees and expenses associated with the regulatory and compliance activities of the adviser or its related persons (as opposed to those activities of the fund itself, which would be permissible to recharge), including expenses incurred in connection with examinations or investigations by a regulatory or governmental authority

The Preferential Treatment Rule prohibits all private fund advisers from providing preferential terms to certain investors that have a material negative effect on other investors, while also conditioning other types of preferential treatment on disclosure to current and prospective investors. The following side agreements between advisers and investors would be strictly prohibited:

• Granting of preferential liquidity terms
• Provision of information regarding the private fund’s portfolio holdings or exposures (if the adviser reasonably expects that such preferential treatment would have a material, negative effect on other investors in the fund)
• Provision of any other kind of preferential treatment without also providing:
  • Written notice to each prospective investor that includes specific disclosure regarding any preferential treatment
  • Annual written notice to current investors in an ongoing offering that includes specific disclosure regarding any preferential treatment provided by the private fund adviser to other investors in the private fund