{"id":11571,"date":"2023-09-06T08:05:14","date_gmt":"2023-09-06T08:05:14","guid":{"rendered":"https:\/\/iqeq.com\/?p=11571"},"modified":"2023-09-07T16:31:29","modified_gmt":"2023-09-07T16:31:29","slug":"u-s-sec-adopts-private-fund-reforms","status":"publish","type":"post","link":"https:\/\/iqeq.com\/insights\/u-s-sec-adopts-private-fund-reforms\/","title":{"rendered":"U.S. SEC adopts private fund reforms"},"content":{"rendered":"
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By Jennifer Dickinson, Senior Managing Director, U.S.<\/em><\/p>\n

On August 23, 2023, the U.S. Securities and Exchange Commission (SEC) adopted the long-awaited private fund reforms. The <\/strong>final rule<\/strong><\/a> and a <\/strong>fact sheet<\/strong><\/a> are available on the SEC\u2019s website.\u00a0 While not as sweeping as the <\/strong>proposed rules<\/strong><\/a>, private fund managers should begin preparing for some significant changes to their business.<\/strong><\/p>\n

Final rule vs proposal<\/h2>\n

At a high level, the final rule differs from the proposal in three respects:<\/p>\n

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  1. Flat prohibitions on certain activities have largely been replaced with consent or notice\/disclosure-based requirements.<\/li>\n
  2. Two sets of rules now have a grandfathering mechanism, which the rule describes as \u201cLegacy Status.\u201d Legacy Status applies to existing funds with written contracts executed before the applicable compliance date that would have to be amended to comply with the rule<\/li>\n
  3. Two controversial proposals have been dropped from the final rule: the prohibitions on indemnity for simple negligence, and charging fees for unperformed services (e.g. accelerated monitoring fees)<\/li>\n<\/ol>\n

    Scope and compliance dates<\/h2>\n

    Some of the new rules will apply to all private fund advisers, including exempt reporting advisers (ERAs), state-regulated advisers, advisers relying on the foreign private adviser exemption, or advisers that are otherwise unregistered.<\/p>\n

    All of the rules apply to registered investment advisers (RIAs).<\/p>\n

    Compliance dates vary by rule and, in some cases, by an adviser\u2019s private fund regulatory assets under management (RAUM).\u00a0 All compliance dates given are from the date of publication in the Federal Register.<\/p>\n

    Private fund reforms: the key rule changes<\/h2>\n <\/div>\n<\/section>\n\n
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    1. Documented compliance program annual reviews \u2013 RIAs<\/p>\n

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    Rule 206(4)-7 requires RIAs to conduct an annual review of their compliance programs. The new rule includes an amendment further requiring all RIAs to document this review. The compliance date for this rule is 60 days, which should be during the fourth quarter of 2023.\u00a0 Firms that have not historically documented their annual review should work with their regulatory counsel or compliance consultant to discuss documentation strategies for their upcoming annual review cycle.<\/p>\n <\/div>\n <\/div>\n <\/div>\n

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    2. Private fund financial statement audits \u2013 RIAs<\/p>\n

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    The Custody Rule requires RIAs with custody of client assets to retain an independent public accounting firm to conduct a surprise examination of client assets. Managers of private funds have always had the option to obtain a financial statement audit and deliver the audited financial statements to fund investors within 120 days after fiscal year-end. The surprise examination route, however, was also an available option. The new rule does away with that option and requires all private funds to be audited in accordance with the Custody Rule\u2019s specifications.<\/p>\n

    The compliance date for this rule is 18 months, which should be during the first quarter of 2025.\u00a0 Firms that have been relying on surprise examinations for any funds or SPVs should plan to transition to a full financial statement audit for the fund\/SPV\u2019s 2025 fiscal year.<\/p>\n <\/div>\n <\/div>\n <\/div>\n

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    3. Quarterly statements \u2013 RIAs<\/p>\n

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    The new rule requires RIAs to provide quarterly reporting to fund investors and specifies the timing, content and formatting of those statements. Q1, Q2 and Q3 statements must be distributed within 45 days of quarter-end for funds, or 75 days for funds-of-funds (FoFs). The Q4 statement must be distributed within 90 days of fiscal year-end, or 120 days for FoFs.<\/p>\n

    Statements must contain:<\/p>\n