63206 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1Unless otherwise noted, when we refer to the 

Advisers Act, or any section of the Advisers Act, 

we are referring to 15 U.S.C. 80b, at which the 

Advisers Act is codified. When we refer to rules 

under the Advisers Act, or any section of those 

rules, we are referring to title 17, part 275 of the 

Code of Federal Regulations [17 CFR part 275], in 

which these rules are published. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 275 

[Release No. IA–6383; File No. S7–03–22] 

RIN 3235–AN07 

Private Fund Advisers; Documentation 

of Registered Investment Adviser 

Compliance Reviews 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’) 

is adopting new rules under the 

Investment Advisers Act of 1940 

(‘‘Advisers Act’’ or ‘‘Act’’). The rules are 

designed to protect investors who 

directly or indirectly invest in private 

funds by increasing visibility into 

certain practices involving 

compensation schemes, sales practices, 

and conflicts of interest through 

disclosure; establishing requirements to 

address such practices that have the 

potential to lead to investor harm; and 

restricting practices that are contrary to 

the public interest and the protection of 

investors. These rules are likewise 

designed to prevent fraud, deception, or 

manipulation by the investment 

advisers to those funds. The 

Commission is adopting corresponding 

amendments to the Advisers Act books 

and records rule to facilitate compliance 

with these new rules and assist our 

examination staff. Finally, the 

Commission is adopting amendments to 

the Advisers Act compliance rule, 

which affect all registered investment 

advisers, to better enable our staff to 

conduct examinations. 

DATES: 

Effective date: These rules are 

effective November 13, 2023. 

Compliance date: See Section IV. 

Comments due date: Comments 

regarding the collection of information 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

should be received on or before October 

16, 2023. 

FOR FURTHER INFORMATION CONTACT: 

Shane Cox, Robert Holowka, and Neema 

Nassiri, Senior Counsels; Tom Strumpf, 

Branch Chief; Adele Murray, Private 

Funds Attorney Fellow; Melissa Roverts 

Harke, Assistant Director, Investment 

Adviser Rulemaking Office; or Marc 

Mehrespand, Branch Chief, Chief 

Counsel’s Office, at (202) 551–6787 or 

IArules@sec.gov, Division of Investment 

Management, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–8549. 

SUPPLEMENTARY INFORMATION: The 

Securities and Exchange Commission is 

adopting rule 17 CFR 275.206(4)–10 

(final rule 206(4)–10), 17 CFR 

275.211(h)(1)–1 (final rule 211(h)(1)–1), 

17 CFR 275.211(h)(1)–2 (final rule 

211(h)(1)–2), 17 CFR 275.211(h)(2)–1 

(final rule 211(h)(2)–1), 17 CFR 

275.211(h)(2)–2 (final rule 211(h)(2)–2), 

and 17 CFR 275.211(h)(2)–3 (final rule 

211(h)(2)–3) under the Investment 

Advisers Act of 1940 [15 U.S.C. 80b–1 

et seq.] (‘‘Advisers Act’’); 1 and 

amendments to 17 CFR 275.204–2 (final 

amended rule 204–2) and 17 CFR 

275.206(4)–7 (final amended rule 

206(4)–7) under the Advisers Act. 

Table of Contents 

I. Introduction 

A. Risks and Harms to Investors 

B. Rules To Address These Risks and 

Harms 

C. The Commission Has Authority To 

Adopt the Rules 

II. Discussion of Rules for Private Fund 

Advisers 

A. Scope of Advisers Subject to the Final 

Private Fund Adviser Rules 

B. Quarterly Statements 

1. Fee and Expense Disclosure 

2. Performance Disclosure 

3. Preparation and Distribution of 

Quarterly Statements 

4. Consolidated Reporting for Certain Fund 

Structures 

5. Format and Content Requirements 

6. Recordkeeping for Quarterly Statements 

C. Mandatory Private Fund Adviser Audits 

1. Requirements for Accountants 

Performing Private Fund Audits 

2. Auditing Standards for Financial 

Statements 

3. Preparation of Audited Financial 

Statements 

4. Distribution of Audited Financial 

Statements 

5. Annual Audit, Liquidation Audit, and 

Audit Period Lengths 

6. Commission Notification 

7. Taking All Reasonable Steps To Cause 

An Audit 

8. Recordkeeping Provisions Related to the 

Audit Rule 

D. Adviser-Led Secondaries 

1. Definition of Adviser-led Secondary 

Transaction 

2. Fairness Opinion or Valuation Opinion 

3. Summary of Material Business 

Relationships 

4. Distribution of the Opinion and 

Summary of Material Business 

Relationships 

5. Recordkeeping for Adviser-Led 

Secondaries 

E. Restricted Activities 

1. Restricted Activities With DisclosureBased Exceptions 

(a) Regulatory, Compliance, and 

Examination Expenses 

(b) Reducing Adviser Clawbacks for Taxes 

(c) Certain Non-Pro Rata Fee and Expense 

Allocations 

2. Restricted Activities With Certain 

Investor Consent Exceptions 

(a) Investigation Expenses 

(b) Borrowing 

F. Certain Adviser Misconduct 

1. Fees for Unperformed Services 

2. Limiting or Eliminating Liability 

G. Preferential Treatment 

1. Prohibited Preferential Redemptions 

2. Prohibited Preferential Transparency 

3. Similar Pool of Assets 

4. Other Preferential Treatment and 

Disclosure of Preferential Treatment 

5. Delivery 

6. Recordkeeping for Preferential 

Treatment 

III. Discussion of Written Documentation of 

All Advisers’ Annual Reviews of 

Compliance Programs 

IV. Transition Period, Compliance Date, 

Legacy Status 

V. Other Matters 

VI. Economic Analysis 

A. Introduction 

B. Broad Economic Considerations 

C. Economic Baseline 

1. Industry Statistics and Affected Parties 

2. Sales Practices, Compensation 

Arrangements, and Other Business 

Practices of Private Fund Advisers 

3. Private Fund Adviser Fee, Expense, and 

Performance Disclosure Practices 

4. Fund Audits, Fairness Opinions, and 

Valuation Opinions 

5. Books and Records 

6. Documentation of Annual Review Under 

the Compliance Rule 

D. Benefits and Costs 

1. Overview 

2. Quarterly Statements 

3. Restricted Activities 

4. Preferential Treatment 

5. Mandatory Private Fund Adviser Audits 

6. Adviser-Led Secondaries 

7. Written Documentation of All Advisers’ 

Annual Review of Compliance Programs 

8. Recordkeeping 

E. Effects on Efficiency, Competition, and 

Capital Formation 

1. Efficiency 

2. Competition 

3. Capital Formation 

F. Alternatives Considered 

1. Alternatives to the Requirement for 

Private Fund Advisers To Obtain an 

Annual Audit 

2. Alternatives to the Requirement To 

Distribute a Quarterly Statement to 

Investors Disclosing Certain Information 

Regarding Costs and Performance 

3. Alternative to the Required Manner of 

Preparing and Distributing Quarterly 

Statements and Audited Financial 

Statements 

4. Alternatives to the Restrictions From 

Engaging in Certain Sales Practices, 

Conflicts of Interest, and Compensation 

Schemes 

5. Alternatives to the Requirement That An 

Adviser To Obtain a Fairness Opinion or 


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2See infra section I.C. 

3See infra section VI.E. See also Private Fund 

Advisers; Documentation of Registered Investment 

Adviser Compliance Reviews, Investment Advisers 

Act Release No. 5955 (Feb. 9, 2022) [87 FR 16886 

(Mar. 24, 2022)] (‘‘Proposing Release’’); Reopening 

of Comment Periods for ‘‘Private Fund Advisers; 

Documentation of Registered Investment Adviser 

Compliance Reviews’’ and ‘‘Amendments 

Regarding the Definition of ‘Exchange’ and 

Alternative Trading Systems (ATSs) That Trade 

U.S. Treasury and Agency Securities, National 

Market System (NMS) Stocks, and Other 

Securities,’’ Investment Advisers Act Release No. 

6018 (May 9, 2022) [87 FR 29059 (May 12, 2022)]; 

Resubmission of Comments and Reopening of 

Comment Periods for Certain Rulemaking Releases, 

Investment Advisers Act Release No. 6162 (Oct. 7, 

2022) [87 FR 63016 (Oct. 18, 2022)]. The 

Commission voted to issue the Proposing Release 

on Feb. 9, 2022. The release was posted on the 

Commission website that day, and comment letters 

were received beginning that same date. The 

comment period closed on Nov. 1, 2022. We have 

considered all comments received since Feb. 9, 

2022. 

4Section 202(a)(29) of the Advisers Act defines 

the term ‘‘private fund’’ as an issuer that would be 

an investment company, as defined in section 3 of 

the Investment Company Act of 1940 (15 U.S.C. 

80a–3) (‘‘Investment Company Act’’), but for section 

3(c)(1) or 3(c)(7) of that Act. We use ‘‘private fund’’ 

and ‘‘fund’’ interchangeably throughout this release. 

Securitized asset funds are excluded from the term 

‘‘private funds’’ for purposes hereof, unless stated 

otherwise. See infra section II.A (Scope of Advisers 

Subject to the Final Private Fund Adviser Rules) for 

a discussion of the application of the final rules to 

securitized asset funds. 

5See, e.g., Commission Interpretation Regarding 

Standard of Conduct for Investment Advisers, 

Investment Advisers Act Release No. 5248 (June 5, 

2019) [84 FR 33669 (July 12, 2019)] (‘‘2019 IA 

Fiduciary Duty Interpretation’’). 

6 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, § 403, 404, 124 

Stat, 1378, 1571–72 (Jul. 2010), codified at 15 U.S.C. 

80b–4(b). 

7Private equity funds, hedge funds, and venture 

capital funds are further described below. 

8See Dodd-Frank Act, section 403. 

9See Dodd-Frank Act, sections 407 and 408; 

Exemptions for Advisers to Venture Capital Funds, 

Private Fund Advisers With Less Than $150 Million 

in Assets Under Management, and Foreign Private 

Advisers, Investment Advisers Act Release No. 

3222 (June 22, 2011) [76 FR 39645 (July 6, 2011)] 

(‘‘Exemptions Adopting Release’’). The Dodd-Frank 

Act also provided the Commission with the ability 

to require the limited number of advisers to private 

funds that did not have to register to file reports 

about their business activities. 

10See Form ADV data (inclusive of assets 

attributable to securitized asset funds). 

11 Id. (inclusive of securitized asset funds). 

Valuation Opinion in Connection With 

Certain Adviser-Led Secondary 

Transactions 

6. Alternatives to the Prohibition From 

Providing Certain Preferential Terms and 

Requirement To Disclose All Preferential 

Treatment 

VII. Paperwork Reduction Act 

A. Introduction 

B. Quarterly Statements 

C. Mandatory Private Fund Adviser Audits 

D. Restricted Activities 

E. Adviser-Led Secondaries 

F. Preferential Treatment 

G. Written Documentation of Adviser’s 

Annual Review of Compliance Program 

H. Recordkeeping 

I. Request for Comment Regarding Rule 

211(h)(2)–1 

VIII. Final Regulatory Flexibility Analysis 

A. Reasons for and Objectives of the Final 

Rules and Rule Amendments 

1. Final Rule 211(h)(1)–1 

2. Final Rule 211(h)(1)–2 

3. Final Rule 206(4)–10 

4. Final Rule 211(h)(2)–1 

5. Final Rule 211(h)(2)–2 

6. Final Rule 211(h)(2)–3 

7. Final Amendments to Rule 204–2 

8. Final Amendments to Rule 206(4)–7 

B. Significant Issues Raised by Public 

Comments 

C. Legal Basis 

D. Small Entities Subject to Rules 

E. Projected Reporting, Recordkeeping, and 

Other Compliance Requirements 

1. Final Rule 211(h)(1)–1 

2. Final Rule 211(h)(1)–2 

3. Final Rule 206(4)–10 

4. Final Rule 211(h)(2)–1 

5. Final Rule 211(h)(2)–2 

6. Final Rule 211(h)(2)–3 

7. Final Amendments to Rule 204–2 

8. Final Amendments to Rule 206(4)–7 

F. Significant Alternatives 

Statutory Authority 

I. Introduction 

The Commission oversees private 

fund advisers, many of which are 

registered with the SEC or report to the 

SEC as exempt reporting advisers. 

Despite the Commission’s examination 

and enforcement efforts with respect to 

private fund advisers, such advisers 

continue to engage in certain practices 

that may impose significant risks and 

harms on investors and private funds. 

Consequently, there is a compelling 

need for the Commission to exercise its 

congressional authority for the 

protection of investors.2 Based on the 

Commission’s extensive experience 

overseeing private fund advisers, the 

Commission is adopting carefully 

tailored rules to address the risks and 

harms to investors and funds, while 

promoting efficiency, competition, and 

capital formation.3

Background 

Private funds are privately offered 

investment vehicles that pool capital 

from one or more investors and invest 

in securities and other instruments or 

investments.4 Each investor in a private 

fund invests by purchasing securities 

(which are generally issued by the fund 

in the form of interests or shares) and 

then participates in the fund through 

the securities that it holds. Private funds 

are generally advised by investment 

advisers that are subject to a Federal 

fiduciary duty as well as the antifraud 

and other provisions of the Act.5 A 

private fund adviser, which often has 

broad discretion to provide investment 

advisory services to the fund, uses the 

money contributed by investors to make 

investments on behalf of the fund. 

Congress expanded the Commission’s 

role overseeing private fund advisers 

and their relationship with private 

funds and their investors in the wake of 

the 2007–2008 financial crisis, when it 

passed, and the President signed, the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 

(‘‘Dodd-Frank Act’’). While the 

antifraud provisions of section 206 

already applied to private fund advisers 

and the Commission already had 

brought enforcement actions against 

private fund advisers before the 

enactment of the Dodd-Frank Act, 

Congress increased the Commission’s 

oversight responsibility of private fund 

advisers. Among other things, Congress 

amended the Advisers Act generally to 

require advisers to private funds to 

register with the Commission and to 

authorize the Commission to establish 

reporting and recordkeeping 

requirements for advisers to private 

funds for investor protection and 

systemic risk purposes.6 Specifically, 

Title IV of the Dodd-Frank Act repealed 

an exemption from registration 

contained in section 203(b)(3) of the 

Advisers Act—known as the ‘‘private 

adviser exemption’’—on which many 

private fund advisers, including those to 

private equity funds, hedge funds, and 

venture capital funds,7 had relied.8 In 

addition to eliminating this provision, 

Congress directed the Commission to 

adopt more limited exemptions for 

advisers that solely advise private 

funds, if the adviser has assets under 

management in the United States of less 

than $150 million, or that solely advise 

venture capital funds.9 Section 203(b)(3) 

of the Act, as amended by the DoddFrank Act, also provides an exemption 

from registration for certain foreign 

private advisers. As a result, private 

fund advisers outside of these narrow 

exemptions became subject to the same 

regulatory oversight and other Advisers 

Act requirements that apply to other 

SEC-registered investment advisers. 

Increasing Importance of Private Funds 

and Their Advisers to Investors 

Investment advisers’ private fund 

assets under management have steadily 

increased over the past decade, growing 

from $9.8 trillion in 2012 to $26.6 

trillion in 2022.10 Similarly, the number 

of private funds has increased from 

31,717 in 2012 to 100,947 in 2022.11

Additionally, private funds and their 

advisers play an increasingly important 

role in the lives of millions of 


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63208 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

12See Division of Investment Management: 

Analytics Office, Private Funds Statistics Report: 

Third Calendar Quarter 2022 (April 6, 2023) (‘‘Form 

PF Statistics Report’’), at 15, available at https://

www.sec.gov/files/investment/private-fundsstatistics-2022-q3.pdf (showing beneficial 

ownership of all funds by category as reported on 

Form PF). See also, e.g., Public Investors, Private 

Funds, and State Law, Baylor Law Review, 

Professor William Clayton (June 15, 2020), at 354 

(‘‘Professor Clayton Public Investors Article’’) 

(stating that public pension plans have dramatically 

increased their investment in private funds). 

13See Form PF Statistics Report, supra at footnote 

12. See also, e.g., Comment Letter of Healthy 

Markets Association (Apr. 15, 2022) (‘‘Healthy 

Markets Comment Letter I’’) (discussing the growing 

number of private funds and increasing allocations 

that public pension plans and endowments are 

making to private funds); Comment Letter of Better 

Markets, Inc. (Apr. 25, 2022) (‘‘Better Markets 

Comment Letter’’) (discussing the growth of the 

private markets and the exposure of millions of 

Americans to the private markets, including 

through pension plans). The comment letters on the 

Proposing Release are available at https://

www.sec.gov/comments/s7-03-22/s70322.htm. 

14States on average have less than 70% of the 

assets needed to fund their pension liabilities with 

that figure for some states reaching as low as 34%. 

See, e.g., Professor Clayton Public Investors Article, 

supra footnote 12; Sarah Krouse, The Pension Hole 

for U.S. Cities and States is the Size of Germany’s 

Economy, Wall Street J. (July 30, 2018), available at 

https://www.wsj.com/articles/the-pension-hole-foru-s-cities-and-states-is-the-size-of-japans-economy1532972501; Pew Charitable Trusts, Issue Brief, The 

State Pension Funding Gap: 2017 (June 27, 2019), 

available at https://www.pewtrusts.org/en/researchand-analysis/issue-briefs/2019/06/the-statepension-funding-gap-2017. 

15See, e.g., Healthy Markets Comment Letter I; 

UBS Wealth Management USA, US Economy: 

Public Pension Plans Tilt Toward Alternatives (Jan. 

12, 2023), available at https://www.ubs.com/us/en/ 

wealth-management/insights/market-news/ 

article.1582725.html (discussing State and local 

pension funds’ increasing allocation to private 

funds over last two decades). 

16See National Data, Public Plans Data, available 

at https://publicplansdata.org/quick-facts/national/ 

#:∼:text;=Collectively%2C%20these%20plans%20

have%3A,members%20and%2011.7%20million%

20retirees. 

17See infra section VI.C.1. 

18 Including the private fund operating agreement 

to which the adviser or its affiliate and the private 

fund investors are typically both parties. 

19Compensation at the underlying ‘‘portfolio 

investment-level’’ is more common for certain 

private funds, such as private equity, venture 

capital or real estate funds, and less common for 

others, such as hedge funds. 

20See Form PF Statistics Report, supra at footnote 

12, at 31 (showing aggregate portfolio turnover for 

hedge funds managed by large hedge fund advisers 

(i.e., advisers with at least $1.5 billion in hedge 

fund assets under management) as reported on 

Form PF). 

21See id. 

22See id. See infra section II.A (Scope of Advisers 

Subject to the Final Private Fund Adviser Rules) for 

a discussion of securitized asset funds as well. 

Americans planning for retirement.12

While private funds typically issue their 

securities only to certain qualified 

investors, such as institutions and high 

net worth individuals, individuals have 

indirect exposure to private funds 

through those individuals’ participation 

in public and private pension plans, 

endowments, foundations, and certain 

other retirement plans, which all invest 

directly in private funds. For example, 

public service workers, including law 

enforcement officers, firefighters, public 

school educators and community 

service workers, participate in these 

retirement plans and other vehicles and 

thus have exposure to private funds. 

Many pension plans, endowments, and 

non-profits invest in private funds to 

meet their internal return targets, to 

diversify their holdings, and to provide 

retirement security or other benefits for 

their stakeholders.13 In particular, 

public pension plans face a stark 

funding gap 14 and many have turned to 

private funds in an attempt to address 

underfunding problems.15 As a result, 

the 26.7 million working and retired 

U.S. public pension plan beneficiaries 

are more likely to have increased 

exposure to private funds.16 The 

Commission staff have also observed a 

trend of rising interest in private fund 

investments by smaller investors with 

less bargaining power, such as the 

growth of new platforms to facilitate 

individual access to private investments 

with small investment sizes, or noninstitutional investor groups pooling 

funds to invest in private funds, or other 

means by which smaller individual 

investors can access private 

investments.17

Role of Investment Advisers in Private 

Fund Structure and Organization 

While there are many different ways 

that private funds are structured and 

organized, private funds typically rely 

on an investment adviser (or affiliated 

entities, such as the fund’s general 

partner or managing member) to provide 

management, investment, and other 

services, and such person usually has 

delegated authority to take actions on 

behalf of the private fund without the 

consent or approval of any other person. 

A private fund rarely has employees of 

its own—its officers, if any, are usually 

employed by the private fund’s adviser. 

As a result, it is the adviser or its 

affiliated entities who generally draft 

the private fund’s private placement 

memorandum and governing 

documents,18 negotiate fund terms with 

the private fund investors, select and 

execute investments, charge or allocate 

fees and expenses to the private fund, 

and provide information on the private 

fund’s activities and performance to 

private fund investors. Advisers are also 

often involved in marketing the private 

fund to prospective investors, including 

marketing to current investors in other 

private funds managed by the adviser. 

Investors in a private fund generally 

pay both fees and expenses to the 

private fund adviser and/or its related 

persons. Investors typically, directly or 

indirectly through the fund interests 

they hold, pay management fees and 

performance-based compensation to the 

adviser of the private fund or the 

adviser’s related person (e.g., a general 

partner or managing member). 

Additionally, investors directly or 

indirectly bear the fees and expenses 

associated with the fund and the fund’s 

investments. It is also not uncommon 

for a private fund’s underlying portfolio 

investments to pay the adviser (or a 

related person) monitoring, transaction 

or other fees and expenses, which can 

be, but are not always, offset against the 

management fees paid to the adviser.19

In certain cases, advisers also negotiate 

with investors to have investors pay 

certain of the adviser’s own expenses 

(such as certain compliance costs of the 

adviser). 

There are many different types of 

private funds. Two broad categories of 

private funds are hedge funds and 

private equity funds. Hedge funds tend 

to invest in more liquid assets and 

generally allow investors the 

opportunity to voluntarily withdraw 

their interests with certain limitations, 

including for example, restrictions on 

timing and notice requirements and, for 

certain funds, the amount that can be 

redeemed at one time or over a period 

of time. Private equity funds, on the 

other hand, tend to invest in illiquid 

assets and generally do not permit 

investors to voluntarily withdraw their 

interests in the fund. Hedge funds 

engage in trillions of dollars in listed 

equity and futures transactions each 

month,20 while private equity funds 

tend to focus on private investments, 

whether through mergers and 

acquisitions, non-bank lending, 

restructurings, and other transactions. 

Hedge funds have over nine trillion 

dollars in gross asset value and private 

equity funds have over six trillion.21

Beyond hedge funds and private equity 

funds, there are other categories of 

private funds, some of which overlap 

with these two. For example, venture 

capital funds are in many ways 

structurally similar to private equity 

funds and provide funding to start-up 

and early-stage companies. As another 

example, real estate private funds 

generally invest in illiquid real estate 

assets, and as such typically do not 

permit investors to withdraw their 

interests in the fund voluntarily. 

Venture capital and real estate private 

funds have over one trillion dollars in 

gross asset value.22


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23Form ADV has also increased transparency to 

investors. 

24See Securities and Exchange Commission’s 

Division of Examinations 2023 Examination 

Priorities (Feb. 7, 2023), available at https://

www.sec.gov/files/2023-exam-priorities.pdf. 

25To the extent that these issues negatively affect 

the efficiency with which investors search for and 

match with advisers, the alignment of investor and 

adviser interests, investor confidence in private 

fund markets, or competition between advisers, 

then the final rules may improve efficiency, 

competition, and capital formation in addition to 

benefiting investors. See infra sections VI.B, VI.E. 

See, e.g., Comment Letter of Consumer Federation 

of America (Apr. 25, 2022) (‘‘Consumer Federation 

of America Comment Letter’’). 

26See, e.g., In the Matter of Blackstone 

Management Partners, L.L.C., et. al., Investment 

Advisers Act Release No. 4219 (Oct. 7, 2015) 

(settled action) (alleging that the adviser received 

undisclosed fees) (‘‘In the Matter of Blackstone’’); In 

the Matter of Lincolnshire Management, Inc., 

Investment Advisers Act Release No. 3927 (Sept. 

22, 2014) (settled action) (alleging that the adviser 

misallocated fees and expenses among private fund 

clients) (‘‘In the Matter of Lincolnshire’’); In the 

Matter of Cherokee Investment Partners, LLC and 

Cherokee Advisers, LLC, Investment Advisers Act 

Release No. 4258 (Nov. 5, 2015) (settled action) 

(alleging that the adviser improperly shifted 

expenses related to an examination and an 

investigation away from itself). 27 Id. 28See In the Matter of re Kohlberg Kravis Roberts 

& Co. L.P., Investment Advisers Act Release No. 

4131 (June 29, 2015) (settled action) (‘‘In the Matter 

of Kohlberg Kravis Roberts & Co.’’). 29See In re NB Alternatives Advisers LLC, 

Investment Advisers Act Release No. 5079 (Dec. 17, 

2018) (settled action) (‘‘In the Matter of NB 

Alternatives Advisers’’). 30See, e.g., In re Global Infrastructure 

Management, LLC, Investment Advisers Act Release 

No. 5930 (Dec. 20, 2021) (settled action) (alleging 

private fund adviser failed to properly offset 

management fees to private equity funds it managed 

and made false and misleading statements to 

investors and potential investors in those funds 

concerning management fee offsets); In the Matter 

of EDG Management Company, LLC, Investment 

Advisers Act Release No. 5617 (Oct. 22, 2020) 

(settled action) (alleging that private equity fund 

adviser failed to apply the management fee 

calculation method specified in the limited 

partnership agreement by failing to account for 

write downs of portfolio securities causing the fund 

and investors to overpay management fees); In the 

Matter of Energy Capital Partners Management, LP, 

Investment Advisers Act Release No. 6049 (June 15, 

2022) (settled action) (alleging that the adviser 

allocated undisclosed and disproportionate 

expenses to a private fund client) (‘‘In the Matter 

of Energy Capital Partners’’); In the Matter of Insight 

Venture Management, LLC, Investment Advisers 

Act Release No. 6322 (June 20, 2023) (settled action) 

(alleging that the adviser failed to disclose a conflict 

of interest relating to its fee calculations and 

overcharged management fees) (‘‘In the Matter of 

Insight’’). 

31See In the Matter of Mitchell J. Friedman, 

Investment Advisers Act Release No. 5338 (Sept. 4, 

2019) (settled action). 

32See In the Matter of Diastole Wealth 

Management, Inc., Investment Advisers Act Release 

No. 5855 (Sept. 10, 2021) (settled action). 

33See Proposing Release, supra footnote 3. 

Need for Further Commission Oversight 

With over a decade since the DoddFrank Act required private fund 

advisers to register with us, the 

Commission now has extensive 

experience in overseeing and regulating 

private fund advisers. Form ADV and 

Form PF reporting have been critical to 

improving our ability to understand 

private fund advisers’ operations and 

relationships with funds and investors 

as private funds continue growing in 

size, complexity, and number.23 The 

information from these forms has 

enabled us to enhance our assessment of 

private fund advisers for purposes of 

targeting examinations and responding 

to emerging trends. For example, the 

Commission’s Division of Examinations 

stated in its 2023 examination priorities 

that it will continue to focus on 

registered private fund advisers, 

including such advisers’ conflicts of 

interest and calculations and allocations 

of fees and expenses.24 This information 

has also improved our ability to identify 

practices that could harm private fund 

investors and has helped us not only 

promote compliance but also detect, 

investigate, and deter fraud and other 

misconduct. 

In the course of this oversight of 

private fund advisers, we have observed 

three primary factors that contribute to 

investor protection risks and harms: 

lack of transparency, conflicts of 

interest, and lack of governance 

mechanisms.25 We have observed that 

these three factors contribute to 

significant investor harm, such as an 

adviser incorrectly, or improperly, 

charging fees and expenses to the 

private fund, contrary to the adviser’s 

fiduciary duty, contractual obligations 

to the fund, or disclosures by the 

adviser.26 The Commission has pursued 

enforcement actions against private 

fund advisers for fraudulent practices 

related to fee and expense charges or 

allocations that are influenced by the 

advisers’ conflicts of interest.27 For 

example, the Commission has brought a 

settled action alleging private fund 

advisers misallocated more than $17 

million in so-called ‘‘broken deal’’ 

expenses to an adviser’s flagship private 

equity fund 28 and improperly allocated 

approximately $2 million of 

compensation-related expenses to three 

private equity funds that an adviser 

managed.29 Our staff has examined 

private fund advisers to assess both the 

issues and risks presented by their 

business models and the firms’ 

compliance with their existing legal 

obligations. Despite these enforcement 

and examination efforts, problematic 

practices persist.30 For example, the 

Commission has brought charges against 

private fund advisers for failing to 

disclose material conflicts of interest to 

a private fund that an adviser managed 

as well as misleading its investors by 

misrepresenting an investment 

opportunity,31 and for failing to disclose 

to investors that the adviser periodically 

made loans to a company owned by the 

son of the principal of the advisory firm 

and that the private fund’s investment 

in the company could be used to repay 

the loans made by the adviser.32

Additionally, any risks and harms 

imposed by private fund advisers on 

private funds and their investors 

indirectly expose the investors’ 

individual stakeholders and 

beneficiaries (e.g., public service 

workers, law enforcement officers, 

firefighters, public school educators, 

and community service workers) to the 

same risks and harms. 

Accordingly, we proposed a series of 

new rules under the Advisers Act to 

protect investors, promote more 

efficient capital markets, and encourage 

capital formation.33 After considering 

comments, the Commission is adopting 

rules with modifications that make the 

rules less restrictive and more flexible, 

while still providing investors with the 

protections to which they are entitled. 

The adopted rules will help address 

risks and harms to investors in a 

carefully tailored way that promotes 

efficiency, competition, and capital 

formation, as well as investor 

protection. 

A. Risks and Harms to Investors 

These rules and amendments are 

important enhancements to private fund 

adviser regulation because they protect 

the adviser’s private fund clients and 

those who invest in private funds by 

increasing visibility into certain 

activities, curbing practices that lead to 

harm to funds and their investors, and 

restricting adviser activity that is 

contrary to the public interest and the 

protection of investors. The private fund 

adviser reforms are designed 

specifically to address the following 

three factors for risks and harms that are 

common in an adviser’s relationship 

with private funds and their investors: 

lack of transparency, conflicts of 

interest, and lack of effective 

governance mechanisms for client 

disclosure, consent, and oversight. 

Lack of Transparency. Private fund 

investments are often opaque, and 

advisers do not frequently or 

consistently provide investors with 

sufficiently detailed information about 

the terms of the advisers’ relationships 

with funds and their investors. For 

example, there are no specific 

requirements for the information that 

private fund advisers must disclose to 

private fund investors about the funds’ 


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34See, e.g., In the Matter of Insight, supra 

footnote 30 (alleging that, due to lack of disclosure, 

investors were unaware of the extent of the conflict 

of interest associated with an adviser’s permanent 

impairment criteria and that the adviser charged 

excessive management fees). 

35See infra section II.B. 

36See, e.g., Comment Letter of Ohio Public 

Employees Retirement System (Apr. 25, 2022) 

(‘‘OPERS Comment Letter’’); Comment Letter of 

Institutional Limited Partners Association (Apr. 25, 

2022) (‘‘ILPA Comment Letter I’’). 

37See, e.g., In the Matter of Insight, supra 

footnote 30 (alleging that the adviser charged excess 

management fees and failed to disclose a conflict 

of interest to investors relating to its fee 

calculations). 

38See infra sections VI.B, VI.C.1. 

39Emerging Trends in the Evolving Continuation 

Fund Market, Private Equity Law Report (July 

2022), available at https://www.pelawreport.com/ 

19285026/emerging-trends-in-the-evolvingcontinuation-fund-market.thtml (stating that the 

market volume for private fund secondaries 

increased from $37 billion in 2016 to $132 billion 

in 2021 and that ‘‘much of that growth was driven 

by an explosion in GP-led continuation fund 

activity’’). 

40A fund’s LPAC or board typically acts as the 

decision-making body with respect to conflicts that 

may arise between the interests of the third-party 

investors and the interests of the adviser. In certain 

cases, advisers seek the consent of the LPAC or 

board for conflicted transactions, such as 

transactions involving investments in portfolio 

companies of related funds or where the adviser 

seeks to cause the fund to engage a service provider 

that is affiliated with the adviser. 

41See infra section VI.B. 

investments, performance, or incurred 

fees and expenses, notwithstanding the 

applicability of the antifraud provisions 

of the federal securities laws and any 

relevant requirements of the marketing 

rule and private placement rules. 

Rather, information and disclosure 

about these items and the terms of an 

investment in a private fund are 

generally individually negotiated 

between private fund investors and the 

fund’s adviser. Since private fund 

structures can be complex and involve 

multiple entities that are related to, or 

otherwise affiliated with, the adviser, 

absent specifically negotiated 

disclosure, it may be difficult for 

investors to understand the conflicts 

embedded within these structures and 

the overall compensation received by 

the adviser. Without specific 

information, even sophisticated 

investors cannot understand the fees 

and expenses they are paying, the risks 

they are assuming, and the performance 

they are achieving in return.34 Investors 

have received reduced returns due to 

improperly charged fees and 

expenses,35 and they must sometimes 

choose between expending resources to 

negotiate for detailed fee and expense or 

performance reporting or using their 

bargaining power to improve the 

economic, informational, or governance 

terms of the investors’ relationships 

with funds and their advisers.36

Conflicts of Interest. These rules 

address many of the problems raised by 

the conflicts of interest commonly 

present in private fund adviser 

practices. Conflicts of interest can harm 

investors, such as when an adviser 

grants preferential redemption rights to 

entice a large investor that will increase 

overall management fees to commit to a 

private fund, and then, when the fund 

experiences a decline, such preferential 

redemption rights allow a large investor 

to exit the private fund before and on 

more advantageous terms than other 

investors. Investors are also harmed by 

not being informed of conflicts of 

interest concerning the private fund 

adviser and the fund, which reduces the 

information available to investors to 

guide their investment decisions.37

There is a trend of rising interest in 

private funds by smaller investors with 

less bargaining power, who may be 

particularly impacted by these practices, 

including where advisers grant 

preferential terms to larger investors 

that may exacerbate conflicts of interest 

as well as the risks of resulting investor 

harm.38

Certain conflicts of interest between 

advisers and private funds also involve 

sales practices or compensation 

schemes that are problematic for 

investors. For example, advisers have a 

conflict of interest with private funds 

(and, indirectly, investors in those 

funds) when they value the fund’s assets 

and use that valuation as the basis for 

the calculation of the adviser’s fees and 

fund performance. Similarly, advisers 

have a conflict of interest with the fund 

(and, indirectly, its investors) when they 

offer existing fund investors the choice 

between selling and exchanging their 

interests in the private fund for interests 

in another vehicle advised by the 

adviser or any of its related persons as 

part of an adviser-led secondary 

transaction.39 In both of these examples, 

there are opportunities for advisers, 

funds, and investors to benefit, but there 

is also a potential for significant harm 

if the adviser’s conflicts are not 

managed appropriately, including 

diminishing the fund’s returns because 

of excess fees and expenses paid to the 

fund’s adviser or its related persons. 

Lack of Governance Mechanisms. 

These rules are designed to respond to 

harms arising out of private fund 

governance structures. In a typical 

private fund structure, the private fund 

is the adviser’s client and investors in 

the private fund are not clients of the 

adviser (unless investors have a separate 

advisory relationship with the adviser 

in addition to their investment in the 

private fund). The adviser (or its related 

person) commonly serves as the general 

partner or managing member (or similar 

control person) of the fund. Because the 

adviser (or its related person) acts on 

behalf of the fund client and is typically 

not required to obtain the input or 

consent of investors in the fund, the 

governance structure of a typical private 

fund is not designed to prioritize 

investor oversight of the adviser and 

general partner or managing member (or 

similar control person) or investor 

policing of conflicts of interest. 

For example, although some private 

funds may have limited partner 

advisory committees (‘‘LPACs’’) or 

boards of directors, these types of bodies 

may not have sufficient independence, 

authority, or accountability to oversee 

and consent to these conflicts.40 Such 

LPACs or boards of directors do not 

have a fiduciary obligation to the private 

fund investors. Moreover, private fund 

advisers often provide certain investors 

with preferential terms, such as 

representation in an LPAC, that can 

create potential conflicts among the 

fund’s investors. The interests of one or 

more private fund investors may not 

represent the interests of, or may 

otherwise conflict with the interests of, 

other investors in the private fund due 

to, among other things, business or 

personal relationships or other private 

fund investments. To the extent 

investors are afforded LPAC 

representation or similar rights, certain 

fund agreements may permit such 

investors to exercise their rights in a 

manner that places their interests ahead 

of the private fund or the investors as a 

whole. For example, certain fund 

agreements state that, subject to 

applicable law, LPAC members owe no 

duties to the private fund or to any of 

the other investors in the private fund 

and are not obligated to act in the 

interests of the private fund or the other 

investors as a whole. 

The rules we are adopting are 

designed to protect private fund 

investors by addressing private fund 

advisers’ conflicts of interest, sales 

practices, and compensation schemes. 

Such protection is necessary because 

investors face difficulties in negotiating 

for reformed practices, including 

stronger governance structures, because 

of the bargaining power held by advisers 

and by investors who benefit from 

current adviser practices, such as 

investors who receive preferential 

treatment from their advisers.41 In 

addition, as discussed above, the 

indirect exposure of the general public 

to the risks of private fund investments 


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42See Proposing Release, supra footnote 3. 43See, e.g., Comment Letter of United for Respect 

(Apr. 12, 2022) (‘‘United for Respect Comment 

Letter I’’); Comment Letter of Private Equity 

Stakeholder Project (Apr. 25, 2022); Comment 

Letter of Trine Acquisition Corp. (Apr. 21, 2022) 

(‘‘Trine Comment Letter’’). 44See, e.g., Comment Letter of InvestX (Mar. 18, 

2022) (‘‘InvestX Comment Letter’’); Comment Letter 

of American Association for Justice (Apr. 25, 2022) 

(‘‘American Association for Justice Comment 

Letter’’); OPERS Comment Letter. 45See, e.g., Comment Letter of Public Citizen 

(Apr. 15, 2022) (‘‘Public Citizen Comment Letter’’); 

Comment Letter of the Comptroller of the State of 

New York (Apr. 25, 2022) (‘‘NY State Comptroller 

Comment Letter’’); Comment Letter of Comptroller 

of the City of New York (Apr. 21, 2022) (‘‘NYC 

Comptroller Comment Letter’’). 46See, e.g., Comment Letter of General Treasurer 

of Rhode Island, For the Long Term and Illinois 

State Treasure, For the Long Term (June 13, 2022) 

(‘‘For the Long Term Comment Letter’’); Comment 

Letter of the Regulatory Fundamentals Group (Apr. 

25, 2022) (‘‘RFG Comment Letter II’’); United for 

Respect Comment Letter I. 47See Better Markets Comment Letter. 48See Comment Letter of District of Columbia 

Retirement Board (Apr. 22, 2022) (‘‘DC Retirement 

Board Comment Letter’’). 49See, e.g., Comment Letter of the Private 

Investment Funds Forum (Apr. 25, 2022) (‘‘PIFF 

Comment Letter’’); Comment Letter of the 

Alternative Investment Management Association 

Limited and the Alternative Credit Council (Apr. 

25, 2022) (‘‘AIMA/ACC Comment Letter’’); 

Comment Letter of the Securities Industry and 

Financial Markets Association Asset Management 

Group (Apr. 25, 2022) (‘‘SIFMA–AMG Comment 

Letter I’’). 

50See, e.g., Comment Letter of Lockstep Ventures 

(Apr. 26, 2022) (‘‘Lockstep Ventures Comment 

Letter’’); Comment Letter of Thin Line Capital (Apr. 

21, 2022) (‘‘Thin Line Capital Comment Letter’’); 

Comment Letter of Blended Impact (Apr. 24, 2022) 

(‘‘Blended Impact Comment Letter’’). 

51See infra section II.B for a discussion of the 

comments on this aspect of the rule. 

52The final quarterly statement, audit, adviser-led 

secondaries, restricted activities, and preferential 

treatment rules do not apply to investment advisers 

with respect to securitized asset funds they advise. 

See infra section II.A (Scope of Advisers Subject to 

the Final Private Fund Adviser Rules). 

53See Proposing Release, supra footnote 3, at 

section I. 

54See infra section II.C for a discussion of the 

comments on this part of the rule. 

55See infra section II.C. 

56See infra section II.C.8 for a discussion of the 

comments on this part of the rule. 

heightens the need for specific 

rulemaking to address these concerns. 

B. Rules To Address These Risks and 

Harms 

The Commission proposed rules to 

address the risks and harms to investors 

and funds, and we received many 

comment letters on the proposal.42 A 

number of commenters supported the 

proposal and stated that it would have 

an overall positive impact on the 

industry.43 Some commenters stated 

that it would establish baseline 

protections for investors, such as 

increased transparency and 

standardized reporting.44 Other 

commenters expressed frustration with 

the conflicts of interest in the private 

funds industry 45 and supported 

prohibitions on certain unfair 

practices.46 One commenter stated that 

the rules, if adopted, ‘‘would implement 

a variety of essential improvements in 

the regulation of the private funds 

markets, making this increasingly 

important financial sector substantially 

more fair and transparent.’’ 47 Another 

commenter stated that the proposed 

rules are essential to protect the right of 

investors to access information critical 

to making informed investment 

decisions, especially because private 

market investments will likely play an 

increasingly growing role in the asset 

allocations and funding targets of 

institutional investors.48 In contrast, 

other commenters opposed the proposal 

and expressed concern that it would 

negatively impact the industry by 

stifling capital formation and reducing 

competition.49 Certain commenters 

asserted that the proposed requirements 

would overburden advisers (especially 

smaller advisers) with compliance costs, 

which may ultimately be passed on to 

investors, directly or indirectly.50 These 

and other comments are discussed more 

fully below. The final rules include 

modifications in response to concerns 

raised and provide additional flexibility 

and tailoring to the rules as proposed, 

while preserving the needed investor 

protections. 

The Quarterly Statement Rule. The 

Commission proposed a rule to require 

SEC-registered advisers to private funds 

to provide investors with periodic 

information about private fund fees, 

expenses, and performance.51 The 

Commission is adopting the rule with 

changes in response to comments: 52

Æ Advisers to illiquid funds are 

required to calculate performance 

information with and without the 

impact of subscription facilities, rather 

than only without; 

Æ We have refined the definition of 

illiquid fund to be based primarily on 

withdrawal and redemption capability; 

Æ Instead of requiring advisers to 

present liquid fund performance since 

inception, we are only requiring a 10- 

year lookback; and 

Æ We are allowing additional time for 

delivery of fourth quarter statements 

and additional time for delivery of all 

statements for funds of funds. 

As discussed more fully below, we are 

adopting the quarterly statement rule 

because we see this lack of transparency 

in many areas, including investment 

advisers’ disclosure regarding private 

fund fees, expenses, and performance. 

For example, some private fund 

investors do not have sufficient 

information regarding private fund fees 

and expenses because those fees and 

expenses have varied labels across 

private funds and are subject to 

complicated calculation 

methodologies.53 Increased 

transparency on fees can also help 

address conflicts of interest concerns. 

For example, some private fund advisers 

and their related persons charge a 

number of fees and expenses to the 

fund’s portfolio companies, and it may 

be difficult for investors to track fee 

streams that flow to the adviser or its 

related persons and reduce the return on 

their investment. 

Investors will also benefit from 

increased transparency into how private 

fund performance is calculated. 

Currently, private fund advisers use 

different metrics and specifications for 

calculating performance, which makes it 

difficult for investors to compare data 

across funds and advisers, even when 

advisers disclose the assumptions they 

used. More standardized requirements 

for performance metrics will allow 

private fund investors to compare more 

effectively the returns of similar fund 

strategies over different market 

environments and over time. In 

addition, they would improve investors’ 

ability to interpret complex performance 

reporting and assess the relationship 

between the fees paid in connection 

with an investment and the return on 

that investment as they monitor their 

investment and consider potential 

future investments. 

The Audit Rule. The Commission is 

adopting the requirement that an SECregistered adviser cause each private 

fund that it advises to undergo an 

annual audit; however, in a change from 

the proposal, we are requiring the audit 

to comply with the audit provision 

under 17 CFR 275.206(4)–2 of the 

Advisers Act (‘‘rule 206(4)–2’’ ‘‘custody 

rule’’).54 To address the valuation 

concerns described above and more 

fully below,55 we are requiring SECregistered advisers to cause the private 

funds they manage to obtain an annual 

audit. By addressing the concerns that 

arise in the valuation process, the rule 

will help prevent fraud and deception 

by the adviser. 

The Adviser-led Secondaries Rule. 

The final rule will require SECregistered advisers conducting an 

adviser-led secondary transaction to 

satisfy certain requirements; however, 

in a change from the proposal, advisers 

may obtain a fairness opinion or a 

valuation opinion under the final rule.56

SEC-registered advisers conducting an 

adviser-led secondary transaction must 


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57See infra sections II.E and II.F for a discussion 

of the comments on this part of the rule. 

58As discussed in greater detail below, this does 

not change the applicability of any other disclosure 

and consent obligations, whether under law, rule, 

regulation, contract, or otherwise. For example, the 

adviser, as a fiduciary, is obligated to act in the 

fund’s best interest and to make full and fair 

disclosure of all conflicts and material facts which 

might incline an investment adviser—consciously 

or unconsciously—to render advice which is not 

disinterested such that a client can provide 

informed consent to the conflict. See 2019 IA 

Fiduciary Duty Interpretation, supra footnote 5. 

59See infra section II.G for a discussion of the 

comments on this part of the rule. 

60See, e.g., Securities and Exchange Commission 

v. Philip A. Falcone, Harbinger Capital Partners 

Offshore Manager, L.L.C. and Harbinger Capital 

Partners Special Situations GP, L.L.C., Civil Action 

No. 12 Civ. 5027 (PAC) (S.D.N.Y.) and Securities 

and Exchange Commission v. and (sic) Harbinger 

Capital Partners LLC, Philip A. Falcone and Peter 

A. Jenson, Civil Action No. 12 Civ. 5028 (PAC) 

(S.D.N.Y.), Civil Action No. 12 Civ. 5027 (PAC) 

(S.D.N.Y.), U.S. Securities and Exchange 

Commission Litigation Release No. 22831A (Oct. 2, 

2013) (‘‘Harbinger Capital’’) (private fund adviser 

granted favorable redemption and liquidity terms to 

certain large investors in a private fund without 

disclosing these arrangements to the fund’s board 

of directors and the other fund investors). See also 

17 CFR 275.206(4)–8 (rule 206(4)–8 under the 

Advisers Act). 

61See infra section III for a discussion of the 

comments on this part of the rule. 

62See infra sections II.B.6, II.C.8, II.D.5, and II.G.6 

for discussions of the comments on this part of the 

rule. 

63The recordkeeping requirements associated 

with the restricted activities rule align with the 

modifications from the prohibited activities rule in 

the proposal. See infra section II.E for a discussion 

of the comments on this part of the rule. 

also prepare and distribute a written 

summary of any material business 

relationships between the adviser or its 

related persons and the independent 

opinion provider. By requiring that 

investors receive a third-party opinion 

and a written summary of any material 

business relationships before deciding 

whether to participate in an adviser-led 

secondary transaction, the final rule will 

help prevent investors from being 

defrauded, manipulated, and deceived 

when the adviser is on both sides of the 

transaction. 

The Restricted Activities Rule. The 

final rule will address concerns about 

five activities with respect to private 

fund advisers.57 In a change from the 

proposal, while the restricted activities 

rule (referred to as the prohibited 

activities rule in the proposal) prohibits 

advisers from engaging in certain 

activity, the final rule includes certain 

disclosure-, and in some cases, consentbased exceptions. As a result, advisers 

generally are not flatly prohibited from 

engaging in the following activities,58 so 

long as they provide appropriate 

specified disclosure and, in some cases, 

obtain investor consent: 

Æ Charging or allocating to the private 

fund fees or expenses associated with an 

investigation of the adviser or its related 

persons by any governmental or 

regulatory authority; however, 

regardless of any disclosure or consent, 

an adviser may not charge or allocate 

fees and expenses related to an 

investigation that results or has resulted 

in a court or governmental authority 

imposing a sanction for violating the 

Investment Advisers Act of 1940 or the 

rules promulgated thereunder; 

Æ Charging or allocating to the private 

fund any regulatory or compliance fees 

or expenses, or fees or expenses 

associated with an examination, of the 

adviser or its related persons; 

Æ Reducing the amount of an adviser 

clawback by actual, potential, or 

hypothetical taxes applicable to the 

adviser, its related persons, or their 

respective owners or interest holders; 

Æ Charging or allocating fees and 

expenses related to a portfolio 

investment (or potential portfolio 

investment) on a non-pro rata basis 

when multiple private funds and other 

clients advised by the adviser or its 

related persons have invested (or 

propose to invest) in the same portfolio 

investment, where such non-pro rata 

allocation is fair and equitable; and 

Æ Borrowing money, securities, or 

other private fund assets, or receiving a 

loan or an extension of credit, from a 

private fund client. 

In a change from the proposal, we are 

not adopting the prohibition on fees for 

unperformed services because we 

believe this activity generally already 

runs contrary to an adviser’s obligations 

to its clients under the Federal fiduciary 

duty. We are also not adopting the 

indemnification prohibition that we 

proposed because much of the activity 

that it would have prohibited is already 

prohibited by the Federal fiduciary duty 

and antifraud provisions. 

The Preferential Treatment Rule. The 

Commission is adopting a preferential 

treatment rule that prohibits advisers 

from providing preferential treatment 

with respect to redemption rights and 

portfolio holdings or exposure 

information, in each instance, that the 

adviser reasonably expects would have 

a material, negative effect on other 

investors, and requires disclosure of all 

other types of preferential treatment.59

In a change from the proposal, the final 

rule includes certain exceptions from 

the redemptions prohibition (i.e., if the 

redemption right is required by law or 

offered to all other existing investors) 

and information prohibition (i.e., if the 

information is offered to all other 

existing investors) and limits the 

proposed requirement to provide 

advance written notice of preferential 

treatment to only apply to material 

economic terms (as opposed to all 

investment terms). Like the proposal, 

however, the final rule requires advisers 

to provide comprehensive postinvestment disclosure. 

We are also adopting the preferential 

treatment rule, in part, because all 

investors will benefit from increased 

transparency regarding the preferred 

terms granted to certain investors in the 

same private fund (e.g., seed investors, 

strategic investors, those with large 

commitments, and employees, friends, 

and family). In some cases, these terms 

materially disadvantage other investors 

in the private fund or otherwise impact 

the terms applicable to their 

investment.60 This new rule will help 

investors better understand marketplace 

dynamics and potentially improve 

efficiency for future investments, for 

example, by expediting the process for 

reviewing and negotiating adviser’s fees 

and expenses. 

The Annual Review Rule. As 

proposed, the final rule will amend the 

annual review component of Advisers 

Act rule 206(4)–7 (‘‘compliance rule’’) to 

require all SEC-registered advisers to 

document their annual review in 

writing, and we are adopting this rule as 

proposed.61 We are adopting this 

requirement for two key reasons. First, 

written documentation of the annual 

review may help advisers better assess 

whether they have considered any 

compliance matters that arose during 

the previous year, any changes in the 

adviser’s or an affiliate’s business 

activities during the year, and any 

changes to the Advisers Act or other 

rules and regulations that may suggest a 

need to revise an adviser’s policies and 

procedures. Second, the availability of 

written documentation of the annual 

review should allow the Commission 

and the Commission staff to determine 

if the adviser is regularly reviewing the 

adequacy of the adviser’s policies and 

procedures. 

The Recordkeeping Rule. As 

proposed, the final rule will amend the 

Advisers Act recordkeeping rule to 

require advisers who are registered or 

required to be registered to retain books 

and records related to the quarterly 

statement rule, the audit rule, the 

adviser-led secondaries rule, and the 

preferential treatment rule.62 In a 

change from the proposal, we are also 

amending the Advisers Act 

recordkeeping rule to require advisers 

who are registered or required to be 

registered to retain books and records 

related to the restricted activities rule.63


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64Under Federal law, an investment adviser is a 

fiduciary, and this fiduciary duty is made 

enforceable by the antifraud provisions of the 

Advisers Act. See 2019 IA Fiduciary Duty 

Interpretation, supra footnote 5. 

65See Advisers Act, sections 206 and 211(h). 

66 15 U.S.C. 80b–6(4). 

67S. REP. NO. 1760, 86th Cong., 2d Sess. 4, 8 

(1960). The Commission has used this authority to 

adopt several rules addressing abusive marketing 

practices, political contributions by investment 

advisers, proxy voting, compliance procedures and 

practices, deterring fraud with respect to pooled 

investment vehicles, and custodial arrangements 

including an audit provision. Rule 206(4)–1; 

275.206(4)–2; 275.206(4)–6; 275.206(4)–7; and 

275.206(4)8. Section 206(4) was added to the 

Advisers Act in Public Law 86–750, 74 Stat. 885, 

at sec. 9 (1960). See H.R. REP. NO. 2197, 86th 

Cong., 2d Sess., at 7–8 (1960) (‘‘Because of the 

general language of section 206 and the absence of 

express rulemaking power in that section, there has 

always been a question as to the scope of the 

fraudulent and deceptive activities which are 

prohibited and the extent to which the Commission 

is limited in this area by common law concepts of 

fraud and deceit . . . [Section 206(4)] would 

empower the Commission, by rules and regulations 

to define, and prescribe means reasonably designed 

to prevent, acts, practices, and courses of business 

which are fraudulent, deceptive, or manipulative. 

This is comparable to Section 15(c)(2) of the 

Securities Exchange Act [15 U.S.C. 78o(c)(2)] which 

applies to brokers and dealers.’’). See also S. REP. 

NO. 1760, 86th Cong., 2d Sess., at 8 (1960) (‘‘This 

[section 206(4) language] is almost the identical 

wording of section 15(c)(2) of the Securities 

Exchange Act of 1934 in regard to brokers and 

dealers.’’). The Supreme Court, in United States v. 

O’Hagan, interpreted nearly identical language in 

section 14(e) of the Securities Exchange Act [15 

U.S.C. 78n(e)] as providing the Commission with 

authority to adopt rules that are ‘‘definitional and 

prophylactic’’ and that may prohibit acts that are 

‘‘not themselves fraudulent . . . if the prohibition 

is ‘reasonably designed to prevent . . . acts and 

practices [that] are fraudulent.’ ’’ United States v. 

O’Hagan, 521 U.S. 642, 667, 673 (1997). The 

wording of the rulemaking authority in section 

206(4) remains substantially similar to that of 

section 14(e) and section 15(c)(2) of the Securities 

Exchange Act. See also Prohibition of Fraud by 

Advisers to Certain Pooled Investment Vehicles, 

Investment Advisers Act Release No. 2628 (Aug. 3, 

2007) [72 FR 44756 (Aug. 9, 2007)] (‘‘Prohibition of 

Fraud Adopting Release’’) (stating, in connection 

with the suggestion by commenters that section 

206(4) provides us authority only to adopt 

prophylactic rules that explicitly identify conduct 

that would be fraudulent under a particular rule, 

‘‘We believe our authority is broader. We do not 

believe that the commenters’ suggested approach 

would be consistent with the purposes of the 

Advisers Act or the protection of investors.’’). 

68See the discussion of the Dodd-Frank Act above 

in the introductory portion of section I. 

69 Dodd-Frank Act, section 913(g). 

70See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5, at 23. 

71See id., at 26. 

We are adopting these requirements to 

enhance advisers’ internal compliance 

efforts and to facilitate the 

Commission’s enforcement and 

examination capabilities by improving 

our staff’s ability to assess an adviser’s 

compliance with the final rule. 

C. The Commission Has Authority To 

Adopt the Rules 

The Commission regulates investment 

advisers under the Advisers Act.64 For 

the reasons we discussed in the 

Proposing Release and throughout this 

release, our adoption of these private 

fund adviser rules is a proper exercise 

of our rulemaking authority under the 

Advisers Act to prevent fraudulent, 

deceptive, and manipulative conduct, 

facilitate the provision of simple and 

clear disclosures to investors, and 

prohibit or restrict certain sales 

practices, conflicts of interest, and 

compensation schemes.65

We have authority under section 

206(4) to adopt rules ‘‘reasonably 

designed to prevent, such acts, 

practices, and courses of business as are 

fraudulent, deceptive or 

manipulative.’’ 66 Among other things, 

section 206(4) permits the Commission 

to adopt prophylactic rules against 

conduct that is not itself necessarily 

fraudulent.67 The Dodd-Frank Act 

expanded the Commission’s oversight 

responsibility for private fund 

advisers.68 It also added section 211(h) 

of the Advisers Act, which, among other 

things, directs the Commission to 

‘‘facilitate the provision of simple and 

clear disclosures to investors regarding 

the terms of their relationships with 

. . . investment advisers’’ and ‘‘examine 

and, where appropriate, promulgate 

rules prohibiting or restricting certain 

sales practices, conflicts of interest, and 

compensation schemes for brokers, 

dealers, and investment advisers that 

the Commission deems contrary to the 

public interest and the protection of 

investors.’’ 69 As applied here, a sales 

practice includes any conduct by an 

investment adviser, or on its behalf, to 

induce or solicit a person to invest, or 

continue to invest, in a private fund 

client advised by the adviser or its 

related persons. For instance, an adviser 

offering preferential terms to certain 

private fund investors to attract, or 

retain, their investment in the private 

fund is a ‘‘sales practice.’’ As the 

Commission has previously stated, a 

conflict of interest means an interest 

that might incline an adviser, 

consciously or unconsciously, to render 

advice that is not disinterested.70

Conflicts of interest can arise when an 

adviser’s own interests conflict with, or 

are otherwise different than, its client’s 

interests or when the interests of 

different clients conflict.71 For instance, 

an adviser has a conflict of interest in 

an adviser-led secondary transaction 

because the adviser and its related 

persons typically are involved on both 

sides of the transaction. As applied 

here, a compensation scheme includes 

any arrangement through which an 

investment adviser is compensated— 

directly or indirectly—for providing 

services to its clients (e.g., performancebased compensation). An example of a 

problematic compensation scheme is 

when an adviser opportunistically 

values a private fund to increase the 

adviser’s compensation. 

Sections 206(4) and 211(h) of the 

Advisers Act are the principal authority 

for all of the five new rules to regulate 

the activities of investment advisers to 

private funds. The new rules are within 

the Commission’s legal authority under 

those sections of the Advisers Act as a 

means reasonably designed to prevent 

fraudulent or deceptive acts and 

practices, facilitate simple and clear 

disclosures to investors, and prohibit or 

restrict certain sales practices, conflicts 

of interest, and compensation schemes 

in the market for advisory services to 

private funds. The quarterly statement 

rule is designed to facilitate the 

provision of simple and clear 

disclosures to private fund investors 

regarding some of the most important 

and fundamental terms of their 

relationships with investment 

advisers—namely what fees and 

expenses those investors will pay and 

what performance they receive for their 

private fund investments. The audit rule 

is designed to help prevent the fraud, 

deception, or manipulation that might 

result from material misstatements in 

financial statements, and it is intended 

to address the conflicts of interest and 

potential compensation schemes that 

may result from an adviser valuing 

assets and charging fees related to those 

assets. When advisers offer investors the 

choice between selling and exchanging 

their interests in the private fund for 

interests in another vehicle advised by 

the adviser or any of its related persons 

as part of an adviser-led secondary 

transaction, advisers have a conflict of 

interest with the fund and its investors, 

and the adviser-led secondaries rule is 

designed to address this concern. The 

restricted activities rule is designed to 

prohibit certain activities that involve 

conflicts of interest and compensation 

schemes that are contrary to the public 

interest and the protection of investors 

unless such activities are disclosed to, 

and in some cases, consented to, by 

investors. Finally, the preferential 

treatment rule addresses our concern 

that an adviser’s current sales practices 

do not provide all investors with 

sufficient detail regarding preferential 

terms granted to other investors, and we 

believe that disclosure (and in some 

cases prohibition) of preferential 

treatment is necessary to guard against 

fraudulent and deceptive practices. We 

have examined a range of alternatives to 


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72See, e.g., Consumer Federation of America 

Comment Letter; Better Markets Comment Letter. 

73See Better Markets Comment Letter. 

74See Consumer Federation of America Comment 

Letter. 

75See, e.g., Comment Letter of Stuart Kaswell 

(Apr. 18, 2022) (‘‘Stuart Kaswell Comment Letter’’); 

Comment Letter of the Center for Capital Markets 

Competitiveness, U.S. Chamber of Commerce (Apr. 

25, 2022) (Chamber of Commerce Comment 

Letter’’); Comment Letter of the Managed Funds 

Association (Apr. 25, 2022) (‘‘MFA Comment Letter 

I’’); Comment Letter of American Investment 

Council (July 27, 2022) (‘‘AIC Comment Letter III’’). 

76See, e.g., Comment Letter of Brian Cartwright, 

Jay Clayton, Joseph A. Grundfest, Paul G. Mahoney, 

Harvey L. Pitt, Adam Pritchard, James S. Spindler, 

Robert B. Stebbins, J.W. Verret, and Charles 

Whitehead (Apr. 25, 2022) (‘‘Cartwright et al. 

Comment Letter’’); MFA Comment Letter I (stating 

that the legislative history surrounding Section 

211(h), and Section 913 of the Dodd-Frank Act 

demonstrates that Section 211(h) was clearly 

intended to address the relationship between retail 

clients and their advisers). 

77Section 913(g)(2) of the Dodd-Frank Act added 

section 211(h) to the Advisers Act. 

78See, e.g., AIMA/ACC Comment Letter; MFA 

Comment Letter I (stating that Section 913 focused 

on harmonizing and standardizing the standard of 

conduct with respect to retail customers and clients 

and therefore section 913(g) should also be 

narrowly interpreted to apply to this subset of the 

investor community). Another commenter asserted 

that, in amending the Advisers Act to add section 

211(h), it was intended to only apply to retail 

customers because it was part of section 913 of the 

Dodd-Frank Act and, further, that this 

interpretation is supported by section 913 of the 

Dodd-Frank Act permitting promulgation of a best 

interest standard for retail customers under the 

section 211(g) amendment to the Advisers Act to 

include certain terms that this commenter asserted 

would be restricted by this rulemaking but 

permitted under section 211(g). See Comment Letter 

of the Committee on Private Investment Funds and 

the Committee on Investment Management 

Regulation of the New York City Bar Association 

(Apr. 25, 2022) (‘‘NYC Bar Comment Letter II’’) 

(pointing to section 211(g) stating under such a best 

interest standard ‘‘any material conflicts of interest 

shall be disclosed and may be consented to by the 

customer’’ and ‘‘receipt of compensation based on 

commission or fees shall not, in and of itself, be 

considered a violation of such standard’’). 

