SEC’s Rule Proposals Seek to Reform the Private Fund Industry

In January 2022, on the heels of the numerous public remarks from Chairman Gensler and other senior U.S. Securities and Exchange Commission (SEC) staff that we analyzed in our Q4 2021 Private Markets Update, the SEC issued a series of rule proposals seeking to reform the private fund industry. Certain rule proposals try to outright ban a host of practices that have long been accepted by general partners (GPs) and limited partners (LPs) alike, whereas other rule proposals set additional requirements to engage in certain types of business practices (e.g., GP-led secondary transactions). Further, certain rule proposals seek more transparent, granular, and consistent disclosures across the private fund industry relating to fees, expenses, and fund performance. The rule proposals easily represent the SEC’s biggest attempt to shape the GP-LP relationship since the implementation of the Dodd-Frank Act.

It is particularly noteworthy that many aspects of the rule proposals are aimed specifically at the private markets fund industry – perhaps the SEC’s first such attempt in Advisers Act rule-making history. Equally noteworthy is the fact that some of the most controversial and hard-hitting aspects of the new rule proposals impact all private markets fund advisers (including those not registered with the SEC - such as exempt reporting advisers (ERAs)) and, as such, could have deeply global ramifications for the private funds industry. Additionally, as currently proposed, the SEC will not permit GPs to waive or modify any aspects of the proposed rules with LP consent.

Key takeaways 

Irrespective of the ultimate outcome of these rule proposals, these SEC rule-making efforts reveal much about how the SEC’s examination and enforcement agenda is likely to unfold in the coming months and years. As such, even though it is too soon to know exactly what form the final rule-making will take, we recommend the following steps for all private markets fund advisers: 

• Carefully undertake a gap analysis of current business practices in the areas touched upon by the proposed rules and assess how they would implement applicable changes if and when required. Such an analysis should involve some degree of assessment of potential increases in business costs (e.g., an increase in D&O/E&O insurance premiums as a result of the proposals’ attempt to significantly limit a fund managers’ ability to seek indemnification from their private funds) – and how such costs will be absorbed should they materialize 
• Consider early implementation in those areas where a transition to a more robust disclosure/reporting regime now seems inevitable based on growing investor demands (e.g., more granular and frequent disclosures to LPs relating to fees and expenses, and enhanced disclosures relating to side letter terms)

Watch our on demand webcast 

For the SEC’s own insights into the rule proposals, please click here to access a recent webcast hosted by ACA featuring Christine A. Schleppegrell, Acting Branch Chief of the SEC’s Private Funds Branch – Division of Investment Management.

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Contact us if you have any further questions about these rule proposals, or how ACA can help your firm meet your regulatory requirements.

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