October 3, 2023Client Alert

SEC Private Fund Adviser Rules: Summary of Rules and Legal Challenge

As many of you already know, on August 23, 2023, the U.S. Securities and Exchange Commission adopted rules (the “Rules”) to enhance the regulation of investment advisers that advise private funds. The Commission adopted the rules as part of its efforts to increase transparency to investors in private capital markets.

SEC Building seal

These Rules mark a dramatic shift in the regulation and landscape of U.S. private capital markets. They also impact more advisers than many advisers might anticipate. Under the Rules, there are new obligations for registered investment advisers, exempt reporting advisers, state-registered advisers, and advisers exempt from state registration.

The Rules have been met with skepticism and resistance. Not long after the Rules were passed, industry groups filed suit to challenge the Rules. Below is a brief summary of the pending legal challenge and the Rules, which will become the law of the land if the legal challenge is not successful.

Legal Challenge

A week after the Rules were finalized, a consortium of six major trade associations filed a Petition for Review in the U.S. Court of Appeals for the Fifth Circuit. The Petition argues that the Rules violate the Administrative Procedures Act because they exceed the Commission’s authority, were adopted without notice and comment, and are otherwise arbitrary, capricious, an abuse of discretion, and contrary to law.

The Petition further challenges the Commission’s purported authority to regulate private funds under Section 206(4) of Advisers Act (a general anti-fraud provision) and Section 913 of the Dodd-Frank Act (which applies to retail investors and does not mention private funds). Additionally, the Petition claims that the Commission violated its obligation under the Advisers Act to consider the Rules’ effect on “efficiency, competition, and capital formation.”

Although the Fifth Circuit has traditionally been favorable to challenges against the Commission, there is no guarantee that the lawsuit will be successful or will render the Rules unenforceable in their entirety. As such, advisers should begin to prepare for compliance while the lawsuit is pending.

Summary of Private Fund Adviser Rules

RIAs that Advise Private Funds

RIAs that advise private funds will be required to:

Quarterly Statement Rule

Provide investors with quarterly statements that account for, among other things: fund performance; fees/expenses incurred by the fund; the cost of investing in the fund; and compensation paid to the adviser and its affiliates. The statements must include line-item reporting and cannot group expenses, fees or compensation into broad categories.

Private Fund Audit Rule

Obtain audits from each private fund advised. The audits must comply with the audit provision in the Custody Rule (17 CFR § 275.206(4)-2).

Adviser-Led Secondaries Rule

Provide an independent fairness or valuation opinion to investors when providing them with the option of selling their interests in the fund or converting their interests to interests in another fund. Advisers will also need to provide investors with a report outlining their material business relationships with the opinion provider within the last two years.

All Private Fund Advisers

All advisers to private funds – including exempt reporting advisers, state-registered advisers, and advisers exempt from state registration – will be required to:

Restricted Activities Rule

Refrain from engaging in specific prohibited activities, including:

  • Allocating expenses from the adviser’s regulatory investigations to a fund without disclosure to and consent from investors.
  • Allocating expenses from the adviser’s regulatory investigations to a fund if the adviser is sanctioned or if the investigation involves alleged violations of the Advisers Act or its rules.
  • Allocating regulatory, examination, or compliance fees to the fund without disclosure to investors.
  • Reducing clawbacks by the amount of certain taxes without disclosing the pre-tax and post-tax clawback amount to investors.
  • Allocating expenses from a portfolio investment on a non-pro rata basis without providing investors with notice and a description of the fairness of the allocation.
  • Receiving a line of credit from a private fund without disclosure to and consent from investors.

Preferential Treatment Rule

Refrain from:

  • Allowing redemptions from the fund unless required by law or the right to redemption is offered to all investors.
  • Providing preferential information about the fund’s portfolio, unless such information is offered to all investors.
  • Providing preferential treatment to investors unless certain terms of the preferential treatment are disclosed before an investor invests in the fund, and all the terms are disclosed following an investor’s investment in the fund.

Amendment to Compliance Rule

Separate from the Rules, the Commission has also amended the Compliance Rule to require all RIAs – including those that do not advise private funds – to keep written documentation of the annual review of their compliance policies and procedures. The Commission has also made corresponding amendments to the Books and Records Rule to help it in evaluate compliance with the Rules.

Compliance Dates

Advisers will be required to comply with the rule by the following compliance dates:


Amended Compliance Rule



Adviser-Led Secondaries Rule
Preferential Treatment Rule
Restricted Activities Rule



Private Fund Audit Rule
Quarterly Statement Rule


November 13, 2023

March 14, 2024 – for advisers with less than $1.5BN
in private funds AUM

September 14, 2024 – for advisers with $1.5BN in private fund AUM

March 14, 2025


 Legacy Status

Advisers will need to ensure the governing agreements of private funds are amended to comply with the Rules by the above compliance dates. However, the Commission has afforded funds and their governing agreements limited legacy status, exempting them from certain provisions of the Preferential Treatment Rule and Restricted Activities Rule. Specifically, legacy status applies to prohibitions on:

  • Preferential redemption rights.
  • Preferential portfolio holding information rights.
  • Borrowing from a private fund without investor consent.
  • Charging investigation fees/expenses of the adviser without investor consent. However, Advisers may not charge fees/expenses related to an investigation resulting in a sanction for a violation of the Advisers Act or rules thereunder.

Legacy status applies only to private funds that commenced operations (e.g., issuing capital calls, setting up a subscription facility, conducting due diligence) before the compliance date. The legacy status also only applies with respect to advisers’ existing agreements with parties as of the compliance date. Therefore, an adviser may not add parties to a pre-existing side letter after the compliance date, but may admit investors to an existing fund if the terms that would otherwise violate the Rules are set forth in the fund’s governing agreement and apply to all investors.

Ultimately, the Rules will dramatically impact all private fund advisers, regardless of their registration status. For more information, please reach out to a member of Michael Best’s Investment Adviser & Broker-Dealer team.

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