79See, e.g., AIMA/ACC Comment Letter; MFA 

Comment Letter I. Some commenters stated that 

analysis of provisions in section 913 of the DoddFrank Act supports a reading that it was enacted in 

response to a concern that retail investors did not 

appreciate the distinction between broker-dealers 

and advisers. See, e.g., Stuart Kaswell Comment 

Letter; NYC Bar Comment Letter II. 

80See AIC Comment Letter III. We disagree. For 

the reasons discussed in the Proposing Release and 

throughout this release, our adoption of these 

private fund adviser rules is a proper exercise of our 

rulemaking authority under the Advisers Act to 

prevent fraudulent, deceptive, and manipulative 

conduct, facilitate the provision of simple and clear 

disclosures to investors, and prohibit or restrict 

certain sales practices, conflicts of interest, and 

compensation schemes. This commenter also 

asserted that before finalizing a number of 

rulemaking proposals affecting private fund 

advisers, including the proposal underlying this 

final rule, we must (i) ‘‘publish a reasonable 

assessment of the cumulative effects’’ of these rules, 

(ii) reopen the comment periods for these rules ‘‘to 

provide the public an opportunity to assess 

holistically the Commission’s proposals’’, and (iii) 

‘‘with the benefit of an appropriate analysis and 

public comment,’’ finalize these rules ‘‘holistically’’ 

taking into account ‘‘not just the expected effects on 

investors and our capital markets but also practical 

realities such as adoption timelines as well as 

information technology requirements.’’ Comment 

Letter of the American Investment Council (Aug. 8, 

2023) (‘‘AIC Comment Letter IV’’). This commenter 

asserted that failing to do so ‘‘would be a violation 

of the Commission’s obligations under the 

Administrative Procedures Act.’’ The effects of any 

final rule may be impacted by recently adopted 

rules that precede it. Accordingly, each economic 

analysis in each adopting release considers an 

updated economic baseline that incorporates any 

new regulatory requirements, including compliance 

costs, at the time of each adoption, and considers 

the incremental new benefits and incremental new 

costs over those already resulting from the 

preceding rules. That is, the economic analysis 

appropriately considers existing regulatory 

requirements, including recently adopted rules, as 

part of its economic baseline against which the 

costs and benefits of the final rule are measured. 

See infra sections VI.C, VI.D.1, and VI.E.2 below. 

81 Dodd-Frank Act, Section 913(a). 

82 Dodd-Frank Act, Section 913(g)(2). 

83 Id. 

84 Id. 

85See Stuart Kaswell Comment Letter II. 

our proposal, carefully considered all 

comments, and made revisions to the 

proposed rules where we concluded it 

was appropriate. The final rules 

represent an appropriate response to the 

developments we discuss above 

regarding the market for private fund 

advisory services. 

Some commenters supported the 

Commission’s legal foundation for the 

rulemaking.72 For example, one 

commenter stated that all of the reforms 

in the proposal are fully within the 

Commission’s ample legal authority to 

regulate advisers.73 Another commenter 

emphasized that, importantly, the 

Commission’s legal authority under 

section 211(h) is broad.74 Other 

commenters, however, questioned the 

Commission’s authority to promulgate 

the proposed rules 75 and argued that 

the rules undermine congressional 

intent regarding the regulation of private 

funds.76 Some commenters argued that 

Congress, in drafting section 913(g) of 

the Dodd-Frank Act,77 did not intend to 

apply section 211(h) of the Advisers Act 

to private fund advisers and instead 

intended this section to only apply to 

retail investors.78 Commenters also 

stated that the legislative history 

surrounding section 913(g) and section 

211(h) support a narrower reading that 

limits these provisions to retail 

customers and clients.79 Another 

commenter stated that Congress would 

have provided clear congressional 

authorization to empower the 

Commission to materially alter the 

regulatory regime for private funds if it 

intended to do so.80

Section 913 of the Dodd-Frank Act 

contains numerous sub-parts, several of 

which specifically pertain to ‘‘retail 

customers,’’ which Congress defined as 

‘‘a natural person, or the legal 

representative of such natural person, 

who (1) receives personalized 

investment advice about securities from 

a broker or dealer or investment adviser; 

and (2) uses such advice primarily for 

personal, family, or household 

purposes.’’ 81 Congress also mentioned 

private fund investors in Section 913, 

specifically indicating in adding section 

211(g) of the Advisers Act that ‘‘the 

Commission shall not ascribe a meaning 

to the term ‘customer’ that would 

include an investor in a private 

fund[.]’’ 82 In the same provision, in 

adding section 211(h) of the Advisers 

Act entitled ‘‘Other Matters,’’ Congress 

spoke of ‘‘investors,’’ and in so doing 

gave no indication that it was referring 

to ‘‘retail customers,’’ a term it had 

defined and used in various other subparts.83 The ‘‘Other Matters’’ provision 

likewise contains no instruction to the 

Commission to include or exclude 

private fund investors from the term 

‘‘investors’’; in fact, it does not mention 

‘‘private fund investors’’ at all.84 This 

provision makes no mention of ‘‘retail’’ 

customers, ‘‘retail’’ clients, or ‘‘retail’’ 

investors, and therefore does not by its 

plain meaning apply to only retail 

investors. While commenters seek to 

read a ‘‘retail’’ limitation into the 

statute, that view is unsupported by the 

plain text of the statute. 

Another commenter similarly argued 

that, because Congress added section 

211(e) to the Advisers Act requiring the 

promulgation of rules to establish the 

form and content of certain reports 

regarding private funds required to be 

filed with the Commission under 

subsection 204(b) of the Advisers Act, it 

‘‘is inconceivable that Congress 

intended Section 211(h) to grant the 

broad private fund disclosure authority 

it claims when Congress spoke with 

such precision [in adding section 

211(e)] within the same section of the 

Advisers Act.’’ 85 Contrary to this 

commenter’s assertion, we find again 

that the juxtaposition of such provisions 

within the amendments Congress made 

to 211 of the Advisers Act show 

Congress knew when it wanted to limit 

a provision to private fund advisers, 

when it wanted to limit a provision to 

retail customers, and when it wanted to 

apply a provision to all investment 

advisers and investors. Another 

commenter asserted that Congress only 

intended to regulate the activities of 

private funds and their investment 

advisers in Title IV of the Dodd-Frank 

Act, and not in Title IX of the DoddFrank Act, and thus section 211(h) 

cannot be read to apply to private fund 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63215 

86See NYC Bar Comment Letter II. 87For example, there is nothing limiting the remit 

of the Investor Advisory Committee mandated by 

section 911 of the Dodd-Frank Act from considering 

investors in private funds and section 911 requires 

that such committee include representation of the 

interests of institutional investors, including 

pension funds, and thus many of the investors in 

private funds. There is also nothing to suggest the 

study of the examination of investment advisers 

under section 914 of the Dodd-Frank Act should 

exclude examination of private fund advisers. 

Finally, there is nothing under section 915 of the 

Dodd-Frank Act (codified as section 4(g) of the 

Exchange Act), which mandated the creation of an 

Investor Advocate at the Commission, to limit its 

remit to non-private fund advisers—indeed section 

915 of the Dodd-Frank Act specifically refers to 

‘‘retail investors’’ in some subsections and 

‘‘investors’’ in others, showing Congress chose the 

application of its directives and grants of authority 

quite specifically. Compare section 4(g)(4)(A) of the 

Exchange Act (providing the Investor Advocate 

shall ‘‘assist retail investors in resolving significant 

problems such investors may have with the 

Commission or self-regulatory organizations’’) with 

section 4(g)(4)(B) of the Exchange Act (providing 

the Investor Advocate shall ‘‘identify areas in which 

investors would benefit from changes in the 

regulations of the Commission or the rules of selfregulatory organizations’’). 

88See, e.g., Comment Letter of the Loan 

Syndications and Trading Association (Apr. 25, 

2022) (‘‘LSTA Comment Letter’’); Comment Letter 

of Citadel (May 3, 2022) (‘‘Citadel Comment 

Letter’’). 

89See 15 U.S.C. 80a–18 and 17 CFR 270.18c–1, 

17 CFR 270.18c–2, 17 CFR 270.18f–1, 17 CFR 

270.18f–2, and 17 CFR 270.18f–4 under the 

Investment Company Act. 

90See 15 U.S.C. 80a–22 and 17 CFR 270.22e–4 

under the Investment Company Act. 

91See 15 U.S.C. 80a–12. 

92See 15 U.S.C. 80a–13. 

93See 15 U.S.C. 80a–10 (independence of 

directors) and 15 U.S.C. 80a–16 (election of 

directors). 

94See Stuart Kaswell Comment Letter. 

95See, e.g., 17 CFR 275.204A–1 (rule 204A–1) 

(requiring registered advisers to adopt codes of 

ethics); 17 CFR 275.205–3 (permitting investment 

advisers to charge performance fees to certain 

clients); 17 CFR 275.206(4)–1 (rule 206(4)–1) 

(regulating registered adviser marketing); rule 

206(4)–2 (regulating the custody practices of 

registered advisers); 17 CFR 275.206(4)–5 (rule 

206(4)–5) (prohibiting registered advisers and 

certain advisers exempt from registration from 

engaging in certain pay to play activities); rule 

206(4)–8 (prohibiting advisers to pooled investment 

vehicles from making false or misleading statements 

to, or otherwise defrauding, investors or prospective 

investors in those pooled vehicles). 

96For example, the various exemptions in section 

203(b), the venture capital exemptions in section 

203(l), and the private fund exemption in section 

203(m). See also section 211(a) of the Act (‘‘The 

Commission shall have authority from time to time 

to make, issue, amend, and rescind such rules and 

regulations and such orders as are necessary or 

appropriate to the exercise of the functions and 

powers conferred upon the Commission elsewhere 

in this title, including rules and regulations 

defining technical, trade, and other terms used in 

this title, except that the Commission may not 

define the term ‘client’ for purposes of paragraphs 

(1) and (2) of section 206 to include an investor in 

a private fund managed by an investment adviser, 

if such private fund has entered into an advisory 

contract with such adviser.’’) 

97See, e.g., Comment Letter of American 

Investment Council (June 13, 2022) (‘‘AIC Comment 

Letter II’’); SIFMA–AMG Comment Letter I. 

advisers.86 We disagree. While Title IV 

contains a number of provisions specific 

to private fund advisers, there are many 

other provisions of the Dodd-Frank Act 

applicable to private fund advisers 

outside of that title, and while Title IX 

contains provisions that affect all 

investment advisers, there is no 

indication that Congress intended to 

restrict its coverage to exclude private 

fund advisers except where it explicitly 

does so.87

Some commenters challenged our 

ability to rely on sections 211(h) and 

206 of the Advisers Act on the grounds 

that our use of such authority directly 

conflicts with Congress’s intent in 

enacting the Investment Company Act 

of 1940 (‘‘Investment Company Act’’).88

Specifically, commenters stated that the 

rules are an attempt to regulate private 

funds despite the fact that Congress 

explicitly excluded such funds from the 

definition of an ‘‘investment company’’ 

and therefore excluded them from 

regulation under the Investment 

Company Act. The final rules, however, 

regulate the activities of investment 

advisers to private funds, over whom 

the Commission has been given 

substantial authority, while the 

substantive provisions of the Investment 

Company Act, and rules thereunder, 

regulate investment companies. These 

final rules are not an indirect 

mechanism for regulating private funds 

because the rules focus on the adviser 

and do not apply to or restrict the 

private fund itself. For example, the 

rules do not dictate or limit the ability 

of private funds to engage in excessive 

leverage or borrowing,89 do not regulate 

fund payment of redemption proceeds 

or require funds to comply with specific 

rules to maintain liquidity sufficient to 

meet redemptions,90 do not regulate 

layering of fees or fund structures,91 or 

changes in investment policies,92 and 

do not impose a governance structure 93

the way that the Investment Company 

Act, and rules thereunder, impose such 

limitations on registered funds and their 

operations. 

One commenter stated that Congress 

amended the Advisers Act to address 

private fund adviser registration and did 

not authorize a disclosure system for 

private funds or allow the Commission 

to circumvent that by putting the 

obligation on advisers.94 We disagree. In 

amending the Advisers Act in 

connection with requiring most private 

fund advisers to register, Congress 

enacted other requirements specific to 

private fund advisers. For example, 

section 204(b) of the Act, entitled 

‘‘Records and Reports of Private Funds,’’ 

specifically authorizes the Commission 

to require registered investment advisers 

to maintain such records of, and file 

with the Commission such reports 

regarding, private funds advised by the 

investment adviser, as necessary and 

appropriate in the public interest and 

for the protection of investors, or for the 

assessment of systemic risk by the 

Financial Stability Oversight Council 

and to provide or make available to the 

Council those reports or records or the 

information contained therein. It further 

provides that the records and reports of 

any private fund to which an 

investment adviser registered under this 

title provides investment advice shall be 

deemed to be the records and reports of 

the investment adviser. Congress thus 

appears to have squarely contemplated, 

for example, that reports regarding 

private funds would be achieved by 

putting the obligation on advisers. Even 

further, in amending the Advisers Act to 

require registration of private fund 

advisers, Congress did not mandate or 

restrict the Commission from applying 

rules adopted under the Advisers Act to 

these advisers. It did not indicate that a 

registered private fund adviser should 

be more or less subject to the 

Commission’s rules under the Advisers 

Act than any other registered adviser 

simply because its clients are private 

funds.95 Where Congress intended for 

certain private fund advisers to be 

treated differently from other registered 

investment advisers, it has been 

specific.96

Some commenters stated that the 

rules are inconsistent with precedent 

treating the Advisers Act as a 

disclosure-based regime, that the 2019 

IA Fiduciary Duty Interpretation reaffirmed the practice of consent through 

disclosure, and that the Commission is 

abandoning this approach in favor of 

acting as a merit regulator.97 The 

Advisers Act sets forth specific 

requirements for advisers, including 

advisers to private funds, and confers 

specific rulemaking authority to the 

Commission in sections 206(4) and 

211(h). Nowhere in these sections or in 

the Advisers Act more broadly did 

Congress provide that the Advisers Act 

is purely a disclosure-based regime or 

that the Commission’s rulemaking 

authority with respect to the Advisers 

Act is limited to disclosure-based rules. 

Furthermore, other statutory provisions 

of the Advisers Act are explicit when 

restricting the Commission’s rulemaking 

authority to require disclosure 

compared to imposing other obligations. 

Indeed, while section 211(h)(1) of the 

Act specifies that the Commission shall 

facilitate the provision of certain 


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98See, e.g., Citadel Comment Letter (discussing 

indemnification clauses); NYC Bar Comment Letter 

II. 

99The audit rule increases the likelihood that 

fraudulent activity or problems with valuation are 

uncovered, thereby deterring advisers from 

engaging in fraudulent conduct. Similarly, the 

quarterly statement rule increases the likelihood 

that fraudulent activity or problems with fees, 

expenses, and performance are uncovered, thereby 

deterring advisers from engaging in fraudulent 

conduct. The adviser-led secondaries rule is 

designed to ensure that the private fund and 

investors that participate in the secondary 

transaction are offered a fair price, which is a 

critical component of preventing the type of harm 

that might result from the adviser’s conflict of 

interest in leading the transaction. The restricted 

activities rule and preferential treatment rule 

prevent advisers from engaging in certain activities 

that could result in fraud and investor harm, unless 

advisers make appropriate disclosures or obtain 

consent, as applicable. 

100See, e.g., Comment Letter of American 

Investment Council (Apr. 25, 2022) (‘‘AIC Comment 

Letter I’’); Citadel Comment Letter. 

101See, e.g., Comment Letter of Haynes and 

Boone, LLP (Apr. 25, 2022) (‘‘Haynes & Boone 

Comment Letter’’); Comment Letter of Committee 

on Capital Market Regulation (Oct. 17, 2022) 

(‘‘CCMR Comment Letter II’’); Citadel Comment 

Letter. 

102See AIC Comment Letter I. 

103See CCMR Comment Letter II. 

104See, e.g., AIC Comment Letter I; Citadel 

Comment Letter. 

105See Haynes & Boone Comment Letter. 

106Applicability of the Advisers Act of 1940 to 

Financial Planners, Pension Consultants, and Other 

Persons Who Provide Others with Investment 

Advice as a Component of Other Financial Services, 

Investment Advisers Act Release No. 1092 (Oct. 8, 

1987) (‘‘Release 1092’’). See also United States v. 

Miller, 833 F.3d 274 (3d Cir. 2016). 

107See United for Respect Comment Letter I. 

disclosures, the very next subsection 

(section 211(h)(2) of the Act) provides 

that the Commission shall examine and, 

where appropriate, promulgate rules 

prohibiting or restricting certain sales 

practices, conflicts of interest, and 

compensation schemes. The authority 

granted to the Commission under 

section 206(4) of the Act, which enables 

the Commission to promulgate rules to 

define, and prescribe means reasonably 

designed to prevent, such acts, 

practices, and courses of business as are 

fraudulent, deceptive, or manipulative, 

also makes no mention of disclosure. 

Similarly, the 2019 IA Fiduciary Duty 

Interpretation addressed advisers’ 

fiduciary duties to their fund clients but 

did not state or seek to imply that 

advisers to private funds were otherwise 

exempt from the specifically worded 

provisions in the Advisers Act. We are 

not seeking to amend or change the 

Commission’s existing rules or past 

interpretations of the Advisers Act with 

respect to private fund advisers. Rather, 

in this rulemaking, we are seeking to 

employ the rulemaking authority in 

sections 206(4) and 211(h) of the Act, as 

Congress set forth, to address the types 

of harms Congress specifically 

identified in those sections. 

Other commenters argued that the 

Commission cannot rely on section 206 

because the Commission has neither 

proposed to define fraudulent practices 

nor demonstrated how the rules would 

prevent fraud.98 Section 206(4) gives the 

Commission the authority to prescribe 

means reasonably designed to prevent 

fraud, and we are employing the 

authority that Congress provided us in 

section 206(4). As detailed below in the 

discussion of the final rules in section 

II of the release, the rules we are 

adopting today are reasonably designed 

to prevent fraud, deception, or 

manipulation because, for example, 

requiring advisers to provide enhanced 

disclosure around potential and actual 

conflicts of interest decreases the 

likelihood that investors will be 

defrauded by certain practices, many of 

which involve conflicts of interest.99 In 

addition, preventing advisers from 

engaging in certain activities, in some 

cases unless they provide disclosure, is 

another means to prevent fraud, 

deception, or manipulation. 

Some commenters stated that the 

‘‘sales practices,’’ ‘‘conflicts of interest’’ 

and ‘‘compensation schemes’’ 

referenced in section 211(h) should be 

read and understood all together in the 

context of an advisory relationship, not 

as a list of distinct items, but as sales 

practices that lead to conflicts of interest 

with associated compensation schemes, 

and that the word ‘‘certain’’ also 

underscores the limited reach of these 

terms’ combined meaning.100 These 

commenters’ reading would effectively 

eliminate ‘‘conflicts of interest’’ and 

‘‘compensation schemes’’ from the 

statutory language and reduce section 

211(h)(2) to refer only to certain sales 

practices. We see no basis for reading 

out of the statute words Congress 

specifically chose to include. First, by 

providing a specific list of items in 

section 211(h) that the Commission 

‘‘shall examine and, where appropriate, 

promulgate rules,’’ Congress intended 

for the Commission to address this 

particularized set of scenarios—‘‘sales 

practices, conflicts of interest, and 

compensation schemes’’—via 

rulemaking. Accordingly, we have 

sought to identify clearly which of these 

scenarios we are attempting to address 

in each rule that is based on our 

rulemaking authority under section 

211(h). Second, we agree that ‘‘certain’’ 

indicates that 211(h) does not apply to 

all sales practices, conflicts of interest 

and compensation schemes, but rather 

only those that, after examination, the 

Commission deems contrary to the 

public interest and protection of 

investors. Following our examination, 

as described in this release, these rules 

aim to restrict only sales practices, 

conflicts of interest and compensation 

schemes that we believe are harmful to 

investors. There are other examples of 

sales practices, conflicts of interest and 

compensation schemes in the private 

fund industry that are not addressed in 

this rulemaking, some of which we do 

not currently view as rising to the level 

of concern set forth in section 211(h). 

Some commenters offered their own 

interpretations of the term ‘‘sales 

practices.’’ 101 A commenter interpreted 

the plain meaning of ‘‘sales practice’’ to 

be ‘‘a mode or method of making 

sales,’’ 102 while another commenter 

interpreted ‘‘sales practice’’ to be ‘‘a 

repeated or customary manner of 

promoting or selling goods.’’ 103 Some 

commenters suggested cold calling as an 

example of a ‘‘sales practice.’’ 104 Yet 

another commenter interpreted ‘‘sales 

practice’’ to apply only to ‘‘an adviser’s 

marketing or promotion of its funds.’’ 105

We agree that such interpretations 

involve a sales practice, and we have 

taken them into consideration in 

interpreting this term. Our 

interpretation is appropriate because it 

is sufficiently broad to capture sales 

practices as they continue to evolve in 

the industry but not so broad as to 

capture operational activities that are 

independent of sales functions. 

Likewise, our interpretation of ‘‘sales 

practice’’ is not so narrow that it would 

exclude conduct that should be within 

scope. For example, the term would not 

exclude conduct because it is not 

‘‘repeated’’ or ‘‘customary.’’ Similarly, it 

would not exclude activity that follows 

a period of marketing or promotion 

when an adviser takes steps to effectuate 

an investment. 

Likewise, the staff has broadly 

interpreted the term ‘‘compensation,’’ 

explaining that ‘‘the receipt of any 

economic benefit, whether in the form 

of an advisory fee or some other fee 

relating to the total services rendered, 

commissions, or some other 

combination of the foregoing’’ would 

satisfy the ‘‘for compensation’’ prong of 

the definition of investment adviser set 

forth in Section 202(a)(11) of the 

Advisers Act.106 A commenter 

suggested that fees and expenses being 

passed on to investors, such as 

accelerated monitoring fees, costs 

related to governmental or regulatory 

investigations, compliance expenses, 

and costs related to obtaining external 

financing, should be characterized as 

‘‘compensation schemes.’’107 Another 


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108See Haynes & Boone Comment Letter. 

109See Release 1092, supra footnote 106, at 10. 

110CFS Securities Corp., SEC Staff Letter (Feb. 27, 

1987) (expressing the staff’s view that a fee 

designed to cover costs would constitute ‘special 

compensation’’’); Touche Holdings, Inc., SEC Staff 

Letter (Nov. 30, 1987) (explaining the staff’s view 

that ‘‘[t]he compensation element is satisfied even 

if payments for services only cover the cost of the 

services’’). 

111See Release 1092, supra footnote 106, at 10. 

112One commenter supported a broad 

interpretation of ‘‘compensation scheme’’ and 

suggested that this authority has the potential to 

address significant failures in our markets. See 

Consumer Federation of American Comment Letter. 

However, another commenter maintained that the 

statutory context indicates that ‘‘compensation 

schemes’’ should be interpreted to refer to 

structural incentives that may encourage a brokerdealer or investment adviser to push an investor 

into an unsuitable transaction. See AIC Comment 

Letter I. As discussed above, this suggested 

interpretation would effectively eliminate ‘‘conflicts 

of interest’’ and ‘‘compensation schemes’’ from the 

statutory language and reduce section 211(h)(2) to 

refer only to certain sales practices. We see no basis 

for reading out of the statute words Congress 

specifically chose to include. Another commenter 

stated that ‘‘compensation scheme’’ has yet to be 

applied or interpreted to prohibit indemnification 

provisions or the passing through of certain fee and 

expense types. See Comment Letter of Committee 

on Capital Market Regulation (Apr. 25, 2022) 

(‘‘CCMR Comment Letter I’’). 

113See, e.g., MFA Comment Letter I; AIC 

Comment Letter I; Goldstein v. SEC, 451 F.3d 873 

(DC Cir. 2006) (‘‘Goldstein v. SEC’’). 

114See AIC Comment Letter I; Goldstein v. SEC, 

supra footnote 113 (clarifying that the ‘‘client’’ of 

an investment adviser managing a pool is the pool 

itself, not an investor in the pool). 

115Further, the Dodd-Frank Act eliminated the 

‘‘private adviser’’ exemption under section 

203(b)(3) of the Advisers Act, which the court 

interpreted in Goldstein v. SEC. Thus, we do not 

believe the court’s ruling in Goldstein v. SEC is 

necessarily relevant because we are not relying on 

repealed section 203(b)(3). 

116See rule 206(4)–8 under the Advisers Act. 

117See supra section I.A. 

118See, e.g., Stuart Kaswell Comment Letter; AIC 

Comment Letter II. 

119See, e.g., SIFMA–AMG Comment Letter I; 

Comment Letter of Federal Regulation of Securities 

Committee of the Business Law Section of the 

American Bar Association (Apr. 28, 2022); MFA 

Comment Letter I. 

120The final quarterly statement, audit, adviserled secondaries, restricted activities, and 

preferential treatment rules do not apply to 

investment advisers with respect to securitized 

asset funds they advise. See discussion below in 

this section II.A. All references to private funds 

shall not include securitized asset funds. 

commenter suggested that we 

distinguish between ‘‘compensation’’ 

and ‘‘reimbursement’’ for purposes of 

defining a ‘‘compensation scheme.’’ 108

Previously, our staff has explained that 

the receipt of any economic benefit to a 

person providing a variety of services to 

a client, including investment advisory 

services, qualifies as 

‘‘compensation.’’ 109 It has consistently 

recognized that reimbursements 

covering only the cost of services are 

‘‘compensation.’’ 110 And staff has 

viewed ‘‘compensation’’ as including 

indirect payments for investment 

advisory services.111 We similarly 

broadly interpret the term 

‘‘compensation scheme’’ for purposes of 

this rulemaking to include any manner 

in which an investment adviser is 

compensated and receives economic 

benefit—directly or indirectly—for 

providing services to its clients.112

Commenters also argued that the 

Commission’s approach runs contrary to 

the D.C. Circuit Court’s decision in 

Goldstein v. SEC.113 One commenter 

stated that the proposal, by offering 

protections directly to private fund 

investors, relies on the same ‘‘lookthrough’’ approach that the D.C. Circuit 

rejected in Goldstein v. SEC.114 The 

exercise of our statutory authority under 

sections 211(h) and 206(4) is not 

inconsistent with the court’s ruling in 

Goldstein v. SEC because section 206(4) 

is not limited in its application to 

‘‘clients’’ and section 211(h) was 

designed to provide protection to 

‘‘investors.’’ Notably, neither section 

206(4) nor 211(h) references ‘‘client,’’ 

and section 211(h) references 

‘‘investors’’ which does not exclude any 

particular type of investor, such as 

private fund investors. A plain 

interpretation of the statute supports a 

reading that Congress intended to allow 

the Commission to promulgate rules to 

protect investors directly (including 

private fund investors) and therefore 

does not contradict the court’s ruling in 

Goldstein v. SEC.115 Moreover, private 

fund advisers are already subject to rule 

206(4)–8 under the Advisers Act, which 

prohibits investment advisers to pooled 

investment vehicles, which include 

private funds, from engaging in any act, 

practice, or course of business that is 

fraudulent, deceptive, or manipulative 

with respect to any investor or 

prospective investor in the pooled 

investment vehicle.116 We recognize 

that the private fund is the adviser’s 

client, but this rulemaking addresses 

with particularity the risk of fraud, 

deception, or manipulation upon 

investors in private funds. As a means 

of preventing fraudulent, deceptive, or 

manipulative acts upon the fund, we are 

also addressing the relationship with 

the fund investors, with whom the 

adviser typically negotiates the terms of 

its relationship with the fund. 

Moreover, as fund clients often lack an 

effective governance process that is 

independent of the adviser to receive or 

provide consent,117 these rules protect 

both the fund and its investors by 

empowering investors to receive 

disclosure and provide such informed 

consent. 

Relatedly, some commenters stated 

that our interpretation of our authority 

under section 211(h) is inconsistent 

with the fact that, at the same time it 

added section 211(h), Congress 

amended 211(a) to clarify that advisers 

do not owe a duty to private fund 

investors.118 On the contrary, the fact 

that Congress made these amendments 

to 211(a) at the same time it added 

section 211(h) supports our 

interpretation. In amending section 

211(a), Congress made an explicit 

differentiation between a fund client of 

an adviser and investors in such fund 

client for purposes of establishing 

potential liability under sections 206(1) 

and 206(2) of the Advisers Act in the 

Advisers Act. However, Congress did 

not frame 211(h) in such terms. Rather, 

Congress did not use the term ‘‘client’’ 

in 211(h) at all but used the term 

‘‘investors’’ specifically in 211(h). 

Congress addressed adviser-client 

relationships when it wished, but used 

a different framing and different terms 

in 211(h). 

Some commenters stated that section 

205 provides the only authority under 

the Advisers Act to regulate contracts 

and that section 205(b) carves out 

contracts with funds exempt from the 

Investment Company Act under section 

3(c)(7) of that Act.119 While section 

205(a) provides authority under the 

Advisers Act to regulate investment 

advisory contracts, it does not state that 

such contracts or private funds are 

otherwise not subject to the other 

provisions of the Advisers Act, 

including disclosure requirements, 

antifraud provisions, or other investor 

protection provisions. The plain 

interpretation of section 205 is that 

Congress intended to exempt certain 

private funds from the prohibition on 

the specified advisory contract terms set 

forth in section 205(a) but did not 

otherwise attempt to imply that private 

finds are broadly exempted from the 

requirements of the Advisers Act. 

II. Discussion of Rules for Private Fund 

Advisers 

A. Scope of Advisers Subject to the 

Final Private Fund Adviser Rules 

The scope of advisers subject to the 

final private fund adviser rules is 

unchanged from the proposal, except as 

discussed below with respect to 

advisers to securitized asset fund.120

The quarterly statement, audit, and 

adviser-led secondaries rule apply to all 

SEC-registered advisers, and the 

restricted activities and preferential 

treatment rules apply to all advisers to 

private funds, regardless of whether 


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121Compare the affirmative obligations in rule 

204A–1 (requiring SEC-registered investment 

advisers to, among other things, establish, maintain 

and enforce a written code of ethics) and rule 

206(4)–2 (requiring SEC-registered investment 

advisers to follow certain practices if they have 

custody of client funds or securities) with the 

prohibition in rule 206(4)–8 (prohibiting both 

registered and unregistered investment advisers to 

pooled investment vehicles from making false or 

misleading statements to, or otherwise defrauding, 

investors or prospective investors in those pooled 

vehicles). 

122See, e.g., AIMA/ACC Comment Letter (adviserled secondaries rule); Comment Letter of Standards 

Board for Alternative Investments (Apr. 25, 2022) 

(‘‘SBAI Comment Letter’’) (adviser-led secondaries 

rule, quarterly statement rule); Comment Letter of 

Andrew (Apr. 25, 2022) (quarterly statement rule). 

123An exempt reporting adviser is an investment 

adviser that qualifies for the exemption from 

registration under section 203(l) of the Advisers Act 

or 17 CFR 275.203(m)–1 (rule 203(m)–1) under the 

Advisers Act. 

124Comment Letter of the North American 

Securities Administrators Association, Inc. (Apr. 

25, 2022) (‘‘NASAA Comment Letter’’). 

125See, e.g., AIC Comment Letter II; Comment 

Letter of the British Private Equity and Venture 

Capital Association (Apr. 25, 2022) (‘‘BVCA 

Comment Letter’’); PIFF Comment Letter. 

126See, e.g., Exemptions Adopting Release, supra 

footnote 9, at 77 (Most of the substantive provisions 

of the Advisers Act do not apply with respect to the 

non-U.S. clients of a non-U.S. adviser registered 

with the Commission.); Registration Under the 

Advisers Act of Certain Hedge Fund Advisers, 

Investment Advisers Act Release No. 2333 (Dec. 2, 

2004) [69 FR 72054, 72072 (Dec. 10, 2004)] (‘‘Hedge 

Fund Adviser Release’’) (stating that the following 

rules under the Advisers Act would not apply to a 

registered offshore adviser, assuming it has no U.S. 

clients: compliance rule, custody rule, and proxy 

voting rule and stating that the Commission would 

not subject an offshore adviser to the rules 

governing adviser advertising [17 CFR 275.206(4)– 

1], or cash solicitations [17 CFR 275.206(4)–3] with 

respect to offshore clients). We note that our staff 

has taken a similar position. See, e.g., American Bar 

Association, SEC Staff No-Action Letter (Aug. 10, 

2006) (confirming that the substantive provisions of 

the Act do not apply to offshore advisers with 

respect to those advisers’ offshore clients (including 

offshore funds) to the extent described in those 

letters and the Hedge Fund Adviser Release); 

Information Update For Advisers Relying On The 

Unibanco No-Action Letters, IM Information 

Update No. 2017–03 (Mar. 2017). Any staff 

statements cited represent the views of the staff. 

They are not a rule, regulation, or statement of the 

Commission. Furthermore, the Commission has 

neither approved nor disapproved their content. 

These staff statements, like all staff statements, have 

no legal force or effect: they do not alter or amend 

applicable law; and they create no new or 

additional obligations for any person. 

127See, e.g., Investment Adviser Marketing, 

Investment Advisers Act Release No. 5653 (Dec. 22, 

2021), at n.200 (‘‘Marketing Release’’). 

128See Proposing Release, supra footnote 3, at 

section II.D. 129See Proposing Release, supra footnote 3, at 

section II.D. 130See, e.g., BVCA Comment Letter; Comment 

Letter of Invest Europe (Apr. 25, 2022) (‘‘Invest 

Europe Comment Letter’’); AIC Comment Letter II; 

PIFF Comment Letter; AIMA/ACC Comment Letter. 

131See, e.g., Healthy Markets Comment Letter I; 

Consumer Federation of America Comment Letter. 

132AIMA/ACC Comment Letter. See also SIFMA– 

AMG Comment Letter I. 

they are registered with the 

Commission. Our scoping decisions 

generally align with the Commission’s 

historical approach and are based on the 

fact that the quarterly statement, audit, 

and adviser-led secondaries rules 

impose affirmative obligations on 

advisers, while the restricted activities 

and preferential treatment rules prohibit 

activity or require disclosure and, in 

some cases, consent.121

Commenters generally supported the 

proposed application of the quarterly 

statement rule, audit rule, and adviserled secondaries rule to SEC-registered 

advisers.122 One commenter asserted 

that the proposed quarterly statement 

rule and audit rule should also apply to 

exempt reporting advisers (‘‘ERAs’’),123

arguing that investors in private funds 

advised by ERAs would similarly 

benefit from information about the 

funds’ fees, expenses, and performance 

and from fund audits.124 Other 

commenters asked for clarification that 

the proposed quarterly statement rule, 

audit rule, and adviser-led secondaries 

rule would not apply to an adviser 

whose principal office and place of 

business is outside of the United States 

(offshore adviser) with regard to any of 

its non-U.S. private fund clients even if 

the non-U.S. private fund clients have 

U.S. investors.125

We are applying these three rules to 

SEC-registered advisers, as proposed. 

No commenter requested we extend 

application of the adviser-led 

secondaries rule to ERAs or other 

unregistered advisers. Regarding the 

quarterly statement rule, we believe 

extending the rule to ERAs, such as 

venture capital fund advisers, would 

raise matters that we believe would 

benefit from further consideration—for 

example, whether different fee, expense, 

and performance information might be 

informative in the context of start-up 

investments. Similarly, while one 

commenter asserted that many ERAs are 

already obtaining audits and thus 

application of the audit rule would 

benefit investors in ERA-advised funds, 

we received no other comments on this 

topic and believe we would benefit from 

further comment on the benefits and 

costs of such a requirement, particularly 

from smaller ERAs. 

We have previously stated, and 

continue to take the position, that we do 

not apply most of the substantive 

provisions of the Advisers Act with 

respect to the non-U.S. clients 

(including private funds) of an SECregistered offshore adviser.126 This 

approach was designed to provide 

appropriate flexibility where an adviser 

has its principal office and place of 

business outside of the United States.127

It is appropriate to continue to apply 

this historical approach to these three 

new rules. The quarterly statement rule, 

audit rule, and adviser-led secondaries 

rule are substantive rules under the 

Advisers Act that we will not apply 

with respect to the non-U.S. private 

fund clients of an SEC-registered 

offshore adviser (regardless of whether 

they have U.S. investors). 

The restricted activities rule prohibits 

all private fund advisers, regardless of 

registration status, from engaging in 

certain sales practices, conflicts of 

interest, and compensation schemes, 

unless the adviser satisfies certain 

disclosure, and, in some cases, consent 

obligations. Likewise, the preferential 

treatment rule prohibits all private fund 

advisers, regardless of registration 

status, from providing preferential 

treatment to any investor in a private 

fund (and in some cases to any investor 

in a similar pool of assets), unless the 

adviser satisfies certain disclosure 

obligations. 

We proposed to continue to apply the 

Commission’s historical position on the 

substantive provisions of the Advisers 

Act to the prohibited activities rule such 

that the rule would not apply with 

respect to a registered offshore adviser’s 

non-U.S. private funds, regardless of 

whether those funds have U.S. 

investors.128 We requested comment on 

whether this approach should apply to 

the proposed prohibited activities rule 

and the other proposed rules.129 Several 

commenters supported applying the 

Commission’s historical approach to all 

of the proposed rules.130 Other 

commenters stated that the 

Commission’s historical approach 

should not apply to the proposed 

prohibited activities rule because it is 

the domicile of the investor and not the 

domicile of the private fund that is most 

important for protecting U.S. 

investors.131 The Commission’s 

historical approach applies such that 

none of the final rules or amendments 

apply with respect to the offshore fund 

clients of an SEC-registered offshore 

adviser. 

One commenter stated that the 

proposed prohibited activities rule and 

the preferential treatment rule should 

not apply to an unregistered offshore 

adviser to offshore private funds 

because the proposal would result in 

SEC-registered offshore advisers being 

subject to less regulation than offshore 

ERAs and other offshore unregistered 

advisers.132 This commenter stated that 

the result would be that offshore SECregistered advisers to offshore funds 


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133AIMA/ACC Comment Letter. 

134See, e.g., BVCA Comment Letter; Invest 

Europe Comment Letter. 

135See Exemptions Adopting Release, supra 

footnote 9, at 77 (stating that disregarding an 

offshore adviser’s activities for purposes of the 

private fund adviser exemption reflects our longheld view that non-U.S. activities of non-U.S. 

advisers are less likely to implicate U.S. regulatory 

interests and that this territorial approach is in 

keeping with general principles of international 

comity); see also id. at 96 (stating that non-U.S. 

advisers relying on the private fund adviser 

exemption are subject to the Advisers Act antifraud 

provisions). 

136Section 402 of the Dodd-Frank Act; section 

202(a)(30) of the Advisers Act. 

137BVCA Comment Letter. 

138BVCA Comment Letter, See Hedge Fund 

Adviser Release, supra footnote 126, at section 

II.D.4.c. 

139See section 211(h)(2) of the Advisers Act. 

Section 211(h)(2) of the Advisers Act applies to 

SEC- and State-registered advisers as well as other 

advisers that are exempt from registration and 

advisers that are prohibited from registering under 

the Advisers Act. 

140See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5, at n.3 (stating that section 206 of 

the Advisers Act applies to SEC- and Stateregistered advisers as well as other advisers that are 

exempt from registration and advisers that are 

prohibited from registering under the Advisers Act). 

141See, e.g., Comment Letter of the Investment 

Adviser Association (Apr. 25, 2022) (‘‘IAA 

Comment Letter II’’) (arguing that the prohibited 

activities rule should not apply to State-registered 

advisers or ERAs, regardless of whether they are 

onshore or offshore); Comment Letter of Schulte 

Roth & Zabel LLP (Apr. 25, 2022) (‘‘Schulte 

Comment Letter’’) (arguing that the prohibited 

activities rule and preferential treatment rule 

should not apply to unregistered advisers); AIMA/ 

ACC Comment Letter (arguing that all of the rules 

should not apply to ERAs and advisers relying on 

the foreign private adviser exemption); SBAI 

Comment Letter (arguing that the prohibited 

activities rule should only apply to SEC RIAs). 

142 IAA Comment Letter II. 

143Moreover, this approach is consistent with the 

historical scope of section 206 of the Advisers Act, 

which was enacted before, and was unchanged by, 

the enactment of NSMIA. 

144Rule 206(4)–8 under the Advisers Act, for 

example, was adopted under section 206(4) and 

applies to all unregistered advisers, including Stateregistered advisers. See Prohibition of Fraud 

Adopting Release, supra footnote 67), at 7, n.16 

(‘‘[o]ur adoption of [rule 206(4)–8] will not alter our 

jurisdictional authority’’). See also Comment Letter 

of NASAA on Prohibition of Fraud by Advisers to 

Certain Pooled Investment Vehicles; Accredited 

Investors in Certain Private Investment Vehicles 

(Dec. 27, 2006) (‘‘NASAA supports the application 

of the proposed rule to advisers registered or 

required to register at the state level.’’). 

145See, e.g., NASAA Comment Letter (stating that 

‘‘the Proposal appropriately prohibits these 

activities for all PFAs [private fund advisers], not 

only those registered or required to be registered 

with the SEC’’); Healthy Markets Comment Letter I; 

Consumer Federation of America Comment Letter 

(both stating that the prohibited activities rule 

should also apply with respect to an offshore 

private fund managed by an offshore SEC-registered 

investment adviser where such fund has U.S. 

investors). 

146See, e.g., In the Matter of SparkLabs Global 

Ventures Management, LLC, Investment Advisers 

Act Release No. 6121 (Sept. 12, 2022) (settled 

action) (alleging unregistered advisers that managed 

private funds breached their fiduciary duty by 

causing private fund clients to lend to each other 

in violation of the funds’ governing documents and 

failing to disclose conflicts of interest to the funds); 

In the Matter of Augustine Capital Management, 

LLC, Investment Advisers Act Release No. 4800 

(Oct. 26, 2017) (settled action) (alleging 

unregistered private fund adviser caused the fund 

client to engage in conflicted transactions, 

including investments and loans, without 

disclosure to or consent by investors); In the Matter 

of Alumni Ventures Group, LLC, Investment 

Advisers Act Release No. 5975 (Mar. 4, 2022) 

(settled action) (alleging exempt reporting adviser 

that managed private funds breached its fiduciary 

duty by causing private fund clients to lend to each 

other in violation of the funds’ governing 

documents and failing to disclose conflicts of 

interest to the fund investors). 

147This approach is consistent with another rule 

adopted under section 206 of the Advisers Act, rule 

206(4)–5, which applies to SEC-registered advisers, 

advisers relying on the foreign private adviser 

exemption, and ERAs. Rule 206(4)–5 was intended 

to combat pay-to-play arrangements in which 

advisers are chosen based on their campaign 

contributions to political officials rather than on 

merit. Rule 206(4)–5 applies to an investment 

adviser registered (or required to be registered) with 

the Commission or unregistered in reliance on the 

exemption available under section 203(b)(3) of the 

Advisers Act, or that is an exempt reporting adviser, 

as defined in rule 17 CFR 275.204–4(a) under the 

Advisers Act. 

would benefit by avoiding the proposed 

prohibited activities rule and 

preferential treatment rule, while 

unregistered offshore advisers to 

offshore funds would be subject to these 

two rules.133 Other commenters 

requested clarification that the two rules 

would not apply to offshore advisers, 

regardless of their registration status.134

We agree with commenters and clarify 

that the restricted activities rule and the 

preferential treatment rule do not apply 

to offshore unregistered advisers with 

respect to their offshore funds 

(regardless of whether the funds have 

U.S. investors). This scoping is 

consistent with our historical treatment 

of other types of offshore advisers, 

including ERAs,135 advisers relying on 

the foreign private adviser 

exemption,136 and other unregistered 

advisers. One commenter stated that the 

Commission has historically limited the 

application of prescriptive rules to 

offshore advisers.137 This approach is 

also consistent with our historical 

position of not applying substantive 

provisions of the Advisers Act to SECregistered offshore advisers with respect 

to their offshore clients, including 

private fund clients.138

It is appropriate to apply these two 

rules to all investment advisers, 

regardless of registration status, because 

these rules focus on prohibiting advisers 

from engaging in certain problematic 

sales practices, conflicts of interest, or 

compensation schemes.139 Also, these 

rules are adopted pursuant to the 

authority under section 206 of the 

Advisers Act, which applies to all 

investment advisers, regardless of 

registration status.140

Several commenters addressed the 

proposed scope of the prohibited 

activities rule and the preferential 

treatment rule, and many commenters 

supported a narrower scope.141 For 

example, one commenter stated that the 

application of the proposed prohibited 

activities rule to State-registered 

advisers would upend the balance of 

State and Federal authority that the 

National Securities Markets 

Improvement Act (‘‘NSMIA’’) 

established.142 We do not believe that 

the application of the restricted 

activities rule and the preferential 

treatment rule to State-registered 

advisers and advisers that are otherwise 

subject to State regulation (e.g., advisers 

that are exempt from State registration) 

runs contrary to the lines NSMIA 

established because we are adopting 

these two rules under sections 206 and 

211 of the Advisers Act, which sections 

apply to all advisers.143 Commission 

rules adopted using this authority, 

accordingly, may apply to all advisers, 

regardless of their registration status.144

In contrast, other commenters either 

supported the scope of the rules as 

proposed or supported an even broader 

scope.145

We are not narrowing the scope of the 

restricted activities and preferential 

treatment rules to exclude ERAs, Stateregulated advisers, advisers relying on 

the foreign private adviser exemption, 

or advisers that are otherwise 

unregistered. The sales practices, 

conflicts of interest, and compensation 

schemes addressed by the restricted 

activities rule and the preferential 

treatment rule can lead to advisers 

placing their interests ahead of their 

clients’ (and, by extension, their 

investors’) interests, and can result in 

significant harm to the private fund and 

its investors. As a result, all of these 

advisers are subject to the restricted 

activities rule and the preferential 

treatment rule. A number of our 

enforcement cases against advisers to 

private funds based on conflicts of 

interests have been brought against 

advisers that are not registered under 

the Advisers Act,146 and we believe this 

demonstrates a need to apply these rules 

to unregistered private fund advisers.147

Investment Advisers to Securitized 

Asset Funds 

The final quarterly statement, 

restricted activities, adviser-led 

secondaries, preferential treatment, and 

audit rules do not apply to investment 

advisers with respect to securitized 

asset funds (we refer to these advisers, 


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148 If an investment adviser that is a SAF adviser 

also advises other private funds that are not 

securitized asset funds, the investment adviser will 

be subject to the final rules with respect to such 

other private funds. 

149See Comment Letter of Ropes & Gray LLP 

(Apr. 25, 2022) (‘‘Ropes & Gray Comment Letter’’); 

LSTA Comment Letter; SIFMA–AMG Comment 

Letter I; Comment Letter of Teachers Insurance and 

Annuity Association of America (Apr. 25, 2022) 

(‘‘TIAA Comment Letter’’); Comment Letter of Fixed 

Income Investor Network (Apr. 29, 2022) (‘‘Fixed 

Income Investor Network Comment Letter’’); PIFF 

Comment Letter; Comment Letter of Structured 

Finance Association (Apr. 25, 2022) (‘‘SFA 

Comment Letter I’’). Although commenters 

generally focused on the application of the 

proposed rules to CLOs, certain commenters 

clarified that their comments applied also more 

broadly to securitization vehicles and vehicles that 

issue asset-backed securities. See LSTA Comment 

Letter; SFA Comment Letter I; SIFMA–AMG 

Comment Letter I; PIFF Comment Letter. 

150See LSTA Comment Letter. 

151See Ropes & Gray Comment Letter. 

152See id. 

153Except as specified, we are not altering the 

applicability of the Advisers Act, or any rules 

adopted thereunder, to SAF advisers. For example, 

Section 206 and rule 206(4)-8 will continue to 

apply to SAF advisers with respect to SAFs (and 

any other private funds) they advise. We are also 

not limiting the scope of advisers subject to the 

Advisers Act compliance rule and thus all SECregistered advisers, including SEC-registered SAF 

advisers, must document the annual review of their 

compliance policies and procedures in writing. 

154We will, however, continue to consider 

whether any additional regulatory action may be 

necessary with respect to SAF advisers in the 

future. 

155See final rule 211(h)(1)–1. 

156We recognize that certain private funds have, 

in recent years, made modifications to their terms 

and structure to facilitate insurance company 

investors’ compliance with regulatory capital 

requirements to which they may be subject. These 

funds, which are typically structured as rated note 

funds, often issue both equity and debt interests to 

the insurance company investors, rather than only 

equity interests. Whether such rated note funds 

meet the SAF definition depends on the facts and 

circumstances. However, based on staff experience, 

the modifications to the fund’s terms generally 

leave ‘‘debt’’ interests substantially equivalent in 

substance to equity interests, and advisers typically 

treat the debt investors substantially the same as the 

equity investors (e.g., holders of the ‘‘debt’’ interests 

have the same or substantially the same rights as 

the holders of the equity interests). We would not 

view investors that have equity-investor rights (e.g., 

no right to repayment following an event of default) 

as holding ‘‘debt’’ under the definition, even if fund 

documents refer to such persons as ‘‘debt investors’’ 

or they otherwise hold ‘‘notes.’’ Further, we do not 

believe that many rated note funds will meet the 

other prong of the definition (i.e., a private fund 

whose primary purpose is to issue asset backed 

securities), because they generally do not issue 

asset-backed securities. 

solely with respect to the securitized 

asset funds they advise, as ‘‘SAF 

advisers’’). These advisers will not be 

required to comply with the 

requirements of the final rules solely 

with respect to the securitized asset 

funds (‘‘SAFs’’) that they advise.148

Some commenters requested for all or 

some of the proposed rules not to apply 

to advisers to securitization vehicles or 

vehicles that issue asset-backed 

securities (in particular, collateralized 

loan obligations (‘‘CLOs’’)).149 One 

commenter stated that the Commission 

did not identify specific concerns with 

SAFs, the rules were generally not 

applicable to SAFs, and that the rules 

did not address or contemplate the 

critical differences between these types 

of vehicles and other private funds.150

Another commenter stated that, 

although SAFs are private funds, their 

structure and purpose are sufficiently 

distinct from other types of funds that 

their advisers should be exempt from 

the rules.151 This commenter stated that 

SAFs are unlike private funds in several 

ways, including because: (i) SAFs do 

not issue equity but rather issue notes 

at various seniorities that entitle holders 

to interest payments and ultimate 

repayment of principal; (ii) SAFs do not 

have general partners affiliated with 

their advisers but rather have 

unaffiliated trustees as fiduciary agents 

of the SAF investors; and (iii) their 

notes are held in street name and traded 

such that an adviser does not 

necessarily know who the noteholders 

are.152

After considering comments, we are 

not applying the five private fund 

adviser rules to SAF advisers.153 This 

approach avoids subjecting SAF 

advisers to obligations that were 

designed to address conduct we have 

observed in other parts of the private 

fund advisers industry, including with 

respect to advisers to hedge funds, 

private equity funds, venture capital 

funds, real estate funds, credit funds, 

hybrid funds, and other non-securitized 

asset funds (‘‘non-SAF advisers’’). We 

believe that the certain distinguishing 

structural and operational features of 

SAFs have together deterred SAF 

advisers from engaging in the type of 

conduct that the final rules seek to 

address. We also believe that the 

advisory relationship for SAF advisers 

and their clients presents different 

regulatory issues than the advisory 

relationship for non-SAF advisers and 

their clients. The final rules generally 

are not designed to take into account 

these differences, which together 

sufficiently distinguish SAFs from other 

types of private funds to warrant this 

approach.154 As a result, we do not 

believe that the private fund adviser 

rules we are adopting here are the 

appropriate tool to regulate SAF 

advisers. 

Definition of Securitized Asset Fund 

The final rule will define SAF as ‘‘any 

private fund whose primary purpose is 

to issue asset backed securities and 

whose investors are primarily debt 

holders.’’ 155 This definition, which is 

based on the corresponding definition 

for ‘‘securitized asset fund’’ in Form PF 

and Form ADV, is designed to capture 

vehicles established for the purpose of 

issuing asset backed securities, such as 

collateralized loan obligations. SAFs are 

special purpose vehicles or other 

entities that ‘‘securitize’’ assets by 

pooling and converting them into 

securities that are offered and sold in 

the capital markets. The definition 

therefore will not capture traditional 

hedge funds, private equity funds, 

venture capital funds, real estate funds, 

and credit funds.156 These private funds 

should not meet the definition because 

they typically have primarily equity 

investors, rather than debt investors, 

and/or they do not have a primary 

purpose of issuing asset backed 

securities. It is appropriate to apply the 

final rules to advisers with respect to 

these private funds because they present 

the concerns the final rules seek to 

address (i.e., lack of transparency, 

conflicts of interest, and lack of 

governance). 

In the context of requesting that the 

rule not apply with respect to 

collateralized loan obligations, one 

commenter stated that the final rule 

should use the following definition: any 

special purpose vehicle advised by an 

investment adviser that (A) (i) issues 

tradeable asset-backed securities or 

loans, the debt tranches of which are 

rated; and (ii) has at least 80% of its 

assets comprised of leveraged loans and 

cash equivalents; (B) is required by its 

governing transaction documents to 

appoint an unaffiliated person to, 

among other things, (i) calculate certain 

overcollateralization and interest 

coverage tests; (ii) prepare and make 

available to investors reports on the 

CLO, and (iii) make the indenture 

readily available to investors; and (C) 

appoints an independent accounting 

firm to perform a series of agreed upon 

procedures. Another commenter, when 

requesting exemptions or other relief 

from the rules, generally referred to 

these vehicles as ‘‘special purpose 

vehicles that issue asset backed 

securities,’’ while another commenter 

used the term ‘‘collateralized loan 

obligations and similar credit 

securitization products.’’ 

The definition in the final rule will 

include the types of funds described by 

these commenters. The definition of 

SAFs in the final rule, however, is one 

that many advisers are familiar with 

because it is used in both Form PF and 

Form ADV. For example, Item 7.B. and 

Schedule D of Form ADV ask whether 

the private fund is a securitized asset 


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157See Form ADV, Section 7.B.(1) and Schedule 

D Private Fund Reporting, Question 10. 

158See Form PF, Section 1a, Question 3. 

159We would also not view, depending on the 

facts and circumstances, private credit funds that 

borrow from third party lenders to enhance 

performance with fund-level leverage and invest in 

underlying loans alongside the equity investors as 

meeting this definition, even if they borrow an 

amount greater than the value of the equity interests 

they issue. 

160See LSTA Comment Letter; SFA Comment 

Letter I; Fixed Income Investor Network Comment 

Letter; TIAA Comment Letter. This view by 

commenters is consistent with the low rate of audits 

of U.S. GAAP financial statements for SAFs. 

However, approximately 10% of SAFs do get audits 

of U.S. GAAP financial statements from 

independent auditors that are Public Company 

Accounting Oversight Board (‘‘PCAOB’’)-registered 

and -inspected. See infra section VI.C.1. Advisers to 

these funds would not be prohibited under the final 

rules from continuing to cause the fund to undergo 

such an audit of U.S. GAAP financial statements. 

161See LSTA Comment Letter. 

162See Asset-Backed Securities, Securities Act 

Release No. 8518 (Dec. 22, 2004) (adopting 

disclosure requirements for asset-backed securities 

issuers) (https://www.sec.gov/rules/final/33- 

8518.htm). 

163See id. 

164See id. 

165See LSTA Comment Letter; SFA Comment 

Letter I; SIFMA–AMG Comment Letter I; TIAA 

Comment Letter. 

fund or another type of private fund, 

such as a hedge fund or private equity 

fund.157 Also, under Form PF, certain 

advisers to securitized asset funds are 

required to complete Section 1, which 

requires an adviser to report certain 

identifying information about itself and 

the private funds it advises.158 We also 

chose this definition because it captures 

the core characteristics that differentiate 

these vehicles from other types of 

private funds: vehicles that issue assetbacked securities collateralized by an 

underlying pool of assets and that have 

primarily debt investors. Thus, as 

discussed above, traditional private 

funds, would not meet this 

definition.159

Distinguishing SAF Characteristics and 

Features 

Although SAFs generally rely on the 

same exclusions from treatment as an 

‘‘investment company’’ under the 

Investment Company Act as other types 

of private funds (i.e., sections 3(c)(1) 

and (7) thereunder), we agree with 

commenters that certain fundamental 

structural and operational differences 

together sufficiently distinguish them 

from other types of private funds to 

warrant carving them out of the final 

rules. These fundamental differences, 

when considered in combination with 

the existing governance and 

transparency requirements of SAFs, 

would cause much of the rules to be 

generally inapplicable and/or ineffective 

with respect to achieving the 

rulemaking’s goals. Below we provide 

examples of these distinguishing 

features and how they relate to certain 

aspects of the final rules. 

We agree with commenters that SAFs 

have structural features that distinguish 

them from most other private funds that 

are relevant in assessing the benefit of 

an audit to investors. Commenters 

stated that Generally Accepted 

Accounting Principles (‘‘GAAP’’) 

financial statements are not typically 

considered relevant for SAFs.160 One 

commenter stated that GAAP’s efforts to 

assign, through accruals, a period to a 

given expense or income are not useful, 

and potentially confusing, for SAF 

investors because principal, interest, 

and expenses of administration of assets 

can only be paid from cash received.161

We recognize that vehicles that issue 

asset-backed securities are specifically 

excluded from other Commission rules 

that require issuers to provide audited 

GAAP financial statements.162

Previously, we have stated that GAAP 

financial information generally does not 

provide useful information to investors 

in asset-backed securities.163 Instead, 

SAF and other asset-backed securities 

investors have historically been 

interested in information regarding 

characteristics and quality of the 

underlying assets used to pay the notes 

issued by the issuer, the standards for 

the servicing of the underlying assets, 

the timing and receipt of cash flows 

from those assets, and the structure for 

distribution of those cash flows.164 We 

continue to believe that GAAP financial 

statements may be less useful to SAF 

investors than they are for non-SAF 

investors. 

SAFs also have features that 

distinguish them from most other 

private funds that are relevant in 

assessing the benefit of the preferential 

treatment rule. Based on staff 

experience, SAFs typically issue 

primarily tradeable, interest-bearing 

debt securities backed by incomeproducing assets, unlike other private 

funds that typically issue equity 

securities to investors. These debt 

securities are typically structured as 

notes and issued in different tranches to 

investors. The tranches offer different 

priority of payments subject to a 

‘‘waterfall’’ and defined levels of risk 

with upside participation caps or limits, 

which are compensated through the 

payment of increasing coupon rates on 

the more subordinated notes. Unlike 

investors in other private funds, the 

noteholders are similarly situated with 

all of the other noteholders in the same 

tranche and they cannot redeem or 

‘‘cash in’’ their note ahead of other 

noteholders in the same tranche. As a 

result, in our experience, this structure 

has generally deterred investors from 

requesting, and SAF advisers from 

granting, preferential treatment. Thus, 

we do not believe that preferential 

treatment for SAFs presents the same 

conflicts of interest and investor 

protection concerns as it does for nonSAF funds. 

We also believe that the quarterly 

statement would generally not provide 

meaningful information for SAF 

investors. For example, some 

commenters highlighted that the 

performance information required to be 

included in private fund quarterly 

statements would generally not 

constitute relevant or useful information 

for SAF investors, because the 

performance of a SAF, as a cash flow 

investment vehicle, primarily depends 

on the cash proceeds it realizes from its 

portfolio assets, as opposed to an 

increase in the value of its portfolio 

assets.165 These commenters stated that, 

instead of the performance metrics 

required for liquid or illiquid funds 

under the rules, a yield performance 

metric and/or information regarding the 

SAF’s cash distributions to investors (as 

well as its ability to make future cash 

distributions) would more appropriately 

reflect the specific cash flow structure of 

a SAF investment; and these 

commenters pointed out that SAF 

investors already receive this 

information, which is generally required 

to be periodically reported to investors 

in detail in accordance with a SAF’s 

securitization transaction agreement. 

We agree with commenters that the 

required performance metrics would be 

less useful to SAF investors than they 

are for non-SAF investors, particularly 

in light of the detailed information that 

SAF investors are generally already 

required to receive. For example, 

because the performance reporting 

would report performance at the SAF 

level, but investors sit in different 

tranches along the SAF’s distribution 

waterfall with different risk/return 

profiles, the required performance 

reporting would likely be uninformative 

with respect to any specific tranche. 

As another example, the 

‘‘distribution’’ requirements under the 

final rules would likely be impracticable 

for most SAF advisers. Unlike other 

private funds that are primarily 

purchased, with respect to U.S. persons, 

through a primary issuance pursuant to 

Regulation D, which generally restricts 

a security’s transferability and does not 

contemplate an investor’s resale of the 

security to a third party, SAF interests 


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166See, e.g., AIC Comment Letter I; Comment 

Letter of the National Venture Capital Association 

(Apr. 25, 2022) (‘‘NVCA Comment Letter I’’); Citadel 

Comment Letter. 

167See, e.g., AIC Comment Letter I; Citadel 

Comment Letter. 

168 Including, for many types of private funds, the 

private fund operating agreement to which the 

adviser or its affiliate and the private fund investors 

are typically both parties. 

169Such fund terms include, for example, the 

formulas that determine the amount of carried 

interest and management fees paid to the adviser in 

addition to other key terms such as the length of 

the life of the fund and the mechanics of fund 

governance. 

170See, e.g., In re Global Infrastructure 

Management, LLC, supra footnote 30 (alleging 

private fund adviser failed to properly offset 

management fees to private equity funds it managed 

and made false and misleading statements to 

investors and potential investors in those funds 

concerning management fee offsets); In the Matter 

of ECP Manager LP, Investment Advisers Act 

Release No. 5373 (Sept. 27, 2019) (settled action) 

(alleging that private equity fund adviser failed to 

apply the management fee calculation method 

specified in the limited partnership agreement by 

failing to account for write downs of portfolio 

securities causing the fund and investors to overpay 

management fees). 

171This includes the private fund operating 

agreement to which the adviser or its affiliate and 

private fund investors are typically both parties. 

172Put simply, performance is key to the terms of 

the relationship between private fund investors and 

advisers because private fund investors pay 

advisers to seek to generate investment returns, and 

performance information allows investors to assess 

how an adviser is fulfilling that obligation. 

