Last year the SEC proposed new rules for private fund advisers. After public comment the SEC just adopted final rules.
Some of the new rules apply only to investment advisers required to be registered with the SEC. Others apply to all investment advisers, including so-called “private fund advisers.” I’m going to focus on the latter set of rules.
NOTE: The new rules apply more broadly than you might think:
EXAMPLE: Nikki Chilandra forms an LLC of which she is the sole manager, raises money from her private network of investors (no more than 100), and uses the money to buy a limited partnership interest in one real estate deal. The LLC is a private fund, and Nikki is likely a private fund adviser subject to the new rules.
Here’s a chart comparing the proposed rules with the final rules:
|Topic||Proposed Rule||Final Rule|
|Charging for Services Not Performed||An adviser can’t charge for services not provided. For example, if an asset is sold, the adviser can’t charge for the advisory fees that would have been due over the next two years.||The final rules do not include this explicit provision. But that’s only because, according to the SEC, advisers are already prohibited from charging for services not performed because of their fiduciary obligations.|
|Charging for Compliance Costs||An adviser can’t charge the fund for expenses incurred in a regulatory examination of the adviser.||The adviser may charge for these expenses with majority consent, unless the investigation results in sanctions under the Investment Advisers Act.|
|Reducing Clawback for Taxes||An advisor can’t reduce her clawback by the amount of any taxes.||The adviser may reduce her clawback for taxes if she notifies investors within 45 days after the end of the quarter in which the clawback occurs.|
|Limiting Adviser Liability||An adviser can’t limit her liability for a breach of fiduciary duty, willful misfeasance, bad faith, recklessness, or even negligence.||The final rules do not include this explicit provision. But the SEC explains that, in its view, the provision isn’t needed in light of the fiduciary and anti-fraud obligations already imposed on advisers under the Investment Advisers Act which, according to the SEC, may not be waived by contract (e.g., in an LLC Agreement).|
|Allocation of Fees Among Funds||An adviser can’t allocate fees among funds on a non-pro rata basis.||The adviser may allocate fees on a different basis if (i) the allocation is fair and equitable under the circumstances and (ii) before charging or allocating the fees, the adviser notifies investors, explaining why it is fair and equitable.|
|Borrowing from Fund||An adviser can’t borrow money from the fund.||The adviser may borrow money with majority consent.|
|Preferential Treatment for Redemptions and Information||An adviser can’t give preferential rights to redemption or preferential information rights to some investors if it would have a material negative effect on other investors.||Both are allowed if the same rights are given to all investors (which makes the treatment non-preferential).|
|Preferential Economic Treatment||An adviser can’t give other preferential economic rights to some investors without full disclosure to all investors.||Preferential treatment is allowed with full disclosure (i) before an investor invests, (ii) when the fundraising period has ended, and (iii) annually.|
In my opinion, the most important feature of the new rules isn’t the new rules themselves but the SEC’s statements concerning the fiduciary obligations of investment advisers. The SEC believes that all investment advisers have a duty of care and a duty of loyalty that cannot be waived by contract and can be liable for their negligence, no matter what the contract says.
Questions? Let me know.