Private Fund Advisers 2023 Regulatory Outlook
Sponsors and managers of private funds must attend to various routine regulatory and compliance tasks, which can include ongoing reporting obligations under the Investment Advisers Act of 1940 (the “Advisers Act”), updating filings for offering exemptions under the Securities Act of 1933 (the “Securities Act”), and affirming reliance on exemptions from registration with the Commodities Futures Trading Commission (CFTC). As the calendar turns to 2023, now is a good time for advisers to ensure that they are prepared to meet these regulatory requirements.
To assist with these compliance obligations in 2023, we have prepared a regulatory and compliance checklist that outlines certain notable private fund adviser filing obligations and other compliance tasks, as well as applicable 2023 deadlines.
In addition to routine regulatory obligations, private fund advisers should note that the Securities and Exchange Commission (SEC) proposed several significant rulemakings in 2022 that could meaningfully impact management, compliance, and reporting for private funds and their advisers. As of the date of this Alert, these proposals remain pending; however, we expect that the SEC’s rulemaking staff is actively evaluating public comments received on these proposals. While industry participants have expressed critical views on certain proposals, at least some and perhaps all of these proposals are likely to be adopted in 2023. Moreover, while the SEC’s Division of Examinations has not yet published its 2023 Examination Priorities, we expect that private fund advisers will remain a top examination priority, as in prior years. We have summarized the currently pending proposals below.
Pending SEC Rulemaking
Private Fund Investor Protection Proposal
On February 9, 2022, the SEC proposed new rules under the Advisers Act that would be applicable to private fund advisers that are registered investment advisers (“RIAs”) and, in some cases, exempt reporting advisers (“ERAs”). The proposals would:
- require registered private fund advisers to provide investors with quarterly statements detailing information about private fund performance, fees, and expenses (Proposed Rule 211(h)(1) under the Advisers Act);
- require registered private fund advisers to obtain an annual audit for each private fund advised by an adviser and cause the private fund’s auditor to notify the SEC upon certain events (Proposed Rule 206(4)-10 under the Advisers Act);
- prohibit all private fund advisers, including those that are not registered, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors (e.g., charging accelerated monitoring fees) (Proposed Rule 211(h)(2)-1 under the Advisers Act);
- require registered private fund advisers, in connection with an adviser-led secondary transaction, to distribute to investors a fairness opinion and a written summary of certain material business relationships between the adviser and the opinion provider (Proposed Rule 211(h)(2)-2 under the Advisers Act);
- prohibit all private fund advisers from providing certain types of preferential treatment that have a material negative effect on other investors (e.g., providing preferential liquidity terms), while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors (Proposed Rule 211(h)(2)-3 under the Advisers Act); and
- require all registered investment advisers to document the annual review of their compliance policies and procedures in writing (Proposed amendments to Rule 206(4)-7 under the Advisers Act).
SEC Proposes New Rules and Amendments Applicable to Private Fund Advisers (MoFo Client Alert)
SEC Proposes Enhanced Disclosures for Private Equity and Hedge Funds (MoFo Client Alert)
Cybersecurity Reporting Proposal
On February 9, 2022, the SEC proposed Rule 206(4)-9 under the Advisers Act, which would require all registered investment advisers to adopt and implement written cybersecurity policies and procedures reasonably designed to address cybersecurity risks. Additionally, the proposal would amend Form ADV to require registered investment advisers to report to the SEC any significant cybersecurity incidents affecting the adviser or its private fund clients and to disclose these incidents and other cybersecurity risks to clients in the adviser’s Form ADV Part 2 brochure.
ESG Disclosure Proposal
On May 25, 2022, the SEC proposed amendments to Form ADV that would require registered investment advisers and exempt reporting advisers to disclose information on Form ADV Part 1A regarding their ESG investment approach and whether they rely on any third-party ESG framework in connection with certain advisory services. The proposal would also amend Form ADV Part 2 to require that a registered investment adviser include in its brochure: (i) a description of the ESG factor or factors it considers for each significant investment strategy or method of analysis; (ii) disclosure of any material relationship or arrangement that the adviser has with any related person that is an ESG consultant or other ESG service provider; and (iii) if the adviser has proxy voting policies or procedures that include ESG considerations, a description of those ESG factors and how they are considered in connection with voting client securities.
Form PF Amendments
In 2022, the SEC published two proposals that would amend Form PF—one on January 26, 2022, and the other on August 10, 2022. The January proposal would add new current reporting requirements for large hedge fund advisers and private equity advisers. The proposed current reporting obligations would require a private fund adviser to file an amended Form PF report within one day of the occurrence of certain events, including extraordinary investment losses, margin or default events, large withdrawal and redemption requests, suspensions of redemptions, the completion of adviser-led secondary transactions, and other events. The January proposal would also lower the annual reporting threshold for large private equity advisers and require these advisers to provide additional information to the SEC about the private equity funds they advise. The August proposal would require private fund advisers to report on Form PF more detailed information regarding assets under management, withdrawal and redemption rights, gross asset value and net asset value, inflows and outflows, borrowings and types of creditors, investment strategies, and counterparty exposures, among other items.
SEC Proposes to Expand Private Funds Reporting Requirements (MoFo Client Alert)
Vendor Oversight Rule Proposal
On October 26, 2022, the SEC proposed new Rule 206(4)-11 that would prohibit registered investment advisers, including private fund advisers, from outsourcing certain functions to service providers unless minimum due diligence, oversight, and written recordkeeping requirements are met. Specifically, proposed Rule 206(4)-11 would require advisers to implement and document a due diligence process for initially approving and thereafter maintaining outsourced and similar service relationships with certain types of service providers, generally including the following: valuation, sub-adviser, client services, cybersecurity, investment risk, portfolio accounting, pricing, reconciliation, trading desk, and trade communication and allocation.
Form N-PX Reporting for Institutional Investment Managers
On November 2, 2022, the SEC proposed amendments to Form N-PX that would require investment advisers that exercise investment discretion over securities with an aggregate value of at least $100 million (i.e., Form 13F filers) to report annually on Form N-PX how they voted proxies relating to shareholder advisory votes on executive compensation (“say-on-pay”) matters.
If you have any questions about these proposals, current private fund regulatory obligations, or preparing for SEC examinations, please contact a member of MoFo’s Private Funds Group or Investment Management team.
 For a more comprehensive reference guide that outlines certain key rules applicable to all registered investment advisers, please see Morrison Foerster’s Investment Adviser Compliance Index.
 See, e.g., 2022 Examination Priorities, SEC Division of Examinations (2022) (noting private fund advisers as a significant focus area for examinations in 2022).