173See infra footnotes 177–178 (providing 

examples of misconduct relating to fees, expenses, 

and performance). 

are primarily purchased in the United 

States through a primary issuance and 

subsequently resold and traded on the 

secondary market by qualified 

institutional buyers pursuant to 

Regulation 144A. Because SAF interests 

are, unlike interests in other types of 

private funds, primarily traded on the 

secondary market, the interests are 

generally held in street name by brokerdealers on behalf of the fund’s investors, 

who are, accordingly, not generally 

known by the fund or its investment 

adviser. To address delivery obligations 

under the fund documents, a SAF’s 

independent collateral administrator 

typically establishes a website that is 

accessible by noteholders where their 

required reports are furnished, in 

accordance with the terms of the 

securitization transaction agreement. As 

a result, a SAF adviser may not have the 

necessary contact information for each 

noteholder of the SAF to satisfy the 

distribution requirements. 

Finally, SAF advisers often have a 

more limited role in the management of 

a private fund, and SAFs or their 

sponsors typically engage more 

independent service providers than 

non-SAF funds. The primary role of an 

adviser to a SAF is, in many cases, to 

select and monitor the fund’s pool of 

assets in compliance with certain 

portfolio requirements and quality tests 

(such as overcollateralization, 

diversification, and interest coverage 

tests) that are set forth in the fund’s 

securitization transaction agreements. In 

many cases, the SAF’s transaction 

agreement appoints an independent 

trustee to serve as custodian for the 

underlying investments. The trustee and 

collateral administrator are typically 

responsible for preparing detailed 

monthly and quarterly reports for the 

investors regarding the SAF’s assets and 

expenses. We believe that these 

structural protections provide an 

important check on the adviser’s 

activity or otherwise limit the actions 

the adviser can take to harm investors. 

For the reasons described above, we 

believe it is appropriate not to apply all 

five private fund adviser rules to 

advisers with respect to SAFs they 

advise. 

B. Quarterly Statements 

Section 211(h)(1) of the Act states that 

the Commission shall facilitate the 

provision of simple and clear 

disclosures to investors regarding the 

terms of their relationships with 

brokers, dealers, and investment 

advisers, including any material 

conflicts of interest. The quarterly 

statement rule is designed to facilitate 

the provision of simple and clear 

disclosures to investors regarding some 

of the most important and fundamental 

terms of their relationships with 

investment advisers to private funds in 

which those investors invest—namely 

what fees and expenses those investors 

will pay and what performance they 

receive on their private fund 

investments. These disclosures will 

allow investors to better understand 

their private fund investments and the 

terms of their relationship with the 

adviser to those funds. 

Several commenters stated that 

section 211(h)(1) of the Act does not 

authorize the quarterly statement rule 

because details about past performance 

of funds and fees paid to the adviser are 

not terms of the relationship between 

investors and advisers.166 However, 

section 211(h)(1) of the Act does not 

limit a ‘‘term’’ of the relationship only 

to the provisions in a contract, as these 

commenters assert.167 In the private 

fund context, it is the adviser or its 

affiliated entities that generally draft the 

private fund’s private placement 

memorandum and governing 

documents,168 negotiate fund terms 169

with the private fund investors, manage 

the fund, charge and/or allocate fees and 

expenses to the private fund which are 

then paid by the private fund investors, 

and calculate and present performance 

information to the private fund 

investors. In this context, fees and 

performance are essential to the 

relationship between an investor and an 

adviser. The method used to calculate 

fees is typically set forth in the fund 

contracts. However, based on 

Commission staff experience, fee and 

performance disclosures are often not 

simple or clear, and investors may have 

difficulty understanding them. As a 

result, advisers have overcharged 

certain fees without investors 

recognizing it immediately.170

Similarly, performance is a crucial term 

of the relationship between an adviser 

and investors. Performance is implicitly 

or explicitly part of the terms of many 

fund contracts to the extent that 

advisers are often compensated in part 

based on the performance of the private 

fund.171 The amount, calculation, and 

timing of performance compensation are 

often negotiated by the adviser and the 

investors and form the core economic 

term of their relationship. 

Calculating performance is also 

complicated, and methods generally 

differ among advisers. Without 

comparable performance metrics and 

methodologies, it can be unclear how 

different advisers perform against one 

another. Performance calculations also 

generally are the product of many 

assumptions and criteria, such as the 

manner in which management fee rates 

are applied. Without simple and clear 

disclosures of such assumptions and 

criteria, investors are at a disadvantage 

with respect to understanding or being 

able to verify how their investments are 

performing.172

Section 206(4) of the Act gives the 

Commission the authority to prescribe 

means reasonably designed to prevent 

fraud, deception, and manipulation. The 

quarterly statement rule is reasonably 

designed to prevent fraud, deception, 

and manipulation because it requires 

advisers to provide timely and 

consistent disclosures that will improve 

the ability of investors to assess and 

monitor fees, expenses, and 

performance. This will decrease the 

likelihood that investors will be 

defrauded, deceived, or manipulated 

because they will be in a better position 

to monitor the adviser and their 

respective investments, and it increases 

the likelihood that any such misconduct 

will be detected sooner.173 Moreover, 

the fee, expense and performance 

information in the quarterly statement 

will improve investors’ ability to 

evaluate the adviser’s conflicts of 

interest with respect to the fees and 


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174See supra section I (discussing conflicts of 

interest). 

175See, e.g., AIC Comment Letter I; NVCA 

Comment Letter. 

176See Citadel Comment Letter. 

177See, e.g., In the Matter of Sabra Capital 

Partners, LLC and Zvi Rhine, Investment Advisers 

Act Release No. 5594 (Sept. 25, 2020) (settled order) 

(alleging that, among other things, an investment 

adviser misrepresented the performance of a fund 

it advised in updates sent to the fund’s limited 

partners); In the Matter of Finser International 

Corporation and Andrew H. Jacobus, Investment 

Advisers Act Release No. 5593 (Sept. 24, 2020) 

(settled order) (alleging that, among other things, an 

investment adviser charged a fund it advised 

performance fees contrary to representations made 

in the fund’s private placement memorandum); In 

the Matter of Omar Zaki, Investment Advisers Act 

Release No. 5217 (Apr. 1, 2019) (settled order) 

(alleging that, among other things, an investment 

adviser repeatedly misled investors in a fund it 

advised about fund performance); In the Matter of 

Corinthian Capital Group, LLC, Peter B. Van Raalte, 

and David G. Tahan, Investment Advisers Act 

Release No. 5229 (May 6, 2019) (settled order) 

(alleging that, among other things, an investment 

adviser failed to apply a fee offset to a fund it 

advised and caused the same fund to overpay 

organizational expenses); In the Matter of Aisling 

Capital LLC, Investment Advisers Act Release No. 

4951 (June 29, 2018) (settled order) (alleging an 

investment adviser failed to apply a specified fee 

offset to a fund it advised contrary to the fund’s 

limited partnership agreement and private 

placement memorandum). 

178See, e.g., In the Matter of Monomoy Capital 

Management, L.P., Investment Advisers Act Release 

No. 5485 (Apr. 22, 2020) (settled action); In the 

Matter of WCAS Management Corporation, 

Investment Advisers Act Release No. 4896 (Apr. 24, 

2018) (settled action); In the Matter of Fenway 

Partners, LLC, et. Al., Investment Advisers Act 

Release No. 4253 (Nov. 3, 2015) (settled action). 

179Final rule 211(h)(1)–2. 

180See infra section II.B.3 for a discussion of the 

change to fiscal time periods for the quarterly 

statement rule. 

181Final rule 211(h)(1)–2. 

182See, e.g., Comment Letter of National 

Education Association and American Federation of 

Teachers (Apr. 12, 2022) (‘‘NEA and AFT Comment 

Letter’’); Comment Letter of the American 

Federation of Teachers New Mexico (Apr. IFT 

Comment Letter Comment Letter of the National 

Conference on Public Employee Retirement 

Systems (Apr. 25, 2022) (‘‘NCPERS Comment 

Letter’’); Better Markets Comment Letter; Comment 

Letter of Ohio Federation of Teachers (Apr. 25, 

2022) (‘‘OFT Comment Letter’’); Comment Letter of 

American Federation of State, County and 

Municipal Employees (Apr. 25, 2022) (‘‘AFSCME 

Comment Letter’’); Consumer Federation of 

America Comment Letter; Public Citizen Comment 

Letter; Comment Letter of National Council of Real 

Estate Investment Fiduciaries (Apr. 25, 2022) 

(‘‘NCREIF Comment Letter’’); Comment Letter of 

New York State Insurance Fund (Apr. 25, 2022) 

(‘‘NYSIF Comment Letter’’); NYC Comptroller 

Letter; Comment Letter of AFL–CIO (Apr. 25, 2022) 

(‘‘AFL–CIO Comment Letter’’); Comment Letter 

NASAA Comment Letter. 

183See, e.g., DC Retirement Board Comment 

Letter; ILPA Comment Letter I; Comment Letter of 

National Electrical Benefit Fund Investments (Apr. 

25, 2022) (‘‘NEBF Comment Letter’’); OPERS 

Comment Letter. 

184See Healthy Markets Comment Letter I. 

185See, e.g., Comment Letter of Andreessen 

Horowitz (June 15, 2022) (‘‘Andreessen Comment 

Letter’’); NVCA Comment Letter; SIFMA–AMG 

Comment Letter I. 

186See, e.g., IAA Comment Letter II; AIC 

Comment Letter I; Comment Letter of Roubaix 

Capital (Apr. 12, 2022) (‘‘Roubaix Comment 

Letter’’). 

187See, e.g., AIC Comment Letter I; IAA Comment 

Letter II; Ropes & Gray Comment Letter. 

188See, e.g., AIMA/ACC Comment Letter; 

Comment Letter of Dechert LLP (Apr. 25, 2022) 

(‘‘Dechert Comment Letter’’); AIC Comment Letter 

I. One commenter stated that the Commission made 

no attempt to review the investor disclosures 

provided by open-end funds in order to evaluate 

whether the proposal would meaningfully increase 

transparency. See Citadel Comment Letter. On the 

contrary, Commission staff regularly reviews openand closed-end fund investor disclosures as part of 

the Commission’s examination program and that 

experience informs this rulemaking. See, e.g., OCIE 

National Examination Program Risk Alert: 

Observations from Examinations of Investment 

Advisers Managing Private Funds (June 23, 2020) 

(‘‘EXAMS Private Funds Risk Alert 2020’’), 

available at https://www.sec.gov/files/ 

Continued 

expenses charged to the fund by the 

adviser and the performance metrics 

that the adviser presents to investors.174

Several commenters stated that 

Commission, in the proposal, failed to 

define a fraudulent, deceptive, or 

manipulative act as required by section 

206(4) of the Act.175 Another 

commenter stated that the Commission, 

in the proposal, failed to connect the 

proposed reporting requirements to any 

actual fraudulent act.176 To the contrary, 

the quarterly statement is designed to 

prevent fraudulent, deceptive, or 

manipulative practices, including ones 

we have observed.177 For example, if an 

adviser is charging investors a 

management fee and simultaneously 

charging a portfolio company a 

monitoring or similar fee without 

disclosing that fee to investors, we 

would view that as fraudulent or 

deceptive because it involves an 

undisclosed conflict in breach of 

fiduciary duty.178 Similarly, if an 

adviser is knowingly using off-market 

assumptions (such as highly irregular 

valuation practices that are not used by 

similarly-situated advisers) when 

calculating performance without 

disclosing such to investors, we would 

view that practice as deceptive. 

The rule requires an investment 

adviser that is registered or required to 

be registered with the Commission to 

prepare a quarterly statement that 

includes certain information regarding 

fees, expenses, and performance for any 

private fund that it advises and 

distribute the quarterly statement to the 

private fund’s investors, unless a 

quarterly statement that complies with 

the rule is prepared and distributed by 

another person.179 If the private fund is 

not a fund of funds, then a quarterly 

statement must be distributed within 45 

days after the end of each of the first 

three fiscal 180 quarters of each fiscal 

year and 90 days after the end of each 

fiscal year.181 If the private fund is a 

fund of funds, then a quarterly 

statement must be distributed within 75 

days after the first, second, and third 

fiscal quarter ends and 120 days after 

the end of the fiscal year of the private 

fund. 

Many commenters supported the 

quarterly statement rule as proposed 

and agreed that it would provide 

increased transparency to private fund 

investors who may not currently receive 

sufficiently detailed, comprehensible, or 

regular fee, expense, and performance 

information for each of their private 

fund investments.182 These commenters 

generally indicated that the quarterly 

statement rule would provide increased 

comparability between private funds 

and accordingly would enable private 

fund investors to make more informed 

investment decisions, as well as 

potentially lead to increased 

competitive market pressures on the 

costs of investing in private funds. Some 

commenters indicated that the rule’s 

establishment of a required baseline of 

recurring reporting would allow 

investors to focus their negotiation 

priorities with private fund advisers on 

other matters, such as fund governance, 

and could also provide investors with 

greater confidence when choosing to 

allocate capital to private fund 

investments.183 One commenter 

suggested that the quarterly statement 

requirement would particularly help 

smaller or less sophisticated investors 

who may receive less timely or 

complete information than investors 

that possess greater negotiating 

power.184 Other commenters did not 

support this quarterly statement rule (or 

parts of the rule, as discussed below).185

Of these commenters, a number 

suggested that this quarterly statement 

requirement would increase costs for 

private funds that would ultimately be 

passed on to investors.186 Some 

commenters stated that the quarterly 

statement rule may not provide 

meaningful information or would 

confuse investors because the required 

information would not be personalized 

to investors, may not be appropriate for 

certain types of private funds, or may 

differ from other information already 

provided to private fund investors.187

Other commenters stated that the rule is 

unnecessary and duplicative, as 

advisory firms already provide similar 

or otherwise sufficient reporting, and 

investors are generally able to negotiate 

for and receive additional disclosure 

that may be appropriate for their 

particular needs.188


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Private%20Fund%20Risk%20Alert_0.pdf. As of 

Dec. 17, 2020, the Office of Compliance, Inspections 

and Examinations (‘‘OCIE’’) was renamed the 

Division of Examinations (‘‘EXAMS’’). 

189See Proposing Release supra footnote 3, at n. 

9–11. 

190See infra section VI.D.2. 

191Furthermore, even if investors are already 

receiving timely updates regarding fund 

performance for the funds in which they are 

currently invested, they may also benefit from no 

longer needing to expend resources negotiating for 

it for funds in which they wish to invest in the 

future. As the quarterly statement rule requires this 

baseline of performance information, investors will 

be able to focus their resources on negotiating for 

more bespoke reporting or other important rights in 

new funds. 

192See infra sections VI.C.3, VI.D.2. 

193See, e.g., GPs feel the strain as LPs push for 

more transparency on portfolio performance and fee 

structures, Intertrust Group (July 6, 2020), available 

at https://www.intertrustgroup.com/news/gps-feelthe-strain-as-lps-push-for-more-transparency-onportfolio-performance-and-fee-structures/; ILPA 

Principals 3.0, (2019), at 36 ‘‘Financial and 

Performance Reporting’’ and ‘‘Fund Marketing 

Materials,’’ available at https://ilpa.org/wp-content/ 

flash/ILPA%20Principles%203.0/?page=36. 

194Section 211(h)(1) of the Advisers Act directs 

the Commission to facilitate the provision of simple 

and clear disclosures to investors regarding the 

terms of their relationships with investment 

advisers. 

195See, e.g., AIC Comment Letter I; IAA Comment 

Letter II. 

196See, e.g., AIC Comment Letter I; Lockstep 

Ventures Comment Letter; SBAI Comment Letter. 

As stated elsewhere, we have 

observed that private fund investments 

are often opaque; advisers frequently do 

not provide investors with sufficiently 

detailed information about private fund 

investments.189 Without sufficiently 

clear, comparable information, even 

sophisticated investors may be unable to 

protect their interests or make sound 

investment decisions. Accordingly, we 

are adopting the quarterly statement 

rule, in part, because of the lack 

transparency in key areas including 

private fund fees and expenses, 

performance, and conflicts of interest. 

While we acknowledge that quarterly 

statements may increase costs, we 

believe these costs are justified in light 

of the benefits of the rule.190 As 

discussed above, investors will benefit 

from increased transparency into the 

fees and expenses charged to the fund, 

as well as the conflicts they present, on 

a timely basis. Investors will also benefit 

from mandatory timely updates 

regarding fund performance if they were 

not already receiving them.191 We also 

disagree with commenters’ concerns 

regarding quarterly statements failing to 

provide meaningful information. The 

quarterly statement will present a 

baseline level of information in a clear 

format and will help private fund 

investors to monitor and assess the true 

cost of their investments better. For 

example, the enhanced cost information 

may allow an investor to identify when 

the private fund has incorrectly, or 

improperly, assessed a fee or expense by 

the adviser. We also disagree with 

certain commenters’ concerns that the 

quarterly statement may not be 

appropriate for certain types of private 

funds. We believe that the fee, expense, 

and performance information required 

in the quarterly statement is a 

fundamental disclosure that is relevant 

to all types of private funds. 

Moreover, we anticipate the costs of 

compliance with this rule may be of 

limited magnitude in light of the fact 

that many private fund advisers already 

maintain and, in many cases, already 

disclose similar information to 

investors.192 Relatedly, we acknowledge 

that many private fund advisers 

contractually agree to provide fee, 

expense, and performance reporting to 

investors already. However, not all 

private fund investors are able to obtain 

this information. Other investors may be 

able to obtain relevant information, but 

the information may not be sufficiently 

clear or detailed regarding the costs and 

performance of a particular private fund 

to enable an investor to understand, 

monitor and make informed investment 

decisions regarding its private fund 

investments. For instance, some 

advisers report only aggregated 

expenses, or do not provide detailed 

information about the calculation and 

implementation of any negotiated 

rebates, credits, or offsets, which does 

not allow an investor to identify the 

actual extent and/or types of costs 

incurred and to evaluate their validity. 

Other investors may not have sufficient 

information regarding private fund fees 

and expenses in part because those fees 

and expenses have varied presentations 

across private funds and are subject to 

complicated calculation methodologies, 

which similarly prevents an investor 

from meaningfully assessing those fees 

and expenses and comparing private 

fund investments. Private fund investors 

are increasingly interested in more 

disclosure regarding private fund 

performance, including transparency 

into the calculation of the performance 

metrics.193 Providing investors with 

simple and clear disclosures regarding 

fees, expenses, and performance will 

allow investors to understand better 

their private fund investments and the 

terms of their relationship with the 

adviser.194

We also disagree with commenters 

that suggested the quarterly statement 

would confuse investors. For example, 

some commenters asserted that 

standardized quarterly statement 

disclosures could confuse investors 

because the required information may 

not reflect an investor’s actual, 

particularized investment experience in 

a fund.195 However, investors will 

benefit from receiving a baseline level of 

simple and clear disclosures regarding 

fee, expenses, and performance. For 

example, private fund advisers currently 

use different metrics and specifications 

for calculating performance, which 

makes it difficult for investors to 

compare information across funds and 

advisers, even when advisers disclose 

the assumptions they used. More 

standardized requirements for 

performance metrics will allow private 

fund investors to compare more easily 

the returns of similar fund strategies 

over different market environments and 

over time. Simple and clear information 

about costs and performance that is 

provided on a regular basis will help an 

investor better decide whether to 

continue the terms of its relationship 

with the adviser, whether to remain 

invested in a particular private fund 

where the fund allows for withdrawals 

and redemptions, whether to invest in 

private funds managed by the adviser or 

its related persons in the future, and 

how to invest other assets in the 

investor’s portfolio. 

Certain commenters argued that the 

quarterly statement requirement would 

be particularly burdensome for small 

and emerging advisers.196 We first 

observe that the quarterly statement rule 

is only applicable to investment 

advisers that are registered or required 

to be registered with the Commission. 

Thus, some private fund advisers, 

including those solely advising less than 

$150 million private fund assets under 

management and those with less than 

$100 million in regulatory assets under 

management registered with, and 

subject to examination by the States, 

will not be subject to the quarterly 

statement rule. Second, we understand 

that firms vary in the extent to which 

they devote resources specifically to 

compliance. It is important for all 

investors in private funds advised by 

SEC-registered advisers to receive 

sufficiently detailed, comprehensible, 

and regular information to enable 

investors to monitor whether fees and 

expenses are being mischarged and to 

ensure that accurate performance 

information is being clearly presented. 

We view sufficient fee, expense, and 

performance information under the rule 

as together forming, and each as an 

essential component of, the basic set of 

information that is generally necessary 

for private fund investors to evaluate 

accurately and confidently their private 


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197One commenter requested the Commission 

clarify that a registered U.S. sub-adviser would not 

need to comply with the quarterly statement rule 

with respect to a private fund whose primary 

adviser is not subject to the rule. See AIMA/ACC 

Comment Letter. However, the final rule does not 

include an exception for such advisers. We believe 

that the requested exception would diminish the 

effectiveness of the rule, as the fact that one adviser 

may not be subject to the final rule does not negate 

the need for the private fund and its underlying 

investors to receive the benefit of a quarterly 

statement. 

198See NYC Comptroller Comment Letter. 

199See, e.g., ILPA Comment Letter I; Healthy 

Markets Comment Letter I; OPERS Comment Letter; 

NYSIF Comment Letter. 

200For example, an investor may seek to analyze 

the performance of each of a fund’s individual 

portfolio investments to better understand the 

nature of such fund’s performance as well as the 

adviser’s skill at investment selection and 

management at a more granular level. 

201See rule 206(4)–1. A communication to a 

current investor can be an ‘‘advertisement,’’ for 

example, when it offers new or additional 

investment advisory services with regard to 

securities. 

202Any class-based assumptions or criteria used 

to calculate fund-level performance should be 

prominently disclosed as part of the quarterly 

statements. For example, if an adviser uses a 

management fee rate that is averaged across 

different classes to compute fund-level 

performance, it should be prominently disclosed in 

the quarterly statement. See infra section II.B.2.c. 

203See, e.g., BVCA Comment Letter; Comment 

Letter of the German Private Equity and Venture 

Capital Association (June 2, 2022) (‘‘GPEVCA 

Comment Letter’’). 

204See, e.g., Schulte Comment Letter; Invest 

Europe Comment Letter; BVCA Comment Letter. 

205See, e.g., Ropes & Gray Comment Letter; MFA 

Comment Letter I; AIMA/ACC Comment Letter. 

206See RFG Comment Letter II. 

207For example, it is our understanding that the 

majority of private equity funds currently provide 

quarterly reporting. Since private equity funds 

generally invest on a longer time horizon, we do not 

expect that monthly reporting would inherently 

provide more beneficial information for investors 

than quarterly reporting and it would entail 

substantial additional administrative costs. 

fund investments. Accordingly, we are 

not providing any exemptions to the 

quarterly statement rule for small or 

emerging advisers. 

In addition to general comments on 

the proposed quarterly statement rule, 

commenters made specific suggestions 

or sought clarification on discrete parts 

of the proposal.197 One commenter 

asked the Commission to clarify that 

investors may negotiate reporting in 

addition to what is required in the 

quarterly statements.198 We confirm that 

the quarterly statements represent a 

baseline level of reporting that is 

required for covered private fund 

advisers. The quarterly statement rule 

itself does not restrict or limit the kinds 

of additional reporting for which private 

fund investors may negotiate. 

Some commenters suggested that we 

require investor-specific or classspecific reporting in addition to fundlevel reporting.199 While we recognize 

the utility to investors of investor-level 

reporting, we do not believe that 

requiring investor-level reporting in 

quarterly statements is essential to this 

rulemaking. First, the quarterly 

statements are designed, in part, to 

allow individual private fund investors 

to use fund-level information to perform 

the types of personalized or otherwise 

customized calculations that underlie 

investor-specific reporting. Second, we 

understand that, even if private fund 

advisers provide investors with 

investor-specific reporting, many 

investors would still need to perform 

personalized or otherwise customized 

calculations to satisfy their own internal 

requirements.200 Third, the fund-level 

reporting requirements do not prevent 

an adviser from providing (or causing a 

third party, such as an administrator, 

consultant, or other service provider, to 

provide) personalized information, as 

well as other customized information, to 

supplement the standardized baseline 

level (i.e., the mandatory floor) of fundlevel information required to be 

included in the quarterly statements, 

provided that such additional 

information complies with the other 

requirements of the final rule, the 

marketing rule,201 and other disclosure 

requirements, each to the extent 

applicable. We are requiring what we 

view as essential baseline, fund-level 

information, allowing investors to focus 

their time and bargaining resources on 

requests for any more personalized 

information they may need, which may 

vary from investor to investor. 

Similarly, while we recognize the 

value of class-level reporting, requiring 

class-level reporting on quarterly 

statements is not necessary for the same 

reasons as those discussed above for 

investor-specific reporting. 

Additionally, requiring class-level 

reporting would not increase 

comparability across different advisers. 

For example, an investor might be in 

substantially different classes in funds 

advised by different advisers and thus 

might have difficulty comparing classlevel reporting across these funds.202

Commenters suggested that we should 

allow investors to waive this quarterly 

statement requirement.203 However, if 

we were to allow investors to waive the 

quarterly statement requirement, then 

some private fund advisers may require 

investors to do so as a precondition to 

investing in a fund. Furthermore, even 

if a private fund adviser does not 

explicitly require such a waiver as a 

precondition to investment, a private 

fund adviser could attempt to anchor 

negotiations around a waiver by 

including one in a private fund’s 

subscription agreement and thereby 

compelling investors to choose between 

expending resources to negotiate for 

quarterly statements or for other 

important terms related to fund 

governance and investor protection. 

Such an outcome would undermine 

improving transparency for these 

private fund investors and would fail to 

address the harms that the rule is 

intended to address. 

Some commenters suggested requiring 

statements annually instead of 

quarterly.204 Other commenters 

suggested requiring statements semiannually.205 Another commenter 

suggested requiring these statements 

more frequently than quarterly for 

liquid funds as many liquid funds 

currently provide monthly 

statements.206 It is our understanding 

that most private funds (liquid and 

illiquid) report at least quarterly. 

Accordingly, we believe that requiring 

quarterly reporting is well suited to 

enhance investors’ ability to compare 

performance as well as fee and expense 

information across liquid and illiquid 

private funds because many private 

investors are accustomed to receiving 

and reviewing quarterly reports. 

Monthly or more frequent reporting may 

also not provide sufficiently more 

meaningful information to justify 

imposing the burdens for private funds 

that do not already provide such 

frequent reporting.207 All private funds, 

including liquid funds, may provide 

additional reporting on a more frequent 

basis than quarterly. On the other hand, 

we believe that annual or semi-annual 

statements are too infrequent and such 

infrequency would make it difficult for 

investors to monitor their investments. 

Receiving a year or six months’ worth of 

fee and expense information at one time 

would make it more burdensome for 

investors to parse (particularly, because 

some of those outlays may be a year or 

six months old) and to help ensure that 

fees are being charged appropriately. 

Similarly, because a fund’s performance 

can change drastically over the course of 

a year or six months, investors often 

need more frequent and regular 

performance reporting to make informed 

investment decisions and to balance 

their own portfolio. We believe that 

quarterly reporting strikes the right 

balance between sufficient frequency to 

enable investor analysis and decision 

making and mitigation of burdens on 

advisers. 


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208See, e.g., ILPA Comment Letter I; Comment 

Letter of the Council of Institutional Investors (Apr. 

7, 2022) (‘‘CII Comment Letter’’); Comment Letter of 

the Seattle City Employees’’ Retirement System 

(Apr. 19, 2022) (‘‘Seattle Retirement System 

Comment Letter’’); OFT Comment Letter; United for 

Respect Comment Letter I; Public Citizen Comment 

Letter; Comment Letter of the Los Angeles County 

Employees Retirement Association (July 28, 2022) 

(‘‘LACERA Comment Letter’’); OPERS Comment 

Letter; NCPERS Comment Letter; Comment Letter of 

Take Medicine Back (Apr. 25, 2022) (‘‘Take 

Medicine Back Comment Letter’’); Comment Letter 

of Segal Marco Advisors (Apr. 25, 2022) (‘‘Segal 

Marco Comment Letter’’); Comment Letter of the 

Illinois State Treasurer (May 12, 2022) (‘‘IST 

Comment Letter’’); AFL–CIO Comment Letter; 

Comment Letter of Morningstar, Inc. (Apr. 25, 2022) 

(‘‘Morningstar Comment Letter’’); Comment Letter 

of CFA Institute (June 24, 2022) (‘‘CFA Comment 

Letter II’’). 

209See, e.g., Comment Letter of Impact Capital 

Managers, Inc. (Apr. 25, 2022) (‘‘ICM Comment 

Letter’’); MFA Comment Letter I; Comment Letter of 

Americans for Tax Reform (Apr. 23, 2022) (‘‘ATR 

Comment Letter’’). 

210See ICM Comment Letter; AIMA/ACC 

Comment Letter; Dechert Comment Letter; AIC 

Comment Letter I. 

211Certain private fund advisers utilize a passthrough expense model where the private fund pays 

for most, if not all, expenses, including the adviser’s 

expenses, but the adviser does not charge a 

management fee. See infra section II.E.1. for a 

discussion of such pass-through expense models. 

212 Investors typically enter into agreements 

under which the private fund pays such 

compensation directly to the adviser or its affiliates. 

Investors generally bear such compensation 

indirectly through their investment in the private 

fund; however, certain agreements may require 

investors to pay the adviser or its affiliates directly. 

213See Proposing Release, supra footnote 3, at 

24–26 (describing the types of fees and expenses 

private fund investors typically pay or otherwise 

bear, including portfolio-investment level 

compensation paid to the adviser or its affiliates). 

214See, e.g., LACERA Comment Letter. 

215See Hedge Fund Transparency: Cutting 

Through the Black Box, The Hedge Fund Journal, 

James R. Hedges IV (Oct. 2006), available at https:// 

thehedgefundjournal2006).com/hedge-fundtransparency/ (stating that ‘‘the biggest challenges 

facing today’s hedge fund industry may well be the 

issues of transparency and disclosure’’); Fees & 

Expenses, Private Funds CFO (Nov. 2020)), at 12, 

available at https://www.troutman.com/images/ 

content/2/6/269858/PFCFO-FeesExpenses-Nov20- 

Final.pdf (noting that it is becoming increasingly 

complicated for investors to determine what the 

management fee covers versus what is a partnership 

expense and stating that the ‘‘formulas for 

management fees are complex and unique to 

different investors.’’); see also, e.g., ILPA Comment 

Letter I; For the Long Term Comment Letter; 

NCPERS Comment Letter; Comment Letter of 

Americans for Financial Reform Education Fund 

(Apr. 25, 2022) (‘‘AFREF Comment Letter I’’). 216See, e.g., Letter from State Treasurers and 

Comptrollers to Mary Jo White, U.S. Securities and 

Exchange Commission (July 21, 2015), available at 

http://comptroller.nyc.gov/wp-content/uploads/ 

documents/SEC_SignOnPDF.pdf; see also Letter 

from Americans for Financial Reform Education 

Fund to Chairman Gary Gensler, U.S. Securities and 

Exchange Commission (July 6, 2021), available at 

https://ourfinancialsecurity.org/wp-content/ 

uploads/2021/07/Letter-to-SEC-re_-Private-Equity7.6.21.pdf. 

217See, e.g., In the Matter of Blackstone, supra 

footnote 26. 218See, e.g., In the Matter of Monomoy Capital 

Management, L.P., Investment Advisers Act Release 

No. 5485 (Apr. 22, 2020) (settled action). 219See, e.g., In the Matter of Cherokee Investment 

Partners, LLC and Cherokee Advisers, LLC, supra 

footnote 26; In the Matter of Yucaipa Master 

Manager, LLC, Investment Advisers Act Release No. 

5074 (Dec. 13, 2018) (settled action). 220See, e.g., In the Matter of Finser International 

Corporation, et al., Investment Advisers Act Release 

No. 5593 (Sept. 24, 2020) (settled action). 221See, e.g., In the Matter of Corinthian Capital 

Group, LLC, et al., Investment Advisers Act Release 

No. 5229 (May 6, 2019) (settled action). 222See, e.g., In the Matter of Lincolnshire, supra 

footnote 26 (alleging that an investment adviser that 

1. Fee and Expense Disclosure 

The rule requires an investment 

adviser that is registered or required to 

be registered to prepare and distribute 

quarterly statements for any private 

fund that it advises with certain 

information regarding the fund’s fees 

and expenses and any compensation 

paid or allocated to the adviser or its 

related persons by the fund, as well as 

any compensation paid or allocated by 

the fund’s underlying portfolio 

investments. The statement will provide 

investors in those funds with 

comprehensive fee and expense 

disclosure for the prior quarterly period 

(or, in the case of a newly formed 

private fund’s initial quarterly 

statement, its first two full fiscal 

quarters of operating results). 

Many commenters generally 

supported the fee and expense 

disclosure requirement for the quarterly 

statements and agreed that establishing 

a standardized baseline level (i.e., a 

‘‘floor’’) of fee and expense disclosure 

would enhance the basic transparency, 

comparability and investors’ 

understanding and oversight of their 

private fund investments.208 Some 

commenters criticized it on various 

grounds, as discussed in more detail 

below, including that the fee and 

expense disclosure requirement as 

proposed would be overly broad, costly, 

and burdensome.209 Certain 

commenters relatedly suggested that 

current fee and expense disclosure 

practices are sufficient because 

investors can already negotiate for the 

types of reporting that would meet their 

needs.210

Although the required fee and 

expense disclosure in the quarterly 

statement will impose some additional 

costs, it is essential that investors 

receive this information in a timely, 

detailed, and consistent manner. Private 

funds are often more expensive than 

other asset classes because the scope 

and magnitude of fees and expenses 

paid directly and indirectly by private 

fund investors can be extensive and 

complex. Although the types of fees and 

expenses charged to private funds can 

vary across the industry, investors 

typically compensate the adviser for 

managing the affairs of a private fund, 

often in the form of management fees 211

and performance-based 

compensation.212 A fund’s portfolio 

investments also may pay fees to the 

adviser or its related persons.213 The 

quarterly statement will help ensure 

disclosure of these fees and expenses, 

and the corresponding dollar amounts, 

to current investors on a consistent and 

regular basis, which will allow investors 

to understand and assess the cost of 

their private fund investments. 

We disagree with the suggestion from 

some commenters that current fee and 

expense disclosure practices are 

sufficient. We understand that some 

fund investors have struggled to obtain 

complete and usable expense 

information, including when 

institutionally required to do so, for 

example, by the laws applicable to State 

and municipal plan investors.214 Many 

investors also generally lack 

transparency regarding the total cost of 

fees and expenses.215 For instance, even 

though investors can indirectly end up 

bearing the costs associated with a 

portfolio investment paying fees to the 

adviser or its related persons, some 

advisers may not disclose the magnitude 

or scope of these fees to investors. 

Opaque reporting practices make it 

difficult for investors to measure and 

evaluate performance accurately, to 

assess whether an adviser’s total fees are 

justified, and to make better informed 

investment decisions.216 Moreover, 

opaque reporting practices may prevent 

private fund investors from assessing 

whether the types and amount of fees 

and expenses borne by the private fund 

comply with the fund’s governing 

agreements or whether disclosures 

regarding fund fees and expenses 

accurately describe the adviser’s 

practices or instead may be misleading. 

The Commission has brought 

enforcement actions related to the 

disclosure, misallocation and 

mischarging of fees and expenses by 

private fund advisers. For example, we 

have alleged in settled enforcement 

actions that advisers have received 

undisclosed fees,217 received 

inadequately disclosed compensation 

from fund portfolio investments,218

misallocated expenses away from the 

adviser to private fund clients,219

mischarged a performance fee to a 

private fund client contrary to investor 

disclosures,220 failed to offset certain 

fees or other amounts against 

management fees as set forth in fund 

documents,221 and directly or indirectly 

misallocated fees and expenses among 

private fund and other clients.222


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misallocated expenses between its private funds’ 

portfolio companies and violated its fiduciary duty 

to the private funds); In the Matter of Rialto Capital 

Management, LLC, Investment Advisers Release No. 

5558 (Aug. 7, 2020) (settled action); In the Matter 

of Energy Capital Partners, supra footnote 30. 

223See EXAMS Private Funds Risk Alert 2020, 

supra footnote 188. 

224See id. 

225See id. 

226See MFA Comment Letter I; NCREIF Comment 

Letter. 

227Although certain kinds of expense ratios are 

required in the registered funds context, we 

understand that fees and expenses are more likely 

to vary over time in the private fund space. For 

example, a private equity fund may incur a 

disproportionate amount of expenses early in its life 

when it is making the majority of its investments 

and incur fewer expenses during the middle part of 

its life when it is focused on holding these 

investments. The use of an expense ratio in these 

periods may overstate or understate, respectively, 

the expense burdens over the life of the fund. 

228See supra footnote 201. 

229Final rule 211(h)(1)–2(b). 

230See final rule 211(h)(1)–1 (defining ‘‘reporting 

period’’ as the private fund’s fiscal quarter covered 

by the quarterly statement or, for the initial 

quarterly statement of a newly formed private fund, 

the period covering the private fund’s first two full 

fiscal quarters of operating results). To the extent 

a newly formed private fund begins generating 

operating results on a day other than the first day 

of a fiscal quarter (e.g., Jan. 1), the adviser should 

include such partial quarter and the immediately 

succeeding fiscal quarters in the newly formed 

private fund’s initial quarterly statement. For 

example, if a fund begins generating operating 

results on Feb. 1, the reporting period for the initial 

quarterly statement would cover the period 

beginning on Feb. 1 and ending on Sept. 30. 

231Final rule 211(h)(1)–2(b)(1). 

232See, e.g., CII Comment Letter; Seattle 

Retirement System Comment Letter; IST Comment 

Letter. 

233See, e.g., ICM Comment Letter; Comment 

Letter of Alumni Ventures (Apr. 25, 2022) (‘‘Alumni 

Ventures Comment Letter’’); MFA Comment Letter 

I. 

234See Proposing Release, supra footnote 3, at 

28–29 (describing the types of adviser 

compensation private fund investors typically pay 

or otherwise bear). 

Commission staff has observed similarly 

problematic practices in its 

examinations of private fund 

advisers.223 For example, Commission 

staff has observed advisers that charge 

private funds for expenses not permitted 

under the fund documents.224

Commission staff has also observed 

advisers allocating expenses, such as 

broken-deal, due diligence, and 

consultant expenses, among private 

fund clients, other clients advised by an 

adviser or its related persons, and their 

own accounts in a manner that was 

inconsistent with disclosures to 

investors.225 Investors are less able to 

monitor effectively whether such fee 

and expense misallocations are 

occurring and to respond effectively to 

this information without sufficiently 

timely, regular, and detailed fee and 

expense information. 

Some commenters suggested requiring 

an expense ratio to help provide context 

as to the relative magnitude of a fund’s 

expenses.226 Although expense ratios 

may be helpful in certain circumstances 

in providing a top-line cost figure, they 

may be less helpful in others. For 

instance, if an adviser is misallocating 

certain smaller expenses, an expense 

ratio may obscure this practice if overall 

changes to the top-line cost figure are 

not obvious. Additionally, expense 

ratios may fail to capture some of the 

nuances of private fund fee and expense 

structures, such as with respect to the 

current and future impact of offsets, 

rebates and waivers, and investors 

might not otherwise receive sufficient 

disclosure on such fee and expense 

structures. The focus of this disclosure 

requirement is to require a private fund 

adviser to provide its private fund 

investors regularly and in a timely 

manner with at least a baseline level of 

consistent and detailed fee and expense 

information, so that private fund 

investors are generally better able to 

assess and monitor effectively the costs 

of investing in private funds managed 

by the adviser.227 If investors receive 

this information reliably, they will be 

better able to calculate their own 

applicable expense ratios. 

Furthermore, as stated above, advisers 

under the rule will remain able to 

provide, and investors are free to 

request and negotiate for, disclosure of 

expense ratios, as well as other 

information, to supplement the 

standardized baseline level (i.e., the 

mandatory floor) of fund fee and 

expense disclosure required in the 

quarterly statements, provided that such 

additional information complies with 

the other requirements of the final rule, 

the marketing rule,228 and other 

disclosure requirements, each to the 

extent applicable. 

(a) Private Fund-Level Disclosure 

The quarterly statement rule will 

require private fund advisers to disclose 

the following information to investors in 

a table format: 

(1) A detailed accounting of all 

compensation, fees, and other amounts 

allocated or paid to the adviser or any 

of its related persons by the private fund 

(‘‘adviser compensation’’) during the 

reporting period; 

(2) A detailed accounting of all fees 

and expenses allocated to or paid by the 

private fund during the reporting period 

other than those listed in paragraph (1) 

above (‘‘fund expenses’’); and 

(3) The amount of any offsets or 

rebates carried forward during the 

reporting period to subsequent quarterly 

periods to reduce future payments or 

allocations to the adviser or its related 

persons.229

The table is designed to provide 

investors with comprehensive fund fee 

and expense disclosure for the prior 

quarterly period (or, in the case of a 

newly formed private fund’s initial 

quarterly statement, its first two full 

fiscal quarters of operating results).230

We discuss each of these elements in 

turn below. 

Adviser Compensation. Substantially 

as proposed, the rule will require the 

fund table to show a detailed accounting 

of all adviser compensation during the 

reporting period, with separate line 

items for each category of allocation or 

payment reflecting the total dollar 

amount, as proposed.231 The rule is 

designed to capture all forms and 

amounts of compensation, fees, and 

other amounts allocated or paid to the 

investment adviser or any of its related 

persons by the fund, including, but not 

limited to, management, advisory, subadvisory, or similar fees or payments, 

and performance-based compensation, 

without permitting the exclusion of de 

minimis expenses, the general grouping 

of smaller expenses into broad 

categories, or the labeling of expenses as 

miscellaneous. 

Many commenters generally 

supported the requirement to report 

adviser compensation on the quarterly 

statements.232 Some commenters 

suggested that this requirement would 

be overly burdensome, in particular due 

to the breadth of certain aspects of the 

requirement (as discussed below), or 

that current market practices are 

sufficient.233

Many private funds compensate 

advisers with a ‘‘2 and 20’’ or similar 

arrangement, consisting of a 2% 

management fee and a 20% share of any 

profits generated by the fund. Certain 

advisers, however, receive other forms 

or amounts of compensation from 

private funds in addition to, or in lieu 

of, such arrangements.234 Requiring 

advisers to disclose all forms of adviser 

compensation as separate line items 

without prescribing particular categories 

of fees is appropriate because this 

requirement will encompass the various 

and evolving forms of adviser 

compensation across the private funds 

industry. 

In addition to compensation paid to 

the adviser, the rule requires the fund 

table to include disclosure of 

compensation, fees, and other amounts 

allocated or paid to the adviser’s 

‘‘related persons.’’ We are defining 

‘‘related persons’’ to include: (i) all 

officers, partners, or directors (or any 


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63228 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

235Final rule 211(h)(1)–1. Form ADV uses the 

same definition. The regulations at 17 CFR 

275.206(4)–2 (rule 206(4)–2) use a similar definition 

by defining related person to include any person, 

directly or indirectly, controlling or controlled by 

the adviser, and any person that is under common 

control with the adviser. 

236Final rule 211(h)(1)–1. The definition, in 

addition, provides that: (i) each of an investment 

adviser’s officers, partners, or directors exercising 

executive responsibility (or persons having similar 

status or functions) is presumed to control the 

investment adviser; (ii) a person is presumed to 

control a corporation if the person: (A) directly or 

indirectly has the right to vote 25% or more of a 

class of the corporation’s voting securities; or (B) 

has the power to sell or direct the sale of 25% or 

more of a class of the corporation’s voting 

securities; (iii) a person is presumed to control a 

partnership if the person has the right to receive 

upon dissolution, or has contributed, 25% or more 

of the capital of the partnership; (iv) a person is 

presumed to control a limited liability company if 

the person: (A) directly or indirectly has the right 

to vote 25% or more of a class of the interests of 

the limited liability company; (B) has the right to 

receive upon dissolution, or has contributed, 25% 

or more of the capital of the limited liability 

company; or (C) is an elected manager of the limited 

liability company; or (v) a person is presumed to 

control a trust if the person is a trustee or managing 

agent of the trust. Form ADV uses the same 

definition. 

237See, e.g., Comment Letter of Convergence 

(Apr. 23, 2022) (‘‘Convergence Comment Letter’’); 

Comment Letter of XTP Implementation Services, 

Inc. (Apr. 25, 2022) (‘‘XTP Comment Letter’’). 

238See, e.g., AIMA/ACC Comment Letter; SBAI 

Comment Letter; SIFMA–AMG Comment Letter I. 

239See AIMA/ACC Comment Letter. 

240See id. This commenter also stated that 

disclosing sub-adviser fees separately could 

disincentivize sub-advisers from offering 

discounted or reduced fees to private funds. The 

final rule will not require separate disclosure of 

sub-adviser fees to the extent such fees are not paid 

by the fund, as discussed below. Nevertheless, this 

comment could also be understood to apply to any 

disclosure of sub-adviser compensation, including 

the disclosure of sub-adviser fees that are paid or 

allocated to the sub-adviser by the fund, which, as 

discussed below, will be required disclosure under 

the final rule. In this regard, although sub-adviser 

compensation, similar to any other adviser 

compensation, may be subject to upward or 

downward fee pressures as a result of the disclosure 

of compensation information, we believe that 

increased transparency and comparability with 

respect to the sub-adviser (and other adviser) 

compensation borne by a private fund is essential 

to generally enable private fund investors to make 

more informed investment decisions, and that this 

information could also lead to increased 

competitive market pressures on the costs of 

investing in private funds. 

241See NASAA Comment Letter. 

242Final rule 211(h)(1)–1. 

person performing similar functions) of 

the adviser; (ii) all persons directly or 

indirectly controlling or controlled by 

the adviser; (iii) all current employees 

(other than employees performing only 

clerical, administrative, support or 

similar functions) of the adviser; and 

(iv) any person under common control 

with the adviser.235 The term ‘‘control’’ 

is defined to mean the power, directly 

or indirectly, to direct the management 

or policies of a person, whether through 

ownership of securities, by contract, or 

otherwise.236 We are adopting both 

definitions as proposed. 

Many advisers conduct a single 

advisory business through multiple 

separate legal entities and provide 

advisory services to a private fund 

through different affiliated entities or 

personnel. The ‘‘related person’’ and 

‘‘control’’ definitions are designed to 

capture the various entities and 

personnel that an adviser may use to 

provide advisory services to, and 

receive compensation from, private fund 

clients. Some commenters supported 

broadening the ‘‘related person’’ and 

‘‘control’’ definitions to include, for 

example, unaffiliated service providers 

that provide payments to an adviser or 

over which an adviser has economic 

influence, former personnel and family 

members, operational partners, senior 

advisors, or similar consultants of an 

adviser, a private fund, or its portfolio 

investments, and/or any recipient of 

fund management fees or performancebased compensation.237 Other 

commenters supported adopting 

definitions that are consistent with 

advisers’ existing reporting 

obligations,238 with one commenter 

suggesting that adopting different 

definitions could capture irrelevant 

persons or entities and create 

unnecessary confusion.239 We are 

adopting definitions that are consistent 

with the definitions of ‘‘related person’’ 

and ‘‘control’’ used on Form ADV and 

Form PF, which advisers already have 

experience assessing as part of their 

disclosure obligations on those forms, 

and which capture the entities and 

personnel that advisers typically use to 

conduct a single advisory business and 

provide advisory services to a private 

fund. 

One commenter suggested that the 

rule’s reference to ‘‘sub-advisory fees’’ 

in the non-exhaustive list of 

compensation types covered by the 

adviser compensation disclosure 

requirement is inappropriate, because 

sub-advisory fees are generally not paid 

to the sub-adviser by a private fund and 

instead are often paid out of the 

management fee or other adviser 

compensation received by the fund’s 

primary adviser from the fund.240 As 

proposed, the rule requires disclosure of 

any adviser compensation allocated or 

paid to the adviser or any of its related 

persons, including, without limitation, a 

related person that is a sub-adviser to 

the private fund, to the extent that the 

compensation to the related person is 

allocated or paid by the fund. 

Accordingly, the rule does not require 

sub-advisory fees allocated or paid to a 

related person solely by the fund’s 

adviser (and not by the fund) to be 

disclosed as a separate item of adviser 

compensation. Another commenter 

suggested that the rule should require 

disclosure of sub-advisory fees to 

unrelated sub-advisers, in addition to 

related person sub-advisers.241

Compensation to unrelated sub-advisers 

is required to be separately disclosed as 

a fund fee and expense under 17 CFR 

211(h)(1)–2(b)(2) (final rule 211(h)(1)– 

2(b)(2)), to the extent that such 

payments are allocated to or paid by the 

fund. 

Substantially as proposed, we are 

defining ‘‘performance-based 

compensation’’ as allocations, 

payments, or distributions of capital 

based on a private fund’s (or its 

investments’) capital gains, capital 

appreciation, and/or profit.242

Commenters generally did not provide 

comments with respect to the proposed 

definition of ‘‘performance-based 

compensation.’’ We are, however, 

making two non-substantive, technical 

changes to this definition. First, we are 

revising the definition to include not 

only capital gains and capital 

appreciation but also profit. This change 

will capture performance-based 

compensation that may be calculated 

based on other types or measures of 

investment performance, such as 

investment income. Second, the 

parenthetical in the definition now 

references ‘‘or any of its investments’’ 

rather than ‘‘or its portfolio 

investments,’’ because the value of the 

fund’s investment (i.e., the value of the 

fund’s interest in a portfolio investment 

entity or issuer) will typically determine 

whether the adviser is entitled to 

performance-based compensation, 

rather than the value of the portfolio 

investment entity or issuer itself. The 

broad scope of this definition, which 

captures, without limitation, carried 

interest, incentive fees, incentive 

allocations, or profit allocations, among 

other forms of compensation, is 

appropriate in light of the various and 

evolving forms of performance-based 

compensation received by private fund 

advisers. This definition also covers 

both cash and non-cash compensation, 

including, for example, allocations, 

payments, or distributions of 

performance-based compensation that 

are in-kind. 

Fund Fees and Expenses. The rule 

requires the table to show a detailed 

accounting of all fees and expenses 

allocated to or paid by the private fund 

during the reporting period, other than 

those disclosed as adviser 

compensation, with separate line items 


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243Final rule 211(h)(1)–2(b)(2). 

244Cf. CFA Comment Letter II (noting that 

proposed rule 211(h)(1)–2(b)(2) could be read to 

‘‘not capture fees and expenses that have been 

accrued and not yet paid’’). 

245See, e.g., OFT Comment Letter; Comment 

Letter of Meketa Investment Group (Mar. 21, 2022) 

(‘‘Meketa Comment Letter’’); Comment Letter of the 

Teacher Retirement System of Texas (Apr. 25, 2022) 

(‘‘TRS Comment Letter’’). 

246See, e.g., AIC Comment Letter I; Dechert 

Comment Letter; ATR Comment Letter. 

247See supra footnote 219 and accompanying 

text. 

248See Key Findings ILPA Industry Intelligence 

Report, ‘‘What is Market in Fund Terms?’’ (2021), 

at 18–19 (‘‘ILPA Key Findings Report’’), available 

at https://ilpa.org/wp-content/uploads/2021/10/ 

Key-Findings-Industry-Intelligence-Report-FundTerms.pdf (stating that ‘‘the importance of elevated 

transparency for [private fund investors] related to 

fees and expenses’’ is underscored by the recent 

trend of ‘‘cost shifting’’ certain expenses 

traditionally borne by private fund advisers to their 

private fund clients). 

249See, e.g., id.; see also Coming to Terms: Private 

Equity Investors Face Rising Costs, Extra Fees, Wall 

Street Journal (Dec. 20, 2021), available at https:// 

www.wsj.com/articles/coming-to-terms-privateequity-investors-face-rising-costs-extra-fees11640001604. 

250See, e.g., AIC Comment Letter II; Comment 

Letter of CFA Institute (Apr. 25, 2022) (‘‘CFA 

Comment Letter I’’); IAA Comment Letter II. 

251See, e.g., AIC Comment Letter I; PIFF 

Comment Letter; Ropes & Gray Comment Letter. 

252See Convergence Comment Letter. 

253See supra footnotes 166–169 and 

accompanying text. 

254See, e.g., AIC Comment Letter I; NVCA 

Comment Letter; Citadel Comment Letter. 

for each category of fee or expense 

reflecting the total dollar amount, 

substantially as proposed.243 In a 

change from the proposal, we are 

revising this requirement to capture not 

only amounts ‘‘paid by’’ the private 

fund but also fees and expenses 

‘‘allocated to’’ the private fund during 

the reporting period.244 This 

clarification is necessary to avoid 

potentially misleading investors in light 

of the various ways that a private fund 

may be caused to bear fees and 

expenses. Additionally, this change is 

consistent with the requirement in rule 

211(h)(1)–2(b)(1), as proposed and 

adopted, to disclose compensation 

allocated or paid to the adviser or any 

of its related persons by the private fund 

during the reporting period. 

Similar to the approach taken with 

respect to adviser compensation 

discussed above, the rule captures all 

fund fees and expenses allocated to or 

paid by the fund during the reporting 

period, including, but not limited to, 

organizational, accounting, legal, 

administration, audit, tax, due 

diligence, and travel expenses. The 

rule’s capturing of all, rather than 

limited categories of, fund fees and 

expenses is appropriate because this 

requirement will encompass the various 

and evolving forms of private fund fees 

and expenses. Advisers must list each 

category of expense as a separate line 

item under the rule, rather than group 

fund expenses into broad categories that 

obfuscate the nature and/or extent of the 

fees and expenses borne by the fund. 

For example, if a fund paid insurance 

premiums, administrator expenses, and 

audit fees during the reporting period, a 

general reference to ‘‘fund expenses’’ on 

the quarterly statement will not satisfy 

the rule’s detailed accounting 

requirement. Instead, an adviser is 

required to separately list each category 

of expense (i.e., in the example above, 

insurance premiums, administrator 

expenses, and audit fees) and the 

corresponding total dollar amount. 

A number of commenters generally 

supported this requirement to report all 

fees and expenses paid by the private 

fund during the reporting period on the 

quarterly statements.245 Some 

commenters suggested that this 

requirement would be too costly or that 

existing market practices make this 

requirement unnecessary.246

We have observed two general trends 

among private fund advisers that 

support the rule’s approach to adviser 

disclosure of fund fees and expenses. 

First, we have observed certain advisers 

shift certain expenses related to their 

advisory business to private fund 

clients.247 For example, some advisers 

charge private fund clients for salaries 

and benefits related to personnel of the 

adviser. Such expenses have 

traditionally been paid by advisers with 

their management fee proceeds or other 

revenue streams but are increasingly 

being charged as separate fund 

expenses, in addition to the 

management fee, and the full nature and 

extent of these expenses may not be 

clearly disclosed and transparent to 

fund investors.248 Second, expenses 

have risen significantly in recent years 

for certain private funds due to, among 

other things, advisers’ use of 

increasingly complex fund structures, 

the expansion of global marketing and 

investment efforts by advisers, and 

increased service provider costs.249

Advisers often pass on such increases to 

the private funds they advise without 

providing investors detailed disclosure 

about the magnitude and type of 

expenses actually charged to, or directly 

or indirectly borne by, the fund. 

Without this information, however, 

investors are less able to effectively 

assess and monitor the costs of investing 

in private funds managed by an adviser. 

Some commenters stated that we 

should allow advisers to group smaller 

expenses generally into broad categories 

or disclose them as ‘‘miscellaneous’’ 

expenses.250 Other commenters 

requested that we allow exemptions for 

de minimis amounts in the fee and 

expense section of the quarterly 

statement.251 In contrast, one 

commenter suggested that we 

specifically not permit advisers to 

exclude de minimis expenses or group 

small expenses into broad categories.252

We are not allowing advisers to exclude 

de minimis expenses, generally group 

small expenses into broad categories, or 

label expenses as miscellaneous. Private 

fund investors need detailed accounting 

of fees and expenses to understand fully 

the costs of their private fund 

investments. If we were to allow 

advisers to group small expenses 

generally into broad categories, they 

might be able to obscure certain costs 

from investors, including those that 

could raise conflict of interest issues. 

Similarly, advisers might use a de 

minimis exception to avoid disclosing 

individual expenses that, in aggregate, 

could be significant. These alternative 

approaches would not provide private 

fund investors with sufficient detail to 

assess and monitor whether that the 

private fund expenses borne by the fund 

conform to contractual agreements and 

the private fund’s terms. 

As discussed above,253 some 

commenters suggested that section 

211(h)(1) of the Act, which states that 

the Commission shall facilitate the 

provision of simple and clear 

disclosures to investors regarding the 

terms of their relationships with 

investment advisers, does not authorize 

the rule’s quarterly disclosure 

requirement with respect to fund fees 

and expenses. These commenters 

generally asserted that ongoing fund fee 

and expense reporting does not 

constitute disclosure of the terms of the 

relationship between private fund 

investors and private fund advisers for 

purposes of section 211(h)(1) of the Act 

and that such terms are instead 

disclosed only at the outset of the 

relationship between a private fund 

investor and a private fund adviser; 

namely, in the terms set forth in a 

private fund’s contractual 

documents.254 Although we recognize 

that the methodology for calculating 

fund fees and expenses is typically set 

forth in a fund’s contractual documents, 

as discussed above, investors must also 

receive simple and clear disclosures of 

the actual fees and expenses borne by 

their fund in order to be able to 

understand and confirm effectively the 


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63230 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

255Final rule 211(h)(1)–2(b). 

256For example, an adviser must show any 

placement agent fees or excess organizational 

expenses before and after any management fee 

offset. 

257Offsets, rebates, and waivers applicable to 

certain, but not all, investors through one or more 

separate arrangements are required to be reflected 

and described prominently in the fund-wide 

numbers presented in the quarterly statement. See 

final rule 211(h)(1)–2(d) and (g). Advisers are not 

required to disclose the identity of the subset of 

investors that receive such offsets, rebates, or 

waivers. 

258Final rule 211(h)(1)–2(b)(3). 

259The offset shifts some or all of the economic 

benefit of the fee from the adviser to the private 

fund investors. 

260See, e.g., Morningstar Comment Letter; CFA 

Comment Letter II; RFG Comment Letter II. 

261See, e.g., IAA Comment Letter II; PIFF 

Comment Letter. 

262See Ropes & Gray Comment Letter. 

263For example, certain investors, such as U.S. 

State pension plans, may be required to report 

complete information regarding fees and expenses 

paid to the adviser and its related persons. See 

LACERA Comment Letter. 

264Final rule 211(h)(1)–2(b)(3). 

265To the extent advisers are required to offset 

fund-level compensation (e.g., management fees) by 

portfolio investment compensation (e.g., monitoring 

fees), they typically do not reduce adviser 

compensation below zero, meaning that, in the 

event the monitoring fee offset amount exceeds the 

management fee for the applicable period, some 

fund documents provide for ‘‘carryforwards’’ of the 

unused amount. The carryforwards are used to 

offset the management fee in subsequent periods. 

266See final rule 211(h)(1)–1 (defining ‘‘portfolio 

investment compensation’’ as any compensation, 

fees, and other amounts allocated or paid to the 

investment adviser or any of its related persons by 

the portfolio investment attributable to the private 

fund’s interest in such portfolio investment). 

267See final rule 211(h)(1)–1 (defining ‘‘covered 

portfolio investment’’ as a portfolio investment that 

allocated or paid the investment adviser or its 

related persons portfolio investment compensation 

during the reporting period). 

268Final rule 211(h)(1)–1. 

accuracy of the terms of their 

relationship with a private fund adviser. 

To the extent that a fund expense also 

could be characterized as adviser 

compensation under the rule, the rule 

requires advisers to disclose such 

payment or allocation as adviser 

compensation as opposed to a fund 

expense in the quarterly statement. For 

example, certain private funds may 

engage the adviser or its related persons 

to provide non-advisory services to the 

fund, such as consulting, legal, or backoffice services. The rule requires 

advisers to disclose any compensation, 

fees, or other amounts allocated or paid 

by the fund for such services, whether 

advisory or non-advisory, as part of the 

detailed accounting of adviser 

compensation. This approach will help 

ensure that investors understand the 

entire amount of adviser compensation 

allocated or paid to the adviser and its 

related persons during the reporting 

period by the fund. 

Offsets, Rebates, and Waivers. We are 

requiring advisers to disclose adviser 

compensation and fund expenses in the 

fund table both before and after the 

application of any offsets, rebates, or 

waivers.255 Specifically, the rule 

requires an adviser to present the dollar 

amount of each category of adviser 

compensation or fund expense 256 before 

and after any such reduction for the 

reporting period.257 In addition, the rule 

requires advisers to disclose the amount 

of any offsets or rebates carried forward 

during the reporting period to 

subsequent periods to reduce future 

adviser compensation.258 We are 

adopting this portion of the rule as 

proposed. 

Advisers may offset, rebate, or waive 

adviser compensation or fund expenses 

in a number of circumstances. For 

example, a private equity adviser may 

enter into a management services 

agreement with a fund’s portfolio 

company, requiring the company to pay 

the adviser a fee for those services. To 

the extent that the fund’s governing 

agreement requires the adviser to share 

the fee with the fund investors through 

an offset to the management fee, the 

management fee would typically be 

reduced, on a dollar-for-dollar basis, by 

an amount equal to the fee.259 Under the 

final rule, the adviser would be required 

to list the management fee both before 

and after the application of the fee 

offset. 

Some commenters generally 

supported the requirement that advisers 

disclose adviser compensation and fund 

expenses both before and after the 

application of any offsets, rebates, or 

waivers.260 Some commenters suggested 

that advisers should only be required to 

disclose adviser compensation and fund 

expenses after the application of any 

offsets, rebates, or waivers, because 

information regarding adviser 

compensation and fund expenses before 

the application of any offsets, rebates, or 

waivers does not reflect actual investor 

experience and accordingly could 

confuse or be of little or no value to 

investors.261 One commenter stated that 

we should consider excepting de 

minimis offsets, rebates, or waivers from 

this requirement.262

We considered whether to require 

advisers to disclose adviser 

compensation and fund expenses only 

after the application of offsets, rebates, 

and waivers, rather than before and 

after. We recognize that investors may 

find the reduced numbers more 

meaningful, given that they generally 

reflect the actual amounts borne by the 

fund during the reporting period. 

However, after considering comments, 

we believe that presenting both figures 

will provide investors with greater 

transparency into advisers’ fee and 

expense practices, particularly with 

respect to how offsets, rebates, and 

waivers affect adviser compensation. 

Transparency into fee and expense 

practices is important, even with respect 

to de minimis amounts, because it will 

assist investors in monitoring their 

private fund investments and, for 

certain investors, will ease their own 

efforts at complying with their reporting 

obligations.263 Advisers should have 

this information readily available, and 

both sets of figures will be helpful to 

investors in monitoring whether and 

how offsets, rebates, and waivers are 

applied. 

In addition, we are requiring advisers 

to disclose the amount of any offsets or 

rebates carried forward during the 

reporting period to subsequent periods 

to reduce future adviser 

compensation.264 This information will 

allow investors to understand whether 

they are or the fund is entitled to 

additional reductions in future 

periods.265 Further, this information 

will assist investors with their liquidity 

management and cash flow models, as 

they should have greater insight into the 

fund’s projected cash flows and their 

obligations to satisfy future capital calls 

for adviser compensation with cash on 

hand. 

(b) Portfolio Investment-Level 

Disclosure 

The quarterly statement rule requires 

advisers to disclose a detailed 

accounting of all portfolio investment 

compensation 266 allocated or paid by 

each covered portfolio investment 267

during the reporting period in a single 

table. We proposed, but in response to 

commenters are not adopting, a 

requirement that advisers disclose the 

private fund’s ownership percentage of 

each covered portfolio investment. We 

discuss each of these aspects of the final 

rule below. 

The rule defines ‘‘portfolio 

investment’’ as any entity or issuer in 

which the private fund has invested 

directly or indirectly, as proposed.268

This definition is designed to capture 

any entity or issuer in which the private 

fund holds an investment, including 

through holding companies, 

subsidiaries, acquisition vehicles, 

special purpose vehicles, and other 

vehicles through which investments are 

made or otherwise held by the private 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63231 

269Certain investment strategies can involve 

complex transactions and the use of negotiated 

instruments or contracts, such as derivatives, with 

counterparties. Although such trading involves a 

risk that a counterparty will not settle a transaction 

or otherwise fail to perform its obligations under 

the instrument or contract and thus result in losses 

to the fund, we would generally not consider the 

fund to have made an investment in the 

counterparty in this context. This approach is 

appropriate because any gain or loss from the 

investment generally would be tied to the 

performance of the derivative and the underlying 

reference security, rather than the performance of 

the counterparty. 

270See Convergence Comment Letter. 

271See CFA Comment Letter II (observing that the 

proposed definition would not cover broken deal 

expenses). We understand that broken deal fees are 

often associated with situations in which 

ownership of a potential portfolio investment is in 

flux. Because the definition of ‘‘portfolio 

investment’’ under the rule includes only entities 

or issuers in which a private fund has invested 

(whether directly or indirectly), the rule’s portfolio 

investment compensation requirements would not 

generally apply to compensation, such as a broken 

deal fee, from only a potential portfolio investment. 

A broken deal fee from an unconsummated 

portfolio investment transaction would thus 

generally not constitute portfolio investment 

compensation under the rule, which instead defines 

‘‘portfolio investment’’ and ‘‘portfolio investment 

compensation’’ to broadly cover compensation that 

could reduce the value of a private fund’s assets. 

However, to the extent that a fund bears a broken 

deal expense, rule 211(h)(1)–2(b)(2) will require its 

disclosure as a fund fee or expense. Because this 

information will thus be reported as a fund fee or 

expense under the rule whenever a fund’s assets are 

actually reduced by broken deal expenses, we 

believe it is unnecessary to also require disclosure 

of this information as a type of portfolio investment 

compensation through changes to the definition of 

‘‘portfolio investment’’ under the rule. 

272See AIMA/ACC Comment Letter. 

273See PIFF Comment Letter; cf. infra footnote 

287. 

274See AIC Comment Letter I; PIFF Comment 

Letter. 

275See Convergence Comment Letter. 

276See final rule 211(h)(1)–1 (defining ‘‘covered 

portfolio investment’’). 

277Because advisers often use separate legal 

entities to conduct a single advisory business, the 

rule will capture portfolio investment 

compensation paid to an adviser’s related persons. 

fund.269 As a result, the definition may 

capture more than one entity or issuer 

with respect to any single investment 

made by a private fund. For example, if 

a private fund invests directly in a 

holding company that owns two 

subsidiaries, this definition captures all 

three entities. 

One commenter supported the 

proposed definition of ‘‘portfolio 

investment.’’ 270 Other commenters 

proposed alternative definitions, such as 

to broaden the definition to cover 

broken deal expenses 271 or to narrow 

the definition to refer only to an issuer 

of securities in which the private fund 

has directly invested.272 One commenter 

suggested limiting the definition of 

‘‘covered portfolio investment’’ to 

portfolio investments over which the 

adviser has ‘‘discretion or substantial 

influence’’ to compensate the adviser or 

its related persons.273

Many commenters discussed how the 

proposed definitions of ‘‘portfolio 

investment’’ and ‘‘covered portfolio 

investment’’ would impact advisers to 

funds of funds. Some commenters 

suggested that we exclude from these 

definitions funds of funds and other 

pooled vehicles that invest indirectly 

through underlying funds or unaffiliated 

structures.274 In contrast, another 

commenter stated that we should not 

exempt funds of funds because advisers 

to funds of funds should be able to 

provide the required information.275

Despite commenter concerns, we are 

adopting these definitions as proposed 

in order to capture, and improve 

investor transparency into, portfolio 

investment compensation arrangements 

that pose potential or actual conflicts of 

interest for the adviser, without 

exception for advisers of fund of funds. 

A fund of funds adviser should be in a 

position to determine whether an entity 

paying the adviser, or a related person, 

is a portfolio investment of the fund of 

funds under the final rule. For example, 

the fund of funds adviser can request 

information from the payor regarding 

whether certain underlying funds hold 

an investment in the payor. The fund of 

funds adviser can also request a list of 

investments from the underlying funds 

to determine whether any of those 

underlying portfolio investments have a 

business relationship with the adviser 

or its related persons. However, we 

recognize that, despite their best efforts, 

certain fund of funds advisers may lack 

information or may not be given 

information in respect of underlying 

entities, and depending on a private 

fund’s underlying investment structure, 

a fund of funds adviser may have to rely 

on good faith belief to determine which 

entity or entities constitute a portfolio 

investment under the rule. An adviser 

may consider documenting this 

determination, as well as its initial and 

ongoing diligence efforts to determine 

whether a portfolio investment has 

compensated the adviser or its related 

persons, in its records. 

We recognize that portfolio 

investments of certain private funds 

may not pay or allocate portfolio 

investment compensation to an adviser 

or its related persons. For example, 

advisers to hedge funds focusing on 

passive investments in public 

companies may be less likely to receive 

portfolio investment compensation than 

advisers to private equity funds focusing 

on control-oriented investments in 

private companies. Under the final rule, 

advisers are required to disclose 

information regarding only covered 

portfolio investments, which are defined 

as portfolio investments that allocated 

or paid the investment adviser or its 

related persons portfolio investment 

compensation during the reporting 

period, as proposed.276 We believe this 

approach is appropriate because the 

portfolio investment table is designed to 

highlight the scope and magnitude of 

any investment-level compensation and 

to improve transparency for investors 

into the potential and actual conflicts of 

interest of the adviser and its related 

persons. If an adviser or its related 

person does not receive investmentlevel compensation under the final 

definition of covered portfolio 

investment, the adviser will not have a 

related disclosure obligation under the 

rule. Accordingly, the rule does not 

require advisers to list any information 

regarding portfolio investments that do 

not fall within the covered portfolio 

investment definition for the applicable 

reporting period. These advisers, 

however, need to identify portfolio 

investment payments and allocations in 

order to determine whether they must 

provide the disclosures under this 

requirement. 

Portfolio Investment Compensation. 

The rule requires the portfolio 

investment table to show a detailed 

accounting of all portfolio investment 

compensation allocated or paid by each 

covered portfolio investment during the 

reporting period, with separate line 

items for each category of allocation or 

payment reflecting the total dollar 

amount, including, but not limited to, 

origination, management, consulting, 

monitoring, servicing, transaction, 

administrative, advisory, closing, 

disposition, directors, trustees or similar 

fees or payments by the covered 

portfolio investment to the investment 

adviser or any of its related persons. An 

adviser should generally disclose the 

identity of each covered portfolio 

investment to the extent necessary for 

an investor to understand the nature of 

the potential or actual conflicts 

associated with such payments. 

Similar to the approach taken with 

respect to adviser compensation and 

fund expenses discussed above, the rule 

requires a detailed accounting of all 

portfolio investment compensation paid 

or allocated to the adviser and its 

related persons.277 This will require 

advisers to list as a separate line item 

each category of portfolio investment 


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278This includes cash or non-cash compensation, 

including, for example, stock, options, and 

warrants. 279See final rule 211(h)(1)–1 (defining ‘‘portfolio 

investment compensation’’). 280This information should be meaningful for 

investors regardless of whether the private fund has 

an equity ownership interest or another kind of 

interest in the covered portfolio investment. For 

example, if a private fund’s interest in a covered 

portfolio investment is represented by a debt 

instrument, the amount of portfolio-investment 

compensation paid or allocated to the adviser may 

hinder or prevent the covered portfolio investment 

from satisfying its obligations to the fund under the 

debt instrument. 

281See, e.g., OFT Comment Letter; LACERA 

Comment Letter; XTP Comment Letter. 

282See, e.g., AIC Comment Letter I; Comment 

Letter of the Goldman Sachs Group, Inc. (Apr. 25, 

2022) (‘‘Goldman Comment Letter’’); IAA Comment 

Letter II. 

283See, e.g., MFA Comment Letter I; PIFF 

Comment Letter. 

284See MFA Comment Letter I. 

285See PIFF Comment Letter. This commenter 

also suggested that including adviser compensation 

paid by a subsidiary of the fund as portfolio 

investment compensation will result in duplicate 

disclosure of these compensation amounts. To the 

extent that a subsidiary of the fund compensates the 

investment adviser on behalf of the fund, whether 

such compensation amounts should be disclosed in 

the fund table or the portfolio-investment table will 

depend on the facts and circumstances and, in 

particular, whether the subsidiary is an entity or 

issuer in which the fund has invested (i.e., a 

portfolio investment). However, such compensation 

amounts would not need to be disclosed twice 

(unless the adviser discloses such compensation 

amounts before and after the application of any 

offsets, rebates, or waivers, if applicable). 

compensation 278 and the corresponding 

total dollar amount. 

The rule requires advisers to disclose 

the amount of portfolio investment 

compensation attributable to a private 

fund’s interest in a covered portfolio 

investment.279 Such amount should not 

reflect the portion attributable to any 

other person’s interest in the covered 

portfolio investment. For example, if the 

private fund and another person coinvested in the same portfolio 

investment and the portfolio investment 

paid the private fund’s adviser a 

monitoring fee, the table would list the 

total dollar amount of the monitoring 

fee attributable only to the fund’s 

interest in the portfolio investment. In 

addition to the required disclosure 

under the rule relating to the fund’s 

interest in the portfolio investment, 

advisers may, but are not required to, 

list the portion of the fee attributable to 

any other person’s interest in the 

portfolio investment. This approach is 

appropriate because it will reflect the 

amount borne by the fund and, by 

extension, the investors. This will be 

meaningful information for investors 

because the amount attributable to the 

fund’s interest generally reduces the 

value of investors’ indirect interest in 

the portfolio investment.280

Similar to the approach discussed 

above with respect to adviser 

compensation and fund expenses, an 

adviser is required to list the amount of 

portfolio investment compensation 

allocated or paid with respect to each 

covered portfolio investment both 

before and after the application of any 

offsets, rebates, or waivers. This will 

require an adviser to present the 

aggregate dollar amount attributable to 

the fund’s interest before and after any 

such reduction for the reporting period. 

Advisers will be required to disclose the 

amount of any portfolio investment 

compensation that they initially charge 

and the amount that they ultimately 

retain at the expense of the private fund 

and its investors. 

We continue to believe that this 

approach is appropriate given that 

portfolio investment compensation can 

take many different forms and often 

varies based on fund type. For example, 

portfolio investments of private credit 

funds may pay the adviser a servicing 

fee for managing a pool of loans held 

directly or indirectly by the fund. 

Portfolio investments of private real 

estate funds may pay the adviser a 

property management fee or a mortgageservicing fee for managing the real estate 

investments held directly or indirectly 

by the fund. 

This disclosure will help inform 

investors about the scope of portfolio 

investment compensation allocated or 

paid to the adviser and related persons 

and provide insight to investors into the 

nature of some of the potential or actual 

conflicts of interest their private fund 

advisers face. For example, in cases 

where an adviser controls a fund’s 

portfolio investment, the adviser also 

generally has discretion over whether to 

charge portfolio investment 

compensation and, if so, the rate, 

timing, method, amount, and recipient 

of such compensation. Additionally, 

where the private fund’s governing 

documents require the adviser to offset 

portfolio investment compensation 

against other revenue streams or 

otherwise provide a rebate to investors, 

this information will help investors 

monitor the application of such offsets 

or rebates. 

As with adviser compensation and 

fund expenses, this approach should 

provide investors with sufficient detail 

to validate that portfolio investment 

compensation borne by the fund 

conforms to contractual agreements. 

Some commenters supported this 

portfolio investment compensation 

reporting requirement, stating that it 

will increase transparency.281 Other 

commenters suggested that this 

requirement will be overly burdensome 

or unnecessary.282 Some commenters 

similarly suggested that this portfolio 

investment compensation disclosure 

requirement will be overly broad in its 

application, as described below.283 One 

commenter stated that each private fund 

is itself a ‘‘related person’’ of the 

adviser, so any amounts paid to a fund 

(e.g., dividends on equity investments 

or interest and fees on debt investments) 

would be reportable under the rule as 

drafted, even though the fund’s 

investors receive 100% of the benefit.284

Another commenter requested that we 

clarify that the definition of ‘‘portfolio 

investment compensation’’ excludes 

fund-level fees and other compensation 

paid by a subsidiary of the fund in 

accordance with the fund’s governing 

documents.285

To clarify, this portfolio investment 

compensation disclosure requirement 

does not include distributions 

representing profit or return of capital to 

the fund, in each case, in respect of the 

fund’s ownership or other interest in a 

portfolio investment (e.g., dividends). 

This disclosure requirement is intended 

generally to capture potentially or 

actually conflicted compensation 

arrangements where the fund’s interest 

in a portfolio investment may be 

negatively impacted by that portfolio 

investment’s allocation or payment of 

portfolio investment compensation to 

the fund’s adviser or its related persons, 

such as when an adviser or its related 

person charges a monitoring fee to a 

portfolio investment of a fund it advises, 

including when such charges are made 

in accordance with the fund’s governing 

documents. Although investors may 

contractually agree, per a fund’s 

governing documents and with 

appropriate initial disclosure, to an 

adviser’s ability to receive portfolio 

investment compensation, investors 

may be misled with respect to the 

magnitude and scope of such 

compensation to the extent that an 

adviser does not disclose information 

relating to the total dollar amount of 

such compensation after the fact. 

The rule requires an adviser to 

include the portfolio investment 

compensation paid to a related person, 

including, without limitation, a related 

person that is a sub-adviser, in its 

quarterly statement. Because portfolio 

investment compensation to related subadvisers presents the same conflicts of 

interest concerns discussed above with 

respect to portfolio investment 

compensation to advisers, the portfolio 

investment compensation disclosure 

requirements under the rule extends to 

portfolio investment compensation to an 


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286See, e.g., PIFF Comment Letter; CFA Comment 

Letter I; Goldman Comment Letter. 

287See, e.g., AIMA/ACC Comment Letter; 

SIFMA–AMG Comment Letter I; SBAI Comment 

Letter; see also supra footnote 273. 

288See Convergence Comment Letter. 

289See, e.g., AIC Comment Letter I; Goldman 

Comment Letter. 

290An adviser may be subject to a potential or 

actual conflict of interest arising out of its 

substantial influence over a portfolio investment, 

for example, if a fund it advises owns a sizeable but 

non-controlling share of the investment or if the 

portfolio investment is otherwise dependent on the 

adviser to operate its business. More broadly, we 

have recognized that an adviser is generally subject 

to a potential or actual conflict of interest with an 

advisory client when it has a conflicting interest 

that ‘‘might incline [the] investment adviser— 

consciously or unconsciously—to render advice 

which was not disinterested.’’ IA Fiduciary Duty 

Release, supra footnote 58, at 23. 

291See, e.g., PIFF Comment Letter; AIMA/ACC 

Comment Letter. 

292See CFA Comment Letter I. 

293See ATR Comment Letter. 

294See PIFF Comment Letter. 

295See Convergence Comment Letter. 

adviser or any of its related persons, 

including a related sub-adviser, as 

proposed. 

Some commenters stated that we 

should require only aggregate portfolio 

investment-level disclosure and not 

each instance of portfolio investment 

compensation in order to provide more 

helpful information to investors, reduce 

costs and compliance burdens for 

advisers, or to avoid potentially causing 

portfolio companies to decline private 

fund investments.286 Although we 

recognize that it could be simpler or less 

burdensome for certain advisers to 

provide aggregate information, it is 

important that investors are made aware 

of each instance of portfolio investment 

compensation to the adviser. Investors 

should be able to analyze each such 

instance and raise any potential 

concerns about these compensation 

schemes with the adviser. Aggregated 

information could provide investors 

with a sense of the magnitude of such 

compensation schemes, but investors 

may not be able to understand the 

nature and scope of the conflicts 

associated with portfolio investment 

compensation to the adviser. 

Several commenters stated that the 

requirement to disclose portfolio 

investment compensation should be 

limited to circumstances in which an 

adviser has the discretion or authority to 

cause a portfolio investment to 

compensate the adviser or its related 

persons, as those are the circumstances 

in which conflicts of interest would 

arise.287 In contrast, another commenter 

supported our proposed approach and 

stated that advisers should be required 

to report portfolio investment 

compensation regardless of whether 

they have such discretion or authority 

over a portfolio investment.288 Other 

commenters suggested that the portfolio 

investment compensation disclosure 

requirement should exclude portfolio 

investment compensation to an 

adviser’s related persons that are 

operationally and otherwise 

independent of the adviser, stating that 

some advisers have related persons who 

negotiate with advisers or their affiliates 

on an arm’s-length basis and would not 

represent their interests when 

negotiating with a portfolio 

investment.289 Although we understand 

that conflicts of interest issues are 

heightened when an adviser has the 

discretion or authority to control a 

portfolio investment (and in the context 

of portfolio investment compensation to 

a related person, to control such related 

person), we recognize that potential or 

actual conflicts of interest are not 

limited to scenarios where an adviser 

has such control and may arise, for 

instance, where an adviser does not 

have control but has substantial 

influence over a portfolio investment (or 

in the context of portfolio investment 

compensation to a related person, over 

such related person) and the portfolio 

investment is compensating the adviser 

or its related persons.290 As a result, we 

believe that it is necessary to provide 

investors with comprehensive 

information regarding payments of 

portfolio investment compensation 

allocated or paid to an adviser or its 

related person, without limitation to 

circumstances in which an adviser has 

discretion or authority over the portfolio 

investment (or over the related person, 

as applicable). 

Some commenters raised concerns 

about potential confidentiality issues if 

advisers are required to disclose the 

names of portfolio investments as part 

of this portfolio investment 

compensation disclosure.291 Although 

we appreciate these confidentiality 

concerns, we believe that many 

investors may likely already know the 

names of the fund’s portfolio 

investments. Even if investors do not 

know this information, investors are 

typically subject to contractual 

obligations to maintain the 

confidentiality of this information. 

Further, as stated above, advisers should 

generally disclose the identity of each 

covered portfolio investment to the 

extent necessary for an investor to 

understand the nature of the potential or 

actual conflicts associated with such 

payments. To the extent the identity of 

any covered portfolio investment is not 

necessary for an investor to understand 

the nature of the conflict, advisers may 

use consistent code names (e.g., 

‘‘portfolio investment A’’). 

Ownership Percentage. We proposed 

but are not adopting a requirement that 

the portfolio investment table include a 

list of the fund’s ownership percentage 

of each covered portfolio investment. At 

proposal, we stated that we believed 

this information would provide 

investors with helpful context for the 

amount of portfolio investment 

compensation paid or allocated to the 

adviser or its related persons relative to 

the fund’s ownership. For example, if 

portfolio investment compensation is 

calculated based on the portfolio 

investment’s total enterprise value, then 

investors would be able to compare the 

amount of portfolio investment 

compensation relative to the fund’s 

ownership percentage. 

One commenter indicated that these 

ownership percentages would not be 

helpful for investors in practice.292

Another commenter stated that 

calculating and recording ownership 

percentages of portfolio investments 

would be onerous and costly.293

Another commenter suggested that we 

should require advisers to disclose these 

ownership percentages only if the 

adviser has discretion or substantial 

influence to cause the accompanying 

portfolio investment compensation to be 

paid to the adviser.294 In contrast, one 

commenter suggested expanding the 

ownership percentage disclosure 

obligation to cover any economic right, 

interest, or benefit that the fund has in 

a company.295 Although we maintain 

that these ownership percentages might 

provide illustrative information for 

investors in certain circumstances, like 

the one noted above, we recognize that 

they might be misleading or unhelpful 

in other cases. For instance, if a fund 

owns voting stock in a company with a 

significant amount of non-voting stock, 

then the ownership percentage might 

appear low relative to the amount of 

control that the fund’s adviser actually 

exerts. Similarly, if a fund owns only a 

debt interest in a portfolio investment, 

its ownership percentage would be 

represented as zero even if the debt 

interest is substantial enough that the 

fund’s adviser can exact some sort of 

compensation for itself. We do not want 

investors to misestimate the degree to 

which advisers are able to influence 

portfolio investments to provide 

compensation. Accordingly, in response 

to commenters, we have decided not to 

adopt this requirement to include 

ownership percentages for covered 

portfolio investments. 


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296Final rule 211(h)(1)–2(d). 

297 Id. 

298See, e.g., Comment Letter of Albourne Group 

(Apr. 22, 2022) (‘‘Albourne Comment Letter’’); TRS 

Comment Letter; Comment Letter of the California 

Public Employees’ Retirement System (May 3, 2022) 

(‘‘CalPERS Comment Letter’’). 

299See, e.g., LSTA Comment Letter; AIMA/ACC 

Comment Letter; IAA Comment Letter II. 

300The definition of a liquid fund is discussed 

below in this section II.B.2. 

301The definition of an illiquid fund is discussed 

below in this section II.B.2. 

302As discussed below, we are adopting 

modifications to (i) the proposed definition of 

illiquid fund and, by reference, the proposed 

definition of liquid fund and (ii) certain aspects of 

the required performance disclosure for illiquid 

funds. 

303Final rule 211(h)(1)–2(e)(2). For example, the 

rule requires an adviser to an illiquid fund to show 

gross internal rate of return with the same 

prominence as net internal rate of return. Similarly, 

the rule requires an adviser to a liquid fund to show 

the annual net total return for each fiscal year with 

the same prominence as the cumulative net total 

return for the current fiscal year as of the end of 

the most recent fiscal quarter covered by the 

quarterly statement. 

304See, e.g., CII Comment Letter; NEA and AFT 

Comment Letter; OPERS Comment Letter; 

Morningstar Comment Letter. 

305See, e.g., IAA Comment Letter II; Comment 

Letter of ApeVue, Inc. (Apr. 25, 2022); ICM 

Comment Letter. 

306See, e.g., Ropes & Gray Comment Letter; NYC 

Bar Comment Letter II. While we acknowledge that 

quarterly statements may increase costs, we believe 

these costs are justified in light of the benefits of 

the rule. As discussed above, investors will benefit 

from mandatory timely updates regarding fund 

performance. See supra the introductory discussion 

in section II.B. 

307See, e.g., Schulte Comment Letter; PIFF 

Comment Letter; NYC Bar Comment Letter II. 

308See infra section VI.D.2. 

309See infra section II.B.2.a) and section II.B.2.b) 

for discussion of the use of the particular 

performance metrics obligations for liquid funds 

and illiquid funds, respectively, in the final rule. 

(c) Calculations and Cross-References to 

Organizational and Offering Documents 

As proposed, the quarterly statement 

rule requires each statement to include 

prominent disclosure regarding the 

manner in which expenses, payments, 

allocations, rebates, waivers, and offsets 

are calculated.296 This disclosure 

should assist private fund investors in 

understanding and evaluating the 

adviser’s calculations. This disclosure 

will generally require advisers to 

describe, among other things, the 

structure of, and the method used to 

determine, any performance-based 

compensation set forth in the quarterly 

statement (such as the distribution 

waterfall, if applicable) and the criteria 

on which each type of compensation is 

based (e.g., whether such compensation 

is fixed, based on performance over a 

certain period, or based on the value of 

the fund’s assets). To facilitate an 

investor’s ability to seek additional 

information and understand the basis of 

any expense, payment, allocation, 

rebate, waiver, or offset calculation, the 

quarterly statement also must include 

cross-references to the relevant sections 

of the private fund’s organizational and 

offering documents that set forth the 

applicable calculation methodology.297

Some commenters supported this 

calculation and cross-reference 

disclosure requirement, stating that it 

would help investors monitor and 

understand fees and expenses.298 Other 

commenters suggested that this 

calculation and cross-reference 

disclosure requirement would be too 

costly or that it would clutter the 

statement and make it more difficult for 

investors to read and digest the 

information contained therein.299

The required cross-references to the 

fund’s documents will enable investors 

to compare what the private fund’s 

documents establish that the fund (and 

indirectly the investors) will be 

obligated to pay to what the fund (and 

indirectly the investors) actually paid 

during the reporting period and thus to 

assess and monitor more effectively the 

accuracy of the payments. Including this 

information in the quarterly statement 

will better enable an investor to confirm 

that the adviser calculated, for example, 

advisory fees in accordance with the 

fund’s organizational and offering 

documents and to identify whether the 

adviser deducted or charged incorrect or 

unauthorized amounts. 

2. Performance Disclosure 

As proposed, in addition to providing 

information regarding fees and 

expenses, the rule requires advisers to 

include standardized fund performance 

information in each quarterly statement 

provided to fund investors. The rule 

requires advisers to liquid funds 300 to 

show performance based on net total 

return on an annual basis for the 10 

fiscal years prior to the quarterly 

statement or since the fund’s inception 

(whichever is shorter), over one-, five-, 

and 10-fiscal year periods, and on a 

cumulative basis for the current fiscal 

year as of the end of the most recent 

fiscal quarter. For illiquid funds,301 the 

rule requires advisers to show 

performance based on internal rates of 

return and multiples of invested capital 

since inception and to present a 

statement of contributions and 

distributions.302 The rule requires 

advisers to display the different 

categories of required performance 

information with equal prominence.303

Many commenters supported the 

performance disclosure requirement and 

generally suggested that it would better 

enable investors to monitor, compare, or 

otherwise alter their private fund 

investments.304 Other commenters did 

not support this requirement for a 

number of reasons.305 In general, 

opponents of this requirement stated 

that the required performance 

disclosure in the quarterly statements 

would lead to increased costs that 

would ultimately be passed down to 

private fund investors with potentially 

little or no corresponding benefit, as 

many advisers already regularly provide 

performance reporting that they assert 

investors deem adequate.306 These 

commenters stated that current market 

practices are typically sufficient and can 

potentially be more effective in 

conveying relevant and fund-tailored 

information regarding a private fund’s 

performance than a standardized 

disclosure approach would.307

While we acknowledge that quarterly 

statements may increase costs, we 

believe these costs are justified in light 

of the benefits of the rule.308 It is 

essential that quarterly statements 

include performance in order to enable 

investors to compare private fund 

investments, comprehensively 

understand their existing investments, 

and determine what to do holistically 

with their overall investment 

portfolio.309 A quarterly statement that 

includes fee, expense, and performance 

information will allow investors to 

monitor their investments better for 

market developments and potential 

fund-level abnormalities (e.g., if 

performance varies drastically quarter to 

quarter or differs extensively from 

relevant market trends or, if applicable, 

comparable benchmarks), as well as to 

understand more broadly the impact of 

fees and expenses on the performance of 

their investments. Simple and clear 

disclosure of this information is 

fundamental to the terms of an 

investor’s relationship with an adviser 

because it is critical to investors’ 

abilities to make investment decisions. 

For example, a quarterly statement that 

includes fee and expense, but not 

performance, information would not 

allow an investor to perform a costbenefit analysis to determine whether to 

retain the current investment or 

consider other options. Similarly, an 

investor without fee, expense, and 

performance information would be 

unable to determine whether to invest 

in other private funds managed by the 

same adviser. In addition, investors may 

use fee, expense, and performance 

information about their current 

investments to inform their overall 

investment decisions (e.g., whether to 

diversify) and their view of the market. 

The inclusion of performance disclosure 


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310See AIMA/ACC Comment Letter. 311Advertisements to prospective clients and 

investors include advertisements to current clients 

and investors about new or additional advisory 

services with regard to securities. See Marketing 

Release, supra footnote 127, at section II.A.2.a.iv 

(noting that the definition of ‘‘advertisement’’ 

includes a communication to a current investor that 

offers new or additional advisory services with 

regard to securities, provided that the 

communication otherwise satisfies the definition of 

‘‘advertisement’’). 

312The marketing rule and its specific protections 

generally do not apply in the context of a quarterly 

statement. See Marketing Release, supra footnote 

127, at sections II.A.2.a.iv and II.A.4. 

313Private funds can have various types of 

complicated structures and involve complex 

financing mechanisms. As a result, an adviser may 

need to make certain assumptions when calculating 

performance for private funds. 314See David Snow, Private Equity: A Brief 

Overview: An introduction to the fundamentals of 

an expanding, global industry, PEI Media (2007), at 

11 (discussing variations on private equity 

performance metrics). 315See infra section II.B.2.b). 

316See NYC Comptroller Comment Letter. 

317See rule 206(4)–1. A communication to a 

current investor is an ‘‘advertisement’’ when it 

offers new or additional investment advisory 

services with regard to securities. 

318This includes the antifraud provisions of 

section 206 of the Advisers Act, rule 206(4)–8 under 

the Advisers Act (rule 206(4)–8), section 17(a) of the 

Securities Act, and section 10(b) of the Exchange 

Act (and rule 10b–5 thereunder), to the extent 

relevant. 

in the quarterly statement also helps 

prevent fraud, deception, and 

manipulation because it requires 

advisers to provide timely and 

consistent performance disclosures to 

enable and empower investors to assess 

adviser performance. This disclosure 

will decrease the likelihood that 

investors will be defrauded, deceived, 

or manipulated by deceptive or 

manipulative representations of 

performance and it increases the 

likelihood that any misconduct will be 

detected sooner. 

One commenter stated that we should 

align the performance reporting 

standards with the principles-based 

approach reflected in the marketing 

rule.310 Although there are 

commonalities between the performance 

reporting elements of the final rule and 

the performance elements of our 

recently adopted marketing rule, the 

two rules have different purposes that 

stem from the needs of the different 

types of clients and investors they seek 

to protect. While the marketing rule is 

focused on prospective clients and 

investors,311 the quarterly statement 

rule is focused on current clients and 

investors. All clients and investors 

should be protected against misleading, 

deceptive, and confusing information, 

but current clients and investors have 

different needs from those of 

prospective clients and investors. 

Current investors should receive 

performance reporting that allows them 

to evaluate an investment alongside 

corresponding fee and expense 

information. Current investors also 

should receive performance reporting 

that is provided at timely, predictable 

intervals so that an investor can monitor 

and evaluate an investment’s progress 

over time, remain abreast of changes, 

compare information from quarter to 

quarter, and take action where 

possible.312 Although the marketing rule 

requires net performance to accompany 

gross performance, it does not prescribe 

a breakdown of fees and expenses to 

accompany performance as is required 

under the quarterly statement rule. The 

marketing rule also does not require 

performance to be delivered at specified 

intervals as is required under the 

quarterly statement rule. While these 

rules both promote investor protection, 

the quarterly statement rule is 

specifically designed to meet the needs 

of current investors to evaluate their 

current portfolios. 

Without standardized performance 

metrics (and adequate disclosure of the 

criteria used and assumptions made in 

calculating the performance),313 it is 

more difficult for investors to compare 

their private fund investments managed 

by the same adviser or gauge the value 

of an adviser’s investment management 

services by comparing the performance 

of private funds advised by different 

advisers.314 Currently, there are various 

approaches to report private fund 

performance to fund investors, often 

depending on the type of private fund 

(e.g., the fund’s strategy, structure, target 

asset class, investment horizon, and 

liquidity profile). Certain of these 

approaches to performance reporting 

may be misleading without the benefit 

of adequately disclosed assumptions, 

and others may lead to investor 

confusion. For example, an adviser 

showing internal rate of return with the 

impact of fund-level subscription 

facilities could mislead investors as 

fund-level subscription facilities can 

artificially increase performance 

metrics.315 An adviser showing private 

fund performance as compared to a 

public market equivalent (‘‘PME’’) in a 

case where the private fund does not 

have an appropriate benchmark may 

mislead investors to believe that the 

private fund performance is comparable 

to the performance of the PME. Certain 

investors may also be led to believe that 

their private fund investment has a 

liquidity profile that is similar to an 

investment in the PME or an index that 

is similar to the PME. 

Standardized performance 

information will help an investor decide 

whether to continue to invest in the 

private fund or, if applicable, redeem or 

withdraw from the private fund, as well 

as more holistically to make decisions 

about other components of the 

investor’s portfolio. Furthermore, 

requiring advisers to show performance 

information alongside fee and expense 

information in the quarterly statement 

will provide a more complete picture of 

an investor’s private fund investment. 

This information will help investors 

understand the true cost of investing in 

the private fund and be particularly 

valuable for investors that are paying 

performance-based compensation. This 

performance reporting will also provide 

greater transparency into how private 

fund performance is calculated, 

improving an investor’s ability to 

understand performance. 

One commenter requested that we 

clarify that investors may negotiate for 

performance and other reporting in 

addition to what is required by this 

rule.316 The rule recognizes the need for 

different performance metrics for 

private funds based on certain fund 

characteristics, but also imposes a 

general framework to help ensure there 

is sufficient standardization in order to 

provide useful, comparable information 

to investors. An adviser remains free to 

include additional performance metrics 

in the quarterly statement as long as the 

quarterly statement presents the 

performance metrics prescribed by the 

rule and complies with the other 

requirements in the rule. However, 

advisers that choose to include 

additional information should consider 

what other rules and regulations might 

apply. For example, although we 

generally do not consider information in 

the quarterly statement required by the 

rule to be an ‘‘advertisement’’ under the 

marketing rule, an adviser that offers 

new or additional investment advisory 

services with regard to securities in the 

quarterly statement would need to 

consider whether such information is 

subject to the marketing rule.317 An 

adviser also needs to consider whether 

performance information presented 

outside of the required quarterly 

statement, even if it contains some of 

the same information as the quarterly 

statement, is subject to, and meets the 

requirements of, the marketing rule. 

Regardless, the quarterly statement is 

subject to the antifraud provisions of the 

Federal securities laws.318

Some commenters suggested that we 

should also require a public market 

equivalent (‘‘PME’’) as part of the 


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63236 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

319See, e.g., NEA and AFT Comment Letter; 

Comment Letter of the Interfaith Center on 

Corporate Responsibility (Apr. 25, 2022) (‘‘ICCR 

Comment Letter’’); AFL–CIO Comment Letter. 

320See CFA Comment Letter I; Comment Letter of 

KPMG LLP (Apr. 25, 2022) (‘‘KPMG Comment 

Letter’’). 

321See AIC Comment Letter II. 

322Final rule 211(h)(1)–2(e)(1). The rule does not 

require the adviser to revisit the determination 

periodically; however, advisers should generally 

consider whether they are providing accurate 

information to investors and whether they need to 

revisit the liquid/illiquid determination based on 

changes in the fund. 

323Final rule 211(h)(1)–1 (defining ‘‘illiquid 

fund’’). 

324See Financial Accounting Standards Board 

(FASB) Accounting Standards Codification (ASC) 

946–205–50–23. 

325See, e.g., OFT Comment Letter; IST Comment 

Letter; CII Comment Letter. 326See, e.g., Morningstar Comment Letter; 

SIFMA–AMG Comment Letter I; SBAI Comment 

Letter. 

327See, e.g., ILPA Comment Letter I; SIFMA– 

AMG Comment Letter I. 

328Proposed prong (iv) states ‘‘. . . has as a 

predominant operating strategy the return of the 

proceeds from disposition of investments to 

investors.’’ 

329See Proposing Release, supra footnote 3, at 62. 

330See, e.g., PIFF Comment Letter; Comment 

Letter of Pricewaterhouse Coopers LLP (Apr. 25, 

2022) (‘‘PWC Comment Letter’’). 

331See ILPA Comment Letter I. 

332See, e.g., SIFMA–AMG Comment Letter I; 

Morningstar Comment Letter; Convergence 

Comment Letter. 

quarterly statements.319 While a PME 

may be helpful in certain circumstances, 

it can also be misleading or confusing in 

others. Many private fund investment 

strategies may not have an appropriate 

PME. For example, it may be difficult to 

identify an effective PME for a private 

fund whose strategy is focused on turnaround opportunities for private 

companies. Similarly, it may be 

challenging to identify appropriate 

PMEs for certain private funds with 

highly technical or niche strategies. A 

PME may also mislead investors to 

believe that their investment has a 

similar liquidity profile to the PME. For 

example, comparing the performance of 

a technology-focused buy-out fund to a 

public technology company index may 

obscure the reality that the former is 

illiquid while the latter is liquid and 

thus a reasonable investor would not 

necessarily expect them to have the 

same performance. Accordingly, the 

final rule does not require a PME as part 

of the quarterly statements. 

Certain commenters suggested that we 

should clarify that the adviser’s (and its 

affiliate’s) interests should be excluded 

when calculating performance because 

such interests are typically non-fee 

paying.320 We agree that the adviser’s 

(and its affiliate’s) interests should 

generally be excluded when calculating 

performance for the quarterly statements 

to prevent the performance from being 

misleading. A typical example would be 

the general partner’s interest in a private 

fund, which generally does not pay 

management fees or carried interest. 

Due to the lack of fees, the performance 

of such non-fee paying interests is not 

necessarily relevant for other investors 

and would serve to increase net returns 

in a way that could be misleading. 

One commenter suggested that we 

should not require performance metrics 

until the fund has at least four quarters 

of results.321 While some private funds 

may have limited investment activities 

during the first four quarters of their 

life, it is not always such the case. Many 

liquid funds are able to deploy capital 

quickly and, as a result, generate 

important performance information that 

investors should have access to. Because 

investors have the ability to redeem 

from liquid funds, it is also important 

that they begin receiving performance 

information as soon as practicable so 

that they can decide whether or not to 

remain invested in the fund. Many 

illiquid funds are also able to deploy 

capital and realize or partially realize 

investments on an accelerated basis and 

thus will have meaningful performance 

information in the early quarters of their 

life. Accordingly, we are requiring all 

private funds, whether liquid or 

illiquid, to provide quarterly statements 

containing these performance metrics 

after their first two full fiscal quarters of 

operating results. 

Liquid v. Illiquid Fund Determination 

The performance disclosure 

requirements of the quarterly statement 

rule require an adviser first to determine 

whether its private fund client is an 

illiquid or liquid fund, as defined in the 

rule, no later than the time the adviser 

sends the initial quarterly statement.322

The adviser is then required to present 

certain performance information 

depending on this categorization. These 

definitions are intended to facilitate 

consistent portrayals of the fund returns 

over time as well as more standardized 

comparisons of the performance of 

similar funds. 

We are defining ‘‘illiquid fund’’ as a 

private fund that: (i) is not required to 

redeem interests upon an investor’s 

request and (ii) has limited 

opportunities, if any, for investors to 

withdraw before termination of the 

fund.323

At proposal, we had listed six factors 

used to identify an illiquid fund: a 

private fund that (i) has a limited life; 

(ii) does not continuously raise capital; 

(iii) is not required to redeem interests 

upon an investor’s request; (iv) has as a 

predominant operating strategy the 

return of the proceeds from disposition 

of investments to investors; (v) has 

limited opportunities, if any, for 

investors to withdraw before 

termination of the fund; and (vi) does 

not routinely acquire (directly or 

indirectly) as part of its investment 

strategy market-traded securities and 

derivative instruments. The proposed 

factors were aligned with the factors for 

determining how certain types of 

private funds should report performance 

under U.S. Generally Accepted 

Accounting Principles (‘‘U.S. 

GAAP’’).324 We requested comment on 

whether we should modify the illiquid 

fund definition by adding or removing 

factors. 

Many commenters supported the 

liquid and illiquid fund distinction as 

part of the required performance 

reporting,325 and many other 

commenters criticized it.326 Of these, a 

number of commenters suggested we 

modify the proposed definitions for 

liquid and illiquid funds.327 Certain 

commenters stated that the distinction 

between liquid and illiquid funds is 

overly technical and does not align with 

how sponsors typically market their 

private funds, particularly with respect 

to the proposed ‘‘disposition of 

investments’’ prong.328 We had 

requested comment specifically 

regarding whether the proposed 

‘‘disposition of investments’’ prong 

could cause certain funds, such as real 

estate funds and credit funds, for which 

we generally believe internal rate of 

return and multiple of invested capital 

are the appropriate performance 

measures, to be treated as liquid funds 

under the proposed rule.329 Certain 

commenters responded with their view 

that the proposed rule would result in 

private funds that should report an 

internal rate of return and multiple of 

invested capital instead reporting a total 

net return metric (or vice versa).330

Similarly, a commenter stated that we 

should define ‘‘illiquid fund’’ more 

precisely to capture strategies such as 

private credit, e.g., income generating 

portion of assets, not just a focus on 

return of proceeds from the disposition 

of investments, as contemplated by 

prong four of the proposed definition.331

Some commenters stated that it may be 

unclear how certain kinds of private 

funds would be categorized under the 

proposed six factor definition.332

After considering responses from 

commenters, we have decided that the 

definition of an illiquid fund should 

focus only on number three and number 

five of the proposed six factors, i.e., a 

private fund that (i) is not required to 


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333See, e.g., OFT Comment Letter; IST Comment 

Letter; CII Comment Letter. 

334See, e.g., Morningstar Comment Letter; 

SIFMA–AMG Comment Letter I; SBAI Comment 

Letter. 

335See, e.g., Morningstar Comment Letter; 

Convergence Comment Letter. 

336See, e.g., BVCA Comment Letter; SBAI 

Comment Letter; AIMA/ACC Comment Letter. 

redeem interests upon an investor’s 

request; and (ii) has limited 

opportunities, if any, for investors to 

withdraw before termination of the fund 

because we believe that redemption and 

withdrawal capability represents the 

distinguishing feature between illiquid 

and liquid funds. We also believe that, 

by narrowing the definition to this 

distinguishing feature, the rule provides 

a more targeted approach and will result 

in fewer funds being mischaracterized 

than under the proposed definition. 

Generally, if a private fund allows 

voluntary redemptions/withdrawals, 

then it is a liquid fund and must 

provide total returns. Similarly, if a 

private fund does not allow voluntary 

redemptions/withdrawals, then it is an 

illiquid fund and must provide internal 

rates of return and multiples of invested 

capital. Private funds that fall into the 

‘‘illiquid fund’’ definition are generally 

closed-end funds that do not offer 

periodic redemption/withdrawal 

options other than in exceptional 

circumstances, such as in response to 

regulatory events. For example, most 

private equity and venture capital funds 

will likely fall under the illiquid fund 

definition, and the rule requires 

advisers to these types of funds to 

provide performance metrics that suit 

their particular characteristics, such as 

irregular cash flows, which otherwise 

make measuring performance difficult 

for both advisers and investors. We 

recognize, however, that even 

traditional, closed-end private equity 

funds have certain redemption or 

withdrawal rights for regulatory events 

(e.g., redemptions related to the 

Employee Retirement Income Security 

Act (‘‘ERISA’’) and the Bank Holding 

Company Act (‘‘BHCA’’)) and other 

extraordinary circumstances (e.g., 

redemptions related to a violation of a 

State pay-to-play law). Private equity 

and other similar closed-end funds 

would still be classified as illiquid 

funds, as defined in this rule, so long as 

such opportunities to redeem are 

limited. 

As proposed, we are defining a 

‘‘liquid fund’’ as any private fund that 

is not an illiquid fund. Some 

commenters generally supported the 

liquid and illiquid fund distinction as 

noted above,333 while other commenters 

generally criticized the distinction.334

We continue to believe that the 

proposed definition is appropriate 

because it will capture any fund that 

does not fit within the definition of 

‘‘illiquid fund’’ and ensure that liquid 

fund investors receive the same type of 

performance metrics. Private funds that 

fall into the ‘‘liquid fund’’ definition 

generally allow periodic investor 

redemptions, such as monthly, 

quarterly, or semi-annually. The rule 

will require advisers to these types of 

funds to provide performance metrics 

that show the year-over-year return 

using the market value of the underlying 

assets. 

We continue to believe that the 

performance metrics for liquid funds— 

which are discussed in detail below— 

will allow investors to assess better 

these funds’ performance. We 

understand that liquid funds generally 

are able to determine their net asset 

value on a regular basis and compute 

the year-over-year return using the 

market-based value of the underlying 

assets. We have taken a similar 

approach with regard to registered 

funds, which invest a substantial 

amount of their assets in primarily 

liquid holdings (e.g., publicly traded 

securities) and, as a result, are also 

generally able to determine their net 

asset value on a regular basis and 

compute the year-over-year return using 

the market-based value of the 

underlying assets. Investors in a private 

fund that is a liquid fund would 

similarly find this information helpful. 

Most traditional hedge funds likely fall 

into the liquid bucket and will need to 

provide disclosures regarding the 

underlying assumptions of the 

performance (e.g., whether dividends or 

other distributions are reinvested). 

Some commenters suggested creating 

a third category to capture certain 

‘‘hybrid’’ funds.335 A third category for 

hybrid funds would create confusion 

and increase the possibility of certain 

private funds not clearly belonging to a 

single category. A category of hybrid 

funds would encapsulate an enormous 

diversity of funds, many of which 

would be more different from one 

another than they would be from liquid 

or illiquid funds, as defined in the rule. 

Additionally, new structures for private 

funds are constantly being developed, 

and there will certainly be new 

approaches in the future as well that are 

difficult to anticipate. It would likely be 

impractical to attempt to define 

characteristics of hybrid funds and thus 

to determine what performance metrics 

are necessary for them. We believe it is 

more effective to crystallize the key 

difference between liquid and illiquid 

funds in the final rule, as discussed 

above. In this regard, and as stated 

above, we believe that our 

simplification of the definition of 

‘‘illiquid fund’’ in the final rule will 

result in fewer funds being 

mischaracterized than under the 

proposed definition, and thus this 

change in the final rule will reduce the 

need to create an additional category of 

hybrid funds to facilitate the 

categorization of private funds for 

performance reporting purposes. 

Other commenters requested that we 

let advisers choose the most appropriate 

approach with respect to performance 

reporting instead of requiring these 

categories.336 A primary objective of the 

rule, however, is to provide the 

investors of a private fund with 

comparable performance information 

with respect to that fund and the 

investor’s other private fund 

investments. Accordingly, we believe 

that establishing standardization with 

respect to a minimum level of sufficient 

disclosure is necessary. Currently, it 

may be difficult for certain investors to 

compare performance across their 

private fund investments if the investors 

are not large enough to negotiate for 

supplemental fund reporting or wellresourced enough to analyze in a timely 

manner the potential nuances in how 

different private funds present their 

performance. We believe that 

establishing a level of standardized 

performance reporting should make it 

easier for investors to evaluate their 

private fund investments and make 

more informed investment decisions. 

The final rule requires advisers to 

provide performance reporting for each 

private fund as part of the fund’s 

quarterly statement. The determination 

of whether a fund is liquid or illiquid 

dictates the type of performance 

reporting that must be included and, 

because it will result in funds with 

similar liquidity characteristics 

presenting the same type of performance 

metrics, this approach will improve 

comparability of private fund 

performance reporting for fund 

investors. 

(a) Liquid Funds 

We are adopting the performance 

requirements for liquid funds as 

proposed, other than (i) the proposed 

requirement for an adviser to disclose 

annual net total returns since inception 

and (ii) the proposed use of calendar 

year reporting periods. Under the final 

rule, an adviser to a liquid fund is 

required to provide annual net total 

returns since inception or for each fiscal 


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63238 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

337See section II.B.3. 

338See, e.g., AIMA/ACC Comment Letter; ILPA 

Comment Letter I; SIFMA–AMG Comment Letter I 

(suggesting that the SEC require reporting only on 

an annual basis within 120 days of the fund’s fiscal 

year end); GPEVCA Comment Letter (suggesting 

that any periodic disclosure requirement be tied to 

the annual audit process). 

339See, e.g., ATR Comment Letter; AIMA/ACC 

Comment Letter. 

340See, e.g., PWC Comment Letter; AIMA/ACC 

Comment Letter. 

341See CFA Comment Letter I. 

342See CFA Comment Letter II; Ropes & Gray 

Comment Letter. 

343Final rule 211(h)(1)–2(e)(2)(i)(B). 

344See CFA Comment Letter I. 

345See, e.g., GPEVCA Comment Letter; BVCA 

Comment Letter. 

346See, e.g., IAA Comment Letter II; NYC Bar 

Comment Letter II; PIFF Comment Letter; Schulte 

Comment Letter. See also Marketing Release, supra 

footnote 127, at 182. 

year over the 10 years prior to the 

quarterly statement, whichever is 

shorter. As discussed in greater detail 

below, this change to the minimum 

number of years of required 

performance is responsive to 

commenters who stated that reporting 

since inception is overly broad and that 

many advisers would not have records 

going back to inception. Under the final 

rule, an adviser to a liquid fund must 

also provide performance metrics based 

on fiscal rather than calendar year 

reporting periods. As discussed in 

greater detail below,337 the adoption of 

fiscal reporting periods seeks to align 

the delivery of the fourth quarter 

statement with the time that private 

funds obtain their audited annual 

financials. The adoption of fiscal 

reporting periods is also responsive to 

commenters who stated that fiscal 

periods would more closely align with 

industry practice.338 While this 

modification may affect comparability 

for some investors across private funds 

with differing fiscal years, we 

understand that the majority of private 

funds’ fiscal years match the calendar 

year and thus do not expect 

comparability to be substantially 

affected in most cases. We discuss each 

performance reporting requirement for 

liquid funds in turn below. 

Annual Net Total Returns. The final 

rule requires advisers to liquid funds to 

disclose performance information in 

quarterly statements for specified 

periods. First, as noted above, an 

adviser to a liquid fund is required to 

disclose either the liquid fund’s annual 

net total returns since inception or for 

each fiscal year over the 10 years prior 

to the quarterly statement, whichever is 

shorter. For example, a liquid fund that 

commenced operations four fiscal years 

ago would show annual net total returns 

for each of the first four fiscal years 

since its inception. A liquid fund that 

commenced operations fourteen years 

ago, however, would be required to 

show annual net total returns only for 

each of the most recent 10 fiscal years. 

Some commenters stated that the 

proposed requirement of performance 

since inception is unworkable.339 In 

particular, certain commenters stated 

that certain longstanding funds may not 

have the necessary records to calculate 

the requisite performance metrics on an 

inception-to-date basis, particularly 

those records outside of the recordkeeping requirements of the Advisers 

Act.340 Another commenter suggested 

that, instead of annual returns since 

inception for liquid funds, we should 

require annual returns for the past 10 

years.341 We recognize that it may be 

difficult for certain longstanding liquid 

funds to calculate inception-to-date 

performance. Specifically, liquid funds 

that have been operating for decades 

might have to make significant 

estimations to be able to report 

inception-to-date performance if the 

relevant records have not been 

maintained over their entire life. While 

we believe there continues to be value 

in reporting inception-to-date 

performance even for longstanding 

funds, we also do not want liquid funds 

to be obligated to report inaccurate or 

misleading performance information 

based on estimates of performance from 

decades ago to investors. We agree with 

commenters that stated 10 years is an 

appropriate time period for liquid funds 

to report performance,342 as it will 

capture the salient performance history 

in most cases and generally align with 

market practice and investor 

preferences, based on staff experience. 

A 10-year period should also generally 

still capture recent, relevant market 

cycles that may have affected 

performance. Accordingly, we are 

requiring only a minimum of 10 years 

of performance for liquid funds that 

have been in operation for longer than 

that. Liquid funds are free, but not 

required, to report performance on a 

longer horizon than 10 years, if 

applicable. 

Annual net total returns will provide 

fund investors with a comprehensive 

overview of the fund’s performance over 

the life of the fund or the prior 10 years, 

whichever is shorter, and improve an 

investor’s ability to compare the fund’s 

performance with other similar funds. 

As noted above, investors can use 

performance information in connection 

with fee and expense information to 

analyze the value of their private fund 

investments. This requirement helps 

ensure that advisers do not present only 

recent performance results or only 

results for periods with strong 

performance. The rule also requires 

advisers to present each time period 

with equal prominence. 

Average Annual Net Total Returns. 

Second, advisers to liquid funds are 

required to show each liquid fund’s 

average annual net total returns over the 

one-, five-, and 10-year periods, as 

proposed.343 If the private fund did not 

exist for any of these prescribed time 

periods, then the adviser is not required 

to provide the corresponding 

information. Requiring performance 

over these time periods will provide 

investors with standardized 

performance metrics that reflect how the 

private fund performed during different 

market or economic conditions. These 

time periods provide reference points 

for private fund investors, particularly 

when comparing two or more private 

fund investments, and provide private 

fund investors with aggregate 

performance information that can serve 

as a helpful summary of the fund’s 

performance. 

One commenter suggested that we 

should include a definition for ‘‘net 

total returns.’’ 344 To the contrary, other 

commenters suggested that we should 

not prescribe how performance is 

calculated.345 We think that defining 

‘‘net total returns’’ for liquid funds in 

this rulemaking may not result in the 

best outcomes for investors. As used in 

the final rule, the liquid fund category 

captures a set of private funds that is 

unrestricted so long as they do not meet 

the definition of an illiquid fund and, as 

a result, is highly diverse. Some liquid 

funds target highly niche assets for 

which the calculation of net total 

returns is based on specialized industry 

norms and practices. Without further 

consideration and study, prescribing a 

single definition for ‘‘net total returns’’ 

could end up harming investors by 

distorting the reported performance of 

liquid funds that invest in less common 

asset classes from what investors have 

come to understand and expect. 

Consequently, we do not believe it is 

appropriate to prescribe a definition for 

‘‘net total returns’’ at this time. 

Certain commenters stated that 

requiring liquid funds to report the 

one-, five-, and 10-year periods would 

provide data to investors that the 

Commission recently determined in the 

marketing rule was not useful 

information for private funds.346 One 

such commenter asserted that requiring 

the use of standardized reporting 

information to be presented alongside 


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347See PIFF Comment Letter. 348See Marketing Release, supra footnote 127, at 

181–182. 349See id. 350For example, if performance suddenly and 

dramatically improves without explanation, then 

investors will be in a better position (especially 

where there are comparable benchmarks that did 

not experience the same sudden and dramatic 

change) to ask advisers to provide an explanation 

and assess whether fraud, deception or 

manipulation may be occurring. 

351See, e.g., Item 4(b)(2) of Form N–1A. 

352See supra the discussion of the definition of 

‘‘liquid fund’’ in section II.B.2. 

353See SIFMA–AMG Comment Letter I. 

354See Morningstar Comment Letter. 

355We also note that advisers are able to provide, 

and investors are free to request and negotiate for, 

average annual net returns over a three-year period, 

provided that such additional reporting complies 

with other regulations, such as the final marketing 

rule when applicable. See supra the introductory 

discussion in section II.B.2. 

356One commenter recommended that we should 

clarify how distributions that are recalled by 

advisers for additional investments (often referred 

to as ‘‘recycling’’) should be treated for certain of 

these illiquid fund performance metrics. See CFA 

Comment Letter II. Advisers generally should treat 

any distributions that they recall for additional 

investments as additional contributions for 

purposes of calculating these illiquid fund 

performance metrics as we understand this is the 

expectation of investors. As a result, illiquid fund 

performance information that does not treat such 

Continued 

the more relevant data would result in 

multiple sets of performance data and 

metrics, creating additional confusion 

for investors and an overwhelming 

volume of information.347 While we 

acknowledge that the marketing rule 

excepted private funds from its one-, 

five-, and 10-year periods presentation 

requirement, the underlying concern 

with requiring these intervals was that 

it could be not useful or meaningful, 

and possibly confusing, for investors in 

a closed-end fund.348 Among our 

reasons for excepting all private funds 

from the requirement under the 

marketing rule, we stated that we did 

not believe the benefit of having 

advisers parse the rule’s requirements 

based on specific fund types would 

justify the complexity.349 Performance 

information in the quarterly statements 

serves a somewhat different purpose, 

however. As stated above, the needs of 

current clients and investors often differ 

in some respects from the needs of 

prospective clients and investors. 

Current investors generally need to 

receive performance reporting during 

different time periods to be able to 

evaluate properly an investment’s 

performance. Current investors also 

generally need to receive performance 

reporting that is provided at timely, 

predictable intervals to be able to 

compare information effectively from 

quarter to quarter and year to year, and 

thus be positioned to take action where 

possible. Requiring regular disclosure of 

performance for liquid funds over these 

periods will help prevent fraud, 

deception, and manipulation because 

timely and consistent performance 

information will decrease the likelihood 

that investors will be defrauded, 

deceived, or manipulated by deceptive 

or misleading representations of 

performance, especially if such 

representations occur with respect to 

each time period.350 It also increases the 

likelihood that any misconduct will be 

detected sooner. Accordingly, the final 

rule will retain the one-, five- and 10- 

year periods for liquid funds because we 

believe they will assist investors with 

this process. 

Cumulative Net Total Returns. Third, 

the adviser is required to show the 

liquid fund’s cumulative net total return 

for the current fiscal year as of the end 

of the most recent fiscal quarter covered 

by the quarterly statement. For example, 

a liquid fund that has been in operation 

for four fiscal years (beginning on 

January 1) and seven months would 

show, pursuant to this requirement, the 

cumulative net total return for the 

current fiscal year through the end of 

the second quarter (i.e., year-to-date 

fund performance as of the end of the 

most recent fiscal quarter covered by the 

quarterly statement). This information 

will provide fund investors with insight 

into the fund’s most recent performance, 

which investors can use to assess the 

fund’s performance during recent 

market conditions. This quarterly 

performance information will also 

provide helpful context for reviewing 

and monitoring the fees and expenses 

borne by the fund during recent 

quarters, which the quarterly statement 

will disclose. 

These required performance metrics 

should allow investors to better assess 

these funds’ performance. Liquid funds 

generally should be able to determine 

their net asset value on a regular basis 

and compute the year-over-year return 

using the market-based value of the 

underlying assets. We have taken a 

similar approach with regard to 

registered open-end funds, which 

typically invest a substantial amount of 

their assets in primarily liquid 

underlying holdings (e.g., publicly 

traded securities).351 Liquid funds, like 

registered funds, currently generally 

report performance, at a minimum, on 

an annual and quarterly basis. Investors 

in a private fund that is a liquid fund 

would similarly find this information 

helpful. Most traditional hedge funds 

are likely liquid funds and will need to 

provide disclosures regarding the 

underlying assumptions of the 

performance (e.g., whether dividends or 

other distributions are reinvested).352

One commenter suggested that we 

should reevaluate the requirement for 

liquid funds to show both annualized 

and cumulative net performance and 

grant private funds flexibility in 

providing either annualized or 

cumulative net performance.353 We 

decided not to allow this flexibility to 

help ensure that investors receive 

standardized, comparable information 

for each private fund. Permitting 

advisers to pick and choose which 

return metrics to use would be 

inconsistent with this goal. Accordingly, 

as proposed, the final rule will require 

advisers to show both annualized and 

cumulative net performance. 

Another commenter suggested that we 

should also require liquid funds to 

provide average annual net returns over 

a three-year period in addition to the 

one-, five- and 10-year periods to 

potentially provide additional 

transparency to private fund 

investors.354 Although we recognize that 

additional performance information 

may serve to enhance the overall 

amount of information available to 

investors, we believe that the 

presentation of standardized 

performance information for one-, fiveand 10-year periods will provide a 

sufficient level of minimum disclosure 

(which may be further supplemented) 

for private fund investors to monitor 

and gain insight into how a private fund 

performed during different market or 

economic conditions.355

(b) Illiquid Funds 

We are adopting the performance 

requirements for illiquid funds largely 

as proposed, other than the requirement 

for an adviser to disclose performance 

figures solely without the impact of 

fund-level subscription facilities. Under 

the final rule, an adviser is required to 

disclose performance figures with and 

without the impact of fund-level 

subscription facilities. As discussed in 

greater detail below, this change is 

responsive to commenters who stated 

that reporting both sets of performance 

figures would provide investors with a 

more complete picture of the fund’s 

performance. We discuss each 

performance reporting requirement for 

illiquid funds in turn below. 

The rule requires advisers to illiquid 

funds to disclose the following 

performance measures in the quarterly 

statement, shown since inception of the 

illiquid fund and computed with and 

without the impact of any fund-level 

subscription facilities: 356


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recalled distributions as additional contributions 

may be misleading. 

357Final rule 211(h)(1)–2I(2)(ii). 

358Final rule 211(h)(1)–2(e)(2)(iii). 

359See, e.g., Trine Comment Letter; AFREF 

Comment Letter I; IST Comment Letter. 

360See, e.g., IAA Comment Letter II; PIFF 

Comment Letter; AIMA/ACC Comment Letter. 

361See CFA Comment Letter II. 

362 Investors that enter an illiquid fund in a 

closing subsequent to the fund’s initial closing are 

also generally subject to types of equalization 

payments or adjustments (e.g., ‘‘true-ups’’) that 

result in their treatment by the private fund as if 

they had entered the fund at its initial closing. 

363Final rule 211(h)(1)–2(e)(2)(ii)(A). 

364As discussed below, the rule also requires 

advisers to prominently disclose the criteria used 

and assumptions made in calculating performance. 

This includes the criteria and assumptions used to 

prepare an illiquid fund’s unlevered performance 

measures. 

365See, e.g., ILPA Comment Letter I; Comment 

Letter of Predistribution Initiative (Apr. 25, 2022) 

(‘‘Predistribution Initiative Comment Letter II’’); IST 

Comment Letter. 

366See Predistribution Initiative Comment Letter 

II. 

367See CFA Comment Letter I. However, this 

commenter also stated that, in certain cases, the 

calculation of performance without the impact of 

subscription facilities could be challenging, 

particularly for historical periods. The commenter 

stated that advisers may need to make assumptions 

about which historical capital calls would have 

been impacted. Because the final rule requires 

advisers to disclose any assumptions used in 

calculating performance, we believe that investors 

will be able to analyze the assumptions made and 

weigh their impact on performance. Nonetheless, 

we recognize that, to the extent these assumptions 

by advisers are not accurate, the benefits of the 

information to investors may be reduced. See infra 

section VI.D.2. 

368See CFA Comment Letter I. 

(i) Gross internal rate of return and 

gross multiple of invested capital for the 

illiquid fund; 

(ii) Net internal rate of return and net 

multiple of invested capital for the 

illiquid fund; and 

(iii) Gross internal rate of return and 

gross multiple of invested capital for the 

realized and unrealized portions of the 

illiquid fund’s portfolio, with the 

realized and unrealized performance 

shown separately. 

The rule also requires advisers to 

provide investors with a statement of 

contributions and distributions for the 

illiquid fund.357

Since Inception. The rule requires an 

adviser to disclose the illiquid fund’s 

performance measures since inception. 

This requirement will ensure that 

advisers are not providing investors 

with only recent performance results or 

presenting only results or periods with 

strong performance, which could 

mislead investors. We are requiring this 

for all illiquid fund performance 

measures under the rule, including the 

performance measures for the realized 

and unrealized portions of the illiquid 

fund’s portfolio. 

The rule requires an adviser to 

include performance measures for the 

illiquid fund through the end of the 

quarter covered by the quarterly 

statement. We recognize, however, that 

certain funds may need information 

from portfolio investments and other 

third parties to generate performance 

data and thus may not have the 

necessary information prior to the 

distribution of the quarterly statement. 

Accordingly, to the extent quarter-end 

numbers are not available at the time of 

distribution of the quarterly statement, 

an adviser is required to include 

performance measures through the most 

recent practicable date, which we 

generally believe would be through the 

end of the quarter immediately 

preceding the quarter covered by the 

quarterly statement. The rule requires 

the quarterly statement to reference the 

date the performance information is 

current through (e.g., December 31, 

2023).358

Some commenters supported the 

since inception performance disclosure 

requirement for illiquid funds,359 while 

other commenters criticized it.360 One 

commenter commented specifically on 

the since inception requirement for 

illiquid fund performance, stating that 

we should retain this requirement 

because inception-to-date returns allow 

investors to understand the 

improvement or deterioration of returns 

over the most relevant period, especially 

for illiquid funds with long-hold 

periods.361 We believe that it is 

important for illiquid funds to provide 

performance information since 

inception so that investors are able to 

evaluate the full performance of their 

investment. For many illiquid funds, 

investors commit capital at or near the 

inception of the fund.362 These same 

investors generally also contribute the 

capital used to make the fund’s initial 

investments. Accordingly, anything less 

than performance since inception would 

misrepresent the performance of such 

investors’ investments in the illiquid 

fund. While there may be situations 

where investors make capital 

commitments to an illiquid fund later 

on in its life, we understand that these 

circumstances are rare. Even in these 

scenarios, the illiquid fund may have 

already made most of the investments it 

will make over its life by the time this 

capital is committed later in its life. We 

also agree with this commenter that 

inception-to-date returns allow 

investors to better assess performance 

trends, particularly for illiquid funds, 

since inception performance will 

generally align with the typical 

investment holding period and the 

period for which the performance-based 

fee is generally calculated for many 

illiquid funds. Accordingly, we 

maintain that performance since 

inception is the best approach for 

representing the illiquid fund’s 

performance. 

Computed With and Without the 

Impact of Fund-Level Subscription 

Facilities. The rule requires advisers to 

calculate performance measures for each 

illiquid fund both with and without the 

impact of fund-level subscription 

facilities.363 For performance measures 

without the impact of fund-level 

subscription facilities (‘‘unlevered 

returns’’), the rule requires advisers to 

calculate performance measures as if the 

private fund called investor capital, 

rather than drawing down on fund-level 

subscription facilities, as proposed.364

For performance measures with the 

impact of fund-level subscription 

facilities (‘‘levered returns’’), the rule 

requires advisers to calculate 

performance measures reflecting the 

actual capital activity from both 

investors and fund-level subscription 

facilities, including, for the avoidance of 

doubt, any activity prior to investor 

capital contributions as a result of the 

fund drawing down on fund-level 

subscription facilities. 

In response to our requests for 

comment, a number of commenters 

suggested that we require performance 

measures for illiquid funds both with 

and without the impact of fund-level 

subscription facilities.365 Of these, one 

commenter stated that requiring 

performance measures for illiquid funds 

both with and without the impact of 

fund-level subscription facilities would 

provide a more complete picture of the 

effects of a fund’s financing 

strategies.366 Another commenter stated 

that this approach would allow 

investors to understand the impact of 

the adviser’s decision to use a 

subscription facility.367 In response to 

commenters, we are requiring advisers 

to calculate performance measures for 

each illiquid fund both with and 

without the impact of fund-level 

subscription facilities. As one 

commenter pointed out, an internal rate 

of return with the impact of the 

subscription facilities is typically used 

to calculate performance-based 

compensation, and this return also 

usually reflects the actual investor 

return.368 Accordingly, after considering 

comments, we think it is necessary for 

investors to be able to compare their 

illiquid fund performance both with and 

without the impact of fund-level 

subscription facilities to better 


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369See infra section VI.D.2. 370See, e.g., CFA Comment Letter I; AIC 

Comment Letter II; ILPA Comment Letter I. 371See, e.g., AIC Comment Letter II; ILPA 

Comment Letter I. 

372See, e.g., CFA Comment Letter I; ILPA 

Comment Letter I. 

373Final rule 211(h)(1)–1. The rule defines 

‘‘unfunded capital commitments’’ as committed 

capital that has not yet been contributed to the 

private fund by investors, and ‘‘committed capital’’ 

as any commitment pursuant to which a person is 

obligated to acquire an interest in, or make capital 

contributions to, the private fund. See id. 

374We recognize that a private fund may 

guarantee portfolio investment indebtedness. In 

such a situation, if the portfolio investment does 

not have sufficient cash flow to pay its debt 

obligations, the fund may be required to cover the 

shortfall to satisfy its guarantee. Even though 

investors’ unfunded commitments may indirectly 

support the fund’s guarantee, the definition would 

not cover such fund guarantees. Unlike fund-level 

subscription facilities, such guarantees generally are 

not put in place to enable the fund to delay the 

calling of investor capital. 

375We recognize that fund-level subscription 

facilities can be an important cash management tool 

for both advisers and investors. For example, a fund 

may use a subscription facility to reduce the overall 

number of capital calls and to enhance its ability 

to execute deals quickly and efficiently. 

376See CFA Comment Letter I. This commenter 

stated that it could be challenging to identify all 

activity related to these subscription facilities for 

those advisers that have not previously calculated 

internal rates of return without the impact of 

subscription facilities, particularly for funds with 

long histories. While we acknowledge these 

calculations could be challenging in certain 

instances, we believe these burdens are justified by 

the benefits of improved comparability and 

standardization across quarterly statements. 

Moreover, we also believe that these challenges will 

lessen as older funds wind down. 

377See, e.g., ICCR Comment Letter; AFREF 

Comment Letter I; NEA and AFT Comment Letter. 

378See, e.g., SBAI Comment Letter; PIFF 

Comment Letter; AIMA/ACC Comment Letter. 

understand how the use and costs of 

any fund-level subscription facilities are 

affecting their returns. Because most 

advisers with fund-level subscription 

facilities are already reporting 

performance with the impact of such 

facilities, we do not anticipate that this 

requirement will entail substantial 

additional burdens for most advisers.369

Some commenters suggested 

exempting advisers from the 

requirement to present unlevered 

returns to the extent they used 

subscription facilities on a short term 

basis to efficiently manage capital, 

rather than to increase returns.370 Of 

these, some stated that this exemption 

would be for advisers using facilities 

solely or primarily to streamline capital 

calls and not to enhance 

performance.371 Some commenters 

suggested that a ‘‘short-term’’ 

subscription facility is generally one for 

which the facility is repaid within 120 

days using committed capital that is 

drawn down through a capital call.372

While we acknowledge that some shortterm subscription facilities may be less 

likely to cause the issues we discuss 

below, providing such an exemption 

could lead to certain undesirable 

outcomes. For instance, a fund may only 

repay each use of a subscription facility 

within 120 days for the first two years 

of the fund’s life but then start leaving 

such subscription facility unpaid for 

longer spans of time for the remaining 

eight years of its life. If we were to 

provide such an exemption, such a fund 

would not be required to show 

unlevered performance measures for the 

first two years but then would be 

required to do so in the third year. 

However, in year three and after, 

investors would only have past levered 

performance measures and may find it 

difficult to assess the newly received 

unlevered performance measures. 

Additionally, it is important that 

investors understand how costs 

associated with a subscription facility 

are affecting performance, and the 

unlevered performance measures will 

facilitate this understanding. 

As proposed, we are defining ‘‘fundlevel subscription facilities’’ as any 

subscription facilities, subscription line 

financing, capital call facilities, capital 

commitment facilities, bridge lines, or 

other indebtedness incurred by the 

private fund that is secured by the 

unfunded capital commitments of the 

private fund’s investors.373 This 

definition is designed to capture the 

various types of subscription facilities 

prevalent in the market that serve as 

temporary replacements or substitutes 

for investor capital.374 Such facilities 

enable the fund to use loan proceeds— 

rather than investor capital—to fund 

investments initially and pay expenses. 

This practice permits the fund to delay 

the calling of capital from investors, 

which has the potential to increase 

performance metrics artificially. 

Many advisers currently provide 

performance figures that reflect the 

impact of fund-level subscription 

facilities. We believe that these 

‘‘levered’’ performance figures, alone, 

have the potential to mislead 

investors.375 For example, an investor 

could reasonably believe that levered 

performance results are similar to those 

that the investor has achieved from its 

investment in the fund. Unlevered 

performance figures, when presented 

alongside levered performance figures, 

will provide investors with more 

meaningful data and improve the 

comparability of returns. 

We stated in the proposal that we 

would generally interpret the phrase 

computed without the impact of fundlevel subscription facilities to require 

advisers to exclude fees and expenses 

associated with the subscription facility, 

such as the interest expense, when 

calculating net performance figures and 

preparing the statement of contributions 

and distributions. One commenter 

suggested that excluding subscription 

line fees and expenses from net 

performance should be optional, rather 

than required.376 On the contrary, 

allowing such flexibility would degrade 

comparability and standardization. In 

addition, this approach is appropriate 

because it will result in returns that 

show what the fund would have 

achieved if there were no subscription 

facility, which will help investors 

understand the impact of the use of the 

subscription facility. 

While there may be certain 

circumstances under which including 

subscription line fees and expenses in 

unlevered performance metrics may 

have advantages, standardization is 

important. If we were to make the 

exclusion of subscription line fees and 

expenses from net performance for 

illiquid funds optional instead of 

required, some advisers might include 

such fees and expenses while others 

might exclude them. This variability 

could make it difficult for investors to 

assess unlevered performance metrics 

across illiquid funds that are managed 

by different advisers. Additionally, 

some advisers might start by including 

subscription line fees and expenses 

from unlevered performance metrics 

and then switch to excluding such fees 

and expenses if there was a downward 

trend in performance. This potential 

gamesmanship could mislead investors. 

Accordingly, we are not allowing such 

optionality. 

Fund-Level Performance. The rule 

requires an adviser to disclose an 

illiquid fund’s gross and net internal 

rate of return and gross and net multiple 

of invested capital for the illiquid fund. 

We are adopting the entirety of this 

portion of the rule, including all 

definitions discussed below, as 

proposed. 

Some commenters supported this 

performance disclosure requirement as 

providing a useful component in the 

totality of information that would be 

required to be provided to private fund 

investors under the rule.377 Other 

commenters criticized this performance 

disclosure requirement on a number of 

grounds.378 One commenter stated that 

we should prohibit the use of internal 

rates of return and multiples of invested 

capital because they can be flawed 


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379See Comment Letter of SOC Investment Group 

(Apr. 25, 2022) (‘‘SOC Comment Letter’’). 

380See AIC Comment Letter II. 

381See, e.g., PIFF Comment Letter; SBAI 

Comment Letter. 

382Primarily, multiple of invested capital does 

not factor in the amount of the time it takes for a 

fund to generate a return, and internal rate of return 

assumes early distributions will be reinvested at the 

same rate of return generated at the initial exit. 

383By receiving both an internal rate of return 

and a multiple of invested capital, an investor will 

be able to use each performance metric to assess the 

limitations of the other. For example, a high 

multiple of invested capital but a low internal rate 

of return likely means that returns are low 

compared to the length of time the investment has 

been held. Similarly, a high internal rate of return 

but a low multiple of invested capital likely means 

that the investment was not held long enough to 

generate substantial returns for the fund. 

384Final rule 211(h)(1)–1 (defining ‘‘gross IRR’’ 

and ‘‘net IRR’’). 

385When calculating a fund’s internal rate of 

return, an adviser will need to take into account the 

specific date a cash flow occurred (or is deemed to 

occur). Certain electronic spreadsheet programs 

have ‘‘XIRR’’ or other similar formulas that require 

the user to input the applicable dates. 

386Final rule 211(h)(1)–1 (defining ‘‘gross MOIC’’ 

and ‘‘net MOIC’’). 

387See Comment Letter of XTAL Strategies (Feb. 

28, 2022) (‘‘XTAL Comment Letter’’). As discussed 

in greater detail below in Section VI.C.3, this 

commenter provided examples where multiple 

funds with different distribution timings had the 

same internal rates of return. However, we were not 

persuaded by this commenter because the fact that 

it is possible to construct examples in which two 

funds with different timings of payments can have 

the same internal rates of return does not mean that 

such performance metric broadly fails to take into 

account the timing of transactions. 

388See AIC Comment Letter II. 

389Final rule 211(h)(1)–2(e)(2)(ii). 

390See, e.g., NEA and AFT Comment Letter 

(noting ‘‘[s]tandardized reporting of the internal rate 

of return (IRR) and the multiple of capital (MoC) 

invested, both gross and net of fees and considering 

the use of subscription credit lines, would mark a 

leap forward in transparency.’’); see also AFL–CIO 

Comment Letter; ICM Comment Letter; ILPA 

Comment Letter I. 

391At proposal, the statement of contributions 

and distributions requirement was listed as rule 

211(h)(1)–2(e)(2)(ii)(A)(4). At adoption, we have 

changed the statement of contributions and 

distributions requirement to rule 211(h)(1)– 

2(e)(2)(ii)(B). We have made this change for 

clarification as a statement of contributions and 

distributions is not a ‘‘performance measure’’ that 

can be ‘‘computed’’ as rule 211(h)(1)–2(e)(2)(ii)(A) 

is phrased. 

performance metrics,379 and another 

commenter indicated that these 

performance metrics may not be 

meaningful in the early stages of a fund 

until it has had time to deploy its 

capital and generate returns.380 Finally, 

certain commenters stated that advisers 

and investors should retain discretion to 

determine appropriate performance 

metrics.381

We recognize that most illiquid funds 

have particular characteristics, such as 

irregular cash flows, that make 

measuring performance difficult for 

both advisers and investors. We also 

recognize that internal rate of return and 

multiple of invested capital have their 

drawbacks as performance metrics.382

Nonetheless, we continue to believe 

that, received together, these metrics 

complement one another.383 Moreover, 

these metrics, combined with a 

statement of contributions and 

distributions reflecting cash flows 

discussed below, will help investors 

holistically understand the fund’s 

performance, allow investors to 

diligence the fund’s performance, and 

calculate other performance metrics 

they may find helpful. When presented 

in accordance with the conditions and 

other disclosures required under the 

rule, such standardized reporting 

measures will provide meaningful 

performance information for investors, 

allowing them to compare returns 

among funds that they are invested in 

and make more-informed decisions with 

respect to, for example, other 

components of their portfolios or 

whether or not to invest with the same 

adviser in the future. Accordingly, we 

are adopting this aspect of the rule as 

proposed. 

As proposed, we are defining 

‘‘internal rate of return’’ as the discount 

rate that causes the net present value of 

all cash flows throughout the life of the 

private fund to be equal to zero.384 Cash 

flows will be represented by capital 

contributions (i.e., cash inflows) and 

fund distributions (i.e., cash outflows), 

and the unrealized value of the fund 

will be represented by a fund 

distribution (i.e., a cash outflow). This 

definition will provide investors with a 

time-adjusted return that takes into 

account the size and timing of a fund’s 

cash flows and its unrealized value at 

the time of calculation.385

We are defining ‘‘multiple of invested 

capital’’ as (i) the sum of: (A) the 

unrealized value of the illiquid fund; 

and (B) the value of all distributions 

made by the illiquid fund; (ii) divided 

by the total capital contributed to the 

illiquid fund by its investors.386 This 

definition will provide investors with a 

measure of the fund’s aggregate value 

(i.e., the sum of clauses (i)(A) and (i)(B)) 

relative to the capital invested (i.e., 

clause (ii)) as of the end of the 

applicable reporting period, as 

proposed. Unlike the definition of 

internal rate of return, the multiple of 

invested capital definition does not take 

into account the amount of time it takes 

for a fund to generate a return (meaning 

that the multiple of invested capital 

measure focuses on ‘‘how much’’ rather 

than ‘‘when’’). 

We received few comments on the 

proposed definitions, with one 

commenter stating that neither 

definition takes into account the timing 

of fund transactions.387 Another 

commenter argued that definitions were 

unnecessary because investors have 

their own methods for calculating 

internal rate of return and multiple of 

invested capital, and that advisers 

typically provide investors with 

sufficient information to calculate 

performance already.388 After 

considering comments, we believe that 

the proposed definitions of internal rate 

of return and multiple of invested 

capital are appropriate because they will 

promote comparability and 

standardization. As stated in the 

proposal, the definitions are generally 

consistent with how the industry 

currently calculates such performance 

metrics. By adopting definitions that are 

widely understood and accepted in the 

industry, the rule will decrease the risk 

of advisers presenting internal rate of 

return and multiple of invested capital 

performance figures that are not 

comparable. Furthermore, the rule will 

not prevent an adviser from providing 

information or performance metrics in 

addition to those required by the rule 

(subject to other requirements 

applicable to the adviser) or an investor 

from using such additional information 

or metrics for its own calculations. 

As proposed, the final rule requires 

advisers to present each performance 

metric on a gross and net basis.389

Commenters were generally supportive 

of this requirement.390 Presenting both 

gross and net performance measures 

will help prevent investors from being 

misled. Gross performance will provide 

insight into the profitability of 

underlying investments selected by the 

adviser. Solely presenting gross 

performance, however, may imply that 

investors have received the full amount 

of such returns. The net performance 

will assist investors in understanding 

the actual returns received and, when 

presented alongside gross performance, 

the negative effect fees, expenses, and 

performance-based compensation have 

had on past performance. 

Statement of Contributions and 

Distributions. The rule also requires an 

adviser to provide a statement of 

contributions and distributions for the 

illiquid fund reflecting the aggregate 

cash inflows from investors and the 

aggregate cash outflows from the fund to 

investors, along with the fund’s net 

asset value, as proposed.391

We are defining a statement of 

contributions and distributions as a 

document that presents: 

(i) All capital inflows the private fund 

has received from investors and all 


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392Final rule 211(h)(1)–1. 

393See, e.g., CFA Comment Letter I; OFT 

Comment Letter. 

394See, e.g., IAA Comment Letter II; PIFF 

Comment Letter. 

395See IAA Comment Letter II. 

396See ILPA Comment Letter I. 

397See CFA Comment Letter II. 

398See, e.g., CFA Comment Letter I; AIC 

Comment Letter II. 

399See XTAL Comment Letter. This commenter 

specifically suggested we require the inclusion of 

additional information such as uncalled 

commitment, cumulated distributions, and net of 

performance fee accruals. While they are helpful, 

we view these additional requirements as 

potentially overly burdensome relative to their 

benefits since they are not necessary for investors 

to diligence the performance measures presented in 

the quarterly statement. 

400Final rule 211(h)(1)–2(e)(2)(ii)(A)(3). 

401See, e.g., ILPA Comment Letter I; AFL–CIO 

Comment Letter; AFREF Comment Letter I; CFA 

Comment Letter I. 

402See, e.g., AIC Comment Letter I; AIC Comment 

Letter II; IAA Comment Letter II; SBAI Comment 

Letter. 

403See, e.g., AIC Comment Letter II; ATR 

Comment Letter. 

404See NCREIF Comment Letter. 

405See, e.g., AIC Comment Letter II; SBAI 

Comment Letter; CFA Comment Letter I. 

406As stated in the proposal, the value of the 

unrealized portion of an illiquid fund’s portfolio 

typically is determined by the adviser and, given 

the lack of readily available market values, can be 

challenging. This creates a conflict of interest 

wherein the adviser may be evaluated and, in 

certain cases, compensated based on the fund’s 

unrealized performance. Further, investors often 

decide whether to invest in a successor fund based 

on a current fund’s performance as reported by the 

adviser. These factors create an incentive for the 

adviser to inflate the value of the unrealized portion 

of the illiquid fund’s portfolio. See Proposing 

Release supra footnote 3, at n.9, 74–75. 

capital outflows the private fund has 

distributed to investors since the private 

fund’s inception, with the value and 

date of each inflow and outflow; and 

(ii) The net asset value of the private 

fund as of the end of the reporting 

period covered by the quarterly 

statement.392

Some commenters supported the 

requirement to provide a statement of 

contributions and distributions.393

Other commenters criticized specific 

parts of this requirement.394 One 

commenter suggested that the statement 

of contributions and distributions 

would be of limited value to private 

fund investors and is not often currently 

requested by private fund investors,395

whereas another commenter conversely 

suggested that private fund investors 

typically already receive information 

beyond what we are requiring to be 

included in the statement of 

contributions and distributions.396

Another commenter suggested that we 

provide flexibility with respect to the 

requirement that the statement of 

contributions and distributions include 

the date of each cash inflow and 

outflow, in light of the possibility that 

older cash flow information may have 

been recorded by certain advisers using 

legacy systems that assumed that all 

cash flows during a certain period 

occurred on the last day of such 

period.397

We believe that the statement of 

contributions and distributions will 

provide private fund investors with 

important information regarding the 

fund’s performance, because it will 

reflect the underlying data used by the 

adviser to generate the fund’s returns, 

which, in many cases, is not currently 

provided to private fund investors. Such 

data will allow investors to diligence 

the various performance measures 

presented in the quarterly statement. In 

addition, this data will allow the 

investors to calculate additional 

performance measures based on their 

own preferences. 

Some commenters suggested that 

subscription facility fees and expenses 

should be included in the statement of 

contributions and distributions.398 At 

proposal, we had required private fund 

advisers to exclude such fees and 

expenses because we had proposed to 

require only unlevered performance 

metrics for illiquid funds and believed 

that the statement of contributions and 

distributions should directly align with 

these unlevered performance metrics. 

As we are requiring both levered and 

unlevered performance to be included 

in the quarterly statement for illiquid 

funds under the final rule, advisers 

should consider including in the 

statement of contributions and 

distributions any fees and expenses 

related to a subscription facility. 

One commenter suggested that we 

should require additional detail in the 

statement of contributions and 

distributions.399 We believe that it is 

important that the statement of 

contributions and distributions provide 

sufficient information to enable 

investors to conduct due diligence on 

the various performance measures 

presented in the quarterly statement and 

to potentially perform their own 

additional performance calculations. 

Investors will need the dates and 

amounts of subscription facility 

drawdowns to be able to calculate 

unlevered returns. As such, we view 

these dates and amounts as providing 

investors critical information necessary 

to perform these calculations on their 

own. Although we are not prescribing 

additional particular information to be 

disclosed beyond what was included in 

the proposal, advisers may wish to 

consider also providing other details 

they believe investors would find 

relevant in the statement of 

contributions and distributions, such as 

information about how each 

contribution and distribution was used 

and the dates of drawdowns from fundlevel subscription facilities. 

Realized and Unrealized 

Performance. As proposed, the rule also 

requires an adviser to disclose a gross 

internal rate of return and gross 

multiple of invested capital for the 

realized and unrealized portions of the 

illiquid fund’s portfolio, with the 

realized and unrealized performance 

shown separately.400

Some commenters supported this 

requirement to disclose realized and 

unrealized performance metrics for 

illiquid funds as contributive to the 

policy goals of transparency and 

comparability of private fund 

investments promoted by the rule.401

Other commenters suggested, however, 

that this requirement could serve to 

undermine these goals and prove 

unhelpful to private fund investors, 

because disaggregating an illiquid 

fund’s realized performance and its 

unrealized performance ultimately may 

involve subjective determinations 402

and will depend on the specific facts 

and circumstances.403 One commenter 

stated that, if we adopt this requirement, 

we should also provide a detailed 

methodology for calculating realized 

and unrealized performance.404 Other 

commenters suggested allowing advisers 

to take a flexible approach with respect 

to determining what investments are 

realized versus unrealized provided that 

their methodology is properly 

documented and disclosed.405

We recognize that it may be difficult 

to determine whether a partially 

realized investment has been realized 

under the final rule, for example, 

following a significant dividend 

recapitalization where the fund recoups 

all or a substantial portion of its initial 

investment. We continue to believe, 

however, that disclosure of realized and 

unrealized performance will provide 

investors with important context for 

analyzing the adviser’s valuations and 

for weighing their impact on the fund’s 

overall performance.406 As a result, we 

believe that the burden associated with 

determining whether a partially realized 

investment should be categorized as 

realized or unrealized is justified by the 

benefits that this performance data will 

provide to investors. 

We recognize that categorizing a 

partially realized investment as realized 

or unrealized for purposes of the rule 

will depend on the facts and 

circumstances and may not always be 

purely objective. We agree with 


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407The methodology used to determine whether 

an investment is realized or unrealized is an 

important criterion to calculate this required 

performance information. Accordingly, it must be 

prominently disclosed in the quarterly statement. 

Final rule 211(h)(1)–2(e)(2)(iii). 

408For example, if we were to set an 100% 

threshold for determining when an investment has 

been fully realized, this may lead to reporting that 

is too high as compared to what investors have 

negotiated for or what they have come to expect for 

certain private funds (or too low if we set the 

percentage threshold lower). If we were to establish 

a realization test based on a different trigger (e.g., 

the sale of a portfolio investment) it might not be 

applicable for certain kinds of private funds (e.g., 

private credit funds that primarily make loans). 

409These examples refer to private credit funds 

that issue equity interests to investors and invest in 

debt instruments privately issued by companies. 

410Based on the experience of Commission staff, 

it is our understanding that investors generally do 

not seek to compare realization methodologies 

across different types of illiquid funds in the same 

way that they might for performance reporting. As 

a result, it is not as important to ensure 

comparability of realization methodologies across 

different types of illiquid funds as it is to ensure 

comparability of performance reporting. 

411See CFA Comment Letter II. RVPI plus DPI 

equal total value to paid-in capital (‘‘TVPI’’), while 

unrealized MOIC and realized MOIC must be 

combined as a weighted average to yield total 

MOIC. For TVPI, the unrealized and realized 

analogues are RVPI and DPI ratios, and the 

denominator in both of these cases is the total 

called capital of the entire fund. For MOIC, 

unrealized and realized MOIC have as 

denominators just the portions of the called capital 

attributable to unrealized and realized investments 

in the portfolio. 

412For example, if the performance of the 

unrealized portion of the fund’s portfolio is 

significantly higher than the performance of the 

realized portion, it may imply that the adviser’s 

valuations are overly optimistic or otherwise do not 

reflect the values that can be realized in a 

transaction or sale with an independent third party. 

413 DPI is not effective at highlighting overly 

optimistic valuations because it focuses on 

distributions (and not residual value) relative to 

paid in capital. 

414See, e.g., AIMA/ACC Comment Letter; AIC 

Comment Letter II. 415The inclusion of realized and unrealized 

performance information in the quarterly statement 

serves chiefly to provide a comparison between the 

two and provide a check against advisers’ 

exaggeration of unrealized performance at the fundlevel. We believe this is achieved by requiring only 

gross realized and unrealized performance without 

also requiring net performance and the associated 

assumptions, such as the allocation of 

organizational expenses, that are part of the 

calculation of net performance for individual 

investments and can entail additional costs and 

subjectivity. 

commenters that it is valuable for 

advisers to have some discretion in 

determining whether an investment has 

been realized for purposes of the rule 

based on the specific facts and 

circumstances, provided that their 

methodology is properly 

documented.407 It is also important that 

advisers remain consistent in how they 

determine realized and unrealized 

investments and that they provide 

sufficient disclosure to investors about 

the methodology and criteria they use to 

achieve consistency in their 

determinations. We do not believe it is 

appropriate to set a bright-line standard 

or otherwise prescribe detailed 

methodology for making this 

determination because any such 

standard or methodology may lead to 

less useful reporting for investors.408

For example, it is our understanding 

that the methodologies used by private 

equity buy-out funds, private credit 

funds,409 and their respective investors 

to determine realization can vary 

considerably. A private equity buy-out 

fund and its investors may seek to 

analyze realization as it relates to the 

sale of a portfolio company (or return of 

a certain amount of proceeds relative to 

the amount invested or anticipated to be 

invested), whereas a private credit fund 

and its investors may seek to analyze 

realization as it relates to a paydown of 

a portion of the principal balance of a 

loan. If we were to prescribe one 

methodology for both of these funds and 

their investors, it may lead to scenarios 

in which there is a conflict between 

how the rule views realization and how 

these funds and their investors view 

realization. Such a result could lead to 

worse reporting outcomes for 

investors.410

One commenter suggested requiring 

reporting of distributions to paid-in 

capital (‘‘DPI’’) and residual value to 

paid-in capital (‘‘RVPI’’) instead of gross 

multiple of invested capital (‘‘MOIC’’) 

for realized and unrealized 

investments.411 As discussed in the 

proposal, some advisers have an 

incentive to inflate the value of the 

unrealized portion of an illiquid fund’s 

portfolio. Highlighting the performance 

of the fund’s unrealized investments 

assists investors in determining whether 

the aggregate, fund-level performance 

measures present an overly optimistic 

view of the fund’s overall 

performance.412 While we recognize 

that DPI and RVPI may provide some 

potentially beneficial, additional 

information, these metrics may not be as 

effective at highlighting potentially 

overly optimistic valuations. RVPI, for 

example, provides investors with 

information on the fund’s residual value 

relative to the amount of capital that 

has been paid in, including paid-in 

capital attributable to the realized 

portion of the portfolio.413 MOIC for 

unrealized portion of the portfolio, on 

the other hand, provides investors with 

information on the fund’s residual value 

relative to the capital that has been 

contributed in respect of the unrealized 

investments, which has the effect of 

highlighting the adviser’s valuations of 

the remaining investments relative to 

those capital contributions only. 

Accordingly, we believe that gross 

MOIC for realized and unrealized 

investments provides more direct 

information on the differences between 

the actual distributions received by 

investors from the realized portfolio and 

the adviser’s valuations of the 

unrealized portfolio. This approach 

better addresses our concerns 

surrounding advisers’ incentive to 

inflate the value of the unrealized 

portion of an illiquid fund’s portfolio. 

The rule only requires an adviser to 

disclose gross performance measures for 

the realized and unrealized portions of 

the illiquid fund’s portfolio, as 

proposed. Commenters generally agreed 

with this approach.414 We continue to 

believe that calculating net figures for 

the realized and unrealized portions of 

the portfolio could involve complex and 

potentially subjective assumptions 

regarding the allocation of fund-level 

fees, expenses, and adviser 

compensation between the realized and 

unrealized portions.415 In our view, 

such assumptions have the potential to 

erase the benefits that net performance 

measures would provide. 

(c) Prominent Disclosure of Performance 

Calculation Information 

As proposed, the final rule will 

require advisers to include prominent 

disclosure of the criteria used and 

assumptions made in calculating the 

performance. This information will 

enable the private fund investor to 

understand how the performance is 

calculated and help provide useful 

context for the presented performance 

metrics. Additionally, while the rule 

includes detailed information about the 

type of performance an adviser must 

present for liquid and illiquid funds, it 

is still possible that advisers will make 

certain assumptions or rely on criteria 

that the rule’s requirements do not 

address specifically. This information is 

integral to the quarterly statement 

because it will enable the investor to 

understand and analyze the 

performance information better and 

better compare the performance of funds 

and advisers without having to access 

other ancillary documents. As a result, 

investors should receive this 

information as part of the quarterly 

statement itself. 

For example, the rule requires an 

adviser to display, for a liquid fund, the 

annual returns for each fiscal year over 

the past 10 years or since the fund’s 

inception, whichever is shorter. If the 

adviser makes any assumptions in 

performing that calculation, such as 


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416Final rule 211(h)(1)–2(e)(2)(iii). 

417See also Marketing Release, supra footnote 

127, at n.61 (discussing clear and prominent 

disclosures in the context of advertisements). 

418See, e.g., United for Respect Comment Letter 

I; Comment Letter of CPD Action (Apr. 25, 2022) 

(‘‘CPD Comment Letter’’); ICCR Comment Letter. 

419See, e.g., Schulte Comment Letter; MFA 

Comment Letter I; Comment Letter of National 

Society of Compliance Professionals (Apr. 19, 2022) 

(‘‘NSCP Comment Letter’’). 

420One commenter suggested that private fund 

advisers should be required to provide supporting 

calculations to investors upon request. See CFA 

Comment Letter I. While advisers do not need to 

provide all supporting calculations as part of a 

quarterly statement, advisers generally should make 

them available upon request from an investor. 

While we believe it is important that investors have 

access to this information if requested, including all 

supporting calculations as a part of each quarterly 

statement could make each quarterly statement 

overly long and difficult to parse, thus undermining 

its utility. 

421 In a change from the proposal, we are 

providing additional time for funds of funds to 

deliver quarterly statements in response to 

commenters that stated that many funds of funds 

will need to receive reporting from their private 

fund investments before they are able to prepare 

and distribute their own quarterly statements. For 

purposes of the final rule, one example of a fund 

of funds would be a private fund that invests 

substantially all of its assets in the equity of private 

funds that do not share its same adviser and, aside 

from such private fund investments, holds only 

cash and cash equivalents and instruments acquired 

to hedge currency exposure. 

422By specifying that ‘‘such quarterly statement,’’ 

as opposed to more generally a quarterly statement, 

must be prepared and distributed, final rule 

211(h)(1)–2 requires that a quarterly statement 

furnished by ‘‘another person’’ must still comply 

with paragraphs (a) through (g) of the rule, 

including with respect to the information otherwise 

required to be included in the quarterly statement 

by the investment adviser. For purposes of this 

section, to the extent that some but not all of the 

information that an investment adviser is required 

to include in the quarterly statement is included in 

a quarterly statement furnished by another person, 

the investment adviser generally would need to 

prepare and distribute separately the required 

information that is not included in the quarterly 

statement furnished by another person, as required 

under the final rule. 

423See AIC Comment Letter II. 

424See, e.g., Convergence Comment Letter; 

Predistribution Initiative Comment Letter II; 

Healthy Markets Comment Letter I. 

425See, e.g., MFA Comment Letter I; AIMA/ACC 

Comment Letter; Comment Letter of Ullico 

Continued 

whether dividends were reinvested, the 

adviser must disclose those assumptions 

in the quarterly statement. As another 

example, for an illiquid fund, the rule 

requires an adviser to present the net 

internal rate of return and net multiple 

of invested capital. Correspondingly, the 

adviser must disclose the use of any 

assumed fee rates, including whether 

the adviser is using fee rates set forth in 

the fund documents, whether it is using 

a blended rate or weighted average that 

would factor in any discounts, or 

whether it is using a different method 

for calculating net performance. The 

rule requires the disclosure to be within 

the quarterly statement.416 Thus, an 

adviser may not provide the information 

only in a separate document, website 

hyperlink or QR code, or other separate 

disclosure.417

Some commenters supported this 

requirement to include prominent 

disclosure of the criteria used and 

assumptions made in calculating the 

performance.418 Other commenters 

stated that such a requirement is 

unnecessary.419 For legal, tax, and other 

reasons, advisers often use complex 

structures to set up private funds, which 

make it difficult, in certain 

circumstances, for advisers to calculate, 

and for investors to understand, fund 

performance as a whole. We recognize 

that, due to these complex structures, 

the criteria used and assumptions made 

in calculating performance can 

sometimes be nuanced and challenging 

to concisely include in the quarterly 

statement. Nonetheless, it is essential 

that advisers disclose assumptions, such 

as assumed fee rates, in the quarterly 

statement so that investors can readily 

understand the performance 

information being provided, despite 

these challenges. Without prominent 

disclosure of the criteria used and 

assumptions made in calculating 

performance, performance information 

is neither simple nor clear. Absent 

disclosure of the criteria used and 

assumptions made in the underlying 

calculations, performance information 

may not be simple to the extent it 

requires referencing multiple sources, 

such as capital call notices, distribution 

notices, and audited financials, to 

understand crucial criteria and 

assumptions. Such disclosure that is not 

prominent would also not be clear 

because it would obscure the extent and 

import of the adviser’s assumptions or 

discretion in making such 

calculations.420 To meet the prominence 

standard, the disclosures should, at a 

minimum, be readily noticeable and 

included within the quarterly statement. 

Thus, an adviser may not provide these 

disclosures only in a separate 

document, website hyperlink or QR 

code, or other separate disclosure. 

We believe this prominently 

displayed information is vital in making 

these disclosures as simple and clear as 

possible for investors. Furthermore, 

permitting advisers to provide quarterly 

statements without prominent 

disclosure of the criteria used and 

assumptions made in calculating 

performance would not sufficiently 

prevent practices that may be 

fraudulent, deceptive, or manipulative. 

For instance, advisers may use a 

deceptive assumed fee rate to calculate 

performance and investors may not be 

aware of it if it is not prominently 

disclosed in the quarterly statement. 

Accordingly, it is crucial that private 

fund investors receive this prominent 

disclosure as part of the quarterly 

statement itself. 

3. Preparation and Distribution of 

Quarterly Statements 

The rule requires quarterly statements 

to be prepared and distributed to 

investors in private funds that are not 

funds of funds within 45 days after the 

first three fiscal quarter ends of each 

fiscal year and 90 days after the end of 

each fiscal year. Advisers to funds of 

funds must prepare and distribute 

quarterly statements within 75 days 

after the first three fiscal quarter ends of 

each year and 120 days after the fiscal 

year end.421 In each instance, an adviser 

must prepare and distribute the required 

quarterly statement within the 

applicable period set forth in the rule, 

unless another person prepares and 

delivers such quarterly statement.422

The reporting period for the final 

quarterly statement covers the fiscal 

quarter in which the fund is wound up 

and dissolved. Under the proposed rule, 

quarterly statements would have been 

required to be prepared and distributed 

to investors for each private fund, 

including funds of funds, within 45 

days of each calendar quarter end, 

including after the end of the fiscal year. 

For a newly formed private fund, the 

rule requires a quarterly statement to be 

prepared and distributed beginning after 

the fund’s second full quarter of 

generating operating results, as 

proposed. However, one commenter 

stated that the requirement to provide 

performance metrics should not be 

triggered until the private fund has four 

quarters of operating results, rather than 

two.423 We continue to believe, 

however, that two full quarters of 

operating results is an appropriate 

standard because it balances the needs 

of investors to receive performance 

information with the needs of advisers 

to have adequate time to generate 

results. We believe that the 

requirements for newly formed funds 

will help ensure that investors receive 

comprehensive information about the 

adviser’s management of the fund 

during the early stage of the fund’s life. 

Some commenters supported the 

proposed rule’s 45-day timing 

requirement.424 Other commenters 

suggested that additional time or 

flexibility should be provided, as 

discussed below.425 Based on our 


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Investment Advisors, Inc. (Apr. 22, 2022) (‘‘Ullico 

Comment Letter’’). 

426See, e.g., ILPA Comment Letter I; SBAI 

Comment Letter; AIC Comment Letter I. 

427See, e.g., CFA Comment Letter I; AIC 

Comment Letter I. 

428Although the rule does not separately require 

an adviser to issue to investors a reconciled fourth 

quarterly statement reflecting information updated 

or corrected in the subsequently delivered audited 

financials, advisers should consider whether 

particular updates or corrections to this information 

under the facts and circumstances could be 

sufficiently material to implicate other applicable 

disclosure obligations, e.g., as under rule 206(4)–8. 

429See, e.g., IAA Comment Letter II; Ropes & Gray 

Comment Letter; Comment Letter of Colmore (Apr. 

25, 2022). 

430See, e.g., Ullico Comment Letter; Segal Marco 

Comment Letter; SBAI Comment Letter. 

431For example, an adviser may experience 

sudden departures of senior financial employees. 

432See, e.g., AIMA/ACC Comment Letter; ILPA 

Comment Letter I; SIFMA–AMG Comment Letter I 

(suggesting that the SEC only require reporting on 

an annual basis within 120 days of the fund’s fiscal 

year end); GPEVCA Comment Letter (suggesting 

that any periodic disclosure requirement be tied to 

the annual audit process). 

experience, advisers generally should be 

in a position to prepare and deliver 

quarterly statements within this period. 

We believe that the timing requirement 

is important because quarterly 

statements will provide fund investors 

with timely and regular statements that 

contain meaningful and comprehensive 

information. Some commenters, 

however, suggested allowing for 

additional time for the fourth quarterly 

statement of the year as audited 

financials are also being prepared at this 

time.426 We recognize the value in 

providing additional time for the fourth 

quarterly statement in light of the 

increased burdens that advisers will 

concurrently face in preparing other 

end-of-year statements, such as audited 

financials. Some commenters suggested 

specifically extending the deadline for 

the fourth quarterly statement to 120 

days to parallel the deadline for audited 

financials.427 Although we recognize the 

potential for some value in aligning the 

deadline for the fourth quarterly 

statement to 120 days to parallel the 

deadline for audited financials, it would 

delay the delivery of these quarterly 

statements too greatly. Assuming a 

December 31 fiscal year end, allowing 

120 days would mean that an adviser 

would not have to deliver the fourth 

quarterly statement until April 30 of the 

following year (assuming it is not a leap 

year). However, the first quarterly 

statement for that following year would 

be due only 15 days later on May 15. It 

is important that investors receive 

quarterly statements on a timely basis so 

that they can effectively monitor the 

costs and performance of their 

investments. Additionally, requiring the 

preparation and delivery of the fourth 

quarterly statement before the deadline 

for audited financials under the final 

rule should not in our view lead to 

undue burdens or investor confusion. 

Although we recognize the possibility 

that information reported in the fourth 

quarterly statement may ultimately be 

updated or corrected in the 

subsequently delivered audited 

financials, the final rule will not 

separately require an adviser to issue a 

reconciled fourth quarterly statement 

reflecting such updated or corrected 

information (which, however, generally 

should be reflected in subsequent 

quarterly reports).428 This approach 

balances the needs of investors to 

receive fee, expense, and performance 

information relatively quickly following 

the end of the fiscal year, with the needs 

of advisers to have sufficient time to 

collect the necessary information and 

distribute the statements to investors. 

Accordingly, in response to 

commenters, we are increasing the 

deadline for the fourth quarterly 

statement from 45 days to 90 days. We 

believe that 90 days is an appropriate 

approach to allow additional time to 

prepare the fourth quarterly statement 

while also preparing the annual audited 

financials without delaying this 

quarterly statement too greatly. 

Some commenters suggested allowing 

additional time for the first three 

quarterly statements of the year as 

well.429 Other commenters suggested 

allowing for a more flexible standard, 

such as ‘‘as soon as reasonably 

practical’’ or ‘‘promptly’’.430 We do not 

think it is necessary to extend the time 

allowed for the first three quarterly 

statements or adopt a more flexible 

standard for the deadline. It is important 

that investors are receiving these 

quarterly statements routinely, so that 

they can properly monitor the fees and 

expenses and performance of their 

investments. If investors receive these 

quarterly statements only 60 or more 

days after quarter-end for the first three 

quarterly statements, the statements 

may be too delayed to enable effective 

engagement and investment decisionmaking as an investor (e.g., whether to 

redeem from the private fund (if 

applicable), to invest additional 

amounts with or divest other 

investments with the adviser, or to 

otherwise modify the investor’s 

portfolio). Moreover, a more flexible 

standard, such as ‘‘as soon as reasonably 

practical’’ or ‘‘promptly,’’ might lead to 

inconsistently delivered quarterly 

statements, which could impair their 

comparability and thus their value. 

However, we recognize there may be 

times when an adviser reasonably 

believes that a fund’s quarterly 

statement would be distributed within 

the required timeframe but fails to have 

it distributed in time because of certain 

unforeseeable circumstances.431

Accordingly, and in light of the fact that 

there is not an alternative method by 

which to satisfy the rule, the 

Commission would take the position 

that, if an adviser is unable to deliver 

the quarterly statement in the timeframe 

required under the rule due to 

reasonably unforeseeable circumstances, 

this would not provide a basis for 

enforcement action so long as the 

adviser reasonably believed that the 

quarterly statement would be 

distributed by the applicable deadline 

and the adviser delivers the quarterly 

statement as promptly as practicable. 

We asked in the proposal whether 

advisers should be required to report 

based on the private fund’s fiscal 

periods, rather than calendar periods, as 

proposed. Because the proposed rule 

required advisers to distribute all four 

reports, including the fourth quarter 

report, within the same time period (i.e., 

45 days), we did not believe the 

distinction between fiscal periods and 

calendar periods was as significant for 

purposes of the proposed rule. However, 

because we are modifying the final rule 

to provide additional time for fourth 

quarter statements, as discussed above, 

we believe it is important to revisit this 

question. Because certain private funds 

may have a fiscal year that is different 

from the calendar year, we believe it is 

appropriate to revise the rule text to 

reference fiscal periods, rather than 

calendar periods, to ensure that advisers 

and private funds receive the benefit of 

the additional time for the fourth 

quarter statement. Commenters 

generally agreed with this approach, 

stating that fiscal periods would more 

closely align with industry practice.432

We recognize that this modification may 

affect comparability for investors across 

different funds if their fiscal years differ, 

as funds with different fiscal years will 

have different reporting periods. 

However, we view this potential 

disadvantage as being justified by the 

benefit investors will obtain by 

receiving quarterly statements that align 

with fund fiscal years. This 

modification will additionally allow 

funds with fiscal years that do not 

match the calendar year more time to 

prepare their fiscal year-end quarterly 

statements alongside their annual 

audited financials. It is also our 

understanding that the majority of 

private funds’ fiscal years match the 

calendar year, and thus we do not 


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433See, e.g., ILPA Comment Letter I (suggesting 

additional time of 14 days to prevent the routine 

use of stale data); MFA Comment Letter I 

(suggesting additional time of 30 days); Comment 

Letter of Pathway Capital Management, LP (June 13, 

2022) (‘‘Pathway Comment Letter’’) (suggesting that 

funds of funds advisers will rely on reports from 

underlying investments and require additional 

time); CFA Comment Letter II (suggesting a 

deadline of 120 days for the first three quarterly 

statements and 180 days for the fourth quarterly 

statement). 

434Some commenters suggested that we provide 

further additional time to funds of funds of funds, 

similar to staff views provided with respect to the 

audit provision of the custody rule, to permit these 

funds additional time to receive information from 

their underlying investments. See, e.g., CFA 

Comment Letter II. The Commission is not 

extending further additional time for quarterly 

statements with respect to funds of funds of funds, 

as doing so would delay the provision of quarterly 

statement information to investors too significantly, 

as discussed above. 

435See final rule 211(h)(1)–1 (defining 

‘‘distribute’’). For purposes of the rules, any ‘‘in 

writing’’ requirement can be satisfied either through 

paper or electronic means consistent with existing 

Commission guidance on electronic delivery of 

documents. See Marketing Release, supra footnote 

127, at n.346. If any distribution is made 

electronically for purposes of these rules, it should 

be done in accordance with the Commission’s 

guidance regarding electronic delivery. See Use of 

Electronic Media by Broker Dealers, Transfer 

Agents, and Investment Advisers for Delivery of 

Information; Additional Examples Under the 

Securities Act of 1933, Securities Exchange Act of 

1934, and Investment Company Act of 1940, 

Release No. 34–37182 (May 9, 1996) [61 FR 24644 

(May 15, 1996)] (‘‘Use of Electronic Media 

Release’’); see also Commission Interpretation: Use 

of Electronic Media, Release No. 34–42728 (Apr. 28, 

2020) [65 FR 25843 (May 4, 2000)]. In 

circumstances where an adviser is obligated to rely 

on a third party, such as a trustee, to deliver 

quarterly statements to investors, an adviser should 

use every reasonable effort to effect such delivery 

in compliance with the final rule. 

436See final rule 211(h)(1)–1 (defining ‘‘control’’). 

437See, e.g., Ropes & Gray Comment Letter; 

AIMA/ACC Comment Letter; AIC Comment Letter 

II. 

438See Use of Electronic Media Release, supra 

footnote 435. 

439See id. 

440See final rule 211(h)(1)–2(f). The use of any 

consolidated reporting is an important criterion for 

the calculation of expenses, payments, allocations, 

rebates, waivers, and offsets as well as performance. 

See supra sections II.B.1.c) and II.B.2.c). 

Accordingly, advisers generally should disclose the 

basis of any consolidated reporting in the quarterly 

statement, including, e.g., if the statement includes 

multiple entities and, if so, which entities and the 

methods used to calculate the amounts on the 

statement allocated from each entity. Advisers 

generally should also disclose any important 

assumptions associated with consolidated reporting 

that affect performance reporting as part of the 

quarterly statement. An example might include how 

unequal tax expenses are factored into consolidated 

performance reporting where one fund has greater 

tax expenses than the other funds in a consolidated 

fund structure. See supra section II.B.2.c). 

expect comparability to be substantially 

affected in most cases. Accordingly, in 

a change from the proposal, advisers are 

required to distribute the required 

reporting based on a fund’s fiscal 

periods, rather than calendar periods. 

Some commenters suggested 

providing additional time for funds of 

funds because they would likely need to 

receive quarterly statements from their 

private fund investments before being 

able to prepare their own quarterly 

statements.433 We recognize that some 

funds of funds, which generally invest 

substantially all of their assets in the 

equity of private funds advised by thirdparty advisers, will need to receive 

quarterly statements or other related 

information from their underlying 

investments to prepare their own 

quarterly statements. We also recognize 

that such underlying investments may 

not provide the quarterly statements 

until the last day of the deadline. 

Accordingly, we are providing an 

additional 30 days for funds of funds to 

deliver each quarterly statement and, as 

such, only requiring funds of funds to 

distribute the first three quarterly 

statements of the year within 75 days 

after quarter end and the fourth 

quarterly statement within 120 days 

after quarter end. We believe this 

approach strikes an appropriate balance 

between granting fund of funds advisers 

additional time to prepare and deliver 

quarterly statements and not overly 

delaying such quarterly statements for 

fund of funds and other private fund 

investors. Advisers to funds (including 

funds of funds and, similarly, funds of 

funds of funds) 434 that do not currently 

receive information from their 

underlying investments in a sufficiently 

timely manner to enable them to 

prepare and deliver quarterly statements 

in compliance with the final rule’s 

deadlines will need to consider 

contractual or other types of 

arrangements with their underlying 

investments to attain this information in 

a timely manner. 

An adviser generally will satisfy the 

requirement to ‘‘distribute’’ the 

quarterly statements when the 

statements are sent to all investors in 

the private fund.435 However, the rule 

precludes advisers from using layers of 

pooled investment vehicles in a control 

relationship with the adviser to avoid 

meaningful application of the 

distribution requirement. In 

circumstances where an investor is itself 

a pooled vehicle that is controlling, 

controlled by, or under common control 

with (i.e., is in a ‘‘control relationship’’ 

with) the adviser or its related persons, 

the adviser must look through that pool 

(and any pools in a control relationship 

with the adviser or its related persons, 

such as in a master-feeder fund 

structure), in order to send the quarterly 

statements to investors in those pools. 

Additionally, advisers to private funds 

may from time to time establish special 

purpose vehicles (‘‘SPVs’’) or other 

pooled vehicles for a variety of reasons, 

including facilitating investments by 

one or more private funds that the 

advisers manage. Without such a control 

relationship requirement, the adviser 

could deliver the quarterly statement to 

itself rather than to the parties the 

quarterly statement is designed to 

inform.436 Outside of a control 

relationship, such as if the private fund 

investor is an unaffiliated fund of funds, 

this same concern is not present, and 

the adviser would not need to look 

through the structure to make 

meaningful delivery of the quarterly 

statement. The adviser should distribute 

the quarterly statement to the adviser or 

other designated party of the 

unaffiliated fund of funds. We believe 

that this approach will lead to 

meaningful delivery of the quarterly 

statement to the private fund’s 

investors. 

Some commenters suggested allowing 

distribution via a data room instead of 

requiring delivery to investors.437 It is 

important that advisers are effectively 

delivering quarterly statements to 

investors on a routine basis. If a 

quarterly statement is distributed 

electronically through a data room, this 

distribution, like other electronic 

deliveries, should be done in 

accordance with the Commission’s 

guidance regarding electronic 

delivery.438 Accordingly, if an adviser 

places the quarterly statements in a data 

room without any notice to investors, 

advisers would not meet the 

distribution requirement under the rule. 

However, if the adviser notifies 

investors when the quarterly statements 

are uploaded to the data room within 

the applicable time period under the 

rule for preparation and delivery of the 

quarterly statement and ensures that 

investors have access to the quarterly 

statement included therein, an adviser 

would generally satisfy the distribution 

requirement.439

4. Consolidated Reporting for Certain 

Fund Structures 

The rule requires advisers to 

consolidate reporting for similar pools 

of assets to the extent doing so provides 

more meaningful information to the 

private fund’s investors and is not 

misleading, as proposed.440 For 

example, certain private funds employ 

master-feeder structures. Typically, 

investors in such funds invest in 

onshore and offshore feeder funds, 

which, in turn, invest all, or 

substantially all, of their investable 

capital in a single master fund. The 


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441See, e.g., GPEVCA Comment Letter; 

Convergence Comment Letter; CFA Comment Letter 

II. 

442See, e.g., SIFMA–AMG Comment Letter I; 

SBAI Comment Letter; Ropes & Gray Comment 

Letter (describing, as an example, certain masterfeeder fund structures where some of the feeder 

funds do not invest in the master fund). 

443See, e.g., Ropes & Gray Comment Letter; PWC 

Comment Letter (the consolidation requirement 

could create confusion in instances where U.S. 

GAAP does not require consolidation for financial 

reporting purposes); IAA Comment Letter II. 

444See, e.g., KPMG Comment Letter; LSTA 

Comment Letter; AIMA/ACC Comment Letter. 

445Final rule 211(h)(1)–2(g). 446See, e.g., CFA Comment Letter II; NYSIF 

Comment Letter; Consumer Federation of America 

Comment Letter. 447See, e.g., Morningstar Comment Letter; 

Albourne Comment Letter. 448See, e.g., SBAI Comment Letter; AIMA/ACC 

Comment Letter; Comment Letter of the Private 

Investment Funds Committee of the State Bar of 

Texas Business Law Section (Apr. 25, 2022) (‘‘State 

Bar of Texas Comment Letter’’). 

same adviser typically advises and 

controls all three funds, and the master 

fund typically makes and holds the 

investments. Because the feeder funds 

are conduits for investors to gain 

exposure to the master fund and its 

investments, the rule requires the 

adviser to provide feeder fund investors 

with a single quarterly statement 

covering the applicable feeder fund and 

the feeder fund’s proportionate interest 

in the master fund on a consolidated 

basis, so long as the consolidated 

statement provides more meaningful 

information to investors and is not 

misleading. 

Due to the complexity of private fund 

structures, the rule takes a principlesbased approach with respect to whether 

private fund advisers must consolidate 

reporting for a specific fund structure. 

Some commenters supported this 

principles-based approach to 

consolidated reporting for certain fund 

structures, arguing that it will provide 

more meaningful information to 

investors.441 Other commenters argued 

that this consolidation requirement 

could undermine the transparency goals 

of this rulemaking.442 Some commenters 

argued that consolidated reporting will 

confuse investors.443

We acknowledge that, in certain 

circumstances, requiring reporting by 

each private fund separately may result 

in more granular information. For 

example, in certain parallel fund 

structures, an investor would receive 

information specific to the parallel fund 

in which it is invested instead of the 

consolidated information for all parallel 

funds. However, in many of these 

circumstances, consolidated reporting of 

the cost and performance information 

by all private funds in the structure 

would provide a more comprehensive 

picture of the fees and expenses borne 

and performance achieved than 

reporting by each private fund 

separately. For instance, in a masterfeeder fund structure, a quarterly 

statement that only covers the feeder 

fund could provide fragmented 

information that does not reflect the true 

costs and performance relevant to a 

feeder fund investor. For example, a 

feeder fund’s returns may be 

significantly impacted by costs at the 

master fund-level, but unconsolidated 

quarterly statements would mean these 

costs would not necessarily appear in 

the feeder fund’s quarterly statement. 

Additionally, absent a principles-based 

consolidation requirement, advisers 

may be incentivized to establish as 

many feeder or parallel funds in a 

particular fund structure as feasible to 

separate investors. Investors may then 

each be receiving different fee, expense, 

and performance information, which 

could make it difficult for them to 

communicate and address collective 

concerns with the adviser. For these 

reasons, we believe that a principlesbased approach to consolidated 

reporting is superior to a requirement to 

report by each private fund separately. 

Similarly, the absence of any 

consolidation requirement could lead to 

differing practices across advisers and 

result in greater investor confusion. 

Some advisers could choose to 

consolidate all fund structures, while 

other choose to do no consolidation, 

and still others choose to consolidate 

some fund structures—such as parallel 

funds—but not others—such as masterfeeder arrangements. Investors with 

minimal negotiating power may have a 

difficult time obtaining accurate 

information on an adviser’s approach to 

consolidation or requiring that an 

adviser take a consistent approach if the 

fund structure is expanded over the 

course of its life. By requiring a similar, 

principles-based approach to all fund 

structures, we believe the quarterly 

statement will be generally easier for 

investors to understand across advisers. 

Some commenters suggested that we 

should provide additional specific 

clarification on when consolidated 

reporting is and is not required.444

While we recognize that a principlesbased approach to consolidated 

reporting may require some additional 

consideration on the part of advisers, an 

overly prescriptive consolidation 

requirement would have a greater 

negative effect. The private fund space 

is diverse. There are many different 

fund structures, and it is reasonable to 

expect that more will be devised in the 

future. We understand that different 

segments of the private fund adviser 

industry tend to use some fund 

structures more than others and, 

correspondingly, tend to have different 

views on what kinds of related funds 

should be considered similar pools of 

assets for purposes of consolidation. 

The rule’s principles-based approach to 

consolidated reporting is designed to 

reflect this diversity by requiring 

advisers to consolidate when doing so 

will provide more meaningful 

information. We recognize that this may 

lead to some degree of difference across 

different segments of the private fund 

adviser industry, but it will ultimately 

result in more meaningful information 

for investors. Relatedly, private fund 

advisers generally should take into 

account any input received from 

investors on what approach to 

consolidation that they view as most 

meaningful. 

5. Format and Content Requirements 

As proposed, the rule requires the 

adviser to use clear, concise, plain 

English in the quarterly statement.445

For example, to satisfy the requirement 

for ‘‘clear’’ disclosures, advisers should 

generally use a font size and type that 

are legible, and margins and paper size 

(if applicable) that are reasonable. 

Likewise, to meet this standard, any 

information that an adviser chooses to 

include in a quarterly statement, but is 

not required by the rule, must be as 

short as practicable, not more prominent 

than the required information, and not 

obscure or impede an investor’s 

understanding of the mandatory 

information. The rule also requires 

advisers to present information in the 

quarterly statement in a format that 

facilitates review from one quarterly 

statement to the next. Quarter-overquarter, an adviser generally should use 

consistent formats for fund quarterly 

statements, thereby allowing investors 

to easily compare fees, expenses, and 

performance over each quarterly period. 

We also encourage advisers to use a 

structured, machine-readable format if 

advisers believe this format will be 

useful to the investors in their funds. 

Some commenters supported this 

format and content requirement, stating 

that consistent formatting for quarterly 

statements will better enable investors 

to gauge adviser track records and 

appropriateness of costs.446 Some 

commenters argued that we should 

adopt more prescriptive formatting 

requirements.447 Conversely, certain 

commenters argued that we should not 

adopt prescriptive formatting 

requirements.448 Other commenters 

suggested that these format and content 


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449See, e.g., AIC Comment Letter I; Comment 

Letter of the American Securities Association (May 

4, 2022) (‘‘ASA Comment Letter’’); State Bar of 

Texas Comment Letter. 

450Final rule 211(h)(1)–2(d). 

451We would generally anticipate the fee and 

expense line items of a private credit fund to be 

more associated with loans or other financing 

activities, and servicing activity related thereto, and 

the fee and expense line items of a private equity 

buyout fund to be more associated with the 

acquisitions and dispositions of portfolio 

companies. 

452Final amended rule 204–2(a)(20). For all of the 

recordkeeping rule amendments in this rulemaking 

package, advisers are required to maintain and 

preserve the record in an easily accessible place for 

a period of not less than five years from the end 

of the fiscal year during which the last entry was 

made on such record, the first two years in an 

appropriate office of the investment adviser. See 

rule 204–2(e)(1) under the Advisers Act. 

453We asked in the proposal whether we should 

require advisers to retain a record of each 

addressee, the date(s) the statement was sent, 

address(es), and delivery method(s) for each 

quarterly statement, as proposed. In response to 

comments received and in a change from the 

proposal (as discussed further below in this 

section), we are not requiring private fund advisers 

to make and retain records of addresses or the 

delivery methods used to disseminate quarterly 

statements. If an adviser distributes a quarterly 

statement electronically through a data room (see 

discussion of data rooms in supra section II.B.3), 

such adviser must keep records of the notifications 

provided to investors that such quarterly statement 

has been made available in the data room. Such 

notification records must include each addressee 

and the date(s) the notification was sent. 

454 In certain circumstances, an adviser may 

change its determination of whether a particular 

fund it advises is a liquid or illiquid fund pursuant 

to the quarterly statement rule. For example, an 

adviser may determine a fund it advises is a liquid 

fund in year one and then later determine it is an 

illiquid fund in year four because the nature of such 

fund’s redemption rights have changed. In such 

cases, advisers should also make and keep books 

and records substantiating the adviser’s 

determination of such change. 

455See, e.g., Convergence Comment Letter; 

AFREF Comment Letter I; CPD Comment Letter. 

456See Convergence Comment Letter. 

457See, e.g., ATR Comment Letter; Chamber of 

Commerce Comment Letter; AIMA/ACC Comment 

Letter. 

requirements are not necessary because 

investors may already negotiate for 

specific format and content 

requirements for investor reporting.449

Although some investors may be able 

to negotiate for bespoke content and 

formatting for investor reporting, many 

investors may not have the bargaining 

power to do so. A goal of the quarterly 

statement requirement is to better 

enable all investors to effectively 

monitor and assess the costs and 

performance of their private fund 

investments with an investment adviser 

over time. The format and content 

requirements apply to all aspects of a 

quarterly statement, including the 

requirements to disclose the manner in 

which expenses, payments, allocations, 

rebates, waivers, and offsets are 

calculated and to cross-reference 

sections of the private fund’s 

organizational and offering 

documents.450 This approach will 

improve the utility of the quarterly 

statement by making it easier for 

investors to review and analyze. 

These requirements are intended to 

support every investor’s ability to 

understand better the context of the 

information provided in the quarterly 

statement regarding fees, expenses, and 

performance and monitor their private 

fund investments. For instance, 

providing investors with clear and 

easily accessible cross-references to the 

fund governing documents will make it 

easier for all investors to assess and 

monitor whether the fees and expenses 

in the quarterly statement comply with 

the fund’s governing documents. 

We believe the final rule strikes an 

appropriate balance in prescribing the 

baseline content of the tables and 

performance information that is 

required to be included in quarterly 

statements while also taking a generally 

principles-based approach with respect 

to the formatting of such information. 

This approach will help provide 

investors with standardized baseline 

information about their private fund 

investments and advisers with 

flexibility in presenting the required 

information, without being overly 

prescriptive or sacrificing readability. 

Additionally, as stated above, advisers 

under the rule remain able to provide, 

and investors are free to request and 

negotiate for, additional information to 

supplement the required information in 

the quarterly statement, subject to 

applicable rules and other disclosure 

requirements. 

We are requiring a tabular format to 

ensure the information in the quarterly 

statements is presented in an organized 

fashion, but we view further 

prescriptive formatting as potentially 

more harmful than beneficial in many 

cases. We considered, but are not 

adopting, more prescriptive formatting 

because we recognize it might result in 

investor confusion if an adviser 

includes inapplicable line items to 

satisfy our form requirements, while 

omitting additional relevant information 

that might be unique to a particular 

fund. The private fund space is diverse, 

and specific reporting formats could be 

appropriate for certain types of funds 

but inappropriate for different types of 

funds. For instance, the fees and 

expenses associated with a private 

equity buyout fund will differ from 

those for a private credit fund.451 If we 

were to prescribe formatting that is 

effective for a buyout fund, such 

formatting may be misleading or 

confusing when applied to a private 

credit fund, a real estate fund or a hedge 

fund. Moreover, we were concerned that 

advisers would be unable to report on 

a consolidated basis if we further 

prescribed the format of the statements. 

6. Recordkeeping for Quarterly 

Statements 

We are amending rule 204–2 (‘‘books 

and records rule’’) under the Advisers 

Act to require advisers to retain books 

and records related to the quarterly 

statement rule.452 First, we are requiring 

private fund advisers to make and retain 

a copy of any quarterly statement 

distributed to fund investors pursuant to 

the quarterly statement rule, as well as 

a record of each addressee and the 

date(s) the statement was sent.453

Second, we are requiring advisers to 

make and retain all records evidencing 

the calculation method for all expenses, 

payments, allocations, rebates, offsets, 

waivers, and performance listed on any 

quarterly statement delivered pursuant 

to the quarterly statement rule. Third, 

we are requiring advisers to make and 

keep books and records substantiating 

the adviser’s determination that a 

private fund client is a liquid fund or an 

illiquid fund pursuant to the quarterly 

statement rule.454 These requirements 

will facilitate our staff’s ability to assess 

an adviser’s compliance with the 

proposed rule and would similarly 

enhance an adviser’s compliance efforts. 

Some commenters supported this 

recordkeeping requirement 455 including 

one that stated that it would not be 

overly burdensome for advisers.456

Other commenters argued that this 

recordkeeping requirement will be 

burdensome and/or not beneficial for 

investors.457 We do not view this 

recordkeeping requirement as creating 

significant, additional burdens. As a 

practical matter, advisers will need to 

generate these records to comply with 

the quarterly statement rule, and we 

anticipate that they would only need to 

modify their existing recordkeeping 

procedures to properly maintain these 

records as well. Requiring 

recordkeeping for quarterly statements 

should also enhance advisers’ internal 

compliance efforts. Moreover, this 

recordkeeping will help facilitate the 

Commission’s inspection and 

enforcement capabilities by improving 

our staff’s ability to assess an adviser’s 

compliance with the final rule. 


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458See CFA Comment Letter II. 

459Final rule 206(4)–10. The rule would apply to 

all investment advisers registered, or required to be 

registered, with the Commission. 

460See American Institute of Certified Public 

Accountants’ (‘‘AICPA’’) auditing standards, AU–C 

Section 550 and PCAOB auditing standards, AS 

2410. 

461See AICPA auditing standards, AU–C Section 

240. Audits performed under PCAOB standards 

provide similar benefits. See PCAOB auditing 

standards, AS 2401, which discusses consideration 

of fraud in a financial statement audit. 

462See Proposing Release, supra footnote 3, at 

101–103. 

463See IAA Comment Letter II; NYC Bar 

Comment Letter II; AIC Comment Letter I. 

464See Comment Letter of Ernst & Young (Apr. 

25, 2022) (‘‘E&Y Comment Letter’’); Comment Letter 

of Deloitte & Touche LLP (Apr. 21, 2022) (‘‘Deloitte 

Comment Letter’’); KPMG Comment Letter; PWC 

Comment Letter; AIC Comment Letter I; TIAA 

Comment Letter; NSCP Comment Letter. See also 

Private Funds and Application of the Custody Rule 

to Special Purpose Vehicles and Escrows, Division 

of Investment Management Guidance Update No. 

2014–07 (June 2014). 

465See SIFMA–AMG Comment Letter I. See also 

Staff Responses to Questions about the Custody 

Rule (‘‘Custody Rule FAQs’’), available at https:// 

www.sec.gov/divisions/investment/custody_faq_

030510.htm. 

466See NYC Bar Comment Letter II. 

467Rule 206(4)–2(b)(4) and (c). In a change from 

the proposal, defined terms in rule 206(4)–10 are as 

defined in the custody rule; they are not defined in 

rule 211(h)–1. See rule 206(4)–10(c). The SEC has 

proposed to amend and redesignate the custody 

rule. See Safeguarding Advisory Client Assets, 

Investment Advisers Act Release No. 6240 (Feb. 15, 

2023) [88 FR 14672 (Mar. 9, 2023)] (‘‘Safeguarding 

Release’’). We are continuing to consider comments 

received in response to that proposal. 

468See rule 206(4)–2(b)(4)(ii) and 206(4)–2(d)(3) 

(defining ‘‘independent public accountant’’). 

469See rule 206(4)–2(b)(4). The custody rule 

requires an accountant performing an audit of a 

pooled investment vehicle to be an ‘‘independent 

public accountant’’ complying with rule 2–01(b) 

and (c) of Regulation S–X. Rule 2–01(c) of 

Regulation S–X references the term ‘‘audit and 

professional engagement period,’’ which is defined 

in rule 2–01(f)(5) of Regulation S–X. 

470The SEC has stated that certain financial 

statements must either be prepared in accordance 

with U.S. GAAP or prepared in accordance with 

some other comprehensive body of accounting 

standards if the information is substantially similar 

to financial statements prepared in accordance with 

U.S. GAAP and contain a footnote reconciling any 

material differences. See Custody of Funds or 

Securities of Clients by Investment Advisers, 

Investment Advisers Act Release No. 2176 (Sept. 

25, 2003) [68 FR 56691 (Oct. 1, 2023)] (‘‘2003 

Custody Rule Release’’) at n.41. Our staff has taken 

a similar view. See Custody Rule FAQs, supra 

footnote 465, at Question VI.5. 

471See rule 206(4)–2(b)(4) and (c). 

One commenter suggested that, 

instead of requiring, for each quarterly 

statement, recordkeeping of each 

addressee, the date(s) sent, address(es) 

and delivery method(s), we should 

require only records necessary to 

demonstrate compliance with the 

quarterly statement distribution 

requirement.458 We agree that the 

addresses and delivery methods used to 

disseminate quarterly statements are not 

necessary to demonstrate compliance 

with the quarterly statement 

distribution requirement and have 

removed those obligations accordingly. 

However, we believe that recordkeeping 

of each addressee and the dates sent are 

necessary to demonstrate compliance 

with the final rule. Records of the 

distribution dates will demonstrate 

compliance with the various 

distribution deadlines set forth in the 

final rule. Records of the addressees are 

similarly necessary to demonstrate that 

each quarterly statement has been sent 

to each investor. These recordkeeping 

requirements will permit Commission 

staff to effectively assess an adviser’s 

compliance with the rule. 

C. Mandatory Private Fund Adviser 

Audits 

We are requiring private fund advisers 

to obtain an annual financial statement 

audit of the private funds they advise, 

directly or indirectly.459 In addition to 

protecting the fund and its investors 

against the misappropriation of fund 

assets, we believe an audit by an 

independent public accountant provides 

an important check on the adviser’s 

valuation of private fund assets, which 

often serves as the basis for the 

calculation of the adviser’s fees. It also 

provides an important check on certain 

conflicts of interest between the adviser 

and the private fund investors, such as 

potentially problematic sales practices 

or compensation schemes. For example, 

during a financial statement audit, an 

auditor will inquire about related party 

relationships and transactions, 

including the identity of any related 

parties, the nature of the relationships, 

and the business purpose of entering 

into any transaction with a related 

party.460 Moreover, as part of the 

auditor’s substantive testing, an auditor 

may review the calculation and 

presentation of management fees paid to 

the adviser and may focus on capital 

allocations to review the adviser’s 

entitlement to performance-based 

compensation. While the auditor does 

not have primary responsibility to 

prevent and detect fraud, it does have a 

responsibility to obtain reasonable 

assurance that the financial statements 

as a whole are free from material 

misstatement, whether caused by fraud 

or error.461

We are adopting the substance of the 

mandatory private fund adviser audit 

rule largely as proposed. The proposed 

rule was primarily drawn from the 

Advisers Act custody rule but differed 

from that rule in several respects.462

Commenters explained that these 

differences could create confusion with, 

and be duplicative of, the custody 

rule.463 For example, commenters stated 

that a staff guidance update on the 

application to SPVs would apply under 

the custody rule but not here.464

Similarly, other commenters stated that 

staff guidance issued in frequently 

asked questions would apply under the 

custody rule but not here.465 One 

commenter asserted that the imposition 

of overlapping and inconsistent 

standards between the requirements of 

the custody rule and this rule would not 

serve to increase investor protection.466

After considering comments, we are 

adopting a final rule that addresses 

those differences. More specifically, we 

are requiring advisers registered with, or 

required to be registered with, the 

Commission to cause their private funds 

to undergo audits in accordance with 

the audit provision (and related 

requirements for delivery of audited 

financial statements) under the custody 

rule.467

The mandatory private fund adviser 

audit rule requires a registered 

investment adviser providing 

investment advice, directly or 

indirectly, to a private fund, to cause 

that fund to undergo a financial 

statement audit that meets the 

requirements set forth in paragraphs 

(b)(4)(i) through (b)(4)(iii) of the custody 

rule applicable to pooled investment 

vehicles subject to annual audit and to 

cause audited financial statements to be 

delivered in accordance with paragraph 

(c) of that rule. As a result, each of the 

following is required under the final 

rule: 

(1) The audit must be performed by an 

independent public accountant that 

meets the standards of independence in 

17 CFR 210.2–01 (rule 2–01(b) and (c) 

of Regulation S–X) that is registered 

with, and subject to regular inspection 

as of the commencement of the 

professional engagement period, and as 

of each calendar year-end, by the 

PCAOB in accordance with its rules; 468

(2) The audit must meet the definition 

of audit in 17 CFR 210.1–02(d) (rule 1– 

02(d) of Regulation S–X); 469

(3) Audited financial statements must 

be prepared in accordance with 

generally accepted accounting 

principles; 470 and 

(4) Annually within 120 days of the 

private fund’s fiscal year-end and 

promptly upon liquidation, the private 

fund’s audited financial statements are 

delivered to investors in the private 

fund.471

Additionally, in recognition that a 

surprise examination under the custody 

rule does not satisfy the requirements of 

this rule, we are adopting the proposed 


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472See final rule 206(4)–10(b). 

473See Public Citizen Comment Letter; Healthy 

Markets Comment Letter I; Trine Comment Letter; 

AFREF Comment Letter I; OPERS Comment Letter; 

ICM Comment Letter; NASAA Comment Letter; 

Better Markets Comment Letter; Albourne Comment 

Letter; ILPA Comment Letter I; Segal Marco 

Comment Letter; RFG Comment Letter II; 

Convergence Comment Letter; NCREIF Comment 

Letter. 

474See PIFF Comment Letter; BVCA Comment 

Letter; Invest Europe Comment Letter; AIC 

Comment Letter I; Comment Letter of Steven Utke 

and Paul Mason (Feb. 26, 2022) (‘‘Utke and Mason 

Comment Letter’’); Dechert Comment Letter; AIMA/ 

ACC Comment Letter; Comment Letter of Canaras 

Capital Management LLC (Apr. 25, 2022) (‘‘Canaras 

Comment Letter’’); SBAI Comment Letter; Ropes & 

Gray Comment Letter; IAA Comment Letter II; NYC 

Bar Comment Letter II. 

475See NASAA Comment Letter. 

476See AIMA/ACC Comment Letter. 

477See PIFF Comment Letter; BVCA Comment 

Letter; Invest Europe Comment Letter; Utke and 

Mason Comment Letter; Dechert Comment Letter; 

AIMA/ACC Comment Letter. 

478See AIC Comment Letter I; BVCA Comment 

Letter. 

479See Chamber of Commerce Comment Letter. 

480See SBAI Comment Letter; AIMA/ACC 

Comment Letter; Comment Letter of LaSalle 

Investment Management, Inc. (Apr. 25, 2022) 

(‘‘LaSalle Comment Letter’’); CFA Comment Letter 

I; PWC Comment Letter; Ropes & Gray Comment 

Letter. 

481Final rule 206(4)–10; see also rule 206(4)– 

2(b)(4) and rule 206(4)–2(c). 

482FASB ASC Topic 820, Fair Value 

Measurement. 

483FASB ASC Topic 850, Related Party 

Disclosures. 

484FASB ASC Topic 470, Debt and FASB ASC 

Subtopic 860–30, Secured Borrowing and 

Collateral. 

485See OPERS Comment Letter; AFSCME 

Comment Letter; ILPA Comment Letter I; NYC 

Comptroller Comment Letter; see generally Seattle 

Retirement System Comment Letter; DC Retirement 

Board Comment Letter. 486NYC Comptroller Comment Letter. 487See OPERS Comment Letter. 488See ILPA Comment Letter I. 489See AFSCME Comment Letter. 490See AIC Comment Letter I; BVCA Comment 

Letter. 491See AICPA auditing standards, AU–C Section 

240 and PCAOB auditing standards, AS 2401. 

exception to this rule for funds and 

advisers not in a control relationship. 

Specifically, for a fund that the adviser 

does not control and that is neither 

controlled by nor under common 

control with the adviser (e.g., an adviser 

to a fund of funds may select an 

unaffiliated sub-adviser to implement a 

portion of the underlying investment 

strategy), the adviser only needs to take 

all reasonable steps to cause the fund to 

undergo an audit that meets these 

elements.472

Some commenters supported the 

proposed rule,473 while others opposed 

it 474 and one commenter highlighted 

the importance of the proposed 

notification provision explaining that 

the issuance of a modified opinion or 

the auditor’s termination may be 

‘‘serious red flags that warrant early 

notice to regulators.’’ 475 Commenters 

who opposed the proposed rule 

indicated that it: (i) would eliminate the 

surprise examination option under the 

custody rule without evidence that 

surprise examinations have not 

adequately protected private fund 

investors; 476 (ii) might increase costs to 

investors and be unnecessary; 477 (iii) 

would not serve the stated policy goals 

of acting as a check on the adviser’s 

valuation of private fund assets; 478 (iv) 

may provide investors a false sense of 

security; 479 and (v) could increase the 

difficulty of finding an auditor in 

certain jurisdictions.480

While the mandatory private fund 

adviser audit rule would effectively 

eliminate the surprise examination 

option under the custody rule for 

private fund advisers and may increase 

costs to some investors, we believe that 

financial statement audits provide a 

critical set of additional protections for 

private fund investors. During a 

financial statement audit, independent 

public accountants not only typically 

verify the existence of pooled 

investment vehicle investments similar 

to a surprise examination, but they also 

test other assertions associated with the 

pooled investment vehicle investments 

and other significant accounts (e.g., 

valuation, presentation and disclosure, 

rights and obligations, completeness, 

and accuracy). Importantly, audited 

financial statements, including the 

related notes, schedules, and audit 

opinion, must be distributed to each 

investor in the pooled investment 

vehicle, providing investors with 

additional information about the 

operation of the private fund.481 For 

example, audited financial statements 

prepared in accordance with U.S. 

GAAP, which are the responsibility of 

the private fund adviser or its related 

person, include disclosures regarding 

the level of fair value hierarchy within 

which the fair value measurements are 

categorized in their entirety and a 

description of the valuation techniques 

and inputs used in the fair value 

measurement of the fund’s 

investments.482 These audited financial 

statements also include disclosures 

regarding material related party 

transactions.483 In addition, fund 

borrowings, such as margin borrowings 

or fund-level subscription facilities, are 

disclosed in the financial statements.484

These are just a few examples of the 

types of critical information provided to 

investors in audited financial statements 

to help them better understand the 

private fund’s operations and financial 

position. If, in lieu of audited financial 

statements, an investment adviser 

obtains a surprise examination of the 

funds and securities of its client (e.g., a 

private fund), an investor may not 

receive this additional important 

information. Comments from 

institutional investors generally 

acknowledged the benefits of annual 

financial statement audits as providing 

an important tool for monitoring their 

investments.485 These commenters 

explained that audits enhance investor 

protection 486 and the mandatory private 

fund adviser audit rule would introduce 

a degree of consistency across private 

funds.487 One commenter stated that 

audits are critical to protecting the 

fund’s assets from fraud and 

malfeasance,488 while another 

commenter explained that annual audits 

provide investors more accurate 

valuations, which also often serve as the 

basis for calculation of fees.489

Accordingly, we continue to believe the 

benefits of a financial statement audit to 

private fund investors justify the 

elimination of the surprise examination 

option for private fund advisers and the 

associated costs. 

We disagree with commenters’ 

assertions that the audit requirement 

will not serve the stated policy goals of 

acting as a check on the adviser’s 

valuation of private fund assets.490

Financial statement audits provide 

meaningful protections to private fund 

investors by increasing the likelihood 

that fraudulent activity or problems 

with valuation are uncovered, thereby 

providing deterrence against fraudulent 

conduct by fund advisers or their 

related persons.491 For example, as 

noted above, a fund’s adviser may use 

a high level of discretion and 

subjectivity in valuing a private fund’s 

illiquid investments, which are difficult 

to value. This creates a conflict of 

interest if the adviser also calculates its 

fees as a percentage of the value of the 

fund’s investments and/or an increase 

in that value (net profit), as is typically 

the case. Moreover, private fund 

advisers often rely heavily on existing 

fund performance when engaging in 

sales practices: obtaining new investors 

(in the case of a private fund that makes 

continuous or periodic offerings), 

retaining existing investors (in the case 

of a private fund that offers periodic 

redemptions or transfer rights), 

soliciting investors for co-investment 

opportunities, or fundraising for a new 

fund. These factors raise the possibility 

that funds are valued opportunistically 

and that the adviser’s compensation 

may involve fraud or deception, 

resulting in an inappropriate 


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492See generally Jenkinson, Sousa, Stucke, How 

Fair are the Valuations of Private Equity Funds? 

(2013), available at https://www.psers.pa.gov/ 

About/Investment/Documents/PPMAIRC%202018/ 

27%20How%20Fair%20are%20the%20

Valuations%20of%20Private%20Equity%20

Funds.pdf. See also In the Matter of Swapnil Rege, 

Investment Advisers Act Release No. 5303 (July 18, 

2019) (settled action) (alleging that an employee of 

a private fund adviser mispriced the private fund’s 

investments, which resulted in the adviser charging 

the fund excess management fees); SEC v. 

Southridge Capital Mgmt., LLC, Lit. Rel. No. 21709 

(Oct. 25, 2010) (alleging that adviser overvalued the 

largest position held by the funds by fraudulently 

misstating the acquisition price of the assets); see 

docket for SEC v. Southridge Capital Mgmt., LLC, 

U.S. District Court, District of Connecticut (New 

Haven), case no. 3:10–CV–01685 (on Sept. 12, 2016 

the court granted the SEC’s motion for summary 

judgment and entered a final judgment in favor of 

the SEC in 2018). 

493See AICPA auditing standards AU–C Section 

540A and PCAOB auditing standards, AS 2501. 

494See AIC Comment Letter I. 

495See In the Matter of EDG Management 

Company, LLC, supra footnote 30; see also In the 

Matter of Energy Capital Partners, supra footnote 

30; Innovation Capital Management, LLC, 

Investment Advisers Act Release No. 6104 (Sept. 2, 

2022) (settled order). 

496See Chamber of Commerce Comment Letter. 

497Public Company Accounting Oversight Board, 

Basics of Inspections, Inspections: An Overview 

(last visited Aug. 13, 2023), available at https://

pcaobus.org/oversight/inspections/basics-ofinspections. 

498See AIMA/ACC Comment Letter; AIC 

Comment Letter I. 

499See, e.g., Exemptions Adopting Release, supra 

footnote 9. 

500See, e.g., PCAOB Reports of Board 

Determinations Pursuant to Rule 6100, available at 

https://pcaobus.org/oversight/international/boarddeterminations-holding-foreign-companiesaccountable-act-hfcaa. 501For example, more than 90% of the total 

number of hedge funds and private equity funds 

currently undergo a financial statement audit. See 

infra section VI.C.4. 502See LSTA Comment Letter; Canaras Comment 

Letter. 503See Fixed Income Investor Network Comment 

Letter. 504See supra section II.A (Scope) for additional 

information. The Commission is not applying all 

five private fund adviser rules to SAFs advised by 

SAF advisers. 

compensation scheme.492 A fund audit 

includes the evaluation of whether the 

fair value estimates and related 

disclosures are in conformity with the 

requirements of the financial reporting 

framework (e.g., U.S. GAAP), which 

may include evaluating the selection 

and application of methods, significant 

assumptions, and data used by the 

adviser in making the estimate.493 The 

Commission continues to believe that 

private fund audits are an important 

tool to provide a check on private fund 

valuations. 

One commenter expressed concerns 

that private equity fund audits are 

unnecessary because ‘‘[p]rivate equity 

funds typically charge management fees 

based on capital commitments, or 

sometimes invested capital, neither of 

which is affected by subjective 

valuation methods.’’ 494 We, however, 

have observed instances of advisers to 

private equity funds overcharging their 

management fee by failing to write 

down the value of fund investments.495

In these cases, the subjective valuation 

method is particularly important 

because the adviser may have to 

decrease invested capital by any 

permanent impairments or write-downs 

of portfolio investments in accordance 

with the fund documents, which, in 

turn, decreases the management fee paid 

to the adviser. Also, during an annual 

period in which a private equity fund 

has sold a portfolio investment, the 

auditor typically reviews the fund’s 

waterfall calculation including the 

calculations for return of invested 

capital, return of allocable expenses, the 

preferred return, the general partner 

catch-up, if applicable, and any 

incentive allocation, as part of the 

annual audit. Thus, the Commission 

continues to believe that the mandatory 

audit requirement should apply to 

private fund advisers, including 

advisers to private equity funds. 

One commenter expressed concern 

that the mandatory audit requirement 

may give investors a false sense of 

security because the PCAOB does not 

have the authority to inspect audit 

engagements that involve private fund 

financial statements.496 Under the 

PCAOB’s current inspection program, 

we understand that the PCAOB selects 

audit engagements of audits performed 

involving U.S. public companies, other 

issuers, and broker-dealers, so private 

fund audit engagements would not be 

selected for review.497 Even though 

private fund engagements are not 

selected for review under the PCAOB’s 

current inspection program, we believe 

that many accounting firms registered 

with the PCAOB and subject to the 

PCAOB’s inspection program would 

implement their quality control systems 

throughout the accounting firm related 

to all their assurance engagements. 

Thus, we continue to believe that 

registration and regular inspection of an 

independent public accountant’s system 

of quality control by the PCAOB may 

provide higher quality audits, resulting 

in additional investor protection. 

Commenters also expressed concerns 

that advisers may have increased 

difficulty finding an auditor in certain 

jurisdictions because requiring 

independent public accountants 

conducting the audit to be registered 

with, and subject to inspection by, the 

PCAOB would greatly limit the pool of 

accountants available to conduct 

audits.498 As noted above, we do not 

apply substantive provisions of the 

Advisers Act and its rules, including the 

mandatory audit requirement, with 

respect to non-U.S. clients (including 

private funds) of an SEC registered 

offshore investment adviser.499 We 

believe that this clarification will reduce 

many of the concerns expressed by 

commenters regarding the difficulty for 

non-U.S. private fund advisers finding 

an auditor in certain jurisdictions. 

In addition, we do not believe that 

advisers will have significant difficulty 

in finding an accountant that is eligible 

under the rule in most jurisdictions 

because many PCAOB-registered 

independent public accountants who 

are subject to regular inspection 

currently have practices in various 

jurisdictions, which may ease concerns 

regarding offshore availability. An 

independent public accounting firm 

would not, however, be considered to be 

‘‘subject to regular inspection’’ if it is 

included on the list of firms that is 

headquartered or has an office in a 

foreign jurisdiction that the PCAOB has 

determined, in accordance with PCAOB 

Rule 6100, it is unable to inspect or 

investigate completely because of a 

position taken by one or more 

authorities in that jurisdiction.500 Based 

on our experience with the custody rule, 

we believe registration and the regular 

inspection of an independent public 

accountant’s system of quality control 

by the PCAOB may lead to higher 

quality audits, resulting in additional 

investor protection. Further, most 

private funds are already undergoing a 

financial statement audit, so the 

increase in demand for these services 

may be limited.501 Thus, although we 

acknowledge commenters’ concerns, we 

still believe it important that the private 

fund auditors meet SEC independence 

requirements and be registered with, 

and subject to regular inspection, by the 

PCAOB. 

Some industry commenters 502 and a 

commenter representing CLO 

investors 503 endorsed an alternative 

compliance option for CLOs, such as an 

agreed-upon-procedures engagement, 

instead of requiring such vehicles to 

undergo an annual audit. As stated 

above,504 we believe that SAFs, 

including CLOs, have certain 

distinguishing structural and 

operational features that warrant carving 

them out of the private fund rules 

entirely, including the audit rule. We 

also believe that an agreed-uponprocedures engagement serves a 

different purpose than an audit. An 

agreed-upon procedures engagement is 

an attestation engagement in which a 


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505See AICPA AT–C 215.02. 

506See id. 

507See AICPA AT–C 215.03. 

508See rule 1–02(d) of Regulation S–X. 

509See E&Y Comment Letter; KPMG Comment 

Letter; PWC Comment Letter; AIC Comment Letter 

I; TIAA Comment Letter. 

510See Custody of Funds or Securities of Clients 

by Investment Advisers, SEC Investment Advisers 

Act Release No. IA–2968 (Dec. 30, 2009) [75 FR 

1455 (Jan. 11, 2010)] (‘‘2009 Custody Rule 

Release’’), at 41. 

511See final rule 206(4)–10(a); see also infra 

section II.C.7 (discussing that an adviser needs only 

to take reasonable steps to cause the private fund, 

including an SPV, to undergo an audit if the adviser 

is not in a control relationship). 

512See final rule 206(4)–10(a) and rule 206(4)– 

2(d)(3) (defining ‘‘independent public accountant’’). 

513 Id. 

514See final rule 206(4)–10(a) and rule 206(4)– 

2(b)(4)(ii). 

515See Ropes & Gray Comment Letter; AIC 

Comment Letter II. 

516See SOC Comment Letter. 

517See rule 206(4)–2(b)(4); see also rule 206(4)– 

2(d)(3) under the Advisers Act. 

518See Revision of the Commission’s Auditor 

Independence Requirements, Release No. 33–7919 

(Nov. 21, 2000) [65 FR 76008 (Dec. 5, 2000)]. The 

custody rule requires all accountants performing 

services to meet the standards of independence 

described in rule 2–01(b) and (c) of Regulation S– 

X. See rule 206(4)–2(d)(3) under the Advisers Act. 

519See Revision of the Commission’s Auditor 

Independence Requirements, Release No. 33–7919 

(Nov. 21, 2000) [65 FR 76008 (Dec. 5, 2000)], at 5. 

520Under the definition in rule 1–02(d) of 

Regulation S–X, an ‘‘audit’’ of an entity (such as a 

private fund) that is not an issuer as defined in 

section 2(a)(7) of the Sarbanes-Oxley Act of 2002 

means an audit performed in accordance with 

either U.S. GAAS or the standards of the PCAOB. 

See 2003 Custody Rule Release, supra footnote 470, 

at n.41. When conducting an audit of financial 

statements in accordance with the standards of the 

PCAOB, however, the auditor would also be 

required to conduct the audit in accordance with 

U.S. GAAS because the audit would not be within 

the jurisdiction of the PCAOB as defined by the 

Sarbanes-Oxley Act of 2002, as amended, (i.e., not 

an issuer, broker, or dealer). See AICPA auditing 

standards, AU–C Section 700.46. We believe most 

advisers will choose to perform the audit pursuant 

to U.S. GAAS only rather than both standards, 

though it will be permissible to perform the audit 

pursuant to both standards. 

521See E&Y Comment Letter; SBAI Comment 

Letter; AIMA/ACC Comment Letter; Deloitte 

Comment Letter. 

522Convergence Comment Letter. 

523See AICPA auditing standards, AU–C Section 

240. Audits performed under PCAOB standards 

provide similar benefits. See PCAOB auditing 

Continued 

certified public accountant performs 

specific procedures agreed upon 

between the engaging party and the 

certified public accountant on subject 

matter and reports findings without 

providing an opinion or conclusion (i.e., 

an agreed-upon procedures engagement 

is not an examination or review 

engagement).505 Because the needs of an 

engaging party may vary widely, the 

nature, timing, and extent of the 

procedures may vary, as well.506

Moreover, the intended users assess for 

themselves the procedures and findings 

reported by the certified public 

accountant and draw their own 

conclusions from the work performed 

by the practitioner.507 An audit, on the 

other hand, is an examination of an 

entity’s financial statements by an 

independent public accountant in 

accordance with either the standards of 

the PCAOB or generally accepted 

auditing standards in the United States 

(‘‘U.S. GAAS’’) for purposes of 

expressing an opinion on those financial 

statements.508 Although the final 

approach we are adopting is not 

identical to commenters’ suggestions, 

we believe it is responsive to 

suggestions for the audit requirement 

not to apply to CLOs. 

Commenters also requested 

clarification about whether advisers 

would need to obtain a separate audit of 

an SPV to comply with the mandatory 

audit requirement.509 We understand 

that an adviser to a pooled investment 

vehicle client may utilize an SPV, 

organized as a limited liability 

company, trust, partnership, corporation 

or other similar vehicle, to facilitate 

investments for legal, tax, regulatory or 

other similar purposes. We believe an 

investment adviser could either treat an 

SPV as a separate client, in which case 

the adviser will be advising the SPV 

directly, or treat the SPV’s assets as 

assets of the pooled investment vehicles 

that it is advising indirectly through the 

SPV.510 If the adviser treats the SPV as 

a separate client, the mandatory private 

fund audit rule will require the adviser 

to comply with the rule’s audited 

financial statement distribution 

requirements.511 Accordingly, the 

adviser will distribute the SPV’s audited 

financial statements to the pooled 

investment vehicle’s beneficial owners. 

If, however, the adviser treats the SPV’s 

assets as the pooled investment 

vehicle’s assets that it is advising 

indirectly, the SPV’s assets will be 

required to be considered within the 

scope of the pooled investment vehicle’s 

financial statement audit. 

1. Requirements for Accountants 

Performing Private Fund Audits 

Although there are substantive 

differences between the proposed rule 

and the final rule, we do not believe that 

these differences are significant. The 

mandatory private fund adviser audit 

rule includes certain requirements 

regarding the accountant performing a 

private fund audit, as currently required 

under the custody rule.512 First, the rule 

requires an accountant performing a 

private fund audit to meet the standards 

of independence described in 

Regulation S–X.513 Second, the rule 

requires the independent public 

accountant performing the audit to be 

registered with, and subject to regular 

inspection as of the commencement of 

the professional engagement period, and 

as of each calendar year-end, by, the 

PCAOB in accordance with its rules.514

Some commenters suggested that we 

should allow auditors to meet AICPA 

standards of independence as opposed 

to the standards of independence 

described in rule 2–01(b) and (c) of 

Regulation S–X.515 Another commenter 

suggested that we should require 

advisers to rotate their auditors and 

prohibit auditors to private funds from 

providing any non-audit services.516

Under the current custody rule, advisers 

to pooled investment vehicles 

qualifying for the audit provision must 

meet the standards of independence 

described in Regulation S–X.517 Based 

on our experience with the audit 

provision in the custody rule, we 

continue to believe that an audit by an 

objective, impartial, and skilled 

professional contributes to both investor 

protection and investor confidence.518

We have long recognized the bedrock 

principle that an auditor must be 

independent in fact and appearance, 

and we believe that the independence 

standards described in Regulation S–X 

focus on those relationships or services, 

including certain non-audit services, 

that are more likely to threaten an 

auditor’s objectivity or impartiality.519

2. Auditing Standards for Financial 

Statements 

Under the mandatory private fund 

adviser audit rule, an audit must meet 

the definition in rule 1–02(d) of 

Regulation S–X, as proposed and as 

currently required under the custody 

rule. Pursuant to that definition, 

financial statement audits performed for 

purposes of the audit rule would 

generally be performed in accordance 

with U.S. GAAS.520

Some commenters suggested that we 

consider whether auditing standards 

other than U.S. GAAS or PCAOB 

standards may meet the requirements of 

the rule,521 while another commenter 

stated that ‘‘the rule should require 

advisers to obtain audits performed 

under rule 1–02(d) of Regulation S–X, as 

proposed.’’ 522 After considering these 

comments, we continue to believe that 

audits should be conducted in 

accordance with U.S. GAAS for the 

following reasons. First, U.S. GAAS 

requires that an auditor evaluate and 

respond to the risk of material 

misstatements of the financial 

statements due to fraud or error.523


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standards, AS 2401, which discusses consideration 

of fraud in a financial statement audit. 

524See supra footnote 520. 

525See final rule 206(4)–10(a) and rule 206(4)– 

2(b)(4). The SEC has stated that certain financial 

statements must either be prepared in accordance 

with U.S. GAAP or prepared in accordance with 

some other comprehensive body of accounting 

standards if the information is substantially similar 

to financial statements prepared in accordance with 

U.S. GAAP and contain a footnote reconciling any 

material differences. See 2003 Custody Rule 

Release, supra footnote 470, at n.41. 

526See Albourne Comment Letter. 

527See SBAI Comment Letter; Deloitte Comment 

Letter. 

528See SIFMA–AMG Comment Letter I; AIC 

Comment Letter I. 

529See Deloitte Comment Letter. 

530See FASB ASC Topic 946, Financial 

Services—Investment Companies. 

531See rule 206(4)–2(b)(4)(i) and rule 206(4)– 

2(b)(4)(iii). 

532See 2003 Custody Rule Release, supra footnote 

470, at n.41. 

533See final rule 206(4)–10(a) and rule 206(4)– 

2(b)(4)(i). 534See NSCP Comment Letter; AIC Comment 

Letter I; ILPA Comment Letter I. 535See Convergence Comment Letter. 536See Segal Marco Comment Letter; SBAI 

Comment Letter. 

537We similarly believe that a 180-day time 

period is appropriate in the context of a fund of 

funds and that a 260-day time period is appropriate 

in the context of a fund of funds of funds because 

advisers to these types of pooled investment 

vehicles may face practical difficulties completing 

their audits before the completion of audits for the 

underlying funds in which they invest. We note 

that our staff has expressed a similar view for 

certain fund of funds for purposes of the custody 

rule. See Custody Rule FAQs, supra footnote 465, 

at Question VI.7, VI.8A, and VI.8B. 

Second, audits performed in accordance 

with U.S. GAAS help detect valuation 

irregularities or errors, as well as an 

investment adviser’s loss, 

misappropriation, or misuse of client 

investments. Third, other standards may 

use different or more flexible rules and 

policies (e.g., the option to follow a 

standard, rather than an obligation to do 

so), which may be less effective than 

U.S. GAAS. Finally, we believe that U.S. 

investors are more familiar with the 

procedures performed during a financial 

statement audit conducted in 

accordance with U.S. GAAS. A financial 

statement audit conducted in 

accordance with U.S. GAAS commonly 

involves an accountant confirming bank 

account balances and securities 

holdings as of a point in time and 

regularly includes the testing of a 

sample of transactions, including 

investor subscriptions and redemptions, 

that have occurred throughout the year. 

We believe that the common types of 

audit evidence procedures performed by 

accountants during a financial statement 

audit—physical examination or 

inspection, confirmation, 

documentation, inquiry, recalculation, 

re-performance, observation, and 

analytical procedures—act as an 

important check to identify erroneous or 

unauthorized transactions or 

withdrawals by the adviser. Thus, we 

continue to believe that audits should 

generally be conducted in accordance 

with U.S. GAAS under this rule.524

3. Preparation of Audited Financial 

Statements 

The mandatory private fund adviser 

audit rule also requires the audited 

financial statements to be prepared in 

accordance with generally accepted 

accounting principles as currently 

required under the custody rule and as 

proposed.525 Requiring that financial 

statements comply with U.S. GAAP or 

some other comprehensive body of 

accounting standards similar to U.S. 

GAAP if the differences are reconciled 

to U.S. GAAP is designed to help 

investors receive consistent and quality 

financial reporting on their investments 

from the fund’s adviser. 

We had proposed to require that 

financial statements of private funds 

organized under non-U.S. law or that 

have a general partner or other manager 

with a principal place of business 

outside the United States contain 

information substantially similar to 

statements prepared in accordance with 

U.S. GAAP and any material differences 

must be required to be reconciled to 

U.S. GAAP. While one commenter 

suggested that we continue to require 

audited financial statements prepared in 

accordance with U.S. GAAP,526 others 

suggested that we should recognize 

other accounting standards outside of 

the United States, such as International 

Financial Reporting Standards 

(IFRS),527 and not impose a U.S. GAAP 

requirement.528 Another commenter 

indicated that IFRS may be sufficient on 

their own without also requiring U.S. 

GAAP financial statements or financials 

with a reconciliation to U.S. GAAP.529

We continue to believe that U.S. 

GAAP is well understood by U.S. 

investors. U.S. GAAP also has important 

industry specific accounting principles 

for certain pooled vehicles, including 

private funds, and requires 

measurement of trades on trade date as 

opposed to settlement date, presentation 

of a schedule of investments, and 

certain financial highlights that may not 

be required under other accounting 

standards.530 Thus, we continue to 

believe that it is important for audited 

financial statements to be prepared in 

accordance with U.S. GAAP or some 

other comprehensive body of 

accounting standards similar to U.S. 

GAAP if the differences are reconciled 

to U.S. GAAP.531 Under the custody 

rule, financial statements of private 

funds organized under non-U.S. law or 

that have a general partner or other 

manager with a principal place of 

business outside the United States are 

required to contain information 

substantially similar to statements 

prepared in accordance with U.S. GAAP 

and any material differences are 

required to be reconciled to U.S. 

GAAP.532

4. Distribution of Audited Financial 

Statements 

The mandatory private fund adviser 

audit rule requires a fund’s audited 

financial statements to be distributed to 

current investors within 120 days of the 

end of a private fund’s fiscal year, as 

currently required under the custody 

rule.533 The audited financial 

statements consist of the applicable 

financial statements, related schedules, 

accompanying footnotes, and the audit 

report. 

We proposed that the audited 

financials be distributed ‘‘promptly’’ 

after the completion of the audit. 

Commenters requested that we clarify 

the ‘‘promptly’’ standard,534 with at 

least one commenter suggesting an outer 

limit of 120 days after a fund’s fiscal 

year end to distribute audited financial 

statements,535 while other commenters 

requested additional flexibility around 

the time to distribute audited financial 

statements.536 After considering these 

comments, as well as comments urging 

us not to create disparity between this 

rule and the audit provision of the 

custody rule, we are incorporating the 

custody rule’s timing requirement for 

the distribution of financial statements 

into the mandatory private fund adviser 

audit rule. We believe that, based on our 

experience with the custody rule, a 120- 

day time period is generally appropriate 

to allow the financial statements of a 

fund to be audited while also balancing 

the needs of investors to receive timely 

information.537 This change will help 

ensure investors receive the statements 

in a timely and consistent manner. 

In rare instances, an adviser may be 

unable to distribute a fund’s audited 

financial statements within the required 

timeframe because of reasonably 

unforeseeable circumstances. For 

example, during the COVID–19 

pandemic, some advisers were unable to 

deliver audited financial statements in 

the timeframe required under the 

custody rule due to logistical 

disruptions. Accordingly, because there 


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538See rule 206(4)–2(b)(4)(i) and rule 206(4)– 

2(b)(4)(iii). 

539See final rule 206(4)–10(a) and rule 206(4)– 

2(c). In a master-feeder structure, master fund 

financials may be attached to the feeder fund 

financials and delivered to investors in the feeder 

fund. See FASB ASC 946–205–45–6. 

540See rule 206(4)–10(a) and rule 206(4)–2(c). 

541Final rule 206(4)–10(a); see Proposing Release, 

supra footnote 3, at 109; see also rule 206(4)– 

2(b)(4)(i). 

542See rule 206(4)–2(b)(4)(iii). 

543See final rule 206(4)–10(a) and rule 206(4)– 

2(b)(4)(i). 

544See AICPA auditing standards, AU Section 

708. 

545See KPMG Comment Letter; AIC Comment 

Letter II; NCREIF Comment Letter; SBAI Comment 

Letter. 

546See KPMG Comment Letter; AIC Comment 

Letter II; Convergence Comment Letter; AIMA/ACC 

Comment Letter; SBAI Comment Letter. 

547See Ropes & Gray Comment Letter. 

548See Safeguarding Release, supra footnote 467; 

we have recently reopened the comment period on 

the Safeguarding rulemaking proposal. 

Safeguarding Advisory Client Assets; Reopening of 

Comment Period, Investment Advisers Act Release 

No. 6384 (August 23, 2023). 

is not an alternative method by which 

to satisfy the rule, the Commission 

would take the position that, if an 

adviser is unable to deliver audited 

financial statements in the timeframe 

required under the mandatory private 

fund adviser audit rule due to 

reasonably unforeseeable circumstances, 

this would not provide a basis for 

enforcement action so long as the 

adviser reasonably believed that the 

audited financial statements would be 

distributed by the deadline and the 

adviser delivers the financial statements 

as promptly as practicable. 

Under the mandatory private fund 

adviser audit rule, the audited financial 

statements must be sent to all of the 

private fund’s investors, as proposed 

and as currently required under the 

custody rule.538 We did not receive any 

comments on this aspect of the 

proposal. In circumstances where an 

investor is itself a limited partnership, 

limited liability company, or another 

type of pooled vehicle that is a related 

person of the adviser, it is necessary to 

look through that pool (and any pools in 

a control relationship with the adviser 

or its related persons, such as in a 

master-feeder fund structure), in order 

to send to investors in those pools.539

Without such a requirement, the audited 

financial statements would essentially 

be delivered to the adviser rather than 

to the parties the financial statements 

are designed to inform. Outside of a 

control relationship, such as if the 

private fund investor is an unaffiliated 

fund of funds, this same concern is not 

present, and it is not necessary to look 

through the structure to make 

meaningful delivery. It will be sufficient 

to distribute the audited financial 

statements to the adviser to, or other 

designated party of, the unaffiliated 

fund of funds. We believe that this 

approach will lead to meaningful 

delivery of the audited financial 

statements to the private fund’s 

investors.540

5. Annual Audit, Liquidation Audit, and 

Audit Period Lengths 

Key to the effectiveness of the audit 

in protecting investors is timely and 

regular administration and distribution. 

We are requiring that an audit be 

obtained at least annually, as 

proposed.541 The final mandatory 

private fund adviser audit rule 

incorporates the custody rule 

requirement that audits must be 

performed promptly upon 

liquidation.542

Requiring the audit on an annual 

basis will help alert investors within 

months, rather than years, as to whether 

the financial statements are free of 

material misstatements and will 

increase the likelihood of mitigating 

losses or reducing exposure to other 

investor harms. Similarly, a liquidation 

audit will help ensure the appropriate 

and prompt accounting of the proceeds 

of a liquidation so that investors can 

take timely steps to mitigate losses or 

protect their rights at a time when they 

may be vulnerable to misappropriation 

by the investment adviser. We believe 

that it becomes increasingly difficult to 

remediate losses or other investor harms 

resulting from a material misstatement 

the longer it goes undetected. The audit 

requirement addresses these concerns 

while also balancing the cost, burden, 

and utility of requiring frequent audits. 

Requiring the audit on an annual 

basis is consistent with current practices 

of private fund advisers that obtain an 

audit to comply with the custody rule 

under the Advisers Act, or to satisfy 

investor demand for an audit, and will 

provide investors with uniformity in the 

information they are receiving.543 Under 

U.S. GAAS, auditors have an obligation 

to evaluate whether the current-period 

financial statements are consistent with 

those of the preceding period, and any 

other periods presented and to 

communicate appropriately in the 

auditor’s report when the comparability 

of financial statements between periods 

has been materially affected by a change 

in accounting principle or by 

adjustments to correct a material 

misstatement in previously issued 

financial statements.544 When an 

investor receives audited financial 

statements each year from the same 

private fund, the investor can compare 

statements year-over-year. Additionally, 

the investor can analyze and compare 

audited financial statements across 

other private funds and similar 

investment vehicles each year. 

With respect to liquidation, we 

understand that the amount of time it 

takes to complete the liquidation of a 

private fund may vary. A number of 

years might elapse between the decision 

to liquidate an entity and the 

completion of the liquidation process. 

During this time, the fund may execute 

few transactions and the total amount of 

investments may represent a fraction of 

the investments that existed prior to the 

start of the liquidation process. We 

further understand that a lengthy 

liquidation period can lead to 

circumstances where the cost of an 

annual audit represents a sizeable 

portion of the fund’s remaining assets. 

Commenters suggested that we clarify 

how these requirements apply to stub 

period audits.545 Certain commenters 

suggested that we should consider a 

period other than annually for funds 

that are undergoing a plan of liquidation 

or a wind down,546 with at least one 

commenter expressing concern that the 

cost of a liquidation audit may outweigh 

the possible benefits.547 Although we 

appreciate commenters’ concerns, we 

are persuaded by commenters who 

urged us to align the requirements of 

this rule and the custody rule for several 

reasons. First, the two rules are 

substantially similar and have 

substantially similar policy objectives. 

Second, aligning this rule and the 

custody rule avoids confusion because 

most private fund advisers are already 

aware of what is required to satisfy the 

audit provision under the custody rule. 

Third, aligning this rule and the custody 

rule avoids additional costs and 

associated burdens due to the two rules’ 

potential differences. We, however, 

requested comment on how these 

requirements apply to stub periods 

when we recently proposed 

amendments to the custody rule.548

6. Commission Notification 

The proposed mandatory private fund 

adviser audit rule would have required 

an adviser to enter into, or cause the 

private fund to enter into, a written 

agreement with the independent public 

accountant performing the audit to 

notify the Commission (i) promptly 

upon issuing an audit report to the 

private fund that contains a modified 

opinion and (ii) within four business 

days of resignation or dismissal from, or 

other termination of, the engagement, or 


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549See Proposing Release, supra footnote 3, at 

111. 

550See NYC Bar Comment Letter II; BVCA 

Comment Letter; Invest Europe Comment Letter. 

551See NASAA Comment Letter. 

552See RFG Comment Letter II. 

553See Safeguarding Release, supra footnote 467. 

554See SEC Charges Two Advisory Firms for 

Custody Rule Violations, One Firm for ADV 

Violations, and Six Firms for Both, (Sept. 9, 2022), 

available athttps://www.sec.gov/news/press-release/ 

2022-156; see also Form ADV, Section 7.B.(1) 

Private Fund Reporting, Question 23(h). 

555Final rule 206(4)–10(b). 

556 Id. 

557See Convergence Comment Letter. 

558See BVCA Comment Letter; Invest Europe 

Comment Letter. 

559See AIMA/ACC Comment Letter. 

560Final amended rule 204–2(a)(21)(i). See also 

supra footnote 452 (describing the record creation 

and retention requirements under the books and 

records rule). 

561See the discussion of recordkeeping 

requirements above in section II.B.6. 

562Final amended rule 204–2(a)(21)(ii). 

563Final rule 211(h)(2)–2. The rule does not apply 

to advisers that are not required to register as 

investment advisers with the Commission, such as 

State-registered advisers and ERAs. 

564The Commission recently adopted certain new 

reporting requirements for private funds on Form 

PF. See Form PF; Event Reporting for Large Hedge 

Fund Advisers and Private Equity Fund Advisers; 

Requirements for Large Private Equity Fund 

Adviser Reporting, Investment Advisers Act Release 

No. 6297 (May 3, 2023) (‘‘Form PF Release’’) (17 

CFR parts 275 and 279). Among these new reporting 

requirements is an obligation for certain private 

equity funds to report adviser-led secondary 

transactions on Form PF on a quarterly basis. While 

the adviser-led secondary transaction reporting 

requirement on Form PF and the adviser-led 

secondary transaction requirements in the final rule 

both serve, at least in part, to further investor 

protection, they do so through different means, 

entail different burdens, and employ modified 

definitions. The adviser-led secondary transaction 

reporting requirement on Form PF is confidential 

and thus does not provide investors with additional 

information. The adviser-led secondary transaction 

requirements in this rule, on the other hand, are 

designed to, among other things, make investors 

better informed about adviser-led secondary 

transactions in which they may be participating. 

upon removing itself or being removed 

from consideration for being 

reappointed.549

Some commenters asserted that the 

notification requirement would be of 

limited benefit to the Commission,550

while one commenter supported the 

notification requirement stating that a 

modified opinion or termination of an 

auditor constitute serious red flags that 

warrant early notice to regulators.551

Another commenter even suggested that 

we should require advisers to notify 

investors upon the occurrence of a 

significant event.552 After carefully 

considering these comments, we are not 

adopting the notification requirement at 

this time because we are persuaded by 

commenters who urged us to align the 

requirements of this rule and the 

custody rule. However, the Commission 

recently proposed amendments to the 

custody rule. As part of the proposed 

rulemaking, the Commission proposed 

similar amendments that would require 

advisers to enter into a written 

agreement with the independent public 

accountant performing the audit to 

notify the Commission (i) within one 

business day upon issuing an audit 

report to the entity that contains a 

modified opinion and (ii) within four 

business days of resignation or 

dismissal from, or other termination of, 

the engagement, or upon removing itself 

or being removed from consideration for 

being reappointed.553 We are continuing 

to consider comments received 

regarding that proposal. Although we 

are not adopting a notification 

requirement as part of this rule, we 

remind advisers that per the 

instructions to Form ADV, Part 1A, 

Schedule D, Section 7.B.23.(h), if a 

private fund adviser has checked 

‘‘Report Not Yet Received,’’ the adviser 

must promptly file an amendment to its 

Form ADV to update its records once 

the report is available.554

7. Taking All Reasonable Steps To 

Cause an Audit 

We recognize that some advisers may 

not have requisite control over a private 

fund client to cause its financial 

statements to undergo an audit in a 

manner that satisfies the mandatory 

private fund adviser rule. This could be 

the case, for instance, where a subadviser is unaffiliated with the fund. In 

a minor change from proposal, we are 

clarifying that if a fund is already 

undergoing an audit, a non-control 

adviser does not have to take reasonable 

steps to cause its private fund client to 

undergo an audit.555 We made this 

change to final rule 206(4)–10(b) to be 

consistent with final rule 206(4)–10(a). 

Thus, we are requiring that an adviser 

take all reasonable steps to cause its 

private fund client to undergo an audit 

that satisfies the rule when the adviser 

does not control the private fund and is 

neither controlled by nor under 

common control with the fund, if the 

private fund does not otherwise undergo 

such an audit.556

One commenter suggested that the 

‘‘all reasonable steps’’ standard is 

unclear.557 Commenters also suggested 

that we remove this requirement for 

sub-advisers 558 and that we apply the 

mandatory audit rule only to private 

funds controlled by the adviser.559 We 

recognize that what would constitute 

‘‘all reasonable steps’’ depends on the 

facts and circumstances. We believe, 

however, that advisers are in the best 

position to evaluate their control 

relationships over private fund clients 

and should be in a position to determine 

the appropriate steps to satisfy such 

standard based on their relationship 

with the private fund and the relevant 

control person. For example, a subadviser that has no affiliation to the 

general partner of a private fund could 

document the sub-adviser’s efforts by 

including (or seeking to include) the 

requirement in its sub-advisory 

agreement. Accordingly, we continue to 

believe that the ‘‘all reasonable steps’’ 

standard is appropriate. 

8. Recordkeeping Provisions Related to 

the Audit Rule 

Finally, we are amending the 

Advisers Act books and records rule to 

require advisers to keep a copy of any 

audited financial statements, along with 

a record of each addressee and the 

corresponding date(s) sent.560 In a 

change from the proposal, we are not 

requiring private fund advisers to make 

and retain records of the addresses and 

delivery methods used to disseminate 

audited financial statements.561

Additionally, the adviser will be 

required to keep a record documenting 

steps taken by the adviser to cause a 

private fund client with which it is not 

in a control relationship to undergo a 

financial statement audit that complies 

with the rule.562 We did not receive 

comments on the recordkeeping 

provisions of the mandatory private 

fund adviser audit rule. This aspect of 

the rule is designed to facilitate our 

staff’s ability to assess an adviser’s 

compliance with the mandatory private 

fund adviser audit rule and to detect 

risks the proposed audit rule is designed 

to address. We believe it similarly will 

enhance an adviser’s compliance efforts 

as well. 

D. Adviser-Led Secondaries 

We are requiring SEC-registered 

advisers to satisfy certain requirements 

if they initiate a transaction that offers 

fund investors the option between 

selling all or a portion of their interests 

in the private fund and converting or 

exchanging them for new interests in 

another vehicle advised by the adviser 

or any of its related persons (an 

‘‘adviser-led secondary transaction’’).563

First, the adviser must obtain a fairness 

opinion or a valuation opinion from an 

independent opinion provider and 

distribute the opinion to private fund 

investors prior to the due date of the 

election form. Second, the adviser must 

prepare and distribute a written 

summary of any material business 

relationships between the adviser or its 

related persons and the independent 

opinion provider.564 Advisers or their 


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565See, e.g., CFA Comment Letter I; ICM 

Comment Letter; Morningstar Comment Letter; 

NEBF Comment Letter; Segal Marco Comment 

Letter. 

566See, e.g., Better Markets Comment Letter; 

Healthy Markets Comment Letter I; NY State 

Comptroller Comment Letter. 

567See, e.g., Comment Letter of the National 

Association of College and University Business 

Officers (Apr. 25, 2022) (‘‘NACUBO Comment 

Letter’’); SIFMA–AMG Comment Letter I; ATR 

Letter; PIFF Comment Letter; NYC Bar Comment 

Letter II; Ropes & Gray Comment Letter. 

568See, e.g., RFG Comment Letter II; OPERS 

Comment Letter (asking the Commission to provide 

additional relief, such as allowing investors to 

participate in the continuation fund on the same 

terms that applied to the investor’s investment in 

the initial fund). 

569For example, one commenter suggested we 

should encourage private funds to appoint 

independent transfer administrators and create 

secondary transfer policies. See Comment Letter of 

NYPPEX Holdings, LLC (Feb. 25, 2022) (‘‘NYPPEX 

Comment Letter’’). Another commenter suggested 

that we should require advisers to carry forward 

relevant side letter provisions to any new 

investment vehicle when those provisions were 

already negotiated and accepted by an adviser in 

respect of the original investment fund. See NY 

State Comptroller Comment Letter. 

570Several commenters stated that providing full 

and fair disclosure concerning the conflicts and 

material facts associated with an adviser-led 

secondary transaction and receiving informed 

consent from investors is the most effective method 

to address the associated conflicts. See, e.g., BVCA 

Comment Letter; Invest Europe Comment Letter. 

However, it is not possible for an investor to receive 

full and fair disclosure concerning the material facts 

associated with an adviser-led secondary 

transaction if the underlying valuation is 

determined only by the adviser without any thirdparty check. We also discuss further economic 

considerations around the viability of disclosure or 

consent requirements in the case of adviser-led 

secondaries below. See infra sections VI.C.2, VI.C.4. 

571See, e.g., ATR Comment Letter; Ropes & Gray 

Comment Letter; AIC Comment Letter I. 572See Ropes & Gray Comment Letter. 

related persons have a conflict of 

interest with the fund and its investors 

when they offer investors the option 

between selling their interests in the 

fund, and converting or exchanging 

their interests in the private fund for 

interests in another vehicle advised by 

the adviser or any of its related persons. 

This rule will provide an important 

check against an adviser’s conflicts of 

interest in structuring and leading such 

a transaction from which it may stand 

to profit at the expense of private fund 

investors. 

Some commenters supported the 

proposed rule,565 including some that 

stated it would help protect investors by 

providing them with better 

information.566 Other commenters 

generally opposed the proposed rule.567

Some commenters suggested that we 

expand the final rule to offer additional 

protections to investors, such as 

requiring advisers to use reasonable 

efforts to allow investors to remain 

invested on their original terms without 

the adviser realizing any carried interest 

on the sale of underlying assets.568

While we understand that investors 

have other concerns surrounding these 

types of transactions,569 we remain 

focused on providing investors with 

information that will enable them to 

make educated and informed decisions 

about their investments, particularly 

when such decisions involve a 

conflicted transaction, and we believe 

fairness and valuation opinions address 

that concern.570 Fairness opinions and 

valuation opinions help investors make 

educated and informed investment 

decisions because they assist investors 

in gaining a more complete 

understanding of the financial aspects of 

the transaction. Moreover, we believe 

the opinion requirement is better suited 

to address the conflicts inherent within 

adviser-led secondary transactions 

because the presence of an independent 

third party reduces the possibility of 

fraudulent, deceptive, or manipulative 

activity. It also reduces the possibility 

that the subject asset may be valued 

opportunistically and that the adviser’s 

compensation may involve fraud or 

deception, resulting in an inappropriate 

compensation scheme. 

Some commenters argued that the 

SEC would exceed its authority if it 

were to require advisers to obtain a 

fairness opinion and that the proposed 

rule conflicts with SEC statements that 

advisers and clients can shape their 

relationships by agreement, provided 

that there is appropriate disclosure.571

Section 206(4) grants the SEC the 

authority to prescribe means that are 

reasonably designed to prevent 

fraudulent, deceptive, or manipulative 

acts, practices, and courses of business. 

The final rule is reasonably designed to 

achieve this goal because it addresses an 

adviser’s conflicts of interest that arise 

when leading a secondary transaction. 

Generally, the adviser is incentivized to 

recommend for the private fund to 

participate in the transaction by selling 

the asset to a new vehicle that survives 

the transaction, often referred to as the 

‘‘continuation vehicle,’’ because the 

adviser and its related persons will 

typically receive additional 

management fees and carried interest 

from managing the continuation vehicle. 

Specifically, the adviser will be 

incentivized to seek a lower sale price 

for the asset to benefit the continuation 

fund because a lower sale price will 

increase the potential for more carried 

interest out of the continuation fund in 

the future. Additionally, an adviser may 

seek to undervalue an asset subject to a 

secondary transaction if the adviser’s 

economics in the continuation fund are 

greater than its economics in the 

existing fund. This would harm 

investors in the existing fund because 

their cash-out offer would be based on 

an underlying valuation that is below 

market value. As another example, if the 

adviser-led secondary required a 

‘‘stapled commitment’’ to another 

vehicle whereby secondary buyers were 

required to make contemporaneous 

capital commitments to another vehicle, 

the price offered to the fund’s investors 

could be adversely affected if the staple 

requirement reduces the amount 

prospective buyers are willing to pay. 

By ensuring that private fund investors 

that participate in a secondary 

transaction are offered an appropriate 

price and provided disclosures about 

the opinion provider’s relationship with 

the adviser, the rule will help prevent 

acts that are fraudulent, deceptive, or 

manipulative. If investors receive the 

benefit of a third-party check on 

valuation and are made aware of any 

conflicts of interest between the opinion 

provider and the adviser, investors are 

less likely to be defrauded, deceived, or 

manipulated by a mis-valuation by the 

adviser in its own interest. 

One commenter argued that the 

proposed rule would be contrary to 

Section 211(h) of the Advisers Act 

because the proposed rule would 

significantly and needlessly expand an 

adviser’s obligations and would 

disadvantage investors and the 

industry.572 Section 211(h)(2) authorizes 

the Commission to prohibit or restrict 

certain sales practices, conflicts of 

interest, or compensation schemes that 

the Commission deems contrary to the 

public interest and the protection of 

investors. As discussed above in this 

section, an adviser-led secondary 

transaction raises certain conflicts of 

interest because the adviser and its 

related persons typically are involved 

on both sides of the transaction. As a 

result, advisers may seek to undervalue 

or overvalue an underlying asset 

involved in the transaction, at the 

expense of the private funds they 

advise, depending on how the 

economics of the transaction most 

benefit them. The conflicts of interest 

associated with adviser-led secondary 

transactions are particularly harmful to 

investor protection because they are 

often not made transparent to investors. 

These conflicts can also harm investors 

that elect to roll into the new vehicle 

advised by the same adviser. For 

example, the conflicts may influence or 

alter the terms the adviser sets forth in 

the new vehicle’s governing agreement 

to the detriment of investors. Because 

investors typically do not have 


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573See NYC Bar Comment Letter II. 

574See 17 CFR 229.1000. 

575Final rule 211(h)(1)–1. In a change from the 

proposal and in response to commenters, we are 

modifying the definition of an ‘‘adviser-led 

secondary transaction’’ from the proposal to 

exclude tender offers generally by revising the 

definition to require a choice between clauses (i) 

and (ii). See the discussion of the change to this 

definition in this section below. 

576One commenter stated that the proposed 

definition of an ‘‘adviser led secondary transaction’’ 

may inadvertently pick up certain types of routine 

cross-trades. See Ropes & Gray Comment Letter. We 

would not consider the rule to apply to cross trades 

(which, generally, include sales of assets from one 

fund managed by an adviser to another fund 

managed by the same adviser) where the adviser 

does not offer the private fund’s investors the 

choice to sell, convert, or exchange their fund 

interest. Although not subject to this rule, such 

cross trades may implicate other Federal securities 

laws, rules, and regulations, such as sections 206(1) 

and (2) of the Advisers Act. 

577See, e.g., Ropes & Gray Comment Letter; SBAI 

Comment Letter. In a typical season and sell 

transaction, one entity originates a loan and then, 

after the conclusion of a ‘‘seasoning period,’’ sells 

the loan to an affiliated entity. See The Investment 

Lawyer, Covering Legal and Regulatory Issues of 

Asset Management, Jessica T. O’Mary (July 2019), 

at 3–4. 

withdrawal rights, they may be subject 

to those terms for an extended period of 

time. 

Adviser-led secondary transactions 

also involve compensation schemes as, 

typically, the adviser receives 

compensation as a result of the 

transaction. Advisers stand to profit 

from being on both sides of the 

transaction by earning additional 

compensation in the form of 

management fees or carried interest 

which is ultimately paid by fund 

investors. For example, in the 

continuation fund context, when an 

asset is sold from an existing fund to the 

continuation fund, the adviser has the 

potential to realize carried interest as 

part of that sale, depending on the 

performance of the existing fund. 

Advisers are thus incentivized to overor undervalue the underlying asset 

depending on how they will receive the 

most compensation. This rule’s 

requirement that private fund investors 

receive a third-party check on price via 

a fairness or valuation opinion and are 

provided disclosures about the opinion 

provider’s relationship with the adviser 

will help protect them against such 

conflicted compensation schemes. 

One commenter stated that, if 

adopted, this rule would be the first and 

only Federal securities law requiring a 

fairness opinion.573 While the Federal 

securities laws generally do not require 

fairness opinions, they have required 

disclosure of fairness findings, 

including by independent parties, in 

other conflicted transactions. For 

example, in certain going-private 

transactions, Regulation M–A requires 

the filer to provide information 

regarding the substantive and 

procedural fairness of the transaction to 

address concerns related to self-dealing 

and unfair treatment, including whether 

the transaction is fair or unfair to 

unaffiliated security holders.574 We 

believe that, due to these and other 

requirements applicable to going-private 

transactions, companies (or their 

affiliates) often obtain fairness opinions 

from independent opinion providers as 

a matter of best practice. Thus, other 

Federal securities laws, such as 

Regulation M–A, have required, or 

otherwise have indirectly caused, 

fairness findings similar to those 

required in the opinion provision of the 

final rule. 

After considering comments, we are 

adopting this rule largely as proposed. 

In contrast to the proposal, we are 

providing advisers the option to obtain 

a valuation opinion or a fairness 

opinion, and we are requiring 

distribution of the opinion and the 

summary of material business 

relationships before the due date of the 

binding election form. 

1. Definition of Adviser-Led Secondary 

Transaction 

Adviser-led secondary transactions 

are defined as transactions initiated by 

the investment adviser or any of its 

related persons that offer the private 

fund’s investors the choice between: (i) 

selling all or a portion of their interests 

in the private fund and (ii) converting 

or exchanging all or a portion of their 

interests in the private fund for interests 

in another vehicle advised by the 

adviser or any of its related persons.575

This definition generally includes 

secondary transactions where a fund is 

selling one or more assets to another 

vehicle managed by the adviser, if 

investors have the option between 

obtaining liquidity and rolling all or a 

portion of their interests into the other 

vehicle. Examples of such transactions 

may include single asset transactions 

(such as the fund selling a single asset 

to a new vehicle managed by the 

adviser), strip sale transactions (such as 

the fund selling a portion of multiple 

assets to a new vehicle managed by the 

adviser), and full fund restructurings 

(such as the fund selling all of its assets 

to a new vehicle managed by the 

adviser).576

We generally would consider a 

transaction to be initiated by the adviser 

if the adviser commences a process, or 

causes one or more other persons to 

commence a process, that is designed to 

offer private fund investors the option to 

obtain liquidity for their private fund 

interests. However, whether the adviser 

or its related person initiates a 

secondary transaction requires a facts 

and circumstances analysis. We 

generally would not view a transaction 

as initiated by the adviser if the adviser, 

at the unsolicited request of the 

investor, assists in the secondary sale of 

such investor’s fund interest. 

Adviser-led transactions raise certain 

conflicts of interest because the adviser 

and its related persons are involved on 

both sides of the transaction and have 

interests in the transaction that are 

different from, or in addition to, the 

interests of the private fund investors. 

For example, because the adviser may 

have the opportunity to earn economic 

and other benefits conditioned upon the 

closing of the secondary transaction, 

such as additional management fees or 

carried interest (including ‘‘premium’’ 

carry), the adviser generally has a 

conflict of interest in setting and 

negotiating the transaction terms. We 

believe that the definition is sufficiently 

broad to remain evergreen as secondary 

transactions continue to evolve and 

capture transactions that present these 

or other conflicts of interest. It also is 

sufficiently narrow to avoid capturing 

certain types of transactions that would 

not raise the same regulatory and 

conflict of interest concerns. For 

example, some commenters expressed 

concerns that the definition would 

capture rebalancing between parallel 

funds, ‘‘season and sell’’ transactions, 

and other scenarios where it may be 

unclear whether the adviser initiated 

the transaction.577 Rebalancing between 

parallel funds and season and sell 

transactions between parallel funds 

generally will not be captured by the 

‘‘adviser-led secondary transaction’’ 

definition because the adviser is not 

offering investors the choice between 

selling and converting/exchanging their 

interests in the private fund. Instead, the 

adviser is moving or reallocating assets 

between private funds it advises for 

legal and/or tax reasons. Rebalancing 

and season and sell transactions are 

important tools that assist an adviser in 

managing a fund’s operations. For 

example, rebalancing allows an adviser 

to ensure that its fund clients have 

appropriate exposure to an investment 

to carry out the funds’ investment 

strategies. Also, season and sell 

transactions are primarily used to 

reduce taxes and may allow an adviser 

to accommodate investors with different 

tax needs. Advisers and investors will 

benefit from continuing to access these 


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578See, e.g., AIC Comment Letter II; NYC Bar 

Comment Letter II. 

579See, e.g., Comment Letter of Cravath, Swaine 

& Moore LLP (Apr. 11, 2022) (‘‘Cravath Comment 

Letter’’); NYC Bar Comment Letter II. 

580An attempt to avoid any of the rule’s 

requirements, depending on the facts and 

circumstances, could violate the Act’s general 

prohibition against doing anything indirectly which 

would be prohibited if done directly. Section 208(d) 

of the Advisers Act. 

581See final rule 211(h)(1)–1 (defining ‘‘fairness 

opinion’’ and ‘‘valuation opinion’’). 582See, e.g., Segal Marco Comment Letter (stating 

that the fairness opinion requirement would ‘‘help 

investors receive independent price assessments’’); 

Better Markets Comment Letter; NY State 

Comptroller Comment Letter. 583See, e.g., AIC Comment Letter I; AIMA/ACC 

Comment Letter; PIFF Comment Letter. 584See, e.g., SBAI Comment Letter; Comment 

Letter of Houlihan Lokey, Inc. (Apr. 25, 2022) 

(‘‘Houlihan Comment Letter’’); IAA Comment Letter 

II. 585As a fiduciary, the adviser is obligated to act 

in the fund’s best interest and to make full and fair 

disclosure to the fund of all conflicts and material 

facts associated with the adviser-led transaction. 586See, e.g., AIMA/ACC Comment Letter; 

Houlihan Comment Letter. 

587See Houlihan Comment Letter. 

588We believe that any fairness or valuation 

opinions provided pursuant to the final rule should 

nonetheless be in line with market practices and 

methodologies. For example, we understand that, 

currently, many fairness and valuation opinions 

rely on discounted cash flow, similar transaction, 

similar company, and/or other comparable 

analyses. We recognize, however, that each of these 

types of analyses may not be possible in all 

circumstances or otherwise applicable to the 

transaction type, and that other types of analysis 

may be appropriate. 

589See, e.g., Cravath Comment Letter; Comment 

Letter of Carta, Inc. (Apr. 25, 2022) (‘‘Carta 

Comment Letter’’); Albourne Comment Letter; 

Pathway Comment Letter; ILPA Comment Letter I; 

IAA Comment Letter II; AIC Comment Letter I. 

590Some commenters suggested that valuations 

obtained within 12 months of the adviser’s 

solicitation of investor interest in the adviser-led 

secondary transaction would provide acceptable 

valuation information. See Cravath Comment Letter 

(suggesting that the final rule exempt from the 

fairness opinion requirement transactions where an 

asset was the subject of a liquidity event within the 

last 12 months, among other requirements); ILPA 

Comment Letter I. However, we believe that 12 

months is too long a period of time and would not 

allow the price to reflect the market’s more recent 

pricing changes. Significant market changes (for 

instance, the global spread and response to COVID– 

19) can occur in a substantially shorter time period 

than 12 months. 

tools, without the need for a fairness 

opinion. 

In the Proposing Release, we 

classified ‘‘tender offers’’ as falling 

within the definition of ‘‘adviser-led 

secondary transactions’’ and we 

requested comment on this treatment 

and asked whether the rule should treat 

tender offers differently. Some 

commenters responded that the 

definition should not capture tender 

offers where the adviser or its related 

person is not acting as the purchaser.578

These commenters stated that a fairness 

opinion would not add value for these 

types of transactions because investors 

typically have discretion to determine 

whether to remain in the fund on their 

existing terms or sell their interests for 

the price offered and that the default in 

a tender offer is for the investor to 

maintain its ‘‘status quo’’ interest in the 

fund. One commenter suggested that we 

revise the definition of adviser-led 

secondaries to more appropriately 

narrow its scope by clarifying that the 

definition requires that investors must 

choose between selling their interest in 

a private fund and converting or 

exchanging their interest for an interest 

in another vehicle advised by the same 

adviser.579

We found commenters’ statements on 

this point persuasive in the context of 

this rule and, in a change from the 

proposal, are revising the rule text to 

exclude tender offers generally from the 

definition of ‘‘adviser-led secondary 

transactions.’’ We have modified the 

definition from the proposal to establish 

that the definition contemplates a 

choice between clauses (i) and (ii) of the 

definition. Accordingly, tender offers 

will not be captured by the definition if 

an investor is not faced with the 

decision between (1) selling all or a 

portion of its interest and (2) converting 

or exchanging all or a portion of its 

interest. Generally, if an investor is 

allowed to retain its interest in the same 

fund with respect to the asset subject to 

the transaction on the same terms (i.e., 

the investor is not required to either sell 

or convert/exchange), as many tender 

offers permit investors to do, then the 

transaction would not qualify as an 

adviser-led secondary transaction.580

2. Fairness Opinion or Valuation 

Opinion 

To complete an adviser-led secondary 

transaction, advisers must either (i) 

obtain a written opinion stating that the 

price being offered to the private fund 

for any assets being sold as part of an 

adviser-led secondary transaction is fair 

(a ‘‘fairness opinion’’), or (ii) obtain a 

written opinion stating the value (as a 

single amount or a range) of any assets 

being sold (a ‘‘valuation opinion’’).581 In 

a change from the proposal, and in 

response to comments, we are allowing 

advisers to have the option to obtain 

and distribute to investors a valuation 

opinion instead of a fairness opinion. 

Many commenters supported the 

proposed requirement that advisers 

obtain a fairness opinion in part because 

they believed it would provide investors 

with important information to inform 

their decisions.582 Others stated that 

requiring fairness opinions would be 

overly burdensome because they would 

increase transaction costs.583 Several 

commenters suggested that we offer 

alternatives to the fairness opinion 

requirement, and some commenters 

suggested we allow advisers to obtain 

valuation opinions in lieu of a fairness 

opinion.584 We continue to believe that 

requiring a third-party check on 

valuation is a critical component of 

preventing the type of harm that might 

result from the adviser’s conflict of 

interest in structuring and leading a 

secondary transaction.585 Requiring 

advisers to obtain an independent 

opinion would provide private fund 

investors assurance that the price being 

offered is based on an appropriate 

valuation. We are receptive to 

commenters’ concerns, however, that 

requiring a fairness opinion could result 

in increased costs to investors and that 

there may be other mechanisms to 

provide investors with unconflicted, 

objective data about the value of assets 

that are the subject to an adviser-led 

secondary transaction.586 We 

understand that, in some cases, the cost 

of a valuation opinion would be lower 

than a fairness opinion, but that a 

valuation opinion would still provide 

investors with a strong basis to make an 

informed decision.587 Namely, a 

valuation opinion would also provide a 

third-party check on valuation which is 

critical to addressing the conflicts of 

interest inherent in adviser-led 

secondary transactions.588 Under the 

final rule, advisers and investors will 

have the ability to negotiate whether a 

fairness opinion or valuation opinion is 

more appropriate. 

Several commenters suggested that we 

exempt adviser-led transactions where 

price can otherwise be determined 

through a market-driven discovery 

process independent of the adviser, 

such as when a recent sale of a minority 

stake in the relevant portfolio 

investment has occurred or shares of an 

underlying asset are publicly traded.589

Although such transactions can provide 

helpful data that can inform a valuation 

opinion or fairness opinion, the 

valuation ascribed to the asset in such 

a transaction may not represent an 

accurate value. For example, valuations 

obtained through a minority stake sale 

may become stale relatively quickly.590

In the context of an underlying asset 

that is publicly traded, the market price 

may be highly volatile or the publicly 

traded security may have limited 

trading volume. In addition to timing, 

each transaction is unique, and factors 

such as size of the asset being sold and 

whether the purchaser is obtaining a 

controlling interest could result in a 


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591See, e.g., Healthy Markets Comment Letter I; 

Better Markets Comment Letter; OPERS Comment 

Letter. 

592We recognize, however, that most adviser-led 

transactions do not involve publicly traded 

securities and typically involve financial assets that 

are valued using unobservable inputs as described 

in FASB ASC Topic 820, Fair Value Measurement, 

i.e., level 3 inputs. 

593See supra the discussion of appropriate 

methodologies in footnote 588. 

594See, e.g., NYPPEX Comment Letter; Segal 

Marco Comment Letter. 

595See, e.g., Houlihan Comment Letter (stating 

that the final rule should not require the fairness 

opinion to state that the private fund and/or its 

investors may rely on the fairness opinion); AIMA/ 

ACC Comment Letter; Cravath Comment Letter. 

596See final rule 211(h)(1)–1 (defining 

‘‘independent opinion provider’’). See supra section 

II.B.1 for a discussion of the definition of ‘‘related 

person.’’ 

597See Ropes & Gray Comment Letter. 

598 In a minor change from the proposed 

definition of ‘‘independent opinion provider,’’ we 

are replacing ‘‘an entity’’ with ‘‘a person.’’ 

‘‘Person,’’ as defined under the Advisers Act 

includes natural persons as well as entities. Section 

202(a)(16) of the Act [15 U.S.C. 80b–2(a)(16)]. 

valuation that is not as relevant to an 

adviser-led secondary transaction 

involving the same asset, depending on 

the facts and circumstances. Another 

example of a distinct transaction is a 

scenario where a strategic purchaser 

may be willing to pay more because the 

purchaser has a plan for realizing 

synergies with the target company after 

the acquisition (e.g., reduced costs). In 

contrast, a purchaser that does not have 

immediate plans for the target company 

might only be willing to pay a reduced 

amount. 

Some commenters supported the 

fairness opinion requirement as a guard 

against suspect valuations, especially 

when such valuations determine the 

carried interest, management fees, and/ 

or other transaction fees an adviser may 

receive from the transaction.591 We 

share these concerns and decline to 

provide an exemption from the fairness/ 

valuation opinion requirement for 

market-driven discovery processes. We 

do not believe that relying solely on 

market-driven transactions is sufficient 

to address the policy concerns that 

motivated this rule. Although 

commenters argued that a fairness 

opinion is unnecessary in certain 

market-driven transactions, such as a 

minority stake sale, we believe that 

some of the same conflicts of interest, 

compensation scheme concerns, and 

potential for fraud or manipulation that 

motivated this rulemaking may persist 

in such market-driven transactions 

because the adviser is still involved in 

deciding whether to engage in the 

transaction and still sets and negotiates 

the terms of that sale. For example, if a 

recent sale improperly valued an asset, 

an adviser could be incentivized to 

initiate a transaction with the same 

valuation, which, depending on the 

terms of the transaction, may benefit the 

adviser at the expense of the investors. 

Similarly, if the market price of shares 

in a publicly traded underlying asset is 

volatile and drops suddenly or is 

depressed for an extended period of 

time, an adviser may be incentivized to 

seek to execute an adviser-led secondary 

with respect to such asset as soon as 

possible to lock in the lower price to the 

detriment of investors.592 As a result, 

our concerns about an adviser’s 

conflicts of interest are not fully 

addressed by relying on such valuations 

for such transactions. Instead, we 

believe that a methodological process 

performed by a third party (such as that 

used to produce a fairness/valuation 

opinion) that takes into account factors 

when analyzing value, including but not 

limited to recent market transactions, 

will provide investors with reliable data 

to inform their decision-making 

process.593 This rule will also serve as 

a deterrent to harmful conflicts of 

interest, compensation schemes and 

fraudulent or manipulative behavior 

because any valuation proposed by an 

adviser would need to be checked by an 

opinion provider. Thus, we believe that 

advisers will be less likely to propose 

such valuations if they anticipate that 

an opinion provider may not support 

them. 

Some commenters suggested that we 

expand the fairness opinion 

requirement to cover information in 

addition to pricing/valuation of the 

asset (e.g., data and pricing information 

for the remaining assets in the fund).594

In contrast, other commenters did not 

support an expansion in scope on the 

grounds that requiring transaction terms 

in an opinion would require the opinion 

provider to make subjective judgments, 

and adding other provisions, such as 

allowing the private fund and/or its 

investors to rely on the opinion, would 

increase the cost of fairness opinions.595

We agree with these commenters that an 

expansion in scope is not necessary to 

address the conflict of interest that 

underlies the need for this rule: concern 

that an adviser’s conflicts of interest 

(due to being on both sides of the 

transaction) will result in a price/ 

valuation that does not reflect the true 

value of the asset. As noted above, an 

adviser’s economic entitlements will 

likely be based on the asset value and 

the fairness/valuation opinion 

requirement is intended to guard against 

the adviser’s incentive to value an asset 

in a manner that maximizes the 

adviser’s profit. 

The final rule requires an adviser to 

obtain the opinion from an independent 

opinion provider, which is defined as a 

person that provides fairness opinions 

or valuation opinions in the ordinary 

course of its business and is not a 

related person of the adviser.596 The 

requirement that the opinion provider 

not be a related person of the adviser 

reduces the risk that certain affiliations 

could result in a biased opinion and 

would further mitigate the potential 

influence of the adviser’s conflicts of 

interest. The ordinary course of business 

requirement is intended to capture 

persons with the experience to value 

illiquid, esoteric, and other types of 

assets based on relevant criteria. 

One commenter suggested expanding 

the proposed definition of ‘‘independent 

opinion provider’’ to allow a broader 

group of opinion providers to satisfy the 

definition (i.e., beyond entities that 

provide opinions about assets sold as 

part of adviser-led secondary 

transactions in the ordinary course of 

their business).597 We decline to 

broaden the types of entities that can 

serve as independent opinion providers 

because it is important that opinion 

providers have the necessary experience 

to value assets in connection with 

adviser-led secondary transactions. We 

are adopting the definition of 

‘‘independent opinion provider’’ largely 

as proposed.598

3. Summary of Material Business 

Relationships 

We also are requiring advisers to 

prepare a written summary of any 

material business relationships the 

adviser or any of its related persons has, 

or has had, with the independent 

opinion provider within the two-year 

period immediately prior to the 

issuance date of the fairness opinion or 

valuation opinion. We are adopting this 

requirement largely as proposed, but we 

are specifying that the lookback period 

for which disclosures must be provided 

for material business relationships that 

existed during the two-year period is 

measured from immediately prior to the 

issuance of the fairness opinion or 

valuation opinion. We believe that 

specifying how the lookback period is 

measured will facilitate the effective 

operation of the rule and will ensure 

that investors receive relevant 

information about an adviser’s conflicts 

at the time the opinion was issued by 

the independent opinion provider. 

Moreover, we believe it is important to 

measure this two-year period from 

immediately prior to the issuance of the 

fairness opinion or valuation opinion to 


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599See, e.g., PIFF Comment Letter; Ropes & Gray 

Comment Letter. 

600Advisers may distribute the fairness opinion 

or valuation opinion as well as the summary of 

material business relationships to private fund 

investors electronically, including through a data 

room, provided that such distribution is done in 

accordance with the Commission’s views regarding 

electronic delivery. See Use of Electronic Media 

Release, supra footnote 435; see also t supra section 

II.B.3- for a discussion of the distribution 

requirements. 

601We also have added the defined term ‘‘election 

form’’ which means a written solicitation 

distributed by, or on behalf of, the adviser or any 

related person requesting private fund investors to 

make a binding election to participate in an adviserled secondary transaction. See final rule 211(h)(1)– 

1. 

602See Proposing Release, supra footnote 3, at 

130. 

603See, e.g., Predistribution Initiative Comment 

Letter II; ILPA Comment Letter I. 

604See Ropes & Gray Comment Letter. 

605Final amended rule 204–2(a)(23). 

606See the discussion of recordkeeping 

requirements above in section II.B.6. 

607See, e.g., ILPA Comment Letter I; Convergence 

Comment Letter. 

608See AIMA/ACC Comment Letter. 

capture any new material business 

relationships that may have developed 

only shortly before the issuance of such 

opinion. 

We are adopting this requirement 

because other business relationships 

may have the potential to result, or 

appear to result, in a biased opinion, 

particularly if such relationships are not 

disclosed to private fund investors. For 

example, an opinion provider that 

receives an income stream from an 

adviser for performing services 

unrelated to the issuance of the opinion 

might not want to jeopardize its 

business relationship with the adviser 

by alerting the private fund investors 

that the price being offered is unfair (or 

by otherwise refusing to issue the 

opinion). By requiring disclosure of 

such material relationships, the rule 

puts private fund investors in a position 

to evaluate whether any conflicts 

associated with such relationships may 

cause the opinion provider to deliver a 

biased opinion. This required disclosure 

would also deter advisers from seeking 

opinions from highly conflicted opinion 

providers as it may raise objections from 

investors. Whether a business 

relationship is material requires a facts 

and circumstances analysis; however, 

for purposes of the rule, audit, 

consulting, capital raising, investment 

banking, and other similar services 

would typically meet this standard. 

Some commenters stated that this 

requirement is unnecessary because 

advisers are already required to disclose 

material conflicts of interest to private 

fund investors.599 We recognize that an 

adviser has an obligation to comply 

with rule 206(4)–8 under the Advisers 

Act and avoid omitting material facts, 

but that rule does not impose an 

affirmative obligation on advisers to 

provide specific disclosure on their 

conflicts of interest. In contrast, the final 

rule would mandate disclosure that 

covers a discrete time period and that 

must be provided to investors at a time 

when investors can use the information 

to make investment decisions. These 

specific requirements are necessary to 

address the conflicts of interest that 

adviser-led secondary transactions 

present. 

4. Distribution of the Opinion and 

Summary of Material Business 

Relationships 

Under the final rule, an adviser must 

distribute 600 the fairness opinion or 

valuation opinion as well as the 

summary of material business 

relationships to private fund investors. 

In a change from the proposal, and in 

response to comments, we are requiring 

that the adviser distribute both the 

opinion and summary of material 

business relationships to private fund 

investors prior to the due date of the 

election form for the transaction instead 

of prior to the closing of the 

transaction.601 We requested comment 

on the distribution of the fairness 

opinion and summary of material 

business relationships.602 Several 

commenters suggested that the final rule 

specify the timing required for delivery 

of the opinion to ensure that investors 

have sufficient time to use the 

information to inform their investment 

decisions.603 One commenter stated that 

it is common for advisers to obtain the 

opinion well in advance of the closing 

of the transaction because the adviser 

delivers it to the investors or the LPAC 

at an earlier stage of a transaction to 

provide such persons with the relevant 

information to make a determination as 

to whether to waive conflicts and allow 

the transaction to proceed.604 We agree 

that specifying the timing for delivery 

will ensure that investors receive the 

benefit of an independent price 

assessment at the time they make an 

investment decision with respect to the 

transaction, which will make them 

better informed about the transaction. 

Moreover, this will make the rule a 

more effective deterrent to conflicts and 

excessive compensation and help 

prevent fraud, deception, and 

manipulation than our proposed 

approach because it will better ensure 

that investors have access to important 

information regarding valuation and 

conflicts at the time they make a 

binding decision to participate in the 

transaction, rather than after this 

decision has been made. 

5. Recordkeeping for Adviser-Led 

Secondaries 

We are amending rule 204–2 under 

the Advisers Act to require advisers to 

make and retain books and records to 

support their compliance with the 

adviser-led secondaries rule and 

facilitate the Commission’s inspection 

and enforcement capabilities.605

Advisers must make and retain a copy 

of the fairness opinion or valuation 

opinion and material business 

relationship summary distributed to 

investors, as well as a record of each 

addressee and the date(s) the opinion 

and summary was sent. In a change 

from the proposal, we are adding a 

reference to the valuation opinion 

consistent with the change discussed 

above allowing an adviser to obtain a 

valuation opinion in lieu of a fairness 

opinion. In another change from the 

proposal, we are not requiring private 

fund advisers to make and retain 

records of the addresses or delivery 

methods used to disseminate fairness 

opinions, valuation opinions, or 

material business relationship 

summaries.606

Some commenters supported the 

recordkeeping requirement.607 Another 

commenter stated that the requirement 

would be overly burdensome for 

advisers to funds with a significant 

number of investors.608 While we 

understand that the rule imposes an 

additional recordkeeping obligation on 

advisers, ultimately advisers are not 

obligated to engage in adviser-led 

secondary transactions. Because these 

transactions are optional and up to the 

adviser’s discretion, an adviser can 

consider the associated recordkeeping 

requirements when deciding whether to 

initiate such a transaction. Also, as 

noted above, we are not adopting the 

proposed address and delivery method 

recordkeeping requirements; thus, the 

final rule lessens the recordkeeping 

burden on advisers compared to the 

proposal. Further, we view these 

requirements as necessary to facilitate 

our staff’s ability to assess an adviser’s 

compliance with the final rule and 

enhance an adviser’s compliance efforts. 

E. Restricted Activities 

In a modification from the proposal, 

final rule 211(h)(2)–1 restricts advisers 

to a private fund from engaging in the 

following activities, unless they satisfy 


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609See proposed rule 211(h)(2)–1. 

610Any attempt to evade any of the rules’ 

restrictions, depending on the facts and 

circumstances, would violate the Act’s general 

prohibitions against doing anything indirectly 

which would be prohibited if done directly. Section 

208(d) of the Advisers Act. 

611See Proposing Release, supra footnote 3, at 

135 and 161. 

612See, e.g., Comment Letter of Joseph A. 

Grundfest, Professor of Law and Business, Stanford 

Law School Commissioner (Apr. 22, 2022) 

(‘‘Grundfest Comment Letter’’) (stating the 

Commission has traditionally a disclosure-based 

philosophy); Cartwright et al. Comment Letter 

(discussing the SEC’s ability to address activity that 

is the subject of the proposal through its existing 

antifraud authority); AIMA/ACC Comment Letter 

(stating its preference for an ‘‘implied consent’’ 

framework but also that ‘‘disclosure to and more 

explicit consent—whether by the relevant 

governing body . . . or by investors individually 

. . . or collectively (e.g., through an investor 

consent obtained in the manner prescribed by, and 

subject to the terms of, a private funds’ governing 

documents)—to be significantly better (and more in 

line with the best interests of investors) than an 

outright ban on such activities’’ and that ‘‘such a 

disclosure and express consent model would 

eliminate any residual confusion regarding what is 

or is not permissible’’); MFA Comment Letter I 

(stating that the Commission has departed from its 

longstanding approach which was to allow advisers 

and clients/investors to shape their relationships 

through disclosure and informed consent); IAA 

Comment Letter II; AIC Comment Letter II (stating 

that ‘‘requiring separate consent (let alone an 

outright prohibition) with respect to such activities 

[in addition to the existing consent framework] 

would be unnecessary and duplicative’’). 

613See, e.g., NEBF Comment Letter; 

Predistribution Initiative Comment Letter II; NY 

State Comptroller Comment Letter; Take Medicine 

Back Comment Letter; IFT Comment Letter. 

614See, e.g., Comment Letter of Canada Pension 

Plan Investment Board (June 22, 2022) (‘‘Canada 

Pension Comment Letter’’) (suggesting that the SEC 

require disclosure of certain activities rather than 

prohibiting them outright); SBAI Comment Letter; 

MFA Comment Letter I. 

615See, e.g., Schulte Comment Letter; ILPA 

Comment Letter I. 

616See MFA Comment Letter I. 

617See Convergence Comment Letter; Invest 

Europe Comment Letter. 

618See supra section I (discussing 

‘‘reimbursements’’ as a form of ‘‘compensation’’). 

619See Healthy Markets Comment Letter I (stating 

that information is often unavailable or incomplete 

regarding these activities that may simply serve to 

enrich persons related to their investment advisers); 

ILPA Comment Letter I (stating that itemized 

disclosure of compliance costs is currently 

insufficient); NEBF Comment Letter (stating that it 

is difficult for investors to observe, track, and 

evaluate the costs and expenses that advisers shift 

to private funds); IFT Comment Letter (stating that 

some fund advisers have ignored requests for 

baseline information about fees and expenses). 

620See supra section I.A. 

certain disclosure and, in some cases, 

consent requirements: 

• Charging or allocating to the private 

fund fees or expenses associated with an 

investigation of the adviser or its related 

persons by any governmental or 

regulatory authority; however, 

regardless of any disclosure or consent, 

an adviser may not charge or allocate 

fees and expenses related to an 

investigation that results or has resulted 

in a court or governmental authority 

imposing a sanction for violating the 

Investment Advisers Act of 1940 or the 

rules promulgated thereunder; 

• Charging the private fund for any 

regulatory, examination, or compliance 

fees or expenses of the adviser or its 

related persons; 

• Reducing the amount of any adviser 

clawback by actual, potential, or 

hypothetical taxes applicable to the 

adviser, its related persons, or their 

respective owners or interest holders; 

• Charging or allocating fees and 

expenses related to a portfolio 

investment on a non-pro rata basis when 

more than one private fund or other 

client advised by the adviser or its 

related persons have invested in the 

same portfolio company; and 

• Borrowing money, securities, or 

other private fund assets, or receiving a 

loan or extension of credit, from a 

private fund client. 

We proposed to prohibit these 

activities without disclosure or consent 

exceptions.609 Like the proposal, the 

final rule applies even if the activities 

are performed indirectly, for example by 

an adviser’s related persons, because the 

activities have an equal potential to 

harm the fund and its investors when 

performed indirectly without the 

specified disclosure, and in some cases, 

consent.610

We requested comment on the 

proposed prohibitions, including on 

whether the final rule should prohibit 

these activities unless the adviser 

satisfies certain governance or other 

conditions, such as disclosures to the 

private fund’s investors, approval by an 

independent representative of the fund, 

or approval by a majority (by number 

and/or in interest) of investors.611 Many 

commenters disagreed with our 

proposed approach of prohibiting 

certain activities as per se unlawful, and 

some commenters suggested that the 

existing full and fair disclosure and 

informed consent framework for 

conflicts of interest with advisory 

clients under the Advisers Act was 

sufficient to address the Commission’s 

concerns with these activities.612

Other commenters generally 

supported the proposed prohibitions, 

stating that they would prevent advisers 

from engaging in activities that 

generally disadvantage and shift costs to 

funds and their investors.613 Some 

commenters who supported the 

Commission’s concerns with these 

activities suggested that enhanced 

disclosure or consent requirements 

would be sufficient to address them and 

would help avoid some of the 

unintended consequences that could 

result from strictly prohibiting the 

activities (e.g., potentially discouraging 

advisers from engaging in complex 

strategies which, according to 

commenters, would result in decreased 

competition and diversification).614 For 

example, some commenters supported, 

as an alternative to the proposed 

prohibition on advisers’ charging 

regulatory and compliance expenses, 

requiring advisers to disclose all 

compliance costs and whether the 

adviser or fund pays them.615 Other 

commenters suggested that we should 

not prohibit advisers from charging fully 

disclosed, and consented to, fees and 

expenses to their private fund clients 616

and that we should provide an 

exception for non-pro rata fee and 

expense charges or allocations if they 

were appropriately disclosed to 

investors.617

We continue to believe that these 

activities involve conflicts of interest 

(e.g., borrowing directly from a private 

fund client may benefit the adviser 

while not being in the best interest of 

the fund) and compensation schemes 

(e.g., passing certain expenses 618 on to 

funds, which increases the adviser’s 

revenue and decreases the fund’s 

profits) that are contrary to the public 

interest and the protection of investors. 

In addition, adopting protective 

restrictions on these activities is 

reasonably designed to prevent fraud 

and deception. 

Many of our concerns with these 

activities have persisted despite our 

related enforcement actions, and we 

believe therefore that further regulation 

is required. Investors often lack 

sufficient insight into the nature, scope, 

and impact of these activities, given that 

advisers do not frequently or 

consistently provide investors with 

sufficiently detailed information about 

them. In this regard, some commenters 

stated that many advisers do not 

provide disclosure of the activities 

covered by the restrictions and, when 

disclosure is provided about those 

activities, it is often incomplete or 

includes unhelpful information.619 In 

addition, the limitations of private fund 

governance structures, discussed in 

detail above, warrant enhanced investor 

protection with respect to these 

activities.620 For example, current 

private fund governance mechanisms, 

such as the LPAC, may not have 

sufficient independence, authority, or 

accountability to effectively oversee and 

consent to conflicts or other harmful 

practices. 

After considering comments, and for 

the reasons discussed below in 


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621However, the exception for the investigation 

restriction does not apply to fees and expenses 

related to an investigation that results or has 

resulted in a court or governmental authority 

imposing a sanction for a violation of the Act or the 

rules promulgated thereunder. 622With respect to a private fund whose investors 

are solely related persons of the fund’s adviser, 

such as an internal fund whose investors are 

limited to the adviser’s employees, the requirement 

in the consent-based exceptions to seek and obtain 

consent from non-related person investors will not 

apply. 623For instance, the terms of a fund’s governing 

documents may provide for the issuance of both 

voting and non-voting interests, where the nonvoting interests are generally excluded for purposes 

of constituting a majority in interest (or a higher 

threshold) of investors. The fund’s governing 

documents may also provide for the exclusion of 

defaulting investors for voting purposes. 

624See supra section I.A. 

625See final amended rule 204–2(a)(24). 

626See the discussion of recordkeeping 

requirements above in section II.B.6. 

627See supra footnote 435 (discussing electronic 

delivery). 

628See final rule 211(h)(1)–1. See supra section 

II.B.3 (‘‘Preparation and Distribution of Quarterly 

Statements’’) for a discussion of the ‘‘distribution’’ 

requirement generally. 

629 In a change from the proposal, we are revising 

this requirement to capture not only amounts 

‘‘charged’’ to the private fund but also fees and 

expenses ‘‘allocated to’’ the private fund. We 

believe that this clarification is necessary in light 

of the various ways that a private fund may be 

caused to bear fees and expenses. 

630Such a written notice should generally include 

a detailed accounting of each category of such fees 

and expenses. Advisers should generally list each 

specific category of fee or expense as a separate line 

item and the dollar amount thereof, rather than 

Continued 

connection with each restricted activity, 

we have determined that investors will 

be better informed and receive 

enhanced protection, while still 

potentially benefiting from these 

activities when they are carried out in 

the best interests of the fund, if 

investors are provided with disclosures 

and, in some cases, consent rights 

regarding these activities. Accordingly, 

the final rule generally will provide 

either a disclosure-based exception or a 

disclosure- and consent-based exception 

for each restricted activity. The non-pro 

rata restriction will be subject to a 

before-the-fact disclosure-based 

exception (in addition to the 

requirement that the allocation be fair 

and reasonable), while the certain fees 

and expenses restrictions and the posttax clawback restriction will be subject 

to after-the-fact disclosure-based 

exceptions. The borrowing restriction 

and the investigation restriction will be 

subject to a consent-based exception, 

which will require an adviser to receive 

advance consent from at least a majority 

in interest of a fund’s investors in order 

to engage in these activities.621

Specifically, each consent-based 

exception will require an adviser to seek 

consent for the restricted activity from 

all of the fund’s investors and obtain 

consent from at least a majority in 

interest of investors that are not related 

persons of the adviser.622 A fund’s 

governing documents may establish that 

a higher threshold of investor consent is 

necessary in order for the adviser to 

engage in these restricted activities and 

may generally prescribe the manner and 

process by which the applicable 

threshold of investor consent is 

obtained.623 However, in light of the 

limitations posed by fund governance 

bodies, such as LPACs, advisory boards, 

or boards of directors, which do not 

generally have a fiduciary obligation to 

the private fund investors, as discussed 

above,624 the consent-based exceptions 

will require that the relevant consent be 

sought and obtained specifically from 

fund investors. 

In light of this change from the 

proposal to allow an adviser to satisfy 

disclosure and, in some cases, consent 

requirements, as applicable, instead of 

being prohibited from certain activities, 

we are amending rule 204–2 under the 

Advisers Act to require SEC-registered 

investment advisers to retain books and 

records to document their compliance 

with the disclosure and consent aspects, 

as applicable of the restricted activities 

rule. This will help facilitate the 

Commission’s inspection and 

enforcement capabilities. Accordingly, 

we are requiring SEC-registered 

investment advisers to retain a copy of 

any notification, consent, or other 

document distributed to or received 

from private fund investors pursuant to 

this rule, along with a record of each 

addressee and the corresponding date(s) 

sent for each such document distributed 

by the adviser.625 Similarly, in a change 

from the proposal, we are not requiring 

private fund advisers to make and retain 

records of the addresses or delivery 

methods used to disseminate any such 

notifications or other documents 

distributed to private fund investors 

pursuant to this rule.626

The exceptions require advisers to 

‘‘distribute’’ certain written notices or 

consent requests to investors.627 An 

adviser generally will satisfy the 

requirement to ‘‘distribute’’ a written 

notice or consent request when it has 

been sent to all investors in the private 

fund. However, the definition of 

‘‘distribute,’’ ‘‘distributes,’’ and 

‘‘distributed’’ precludes advisers from 

using layers of pooled investment 

vehicles in a control relationship with 

the adviser to avoid meaningful 

application of the distribution 

requirement.628 In circumstances where 

an investor is itself a pooled vehicle that 

is controlling, controlled by, or under 

common control (a ‘‘control 

relationship’’) with the adviser or its 

related persons, the adviser must look 

through that pool (and any pools in a 

control relationship with the adviser or 

its related persons, such as in a masterfeeder fund structure) and send the 

written notice or consent request to 

investors in those pools. Outside of a 

control relationship, such as if the 

private fund investor is an unaffiliated 

fund of funds, this same concern is not 

present, and the adviser would not need 

to look through the structure to make 

delivery that satisfies the definition of 

‘‘distribute.’’ This approach will lead to 

meaningful distribution of the written 

notices and consent requests to the 

private fund’s investors. 

In addition, the disclosure-based 

exceptions to the restrictions on certain 

regulatory, compliance, and 

examination fees and expenses and 

post-tax clawbacks require advisers to 

distribute written notices to investors 

within 45 days after the end of the fiscal 

quarter in which the relevant activity 

occurs. This disclosure timeline is 

appropriate because it emphasizes the 

need for the notices to be distributed to 

investors within a reasonable period of 

time to help ensure their timeliness, 

while affording advisers a limited 

degree of flexibility. The 45-day 

timeline generally matches the timeline 

required for advisers to distribute 

quarterly statements under the quarterly 

statement rule, except for quarterly 

statements distributed at fiscal year-end 

or quarterly statements prepared for a 

fund of funds. This will allow advisers 

that are subject to the quarterly 

statement rule to include disclosures 

related to the restricted activities rule in 

their quarterly reports, subject to those 

exceptions. 

1. Restricted Activities With DisclosureBased Exceptions 

(a) Regulatory, Compliance, and 

Examination Expenses 

We proposed to prohibit advisers 

from charging their private fund clients 

for (i) regulatory or compliance fees and 

expenses of the adviser or its related 

persons and (ii) fees and expenses 

associated with an examination of the 

adviser or its related persons by any 

governmental or regulatory authority. 

We are adopting these provisions 629

but, after considering comments, are 

providing an exception from the 

proposed prohibitions if an adviser 

distributes a written notice of any such 

fees or expenses, and the dollar amount 

thereof,630 to investors in a private fund 


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63264 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

group such fees and expenses into broad categories 

such as ‘‘compliance expenses.’’ 

631Final rule 211(h)(2)–1(a)(2). We are also 

reiterating that charging these expenses without 

authority in the governing documents is 

inconsistent with an adviser’s fiduciary duty. See 

the introduction of this section II.E above for a 

discussion of the distribution requirement. Advisers 

may, but are not required to, provide such 

disclosure in the statements they must deliver to 

investors under the quarterly statement rule, if they 

are subject to that rule. Although we generally do 

not consider information in the quarterly statement 

required by the rule to be an ‘‘advertisement’’ under 

the marketing rule, an adviser that offers new or 

additional investment advisory services with regard 

to securities in the quarterly statement would need 

to consider whether such information is subject to 

the marketing rule. A communication to a current 

investor is an ‘‘advertisement’’ when it offers new 

or additional investment advisory services with 

regard to securities. See rule 206(4)–1. 

632See, e.g., AFR Comment Letter I; OPERS 

Comment Letter; NY State Comptroller Comment 

Letter. 

633See, e.g., Sullivan and Cromwell LLP 

Comment Letter (Apr. 25, 2022) (‘‘Sullivan & 

Cromwell Comment Letter’’); NYC Bar Comment 

Letter II; ASA Comment Letter. One commenter 

stated that this prohibition is unnecessary because 

there is strong alignment of interests between 

advisers and investors with respect to regulatory, 

compliance, and examination-related expenses. 

This commenter noted that investments from 

principals and employees of its adviser account for 

over 20% of total assets under management and that 

these principals and employees pay the same fees 

and expenses as third-party investors. See Citadel 

Comment Letter. However, this is just one example 

and we understand that different private fund 

advisers have different alignments of interests with 

their investors depending on the amount of 

proprietary capital invested in the funds, fee 

arrangements, and other factors. Moreover, this 

commenter’s argument does not address whether 

the private fund should be charged for the fees and 

expenses in the first place; rather, it focuses on the 

fact that certain advisers, especially advisers with 

significant investments in their private funds, have 

an incentive to limit such fees and expenses 

because they have the potential to reduce the 

adviser’s returns alongside the investors’ returns. 

634See, e.g., Schulte Comment Letter; AIMA/ACC 

Comment Letter; SBAI Comment Letter. One 

commenter suggested that, to the extent no 

management fees are charged, disclosure and 

approval by the governing body for that private 

fund may be a more appropriate avenue in ensuring 

the expenses passed on are appropriate. See 

Albourne Comment Letter. We believe it is more 

appropriate to require disclosure to investors as 

private fund governing bodies can vary 

considerably in structure, representation and legal 

responsibility. 

635See SBAI Comment Letter. 

636See NYC Bar Comment Letter II. 

637See, e.g., NVCA Comment Letter; Chamber of 

Commerce Comment Letter; Comment Letter of 

Andrew M. Weiss, Professor Emeritus, Boston 

University, Chief Executive Officer, Weiss Asset 

Management (Apr. 23, 2022) (‘‘Weiss Comment 

Letter’’). 

638Comment Letter of Eric S. Maskin, Professor 

of Economics, Harvard University (Apr. 21, 2022) 

(‘‘Maskin Comment Letter’’). 

639See, e.g., Dechert Comment Letter; Haynes & 

Boone Comment Letter; Chamber of Commerce 

Comment Letter. 

640See supra section I for a discussion of the 

definition of ‘‘compensation scheme’’. 641See, e.g., In the Matter of NB Alternatives 

Advisers, supra footnote 29 (alleging private fund 

adviser allocated employee compensation-related 

expenses to three private equity funds it advised in 

violation of their organizational documents). 642For example, if an adviser charges a fund for 

fees and expenses associated with the preparation 

and filing of the adviser’s Form ADV but only 

identifies such charges broadly as ‘‘legal expenses.’’ 

in writing on at least a quarterly 

basis.631

Some commenters supported the 

proposed prohibition, stating that 

advisers should not be charging 

examination, regulatory, and 

compliance fees and expenses to the 

fund.632 Other commenters stated that 

this prohibition is unnecessary, at least 

in part because investors already 

negotiate what fees may or may not be 

charged to funds.633 A number of 

commenters suggested that we should 

require disclosure of these expenses 

instead of prohibiting these practices.634

In particular, as an alternative to the 

proposed prohibition, one commenter 

recommended that any such expenses 

should be fully disclosed to investors as 

separate line items 635 while another 

commenter recommended that we 

should require clear empirical 

disclosure of such expenses.636 Some 

commenters argued that the proposed 

prohibition would harm investors 

because it would disincentivize advisers 

from investing in compliance.637

Another commenter argued that 

compliance costs increase with 

diversification of an adviser’s portfolio, 

and that requiring advisers to bear costs 

of compliance would therefore 

discourage portfolio diversification (and 

remove the ability for investors to 

decide for themselves whether they are 

willing to pay extra compliance costs to 

achieve better diversification).638 Others 

predicted that advisers would assess 

higher management fees if they could 

not allocate these fees and expenses to 

funds.639

It is in investors’ best interest for 

advisers to develop robust regulatory 

and compliance programs that enable 

advisers to comply with their legal and 

regulatory obligations. Regulatory, 

compliance, and examination fees and 

expenses are customary costs of doing 

business that enable advisers to operate 

and attract clients as well as investors. 

For example, advisers may incur filing 

and other fees associated with SEC 

filings, such as Form ADV and Form PF, 

as well as certain state filings. Advisers 

may also pay fees and expenses for a 

compliance consultant to help them 

with mock or real examinations. Most 

private fund advisers charge 

management fees, in part, to pay for 

costs incurred as a result of legal and 

regulatory obligations imposed on them 

in connection with providing advisory 

services. These and other costs of doing 

business are integral to managing a 

private fund and are generally 

considered overhead payable by the 

adviser out of its own resources. 

Charging investors separately for 

regulatory or compliance fees and 

expenses of the adviser or its related 

persons, or fees and expenses associated 

with an examination of the adviser or its 

related persons by any governmental or 

regulatory authority, is therefore a 

compensation scheme contrary to the 

public interest and protection of 

investors because an investment 

adviser, despite the management fees, is 

taking additional compensation for 

these fees and expenses.640 Moreover, 

such allocations create a conflict of 

interest because they provide an 

incentive for an adviser to place its own 

interests ahead of the private fund’s 

interests and allocate expenses away 

from the adviser to the fund.641 We also 

believe that allocation of these types of 

fees and expenses to private fund clients 

can be deceptive in current market 

practice. For example, investors may 

generally expect an adviser to bear fees 

and expenses directly related to its 

advisory business, similar to how 

investors typically bear fees and 

expenses directly related to their own 

investment activity. Further, while 

certain investors may contractually 

agree, with appropriate initial 

disclosure, to bear an adviser’s specified 

fees and expenses, they may be 

deceived to the extent the adviser does 

not disclose the total dollar amount of 

such fees and expenses after the fact. 

Investors may also be deceived if 

advisers describe such fees and 

expenses so generically as to conceal 

their true nature and extent.642

Restrictions on the charging of these 

fees and expenses are, therefore, 

merited. 

The requirement to disclose these 

charges for regulatory, compliance, and 

examination fees and expenses within 

45 days after the end of the fiscal 

quarter is also appropriate. This 

timeline emphasizes the need for the 

notices to be distributed to investors 

within a reasonable period of time to 

help ensure their timeliness, while 

affording advisers a limited degree of 

flexibility. The 45-day timeline 

generally matches the timeline required 

for advisers to distribute quarterly 

statements under the quarterly 

statement rule, except for quarterly 

statements distributed at fiscal year-end 

or quarterly statements prepared for a 

fund of funds. This structure will allow 

advisers that are subject to the quarterly 

statement rule to generally include 

disclosures related to the restricted 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63265 

643See, e.g., Chamber of Commerce Comment 

Letter; Weiss Comment Letter; Maskin Comment 

Letter. 

644See, e.g., Dechert Comment Letter; Haynes & 

Boone Comment Letter; Chamber of Commerce 

Comment Letter. 

645However, even in such circumstances where 

fee and expense allocation provisions are highly 

negotiated, we believe such negotiation is only 

effective if investors are receiving timely and 

detailed disclosure of any such allocations when 

they occur. 

646Some commenters also stated that the 

proposed prohibition would put underrepresented 

private fund advisers, such as those advisers that 

are minority-owned, at a disadvantage when 

competing with more established firms that can 

waive fees for services. See, e.g., Blended Impact 

Comment Letter; CozDev LLC Comment Letter; 

BAM Ventures Comment Letter. 

647Certain private fund advisers utilize a passthrough expense model where the private fund pays 

for most, if not all, expenses, including the adviser’s 

expenses, but the adviser does not charge a 

management, advisory, or similar fee. See, e.g., 

BVCA Comment Letter; Sullivan & Cromwell 

Comment Letter; SBAI Comment Letter. 

648See, e.g., NSCP Comment Letter; NYC Bar 

Comment Letter II; Ropes & Gray Comment Letter. 

649The proposed rule defined: (i) ‘‘adviser 

clawback’’ as any obligation of the adviser, its 

related persons, or their respective owners or 

interest holders to restore or otherwise return 

performance-based compensation to the private 

fund pursuant to the private fund’s governing 

agreements, and (ii) ‘‘performance-based 

compensation’’ as allocations, payments, or 

distributions of capital based on the private fund’s 

(or its portfolio investments’) capital gains and/or 

capital appreciation. Commenters generally did not 

provide comments with respect to the proposed 

definitions of ‘‘adviser clawback’’ and 

‘‘performance-based compensation.’’ We are 

adopting the definition of ‘‘adviser clawback’’ as 

proposed. However, in a change from the proposed 

rule, we are making a technical revision to the 

‘‘performance-based compensation’’ definition to 

include allocations, payments, or distributions of 

profit. See supra section II.B.1.a. See also final rule 

211(h)(1)–1. 

650See Proposing Release, supra footnote 3, at 

146–147. 

651For the avoidance of doubt, the rule does not 

change the applicability to the adviser of any other 

applicable disclosure and consent obligation, 

whether they exist under law, rule, regulation, 

contract, or otherwise. 

652See, e.g., AFL–CIO Comment Letter; Albourne 

Comment Letter; Better Markets Comment Letter; 

Convergence Comment Letter; NASAA Comment 

Letter; NYC Comptroller Comment Letter; OPERS 

Comment Letter; Predistribution Initiative 

Comment Letter II; Comment Letter of Reinhart 

Boerner Van Deuren (Apr. 12, 2022) (‘‘Reinhart 

Comment Letter’’); RFG Comment Letter II. Because 

many entities that receive performance-based 

compensation are fiscally transparent for U.S. 

Federal income tax purposes and thus not subject 

to entity-level taxes, determining the actual taxes 

paid on ‘‘excess’’ performance-based compensation 

can be challenging, particularly for larger advisers 

that have not only a significant number of 

participants that receive such compensation but 

also have participants subject to non-U.S. tax 

regimes. Moreover, investors may be in different 

U.S. States as well, each with their State tax 

nuances. To address these considerations, advisers 

typically use a ‘‘hypothetical marginal tax rate’’ to 

determine the tax reduction amount, which is 

usually based on the highest marginal U.S. Federal, 

State, and local tax rates. 

653See NACUBO Comment Letter; Reinhart 

Comment Letter. 

activities rule in their quarterly reports, 

subject to those exceptions. 

After reviewing responses from 

commenters, we acknowledge that a 

prohibition of certain of these charges 

without an exception for instances in 

which the adviser provides effective 

disclosure could result in unfavorable 

outcomes for investors. For example, as 

some commenters also suggested,643 we 

anticipate that some advisers may be 

disincentivized from diversifying their 

portfolios to the extent that compliance 

costs (that will now be borne by the 

adviser) increase with portfolio 

diversification. As other commenters 

also stated,644 some advisers may 

attempt to increase management or 

other fees if they were no longer able to 

charge such fees and expenses to fund 

clients, and the increase in management 

fees may have been more than the 

increase in any fees or expenses already 

being passed through to the private 

fund. We also recognize that whether 

such fees and expenses can be charged 

to the private fund can be highly 

negotiated by investors in certain 

instances 645 (e.g., investors may be 

more receptive to bearing registration 

and other compliance expenses for a 

first-time manager).646 As a result, we 

believe it is necessary to prohibit these 

practices unless advisers distribute 

written notice of any such fees or 

expenses, and the dollar amount 

thereof, to investors in any such private 

funds in writing on at least a quarterly 

basis. In short, advisers must notify 

investors of such actual allocation 

practices on a regular, ongoing basis to 

help ensure that investors are able to 

negotiate effectively for their own 

interests and avoid the compensation 

schemes that are contrary to the public 

interest and the protection of investors. 

To illustrate, an adviser may charge a 

private fund client for fees it pays to a 

compliance consultant to assess the 

adviser’s compliance program, provided 

the adviser discloses those fees pursuant 

to this rule. An adviser may also charge 

a private fund client for fees and 

expenses associated with an 

examination of the adviser or its related 

persons, such as by staff from our 

Division of Examinations, provided 

those fees and expenses are adequately 

disclosed pursuant to this rule. 

Some commenters expressed concerns 

about how the proposed prohibition 

would adversely impact funds with 

‘‘pass-through’’ expense models.647

Since we are providing a disclosurebased exception from this prohibition, 

we no longer anticipate that this aspect 

of the proposed prohibited activities 

rule will cause a significant disruption 

in practice for funds with pass-through 

expense models. We understand that 

most pass-through funds already 

provide ongoing, regular disclosure of 

the fees and expenses that are being 

‘‘passed through’’ to investors. 

Some commenters suggested that we 

should explicitly clarify which 

compliance fees and expenses are 

related to the adviser’s activities or the 

fund’s activities.648 As we are not flatly 

prohibiting advisers from passing on 

compliance, regulatory, and 

examination expenses, we do not 

believe it is necessary to describe which 

fees and expenses are related to the 

adviser’s activities or the fund’s 

activities. Advisers and investors may 

negotiate whether certain compliance, 

regulatory, or examination fees and 

expenses are charged to a fund, 

provided that the disclosure of such fees 

and expenses satisfies the requirements 

of the rule. 

(b) Reducing Adviser Clawbacks for 

Taxes 

We proposed to prohibit an adviser 

from reducing the amount of any 

adviser clawback by actual, potential, or 

hypothetical taxes applicable to the 

adviser, its related persons, or their 

respective owners or interest holders.649

This proposed provision was designed 

to protect investors by ensuring that 

they receive their share of fund profits, 

without any reduction for tax 

obligations of the adviser or its related 

persons.650 However, as discussed 

further below, the final rule will not 

prohibit advisers from engaging in aftertax adviser clawback reductions, if 

advisers satisfy certain disclosure 

requirements designed to better inform 

private fund investors of the impact of 

after-tax adviser clawback reductions.651

Some commenters supported the 

proposal to prohibit advisers from 

reducing the amount of any adviser 

clawback by actual, potential, or 

hypothetical taxes.652 Some also 

encouraged the Commission to expand 

the scope of the rule to require advisers 

to provide affirmatively, whether in the 

governing agreement or otherwise, a 

clawback mechanism to restore excess 

performance-based compensation, 

rather than only prohibiting advisers 

from reducing clawbacks by taxes 

applicable to the adviser.653

The majority of commenters, 

however, opposed this aspect of the 

proposal. Many commenters suggested 

that our proposal was unnecessary to 

ensure that private fund investors 

receive their full share of fund profits, 

because clawback mechanisms are 

structured to restore private funds with 


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63266 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

654See, e.g., AIC Comment Letter I; Dechert 

Comment Letter; Ropes & Gray Comment Letter. 

655See, e.g., AIC Comment Letter I; AIMA/ACC 

Comment Letter; ASA Comment Letter; Comment 

Letter of Baird Capital (Apr. 25, 2022) (‘‘Baird 

Comment Letter’’); Carta Comment Letter; IAA 

Comment Letter II; Comment Letter of PROOF 

Management, LLC (May 25, 2022) (‘‘Proof Comment 

Letter’’); Ropes & Gray Comment Letter. 

656See, e.g., AIC Comment Letter I; Baird 

Comment Letter; GPEVCA Comment Letter; IAA 

Comment Letter II; Invest Europe Comment Letter; 

Comment Letter of National Association of Private 

Fund Managers (Apr. 25, 2022); Proof Comment 

Letter; Ropes & Gray Comment Letter. 

657See, e.g., AIC Comment Letter I; GPEVCA 

Comment Letter; Dechert Comment Letter; IAA 

Comment Letter II; Invest Europe Comment Letter; 

Proof Comment Letter; Ropes & Gray Comment 

Letter; SIFMA–AMG Comment Letter I. 

658The after-tax reduction of an adviser clawback 

constitutes a compensation scheme within the 

meaning of section 211(h) of the Advisers Act 

because it is a method by which an investment 

adviser may take additional compensation 

indirectly that otherwise its private fund clients 

would be entitled to as investment proceeds. 

659Cf. Form PF; Event Reporting for Large Hedge 

Fund Advisers and Private Equity Fund Advisers; 

Requirements for Large Private Equity Fund 

Adviser Reporting, Investment Advisers Act Release 

No. 6279 (May 3, 2023) [88 FR 38146 (June 12, 

2023)], at 73–74 (discussing conflicts of interest that 

may arise from general and limited partner 

clawbacks and noting that ‘‘clawbacks are 

negotiated early on in a fund’s life, long before the 

inciting event occurs’’). 

660See, e.g., AIC Comment Letter I; AIC Comment 

Letter II; AIMA/ACC Comment Letter; ATR 

Comment Letter; CCMR Comment Letter I; 

Comment Letter of Correlation Ventures (June 13, 

2022) (‘‘Correlation Ventures Comment Letter’’); 

Comment Letter of Canadian Venture Capital and 

Private Equity Association (Apr. 25, 2022) (‘‘CVCA 

Comment Letter’’); Comment Letter of Landspire 

Group (Apr. 25, 2022); Lockstep Ventures Comment 

Letter; Comment Letter of the National Association 

of Investment Companies (Apr. 25, 2022) (‘‘NAIC 

Comment Letter’’); PIFF Comment Letter; Proof 

Comment Letter; Ropes & Gray Comment Letter; 

SBAI Comment Letter; Schulte Comment Letter; 

SIFMA–AMG Comment Letter I; Comment Letter of 

Top Tier Capital Partners, LLC (June 13, 2022) 

(‘‘Top Tier Comment Letter’’). 

661See NVCA Comment Letter (stating that the 

Commission should consider the alternative of 

using enhanced disclosures instead of banning 

clawback reduction provisions); Comment Letter of 

OPSEU Pension Plan Trust (Aug. 18, 2022) (stating 

that investment terms are a negotiation between 

advisers and institutional investors and that the 

final rules should generally focus on disclosure 

rather than prohibitions); SIFMA–AMG Comment 

Letter I (stating that, if adopted, the final rule 

should require advisers to include estimated 

clawback calculations reflecting any adjustments 

for taxes as part of the quarterly statement reporting 

requirements, which would enable investors to 

assess a potential clawback situation and any 

potential reductions for taxes, that may arise); AIC 

Comment Letter I (stating that, if adopted, the final 

rule should require only quarterly disclosures to 

private fund investors of the potential clawback 

payable and the amount of carried interest 

distributions that have been reserved against the 

potential clawback). 

the full amount of any excess 

performance-based compensation 

received by the adviser (or its related 

persons), except in the rare 

circumstances where such excess 

amount is so significant as to be greater 

than the total amount of performancebased compensation retained by the 

adviser (or its related persons) on an 

after-tax basis.654 These commenters 

suggested that post-tax clawbacks reflect 

a widely accepted and negotiated 

position between advisers and their 

private fund clients (and, indirectly, 

their private fund investors).655 They 

stated that the prevailing market 

practice is to allocate the economic risk 

of a post-tax clawback to private fund 

clients, rather than to advisers, because 

if this economic risk were allocated to 

advisers, it could leave them worse off 

than if they had not received any 

performance-based compensation at 

all.656 These commenters stated that 

advisers could be worse off because 

taxes paid in respect of excess 

performance-based compensation 

generally cannot be recouped by 

amending prior tax returns, and the 

ability to realize a tax benefit from 

subsequent losses is in practice limited. 

Additionally, these commenters 

indicated that both applicable tax rules 

and portfolio management 

considerations (such as determining at 

what time the disposal of a portfolio 

investment would be in a private fund 

client’s best economic interest) limit the 

actual discretion that advisers otherwise 

might have to defer or delay payments 

of performance-based compensation to 

prevent the need for a clawback.657 For 

example, because U.S. tax laws require 

a partner of a partnership to pay annual 

tax based on the amount of partnership 

income allocated to the partner, rather 

than based on the amount of actual 

partnership distributions received by 

the partner in the applicable year, an 

adviser may not necessarily be in a 

position to delay or defer payments or 

allocations of performance-based 

compensation to prevent the need for a 

clawback. 

We believe that reducing the amount 

of any adviser clawback by taxes 

applicable to the adviser presents an 

opportunity for an adviser to put its 

own interests ahead of its clients’ 

interests by allocating to the client (and 

indirectly, to fund investors) the risk of 

a tax liability otherwise attributable to 

and borne by the adviser, which reduces 

its client’s (and indirectly, fund 

investors’) returns. We therefore believe 

that, unless this practice is adequately 

disclosed to investors, it creates a 

compensation scheme that is contrary to 

the public interest and the protection of 

investors.658 Furthermore, although 

investors may contractually agree, per a 

fund’s governing documents and with 

appropriate initial disclosure, to an 

adviser’s ability to reduce an adviser 

clawback by applicable taxes, investors 

may be deceived to the extent that an 

adviser does not disclose information 

relating to the total dollar amount of the 

adviser clawback and its reduction after 

the fact.659 To the extent that their 

private fund investments are opaque, 

investors can lack insight into this 

potentially conflicted practice by 

advisers and its impact on the returns of 

their private fund investments. 

We appreciate commenters’ concerns 

that the proposed rule could ultimately 

result in unintended consequences that 

would be inconsistent with our 

proposal’s purpose, such as, among 

others, the following: fewer advisers 

choosing to offer clawback mechanisms 

in their private funds when such 

mechanisms benefit investors; 

restructuring performance-based 

compensation arrangements in a way 

that would be less favorable for 

investors (e.g., adopting incentive fee 

structures that reduce or eliminate the 

potential for a clawback but are less 

favorable to certain investors from a tax 

treatment perspective, or implementing 

higher carried interest rates); offsetting 

changes to other economic terms 

applicable to investors (e.g., 

implementing higher management fees); 

adjusting the timing of portfolio 

management decisions to avoid 

potential clawback liabilities (i.e., 

potentially incentivizing advisers to 

make portfolio management decisions 

for reasons other than a private fund 

client’s best interests); and 

disproportionate burdens on smaller 

investment advisers that may be more 

reliant on the receipt of performancebased compensation on a deal-by-deal 

basis to remunerate their employees and 

fund their operations.660 In view of 

these potential unintended 

consequences, several commenters 

suggested that the Commission adopt 

disclosure requirements relating to the 

use of after-tax adviser clawbacks rather 

than an outright prohibition of the 

practice,661 and we agree, as described 

below. 

Many investors lack information 

regarding adviser clawbacks and their 

impact on fund profits. For example, 

many fund agreements only require 

advisers to restore the excess 

performance-based compensation (less 

taxes) to the fund, without requiring 

them to provide investors with any 

information regarding the adviser’s 

related determinations and calculations, 

such as whether a clawback was 

triggered and the aggregate amount of 

the clawback. Without adequate 

disclosure, investors are unable to 


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662For the avoidance of doubt, this does not 

change the applicability to the adviser of any other 

applicable disclosure and consent obligations, 

whether they exist under law, rule, regulation, 

contract, or otherwise. 

663See final rule 211(h)(2)–1(a)(3). 

664One commenter stated that, if adopted, the 

final rule should require advisers to include 

estimated clawback calculations reflecting any 

adjustments for taxes as part of the quarterly 

statement reporting requirements, which would 

enable investors to assess a potential clawback 

situation, and any potential reductions for taxes, 

that may arise. See SIFMA–AMG Comment Letter 

I. Including such information in the quarterly 

statement is not necessary to satisfy the specific 

disclosure requirements and transparency 

objectives of the final restrictions rule. 

665Proposed rule 211(h)(2)–1(a)(6). 

666 In the Matter of Energy Capital Partners, supra 

footnote 30; In the Matter of Rialto Capital 

Management, LLC, supra footnote 222; In the Matter 

of Lightyear Capital, LLC, Investment Advisers 

Release No. 5096 (Dec. 26, 2018) (settled action); In 

the Matter of WL Ross & Co. LLC, Investment 

Advisers Act Release No. 4494 (Aug. 24, 2016) 

(settled action); In the Matter of Kohlberg Kravis 

Roberts & Co., supra footnote 28; In the Matter of 

Lincolnshire, supra footnote 26; see In the Matter 

of Platinum Equity Advisors, LLC, Investment 

Advisers Release No. 4772 (Sept. 21, 2017) (settled 

action). Our staff has also observed instances of 

advisers charging or allocating fees and expenses 

related to a portfolio investment on a non-pro rata 

basis when multiple private funds and other clients 

advised by the adviser or its related persons have 

invested (or propose to invest) in the same portfolio 

investment during examinations. See EXAMS 

Private Funds Risk Alert 2020, supra footnote 188. 

667See, e.g., In the Matter of Platinum Equity 

Advisors, LLC, supra footnote 666. 

668See, e.g., In the Matter of Energy Capital 

Partners, supra footnote 30; see also Healthy 

Markets Comment Letter I (stating that investors are 

very unlikely to be willing or able to negotiate on 

their own the end of these practices, such as 

charging certain non-pro-rata fees and expenses). 

669Final rule 211(h)(2)–1(a)(4). In a change from 

the proposal, we are making a revision to the rule 

text to clarify that the prohibition is against 

charging either fees, or expenses, or both. 

understand and assess the magnitude 

and scope of the clawback, as well as its 

impact on fund performance and 

investor returns. Further, not all 

investors may be able to ask questions 

successfully or seek more information 

about a clawback on a voluntary basis 

from their private fund’s adviser. We 

believe that disclosure will achieve the 

rule’s policy goal of protecting 

investors, while preventing unintended 

consequences that may have resulted 

from a flat prohibition. 

Accordingly, the final rule will not 

prohibit advisers from engaging in aftertax adviser clawback reductions, if 

advisers satisfy certain disclosure 

requirements designed to better inform 

private fund investors of the impact of 

after-tax adviser clawback reductions.662

Specifically, the final rule restricts 

advisers from reducing the amount of an 

adviser clawback by actual, potential, or 

hypothetical taxes applicable to the 

adviser, its related persons, or their 

respective owners or interest holders, 

unless the adviser distributes a written 

notice to the investors of the impacted 

private fund client that sets forth the 

aggregate dollar amounts of the adviser 

clawback both before and after any such 

reduction of the clawback for actual, 

potential, or hypothetical taxes within 

45 days after the end of the fiscal 

quarter in which the adviser clawback 

occurs.663

In order to satisfy the disclosure 

requirement, within 45 days after the 

end of the fiscal quarter in which the 

clawback occurs, an adviser must 

distribute a written notice to the 

investors of the affected private fund 

client that sets forth the aggregate dollar 

amounts of the adviser clawback both 

before and after the application of any 

tax reduction. These aggregate dollar 

amounts should reflect the gross amount 

of excess compensation received by the 

adviser (or its related persons) that is 

being clawed back. The aggregate dollar 

amount of the clawback before the 

application of any tax reductions must 

not be reduced by taxes paid, or deemed 

paid, by the recipients or other persons 

on their behalf, whereas the aggregate 

dollar amount of the clawback after the 

application of any tax reduction needs 

to be so reduced. As an example of 

disclosure that an adviser can make to 

satisfy this requirement, an adviser that 

is subject to a clawback could at the end 

of a private fund’s term include 

disclosure in the fund’s quarterly 

statement regarding the aggregate dollar 

amounts of the adviser clawback before 

and after the application of any tax 

reduction (if the adviser is subject to the 

quarterly statement requirement and to 

the extent that the quarterly statement is 

delivered within 45 days following the 

end of the relevant fiscal quarter). An 

investor will be able to compare these 

reported aggregate dollar amounts of the 

adviser clawback both before and after 

any tax reduction to evaluate the actual 

impact of a tax reduction on the 

clawback. 

An investment adviser may wish to 

consider providing private fund client 

investors with, and investors may 

request and negotiate for, additional 

information that is not specifically 

required by the final rule. For example, 

advisers that routinely monitor their 

potential clawback liability could 

provide their private fund client 

investors with information regarding 

their currently estimated clawback 

amounts.664 Additionally, in situations 

where an adviser’s tax reduction serves 

to reduce the clawback amount received 

by a private fund client, an adviser 

could consider providing investors in 

such fund with information clarifying 

their respective shares of the reduction. 

(c) Certain Non-Pro Rata Fee and 

Expense Allocations 

We proposed to prohibit an adviser 

from directly or indirectly charging or 

allocating fees and expenses related to 

a portfolio investment (or potential 

portfolio investment) on a non-pro rata 

basis when multiple private funds and 

other clients advised by the adviser or 

its related persons have invested (or 

propose to invest) in the same portfolio 

investment.665 Charging or allocating 

fees and expenses related to a portfolio 

investment (or potential portfolio 

investment) on a non-pro rata basis 

when multiple private funds and other 

clients advised by the adviser or its 

related persons have invested (or 

propose to invest) in the same portfolio 

investment presents an opportunity for 

an adviser to put its interests ahead of 

its clients’ interests (and, by extension, 

their investors’), and can result in 

private funds and their investors, 

particularly smaller investors that may 

not have as much influence with the 

adviser or its related persons, being 

misled, deceived, or otherwise harmed. 

As discussed in greater detail below, 

any such non-pro rata charge or 

allocation can create a conflict of 

interest and operate as a compensation 

scheme, both of which we deem 

contrary to the public interest and the 

protection of investors.666 This practice 

may also violate antifraud provisions if 

an adviser contravenes representations 

within the fund governing documents, 

and the adviser, faced with a conflict of 

interest, may seek to charge or allocate 

fees and expenses to one fund client as 

opposed to another client in a manner 

that benefits the adviser.667 Despite the 

number of enforcement actions brought 

by the Commission, we believe that this 

practice still exists among private fund 

advisers. Accordingly, we believe it is 

appropriate to promulgate a rule that 

restricts it.668 The adopted rule 

therefore restricts this practice unless (i) 

the non-pro rata charge or allocation is 

fair and equitable under the 

circumstances and (ii) prior to charging 

or allocating such fees or expenses to a 

private fund client, the investment 

adviser distributes to each investor of 

the private fund a written notice of the 

non-pro rata charge or allocation and a 

description of how it is fair and 

equitable under the circumstances.669

Charging or allocating fees and 

expenses related to a portfolio 

investment (or potential portfolio 

investment) on a non-pro rata basis 

presents a conflict of interest because 

advisers have economic and/or other 


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670 In some instances, a fund may not have the 

resources to bear its pro rata share of expenses 

related to a portfolio investment (whether due to 

insufficient reserves, the inability to call capital to 

cover such expenses, or otherwise). 

671The final rule does not prohibit an adviser 

from paying a fund’s pro rata portion of any fee or 

expense with its own capital. In addition, to the 

extent a fund does not have resources to pay for its 

share, the final rule does not prohibit an adviser 

from diluting such fund’s interest in the portfolio 

investment in a manner that is fair and equitable, 

subject to applicable laws, rules, or regulations and 

applicable provisions of the fund’s governing 

documents. 

672See, e.g., In the Matter of Rialto Capital 

Management, LLC, supra footnote 222. 

673 Id. 

674Although the adviser’s interest (or its affiliate’s 

interest, such as the general partner’s interest) may 

not be charged a management fee or an incentive 

allocation, they are often allocated or charged fund 

expenses, directly or indirectly, in a manner that is 

similar to a third party investor’s interest in the 

fund. 

675See, e.g., In the Matter of Kohlberg Kravis 

Roberts & Co, supra footnote 28. 

676See Healthy Markets Comment Letter I; NY 

State Comptroller Comment Letter; AFL–CIO 

Comment Letter; ILPA Comment Letter I; ICCR 

Comment Letter; RFG Comment Letter II. See also 

IAA Comment Letter II. 

677See SBAI Comment Letter; IAA Comment 

Letter II; Ropes & Gray Comment Letter. 

678See Dechert Comment Letter; AIC Comment 

Letter I; MFA Comment Letter I; NYC Bar Comment 

Letter II. 

679See Dechert Comment Letter (discussing 

scenarios where a particular investment structure, 

tax structure and/or regulatory position or status for 

an investment exists solely to benefit one or more 

particular investors); Ropes & Gray Comment Letter. 

680See Dechert Comment Letter. 

681See Dechert Comment Letter; OPERS 

Comment Letter. 

business reasons to charge or allocate 

fees and expenses to one fund client as 

opposed to another client (e.g., 

differences in a private fund’s fee 

structure, ownership structure, lifecycle, 

and investor base).670 For example, 

when determining how to charge or 

allocate fees and expenses related to a 

portfolio investment where multiple 

private fund clients have invested (or 

propose to invest), the adviser may 

choose to charge or allocate less fees 

and expenses to its higher fee-paying 

client to the detriment of its lower feepaying client because the higher feepaying client pays more to the adviser. 

Not only would this decision to charge 

or allocate less fees and expenses to its 

higher fee-paying client benefit the 

adviser but it could also disadvantage 

the lower fee-paying client and its 

investors who bear more than a pro rata 

share of expenses while supporting the 

value of the higher fee-paying client’s 

investment.671

We have observed these 

considerations leading advisers to favor 

one private fund client (and its 

investors) over another private fund 

client (and its investors) because of the 

fund’s investor base. For example, as 

part of their strategy, some advisers 

agree to perform certain services, e.g., 

asset-level due diligence, accounting, 

valuation, legal, either in-house or 

through a captive consulting firm, for 

portfolio investments at costs that are at 

or below market rates rather than hire a 

third party to perform these services.672

To facilitate a portfolio investment, the 

adviser may set up a co-investment 

vehicle that invests alongside the 

adviser’s main fund.673 If the main fund 

and the co-investment vehicle have both 

invested (or propose to invest) in the 

same portfolio investment that engages 

the adviser for these services, the 

adviser may decide not to allocate the 

costs of these services to the coinvestment vehicle, which is often made 

up of favored or larger investors and 

may have specific fee and expense 

limits, and may instead allocate the 

costs of these services to the main fund, 

causing the main fund to pay more in 

expenses than it otherwise would under 

a pro-rata allocation. 

Charging or allocating fees and 

expenses related to a portfolio 

investment (or potential portfolio 

investment) on a non-pro rata basis 

when multiple private funds and other 

clients advised by the adviser or its 

related persons have invested (or 

propose to invest) in the same portfolio 

investment is a conflict of interest for 

the adviser and can also lead, and in our 

experience often does lead, to a 

compensation scheme that we deem 

contrary to the public interest and 

protection of investors, unless this 

practice is fair and equitable and is 

adequately disclosed to investors in 

advance. It also may be fraudulent or 

deceptive, and result in investor harm. 

For instance, if two funds invest in the 

same portfolio investment but only one 

fund pays an incentive allocation, the 

adviser may have an incentive to avoid 

charging or allocating fees and expenses 

to the fund paying an incentive 

allocation in an effort to increase the 

adviser’s incentive allocation. Similarly, 

if the adviser’s ownership interests vary 

from fund to fund, the adviser may have 

an incentive to charge or allocate fees 

and expenses away from the fund in 

which the adviser holds a greater 

interest.674 Because of these differences 

in ownership or compensation 

structures, an adviser may have an 

incentive to charge or allocate fees and 

expenses in a way that maximizes its 

economic entitlements at the expense of 

its fund client’s (and investors’) 

economic entitlements. 

Moreover, this practice can result in 

a conflict of interest and compensation 

scheme contrary to the protection of 

investors by favoring not only the 

adviser but also the adviser’s related 

persons. For example, an adviser may 

set up co-investment vehicles for related 

persons, such as executives, family 

members, and certain consultants, that 

invest alongside the adviser’s main 

fund.675 These co-investment vehicles 

may receive a set percentage of each 

portfolio investment made by the 

adviser’s main fund without having to 

share in any research expenses, travel 

costs, professional fees, and other 

expenses incurred in deal sourcing 

activities related to portfolio 

investments that never materialize. For 

the adviser to allow its related persons, 

such as executives, family, and certain 

consultants, to participate in 

consummated portfolio investments 

without having to bear the cost of these 

expenses may be an undisclosed form of 

compensation to the adviser and its 

related persons. It also may defraud, 

deceive, or harm the fund that bore the 

co-investment vehicle’s share of 

expenses. 

Some commenters supported the 

proposed prohibition and stated it 

would protect investors, including those 

who do not benefit from co-investment 

opportunities.676 In contrast, other 

commenters opposed the proposed 

prohibition and stated that it could 

result in inequitable outcomes 677 and 

would be disruptive.678 Commenters 

stated that allowing advisers to allocate 

expenses on a non-pro rata basis is 

essential for the fair treatment of 

investors because it allows advisers to 

allocate expenses appropriately to the 

relevant investors that generated the 

additional cost.679 Commenters asserted 

that the prescriptive nature of the 

proposed rule would result in 

unintended consequences, indicating 

there may be circumstances, whether 

due to tax, regulatory, accounting, or 

other reasons, where a pro rata expense 

allocation would lead to inequitable 

results.680 For example, they questioned 

whether the proposed rule would 

prevent an adviser from fairly allocating 

tax liabilities that are attributable to a 

specific investor in the private fund 

(e.g., withholding taxes and partnershiplevel assessments resulting from a tax 

audit) and whether the adviser 

absorbing certain expenses of a specific 

investor where that investor is unable to 

pay for the expense in the private fund 

would be seen as non-pro rata allocation 

under the proposed rule.681

Many commenters suggested that we 

instead allow advisers to allocate fees 

and expenses related to portfolio 

expenses in a fair and equitable manner. 


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682See NYC Bar Comment Letter II; MFA 

Comment Letter I; Comment Letter of the Managed 

Funds Association (June 13, 2022) (‘‘MFA Comment 

Letter II’’). 

683See Convergence Comment Letter; Invest 

Europe Comment Letter. 

684See Comment Letter of the Securities Industry 

and Financial Markets Association Asset 

Management Group (June 13, 2022); GPEVCA 

Comment Letter; SIFMA–AMG Comment Letter I; 

SBAI Comment Letter; Ropes & Gray Comment 

Letter; AIMA/ACC Comment Letter. 

685See IAA Comment Letter II; see generally NY 

State Comptroller Comment Letter (suggesting the 

disclosure of written expense allocation and control 

policies to investors). 

686See SBAI Comment Letter. 

687See GPEVCA Comment Letter. 

688Final rule 211(h)(2)–1(a)(4). 

689 GPEVCA Comment Letter; NYC Bar Comment 

Letter II; MFA Comment Letter I; MFA Comment 

Letter II. 690See SIFMA–AMG Comment Letter I; GPEVCA 

Comment Letter; SBAI Comment Letter. See 

generally IAA Comment Letter II (suggesting the 

disclosure of written fee and expense allocation 

policies to investors); NY State Comptroller 

Comment Letter (suggesting the disclosure of 

written expense allocation and control policies to 

investors). 

691See Schulte Comment Letter; OPERS 

Comment Letter; PIFF Comment Letter; AIC 

Comment Letter I; Ropes & Gray Comment Letter; 

Continued 

Some suggested that we refrain from 

rulemaking on this issue because 

advisers are already required to allocate 

fees and expenses on a fair and 

equitable basis,682 while others urged 

the Commission to adopt an exception 

for non-pro rata fee and expense charges 

or allocations that are appropriately 

disclosed and consented to by 

investors 683 or an alternative approach 

that involves disclosure to investors to 

avoid unfair outcomes.684 For example, 

some commenters suggested that, as an 

alternative to the proposed prohibition, 

advisers disclose their policies and 

procedures regarding the allocation of 

fees and expenses among private funds 

to each fund investor.685 In another 

example, a commenter suggested that 

we should require disclosure only 

where fees and expenses are not split on 

a pro-rata basis.686 One commenter 

stated that advisers typically allocate 

expenses on a pro rata basis, unless it 

would otherwise be fair and equitable to 

allocate non-pro rata under the 

circumstances.687 This commenter 

suggested that a disclosure-based 

approach would afford more flexibility 

and accommodate the diversity of 

investment structures used by advisers 

for private funds. 

After considering comments, we are 

adopting a rule that focuses on ensuring 

that clients are treated fairly and 

equitably, which we recognize may not 

always mean clients must be treated 

identically. Accordingly, in a change 

from the proposal, the final rule 

prohibits a private fund adviser from 

charging or allocating fees and expenses 

related to a portfolio investment (or 

potential portfolio investment) on a 

non-pro rata basis, unless the adviser 

meets two requirements.688

First, the adviser’s non-pro rata 

allocation must be fair and equitable 

under the circumstances. Whether it is 

fair and equitable will depend on factors 

relevant for the specific expense. For 

example, it would be relevant whether 

the expense relates to a specific type of 

security that one private fund client 

holds. In another example, a factor 

could be whether the expense relates to 

a bespoke structuring arrangement for 

one private fund client to participate in 

the portfolio investment. As yet another 

example, another factor could be that 

one private fund client may receive a 

greater benefit from the expense relative 

to other private fund clients, such as the 

potential benefit of certain insurance 

policies. 

Second, before charging or allocating 

such fees or expenses to a private fund 

client, the adviser must distribute to 

each investor a written notice of the 

non-pro rata charge or allocation and a 

description of how it is fair and 

equitable under the circumstances. The 

written notice will allow an investor to 

understand better how the adviser is 

treating the private fund relative to 

other private funds or clients advised by 

the adviser. For instance, the written 

notice may help the investor understand 

whether the adviser’s allocation 

approach creates any conflicts of 

interest, results in any additional direct 

or indirect compensation to the adviser 

or its related parties, creates the risk of 

potential harms, or results in other 

disadvantages related to such activity. 

In this notice, advisers should consider 

addressing relevant factors, which might 

include the adviser’s allocation 

approach and the reason(s) why the 

adviser believes that its non-pro rata 

allocation approach is fair and equitable 

under the circumstances. This change is 

responsive to comments that we 

received suggesting that adviser’s 

allocations are or should be fair and 

equitable 689 and that a more disclosurebased approach in certain instances 

rather than a strict requirement to 

charge or allocate fees and expenses 

solely on a pro rata basis.690 This 

disclosure setting forth how the 

adviser’s allocation is fair and equitable 

must be distributed to all investors in 

the private fund. 

We believe that it is important for all 

investors in the private fund to receive 

this disclosure before the adviser 

charges or allocates non-pro rata fees or 

expenses to a private fund client. 

Private fund investors generally do not 

have insight into (and the quarterly 

statement rule will not require advisers 

to disclose) the amounts of joint fees or 

expenses that the adviser allocated to its 

other clients, and investors are unable to 

compare amounts borne by their fund 

with amounts borne by the adviser’s 

other clients to assess whether the 

adviser allocated joint costs consistently 

with the fund’s terms and other 

disclosures and representations made by 

the adviser. To make this assessment, an 

investor would need access to 

information regarding the terms of the 

adviser’s relationships with its clients 

other than the fund, as well as certain 

information (including potentially 

accounting information) about those 

other clients. This advance disclosure 

timeline therefore is appropriate 

because it provides investors with 

access to important fee and expense 

information to enable investors to 

discuss the non-pro rata allocation with 

the adviser before being charged. 

As explained above, we believe it is 

important to restrict the practice of 

charging or allocating fees and expenses 

related to a portfolio investment (or 

potential portfolio investment) on a 

non-pro rata basis because this practice 

presents a conflict of interest and can 

result in a compensation scheme that is 

contrary to the public interest and the 

protection of investors. We have not, 

however, prohibited this practice where 

an adviser’s non-pro rata allocation 

would be fair and equitable under the 

circumstances. We recognize that 

private fund advisers may structure 

investments for specific tax, regulatory, 

accounting, or other reasons for the 

benefit of certain investors, creating a 

diversity of investment structures. We 

believe this framework offers investors 

additional protections while 

simultaneously offering advisers the 

flexibility to execute investment 

strategies and offer a diversity of 

investment structures in a way that may 

benefit investors. 

This framework will also encourage 

advisers, as fiduciaries, to review their 

approach to allocating fees and 

expenses to their clients, particularly if 

advisers must disclose to investors why 

an allocation is fair and equitable. This 

framework provides more 

comprehensive information for 

investors so that investors can evaluate 

the adviser’s allocation approach. 

Several commenters, including a 

commenter that generally supported this 

rule, expressed concern that the 

proposed rule could impair coinvestment opportunities.691 They 


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BVCA Comment Letter; Invest Europe Comment 

Letter; Dechert Comment Letter; GPEVCA Comment 

Letter. See also ILPA Comment Letter I. 

692See Schulte Comment Letter; OPERS 

Comment Letter. 

693See Schulte Comment Letter; PIFF Comment 

Letter. 

694See AIC Comment Letter I; Ropes & Gray 

Comment Letter. 

695See infra section VI.E.3 (where we discuss 

several factors that may mitigate these potentially 

negative effects, including reasons why the 

disclosure requirements could promote capital 

formation). 

696See In the Matter of Energy Capital Partners, 

supra footnote 30; In the Matter of Platinum Equity 

Advisors, LLC, supra footnote 666; In the Matter of 

WL Ross & Co. LLC, supra footnote 666. 

697See In the Matter of Energy Capital Partners, 

supra footnote 30. 

698See In the Matter of Platinum Equity Advisors, 

LLC, supra footnote 666. 

699See id. 

700See In the Matter of WL Ross & Co. LLC, supra 

footnote 666 (the adviser retained for itself the 

portion of transaction fees attributable to the coinvestors’ ownership of the portfolio company, 

without subjecting such fees to any management fee 

offsets). 

701See IAA Comment Letter II; AIC Comment 

Letter I. But see Ropes & Gray Comment Letter 

(suggesting that we define the concept of ‘‘pro rata’’ 

to make the rule easier to apply in certain 

circumstances). 

702 In a change from the proposal, we are revising 

this requirement to capture not only amounts 

‘‘charged’’ to the private fund but also fees and 

expenses ‘‘allocated to’’ the private fund. We 

believe that this clarification is necessary in light 

of the various ways that a private fund may be 

caused to bear fees and expenses. 

703Final rule 211(h)(2)–1(a)(1). We are also 

reiterating that charging these expenses without 

authority in the governing documents is 

inconsistent with an adviser’s fiduciary duty and 

may violate the antifraud provisions of the Act. For 

purposes of requesting consent under this rule, 

advisers generally should list each category of fee 

or expense as a separate line item, rather than group 

fund expenses into broad categories, and describe 

how each such fee or expense is related to the 

relevant investigation. 

stated that co-investment opportunities 

benefit the fund and its investors, and 

that such transactions are critical to 

enabling the fund to execute its 

investment strategy.692 Commenters 

suggested that the proposed rule would 

severely impact the availability of coinvestment opportunities because these 

are time-sensitive opportunities and 

increasing the regulatory burden on 

advisers would only heighten the 

chance that private funds would miss 

out on an opportunity to participate.693

They also stated that the rule would 

interrupt the commercial speed of coinvestment transactions because 

potential co-investors would wait until 

a transaction is certain before 

committing to the transaction to avoid 

broken deal expenses.694 Also, these 

commenters expressed concern that 

advisers could lack the leverage 

necessary to require co-investors to 

share in fees and expenses on a pro rata 

basis and that some co-investors may 

decline to participate in the transaction 

rather than bear additional fees and 

expenses. These commenters asserted 

that the rule would inhibit capital 

formation by preventing funds from 

completing larger deals because they 

would not be able to find co-investment 

capital to invest alongside the fund. 

Because the final rule restricts (rather 

than prohibits) this practice if the 

adviser makes certain disclosures, we 

believe the final rule generally 

addresses these concerns. For example, 

although we acknowledge that many coinvestments are executed on short 

notice, co-investors typically review and 

negotiate co-investment documentation, 

such as fund agreements, side letters, 

and subscription agreements, prior to 

the closing of the transaction. We 

believe that the final rule’s requirements 

can generally be completed during this 

period (and prior to the adviser 

completing the non-pro rata charge or 

allocation). We believe restricting this 

practice while requiring disclosure and 

that it be fair and equitable balances the 

burdens on the adviser with the 

interests of investors to be treated fairly 

and receive timely access to important 

information about non-pro rata fee and 

expense allocations. While we 

acknowledge that this approach imposes 

some incremental burden on coinvestment deals, we do not believe the 

burdens created by these requirements 

will significantly deter investor appetite 

for co-investments or inhibit capital 

formation.695

We requested comment on whether 

we should define ‘‘pro rata.’’ In the past, 

we have generally observed that 

advisers implement pro rata allocations 

based on ownership percentages.696 For 

example, one adviser allocated a fund 

more than its pro rata share of bridge 

facility commitment fees relative to its 

ownership of a portfolio investment.697

In another example, a co-investment 

vehicle’s governing documents provided 

that the co-investment vehicle would 

pay its pro rata share of expenses for 

any portfolio company investments 

made by the co-investment vehicle.698

Although the co-investment vehicle 

agreed to pay its pro rata share of 

expenses of any consummated portfolio 

company investment and the coinvestment vehicle invested on a 

predetermined amount in each 

consummated portfolio company 

investment, the adviser did not allocate 

broken deal expenses to the coinvestment vehicles.699 We have alleged 

in settled enforcement actions that an 

adviser has allocated transaction fees in 

a way that benefited the adviser rather 

than pro rata among the adviser’s funds 

and co-investors invested in the 

portfolio company investment.700

A commenter specifically suggested 

that we refrain from defining ‘‘pro rata’’ 

to allow advisers flexibility because 

there are multiple methods that can be 

used to allocate pro rata.701 We agree 

that there may be multiple methods to 

determine pro rata allocations, and we 

have therefore declined to define ‘‘pro 

rata.’’ We recognize that the framework 

we are adopting could result in some 

subjectivity regarding how advisers 

calculate pro rata and when an 

allocation is fair and equitable. 

Nonetheless, we believe that this 

framework offers additional protection 

to investors in situations where an 

adviser may have an incentive to favor 

one client (or a group of investors) over 

another client (or another group of 

investors). This framework requires an 

adviser to evaluate its conflicts of 

interest when multiple private funds 

and other clients advised by the adviser 

or its related persons have invested (or 

propose to invest) in the same portfolio 

investment and enhances protections 

and disclosures made to investors when 

an adviser allocates or charges fees and 

expenses in a non-pro rata manner. 

2. Restricted Activities With Certain 

Investor Consent Exceptions 

(a) Investigation Expenses 

We proposed to prohibit advisers 

from charging their private fund clients 

for fees and expenses associated with an 

investigation of the adviser or its related 

persons by any governmental or 

regulatory authority. We are adopting 

this provision 702 but, after considering 

comments, we are providing an 

exception from the proposed 

prohibition if an adviser seeks consent 

from all investors of a private fund, and 

obtains written consent from at least a 

majority in interest of the fund’s 

investors that are not related persons of 

the adviser, for charging the private 

fund for such investigation fees or 

expenses.703 However, the exception 

does not apply to fees or expenses 

related to an investigation that results or 

has resulted in a court or governmental 

authority imposing a sanction for a 

violation of the Act or the rules 

promulgated thereunder. 

The heightened protection of investor 

consent is particularly appropriate with 

respect to the investigation restriction 

because such investigations are focused 

on the adviser’s own potential or actual 

wrongdoing. If an adviser is able to pass 

on expenses associated with an 

investigation related to its own 

misfeasance, without providing 


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704See infra sections VI.C.2 and VI.D.3. 

705See, e.g., AFR Comment Letter I; United for 

Respect Comment Letter I; NYC Comptroller 

Comment Letter. 

706See, e.g., Sullivan & Cromwell Comment 

Letter; NYC Bar Comment Letter II; ASA Comment 

Letter. 

707See, e.g., AIMA/ACC Comment Letter; SBAI 

Comment Letter. 

708See SBAI Comment Letter. 

709See NYC Bar Comment Letter II. 

710See, e.g., Dechert Comment Letter; Haynes & 

Boone Comment Letter; Chamber of Commerce 

Comment Letter. 

711See, e.g., CalPERS Comment Letter; NYC 

Comptroller Comment Letter; ILPA Comment Letter 

I. 

712See supra section I for a discussion of the 

definition of ‘‘compensation scheme’’. 

713See, e.g., See, e.g., In the Matter of Cherokee 

Investment Partners, LLC and Cherokee Advisers, 

LLC, supra footnote 26 (alleging that the adviser 

improperly shifted expenses related to an 

examination and an investigation away from itself). 

714One commenter stated that the proposed 

prohibition on advisers charging their private fund 

clients for these expenses is unnecessary because 

the Commission has the authority, as a condition 

of the settlement, to require advisers to bear the 

costs associated with a settlement or penalty. See 

Citadel Comment Letter. We view this authority as 

supporting the need for a broader rule in this area 

rather than relying on invocations of this authority 

in each separate instance. In addition, relying on 

imposing this condition as a condition of 

settlement, by which point an adviser who has 

committed fraud may have dissipated its money 

and be unable to reimburse investors for the 

investigation expenses already charged, provides 

inadequate and lesser protection to investors 

compared to the rule’s consent requirement. 

715See, e.g., Dechert Comment Letter; Haynes & 

Boone Comment Letter; Chamber of Commerce 

Comment Letter. 

716However, even in such circumstances where 

investigation fee and expense allocation provisions 

are highly negotiated, we believe such negotiation 

is only effective if investors explicitly consent to 

any such allocations in each specific instance. 

717See section 215(a) of the Advisers Act. See 

also section 215(b) of the Advisers Act (stating that 

any contract made in violation of the Act or rules 

thereunder is void). 

disclosure of the specific fees and 

expenses actually being passed through 

to funds relating to a particular 

investigation and securing consent from 

investors, such adviser has adverse 

incentives to engage in conduct likely to 

trigger an investigation and may not be 

adequately incentivized to limit the 

legal fees incurred on its own behalf.704

An adviser faces a conflict of interest 

when charging investors for fees and 

expenses associated with an 

investigation of the adviser by any 

governmental or regulatory authority 

because these fees and expenses are 

related to the adviser’s potential or 

actual wrongdoing. 

We recognize that governmental or 

regulatory bodies may not formally 

notify an adviser that it is under 

investigation. In such a circumstance, 

whether an adviser is under 

investigation would be determined 

based on the information available. 

Some commenters supported the 

proposed prohibition, stating that 

advisers should not be charging 

investigation fees and expenses to the 

fund.705 Other commenters stated that 

this prohibition is unnecessary, at least 

in part because investors are already 

able to agree on what fees may or may 

not be charged to funds.706 Several 

commenters suggested that we should 

require disclosure of these expenses 

instead of prohibiting these practices.707

In particular, as an alternative to the 

proposed prohibition, one commenter 

recommended that any such expenses 

should be fully disclosed to investors as 

separate line items 708 while another 

commenter recommended that we 

should require clear empirical 

disclosure of such expenses.709 Others 

predicted that advisers would assess 

higher management fees if they could 

not allocate these fees and expenses to 

funds.710 Some commenters suggested 

that we should clarify that certain costs 

and expenses resulting from settlements 

and judgments with governmental 

authorities are not indemnifiable.711

Charging investors separately for fees 

and expenses associated with an 

investigation of the adviser or its related 

persons by any governmental or 

regulatory authority is a compensation 

scheme contrary to the public interest, 

unless this practice is consented to, in 

writing, by investors who are not related 

persons of the adviser. Such fees and 

expenses are related to the adviser’s 

potential or actual wrongdoing and 

should be borne by the adviser unless 

investors consent in writing to paying 

them for each specific investigation. 

Accordingly, the allocation or charging 

of these types of expenses to private 

fund clients constitutes a compensation 

scheme within the meaning of section 

211(h) of the Advisers Act because it is 

a method by which an investment 

adviser may take additional 

compensation in the form of 

reimbursement for expenses that the 

adviser should bear.712 Moreover, such 

allocations create a conflict of interest 

because they provide an incentive for an 

adviser to place its own interests ahead 

of the private fund’s interests and 

allocate expenses away from the adviser 

to the fund.713 In such a case where an 

adviser incurs expenses as a result of an 

investigation into the adviser’s conduct, 

then uses investor assets to pay the 

expenses associated thereto, investors 

have the potential to be doubly harmed 

if the adviser’s alleged misconduct 

harms investors.714 We also believe that 

allocation of these types of fees and 

expenses to private fund clients can be 

deceptive in current market practice. 

For example, investors may generally 

expect an adviser to bear fees and 

expenses directly related to its own 

wrongdoing. Regarding fees and 

expenses associated with investigation 

of the adviser or its related persons, we 

do not believe it is appropriate for an 

adviser to enrich itself by charging for 

investigation fees and expenses related 

to its own actual or potential 

wrongdoing, unless investors consent to 

such fees and expenses. Thus, we 

believe that, unless this practice is 

consented to, in writing, by investors, it 

creates a compensation scheme that is 

contrary to the public interest and the 

protection of investors. 

After reviewing responses from 

commenters, however, we acknowledge 

that a prohibition of certain of these 

charges without an exception for 

instances in which the adviser obtains 

investor consent could result in 

unfavorable outcomes for investors. For 

example, as some commenters 

suggested,715 some advisers may 

attempt to increase management or 

other fees if they were no longer able to 

charge such fees and expenses to fund 

clients, and the increase in management 

fees might have been more than the 

increase in any fees or expenses already 

being passed through to the private 

fund. We also recognize that whether 

such fees and expenses can be charged 

to the private fund can be highly 

negotiated by investors in certain 

instances.716 As a result, we believe it 

is necessary to prohibit these practices 

unless advisers get requisite written 

consent from investors. 

The final rule, however, does not 

contain a consent-based exception for 

an adviser to charge a fund for fees or 

expenses related to an investigation that 

results or has resulted in a court or 

governmental authority imposing a 

sanction for a violation of the Act or the 

rules promulgated thereunder. Such 

charges will be outright prohibited. If an 

adviser were to charge a client for such 

fees and expenses, we would view that 

adviser as requiring its client to 

acquiesce to the adviser’s violation of 

the Act. Advisers must comply with all 

applicable provisions of the Act, and the 

SEC would view a waiver of any 

provision of the Act as invalid under 

section 215(a) of the Act. Section 215(a) 

of the Act provides that any condition, 

stipulation, or provision binding any 

person to waive compliance with any 

provision of the Act shall be void.717 An 

adviser that charges its private fund 

client for fees and expenses related to 

the adviser’s violation of the Act, or the 


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718For example, if the Commission sanctioned an 

adviser pursuant to a settled order finding that the 

adviser violated the Act or the rules promulgated 

thereunder, including an order to which the adviser 

consented without admitting or denying the 

Commission’s findings, the adviser would not be 

permitted to seek investor consent to charge any 

fees and expenses related to the Commission’s 

investigation to the fund, including any penalties or 

disgorgement. 

719See, e.g., BVCA Comment Letter; Sullivan & 

Cromwell Comment Letter; SBAI Comment Letter. 

720The obligation of an adviser to a pass-through 

fund to pay fees or expenses associated with a 

sanction under the Act is attenuated to the extent 

such adviser has other assets (e.g., balance sheet 

capital), sources of revenue (e.g., performance-based 

compensation), or access to capital (e.g., loans) to 

pay any such fees or expenses. As the Commission 

may already require advisers to pass-through funds 

to pay penalties associated with a sanction under 

the Act, we anticipate that this rule will not cause 

a significant disruption from current practice for 

advisers to pass-through funds. 

721Proposed rule 211(h)(2)–1(a)(7). 

722See SIFMA–AMG Comment Letter I; NYC Bar 

Comment Letter II; IAA Comment Letter II. 

723See OPERS Comment Letter; Convergence 

Comment Letter; AFL–CIO Comment Letter; ILPA 

Comment Letter I; RFG Comment Letter II; 

American Association for Justice Comment Letter. 

724See Convergence Comment Letter. 

725See NYC Bar Comment Letter II. 

726Tax advances occur when the private fund 

pays or distributes amounts to the general partner 

to allow the general partner to cover tax obligations. 

727See SBAI Comment Letter; CFA Comment 

Letter I; AIC Comment Letter I. 

728See IAA Comment Letter II. 

729See, e.g., SIFMA–AMG Comment Letter I 

(stating that borrowing securities can be structured 

as a purchase subject to section 206(3) of the 

Advisers Act); NYC Bar Comment Letter II. To the 

extent that a borrowing under the final rule 

involves a purchase under section 206(3) of the 

Advisers Act, the requirements of that section will 

continue to apply to the adviser. 

730See Convergence Comment Letter. 

731See, e.g., IAA Comment Letter II; AIC 

Comment Letter I. 

rules promulgated thereunder, would 

operate as a waiver of its liability for 

such violation. While other types of 

investigations may involve a great 

variety of potential or actual 

wrongdoing that may differ in nature 

and severity, compliance with the Act is 

core to the existence and activities of 

investment advisers. Accordingly, an 

adviser charging its private fund client 

for fees and expenses related to an 

investigation that results or has resulted 

in a court or governmental authority 

imposing a sanction for a violation of 

the Act, or the rules promulgated 

thereunder, is impermissible.718

To illustrate, an adviser may charge a 

private fund client for fees and expenses 

associated with an investigation by the 

SEC of the adviser or its related persons 

for a potential violation of Section 206 

of the Act or the rules thereunder, 

provided those fees and expenses are 

consented to by investors pursuant to 

this rule. However, if the investigation 

results in a court or governmental 

authority imposing a sanction on the 

adviser for a violation of the Act or the 

rules promulgated thereunder, then the 

adviser must refund the fund for the 

fees and expenses associated with the 

investigation, such as lawyer’s fees. 

Some commenters also expressed 

concerns about how the proposed 

prohibition related to investigation 

expenses would adversely impact funds 

with ‘‘pass-through’’ expense models.719

First, investigations of advisers by 

governmental authorities are 

uncommon, and thus we do not expect 

expenses related to investigations to 

pose a threat to the majority of advisers 

using pass-through expense models. 

Second, since we are providing a 

consent-based exception from this 

prohibition, advisers with pass-through 

expense models are still able to charge 

investigation expenses to the funds they 

advise, provided they obtain investor 

consent pursuant to this rule (subject to 

compliance with other applicable 

disclosure and consent requirements). 

Thus, the final rule generally does not 

prohibit advisers from continuing to 

utilize such models. Such advisers, like 

any other private fund adviser, would 

nonetheless be prohibited from 

allocating to such funds fees or 

expenses related an investigation that 

results or has resulted in a court or 

governmental authority imposing a 

sanction for a violation of the Act, or the 

rules promulgated thereunder.720

(b) Borrowing 

We proposed to prohibit an adviser 

directly or indirectly from borrowing 

money, securities, or other fund assets, 

or receiving a loan or an extension of 

credit, from a private fund client 

(collectively, a ‘‘borrowing’’).721

Some commenters opposed the 

prohibition,722 while others supported 

it.723 One commenter encouraged the 

Commission to expand the scope of the 

proposed prohibition by preventing an 

adviser from borrowing from coinvestment vehicles or other 

accounts.724 Another commenter that 

opposed the proposed prohibition stated 

that the prohibition was unnecessary 

because advisers and their related 

persons rarely borrow from fund 

clients.725 These commenters asserted 

that the proposed prohibition could 

inadvertently prohibit activity that 

could benefit investors, such as tax 

advances,726 borrowing arrangements 

outside of the fund structure,727 and the 

activity of service providers that are 

affiliates of the adviser, especially with 

large financial institutions that play 

many roles in a private fund 

complex.728 Commenters also stated 

that the rule could prohibit certain types 

of transactions that are permitted (e.g., 

an adviser purchasing securities from a 

client), with appropriate disclosure and 

consent, under section 206(3) of the 

Advisers Act.729 One commenter stated 

that we should instead require 

disclosure of adviser borrowings on 

Form PF and Form ADV,730 while other 

commenters stated that we should 

provide exemptions for borrowings 

disclosed to investors or LPACs to 

ensure that these arrangements are 

entered into on arm’s length terms.731

Under section 211(h)(2) of the 

Advisers Act, the Commission has the 

authority to promulgate rules to prohibit 

or restrict certain conflicts of interest 

that the Commission deems contrary to 

the public interest and the protection of 

investors. We believe it is important to 

restrict the practice of borrowing from a 

private fund client because it presents a 

conflict of interest that is contrary to the 

public interest and the protection of 

investors. When an adviser borrows 

from a private fund, that adviser has a 

conflict of interest because it is on both 

sides of the transaction (i.e., the adviser 

benefits from the loan and manages the 

client lender). As discussed above, a 

private fund rarely has employees of its 

own. The fund typically relies on the 

investment adviser (and, in certain 

cases, affiliated entities) to provide 

management, investment, and other 

services, and such persons usually have 

general authority to take actions on 

behalf of the private fund without 

further consent or approval of any other 

person. This structure causes a conflict 

of interest between the private fund 

(and, by extension, its investors) and the 

investment adviser because the interests 

of the fund are not necessarily aligned 

with the interests of the adviser. For 

example, when determining the interest 

rate for the borrowing, an investment 

adviser’s interest in maximizing its own 

profit by negotiating (or setting) a low 

rate may conflict with the private fund’s 

(and, by extension, its investors’) 

interest in seeking to maximize the 

profits of the fund. As another example, 

if the adviser becomes insolvent or 

suffers financial distress, the interests of 

the fund in seeking to protect its 

interests (whether through enforcing a 

default against, or renegotiating the 

terms of the loan with, the adviser) may 

conflict with the interests of the adviser 

in seeking to discharge the liability or 

otherwise renegotiate more favorable 

terms for itself. 

Additionally, this practice may 

prevent the fund client from using those 

assets to further the fund’s investment 

strategy. Even where disclosed to 


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732See SEC v. Philip A. Falcone, et al., Civil 

Action 12–CV–5027 (S.D.N.Y) (Aug. 16, 2013) 

(consent of defendants) (admitting that a hedge 

fund adviser borrowed from a hedge fund client, at 

an interest rate lower than the fund’s borrowing 

rate, in order to repay the adviser’s personal taxes, 

and that the adviser failed to disclose the loan to 

investors for five months); In the Matter of Wave 

Equity Partners LLC, Investment Advisers Act 

Release No. 6146 (Sept. 23, 2022) (settled action) 

(alleging that the adviser (i) borrowed money from 

a private equity fund that it managed in order to 

pay placement agent fees to a third-party vendor; 

and (ii) without adequate disclosure, failed 

promptly to repay the fund through an offset of 

quarterly management fees as required by fund 

documents); In the Matter of SparkLabs Global 

Ventures Management, LLC, et al., Investment 

Advisers Act Release No. 6121 (Sept. 12, 2022) 

(settled action) (alleging that exempt reporting 

advisers and their owner (i) directed certain funds 

they managed to make more than 50 unauthorized 

loans totaling over $4.4 million, at below-market 

interest rates, to other funds under their 

management and certain affiliates of the adviser 

and/or its related persons; (ii) failed to enforce the 

terms of the loans when they were due; and (iii) 

failed to disclose to their clients or investors the 

conflicts of interest associated with the loans and 

to seek approval for them). 

733See In the Matter of Monsoon Capital, LLC, 

Investment Advisers Act Release No. 5490 (Apr. 30, 

2020) (settled action). 

734See In the Matter of Resilience Management, 

LLC, et al., Investment Advisers Act Release No. 

4721 (June 29, 2017) (settled action). 

735Final rule 211(h)(2)–1(a)(5). See supra section 

II.E. (Restricted Activities) for discussions of the 

‘‘distribution’’ requirement and of the type and 

manner of investor consent required under the final 

rule. 

736Advisers may also consider providing 

additional information, including, to the extent 

relevant, updated post-borrowing disclosure to 

reflect increases, decreases, or other changes in the 

borrowing, to help investors understand the nature 

of the conflict of interest and its potential influence 

on the adviser. 737See, e.g., ILPA Comment Letter I. 

investors (or to an advisory board of the 

private fund, such as an LPAC), this 

practice presents a conflict of interest 

that can be harmful to investors 

because, as a result of the unique 

structure of private funds, only certain 

investors with specific information or 

governance rights (such as 

representation on the LPAC) may be in 

a position to discuss, diligence, 

negotiate, consent to, or monitor the 

borrowing with the adviser, rather than 

all of the private fund’s investors, 

depending on the facts and 

circumstances. 

Further, section 206(4) of the Advisers 

Act permits the Commission to 

prescribe a means to prevent acts, 

practices, and courses of business that 

are fraudulent, deceptive, or 

manipulative. Restricting the ability of 

an adviser to borrow from a private fund 

client would help prevent fraud, 

deception, and manipulation that can 

occur when an adviser engages in this 

practice. The Commission has 

previously settled enforcement actions 

against advisers that directly or 

indirectly borrowed from private fund 

clients without providing appropriate 

disclosure or obtaining approval.732 For 

example, the Commission brought 

charges against a private fund adviser 

and its owner for, among other things, 

improperly borrowing money from a 

private fund.733 Specifically, the 

Commission order alleged that the 

owner breached his fiduciary duty when 

he borrowed from the fund to settle a 

personal trade. In another example, the 

Commission found that an investment 

adviser, through its owner, improperly 

borrowed money from private funds to 

pay the adviser’s expenses.734 In both 

instances, the advisers did not timely 

disclose or obtain approval for the 

borrowings. The advisers also defrauded 

the private funds and their investors by 

illegally using the private funds’ assets 

to serve their personal interests. Despite 

the Commission’s enforcement efforts, 

adviser borrowing practices continue to 

pose harmful risks to private funds (and, 

by extension, their investors) in light of 

the conflicts of interests that arise 

between a fund and its adviser when the 

adviser has a direct or indirect interest 

on both sides of a borrowing 

arrangement. 

After considering comments and in a 

change from the proposal, the final rule 

prohibits advisers from engaging in 

borrowings from a private fund client 

unless the adviser distributes a written 

notice and description of the material 

terms of the borrowing to the investors 

of the private fund, seeks their consent 

for the borrowing, and obtains written 

consent from at least a majority in 

interest of the fund’s investors that are 

not related persons of the adviser (as 

described above).735 The final rule does 

not enumerate specific terms of the 

borrowing that must be disclosed in 

connection with an adviser’s consent 

request; rather, it requires advisers to 

disclose the prospective borrowing and 

the material terms related thereto. This 

could include, for example, the amount 

of money to be borrowed, the interest 

rate, and the repayment schedule, 

depending on the facts and 

circumstances. We believe that this 

approach will help prevent activity that 

is potentially harmful unless 

accompanied by specific and timely 

disclosure that can be meaningfully 

evaluated and acted upon by investors. 

By not enumerating specific terms that 

must be disclosed and instead 

incorporating a materiality standard, the 

final rule will also afford investors and 

advisers the flexibility to negotiate for 

disclosures and terms that are tailored 

to their unique needs and 

relationships.736

The heightened protection of investor 

consent is particularly appropriate with 

respect to the borrowing restriction. 

Borrowing from a private fund creates a 

conflict of interest where the adviser is 

incentivized to favor its own interest 

over the interest of the fund. 

Additionally, there are other potential 

conflicts that arise in the event that the 

adviser is unable to repay the 

borrowing, or it has to choose whether 

to repay the borrowing among other 

uses of the capital when funds are 

limited. This restriction will not apply 

to borrowings from a third party on the 

fund’s behalf or to the adviser’s 

borrowings from individual investors 

outside of the fund, such as a bank that 

is invested in the fund; instead the 

restriction focuses on the types of 

borrowings that, based on our 

experience, present the greatest 

opportunities for an adviser to abuse its 

control over a client’s assets; namely, 

when an adviser borrows its client’s 

assets, directly or indirectly, for its own 

use. However, we recognize that, in 

certain instances, such as in connection 

with enabling a smaller adviser to 

satisfy a sponsor commitment to the 

fund, investors may under certain terms 

be willing to accept a borrowing from 

the fund by the adviser.737 Rather than 

prescribe these terms, the final rule will 

require that advisers disclose and obtain 

advance written consent for them from 

investors, as discussed above. In this 

way, the rule will enable investors to 

have an opportunity to evaluate whether 

a proposed borrowing would be 

favorable for the fund (as opposed to 

only for the adviser) and, relatedly, to 

negotiate for changes to the terms of the 

borrowing as appropriate. 

Because we are providing a consentbased exception from this prohibition, 

the revised approach is responsive to 

commenters who stated that the rule 

should be based on more express 

disclosure to, and consent from, 

investors rather than prohibition-based. 

We were not persuaded, however, by 

comments suggesting that the manner of 

disclosure about adviser borrowings 

should be through Form ADV or Form 

PF. We believe that disclosure directly 

to investors, in the format contemplated 

by the final rule and in connection with 

an adviser’s consent request, will better 

ensure that existing investors have 

timely access to information that will 

assist those investors in determining the 

conflicts related to such borrowings and 

how they impact the adviser’s 

relationship with the private fund, 

whether the borrowing would be in the 

fund’s or the adviser’s interest, and 


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738Commenters state that prohibiting this 

practice would harm smaller advisers and raise 

barriers to entry because such advisers would not 

be able to fund such tax payments. See SBAI 

Comment Letter; AIMA/ACC Comment Letter; AIC 

Comment Letter III. 

739See, e.g., MFA Comment Letter II; SBAI 

Comment Letter; AIMA/ACC Comment Letter; AIC 

Comment Letter I; AIC Comment Letter II. 

740See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5, at 23. 

741See id. 

742See id., at 25–26. 

743Proposing Release, supra footnote at 3, at 136. 

744Comment Letter of Eileen Appelbaum and 

Jeffrey Hooke (Mar. 17, 2022); Comment Letter of 

Senators Sherrod Brown and Jack Reed (Aug. 4, 

2022) (‘‘Senators Brown and Reed Comment 

Letter’’); Trine Comment Letter; AFREF Comment 

Letter I; OPERS Comment Letter; Morningstar 

Comment Letter; ILPA Comment Letter I; For The 

Long Term Comment Letter; Healthy Markets 

Comment Letter I; Predistribution Initiative 

Comment Letter II; NYSIF Comment Letter. 

745Morningstar Comment Letter; Healthy Markets 

Comment Letter I. 

746Senators Brown and Reed Comment Letter. 

747 ILPA Comment Letter I. 

748See generally AFREF Comment Letter I. 

whether to ultimately approve or 

disapprove of the borrowing. 

Additionally, the related books and 

records requirement in final rule 204– 

2(a)(24) will require advisers to 

maintain this information in a manner 

that permits easy location, access, and 

retrieval of any particular record. 

Finally, in response to commenters, 

we are clarifying that we did not intend 

for the proposed rule to prohibit certain 

practices that have the potential to 

benefit investors, and we would not 

interpret ordinary course tax advances 

and management fee offsets as 

borrowings that are subject to this final 

rule, as discussed below. 

A tax advance occurs when a fund 

provides an adviser or its affiliate an 

advance of money against the adviser’s 

actual or expected future share of the 

fund’s assets (e.g., the adviser’s accrued 

performance fees or carried interest) to 

allow the adviser or its affiliate to meet 

certain of its tax obligations (or its 

investment professionals’ tax 

obligations) as they are due. Such 

advances are used to enable an adviser, 

its affiliates, and its investment 

professionals to pay taxes derived from 

their interest in a fund (e.g., taxes 

associated with performance fees or 

carried interest that have been allocated 

to the affiliated general partner), 

because such tax liabilities frequently 

arise and are due before these parties are 

actually entitled to a cash distribution 

from the fund. This practice can benefit 

investors because it allows advisers to 

pay their tax liabilities while continuing 

to manage the fund and, accordingly, to 

avoid the potential misalignment of 

interests that can occur if advisers were 

instead to seek higher amounts of 

compensation from a fund (or from fund 

portfolio investments) to create a reserve 

amount covering their potential tax 

liabilities or to begin timing portfolio 

investment transactions in 

consideration of the resulting tax 

impacts on the adviser and its affiliates 

and their personnel (as opposed to 

managing the fund with a focus solely 

on the best interests of the fund).738

Some commenters suggested that such 

arrangements are widely disclosed to 

and understood by investors.739 We do 

not interpret the final rule to apply to 

tax advances as a type of restricted 

borrowing because they are tax 

payments that are attributable to and 

made against the unrealized income (or 

other amounts) allocated to in respect of 

the private fund. As such, they are not 

structured to include the repayment of 

advanced amounts to the fund, but 

rather only the reduction of the future 

income to be received by the adviser. 

However, to the extent that a tax 

advance is structured to contemplate 

amounts that will be repaid to the fund, 

as opposed to amounts that only reduce 

an adviser’s future income, it would 

generally be a restricted borrowing 

under the final rule, subject to the rule’s 

consent requirement. 

Similarly, management fee offsets are 

not borrowings subject to the final rule 

because they do not involve the adviser 

or its affiliates taking fund assets and 

promising to repay such assets at a later 

date. Management fee offsets typically 

occur when an adviser reduces the 

management fee owed by the fund by 

other amounts that the fund has already 

paid to, or on behalf of, the adviser, its 

affiliates, or certain other persons. For 

example, fund governing documents 

may require an adviser to reduce the 

management fee by any amounts the 

adviser’s affiliates receive for providing 

services to a portfolio company that the 

fund invests in. Also, some private fund 

governing documents limit 

organizational expenses and provide 

that any amount of organizational 

expenses paid by the fund above the 

expense cap may be offset against the 

adviser’s management fee. Management 

fee offsets benefit investors because they 

reduce the fees and expenses the fund 

pays to the adviser and its affiliates, 

typically on a dollar-for-dollar basis 

with the amount initially paid, directly 

or indirectly, by the fund. We therefore 

consider a management fee offset to be 

a calculation methodology that reduces 

the amount a fund pays the adviser and 

its affiliates in the future. 

We also remind advisers of their 

fiduciary obligations when engaging in 

transactions with private fund clients 

and of their antifraud obligations when 

engaging with private fund investors. To 

satisfy its fiduciary duty, an adviser 

must eliminate or at least expose 

through full and fair disclosure all 

conflicts of interest which might incline 

an investment adviser to provide advice 

that is not disinterested.740 Full and fair 

disclosure should be sufficiently 

specific so that a client is able to 

understand the material fact or conflict 

of interest and make an informed 

decision whether to provide consent.741

The disclosure must be clear and 

detailed enough for the client to make 

an informed decision to consent to the 

conflict of interest or reject it.742 When 

making disclosures to private fund 

investors, advisers should also be 

mindful of their antifraud 

responsibilities per rule 206(4)-8 under 

the Advisers Act. 

F. Certain Adviser Misconduct 

1. Fees for Unperformed Services 

We are not adopting the proposed 

prohibition on charging a portfolio 

investment for monitoring, servicing, 

consulting, or other fees in respect of 

any services the investment adviser 

does not, or does not reasonably expect 

to, provide to the portfolio 

investment.743 As discussed below, we 

believe that it is unnecessary for the 

final rule to prohibit an adviser from 

charging fees without providing a 

corresponding service to its private fund 

client because such activity already is 

inconsistent with the adviser’s fiduciary 

duty. 

Some commenters supported this 

prohibition.744 Commenters generally 

stated that charging fees for 

unperformed services to the fund is 

against the public interest and 

inconsistent with the Advisers Act by 

placing the interests of the advisers 

ahead of those of investors.745 A 

commenter suggested that because of 

the substantial conflicts of interest faced 

by advisers charging fees for 

unperformed services no amount of 

disclosure should be enough to enable 

an investor to provide informed consent 

to these practices.746 Another 

commenter indicated that an adviser 

should refund prepaid amounts 

attributable to unperformed services 

where an adviser is paid in advance for 

services that it reasonably expects to 

perform but ultimately does not 

provide.747 A commenter expressed 

concern that advisers have not 

historically provided enough 

transparency into certain payments, 

such as monitoring fees.748


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749See SIFMA–AMG Comment Letter I; Invest 

Europe Comment Letter; see generally Dechert 

Comment Letter. 

750AIC Comment Letter I. 

751 Dechert Comment Letter. 

752See Proposing Release, supra footnote 3, at 

137. 

753We proposed to adopt this rule under sections 

206 and 211 of the Advisers Act. Proposing Release, 

supra footnote 3, at 134. See also 2019 IA Fiduciary 

Duty Interpretation, supra footnote 5, at 1 and n.2– 

3 (discussing an adviser’s fiduciary duty under 

Federal law). 

754See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5, at 7–8. 755See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5, at n.58. 756Section 206(1) and section 206(2) of the 

Advisers Act. Depending on the facts and 

circumstances, we believe that this conduct may 

also violate other Federal securities laws, rules, and 

regulations, such as rule 206(4)–8, which prohibits 

advisers to pooled investment vehicles from, among 

other things, defrauding investors or prospective 

investors. 

757See, e.g., In the Matter of THL Managers V, 

LLC and THL Managers VI, LLC, Investment 

Advisers Act Release No. 4952 (June 29, 2018) 

(settled action); In the Matter of TPG Capital 

Advisors, LLC, Investment Advisers Act Release No. 

4830 (Dec. 21, 2017) (settled action); In the Matter 

of Apollo Management V, L.P., et al., Investment 

Advisers Act Release No. 3392 (Aug. 23, 2016) 

(settled action); In the Matter of Blackstone, supra 

footnote 26. 

758Advisers that are subject to the quarterly 

statement rule discussed above will also need to 

disclose these amounts in the quarterly statement 

provided to investors, to the extent such 

compensation meets the definition of portfolioinvestment compensation. 

759See Jason Baker Tuttle, Sr., Initial Decision 

Release No. 13 (Jan. 8, 1990); Monitored Assets 

Corp., Investment Advisers Act Release No. 1195 

(Aug. 28, 1989) (settled order); In the Matter of 

Beverly Hills Wealth Mgmt., LLC, Investment 

Advisers Act Release No. 4975 (July 20, 2018) 

(settled order). 

760Section 208(d) of the Advisers Act. 

761See AIC Comment Letter I (stating that ‘‘[i]f 

monitoring fees are charged based on the deal size, 

periodic payments instead of a lump sum payment 

can provide the portfolio company with liquidity 

management by spreading the costs over time, even 

though the services and resulting value creation 

may not correspond to the same time period of 

payments.’’). 

Other commenters opposed this 

prohibition for several reasons. First, 

commenters stated that this prohibition 

may be unnecessary because it is 

generally market practice for fund 

documents to prohibit advisers from 

charging fees for unperformed services 

or, less commonly, to disclose such 

practices.749 Second, a commenter 

indicated that certain advisers may 

structure fee arrangements based on the 

value expected to be created, rather than 

based on a time-worked model.750

Third, a commenter expressed concerns 

that the ‘‘reasonably expect’’ standard is 

inappropriate because of the risk that 

advisers would be second-guessed 

afterwards.751

Fees for unperformed services may 

incentivize an adviser to cause a private 

fund to exit a portfolio investment 

earlier than anticipated. We stated in 

the proposal that such fees may cause 

an adviser to seek portfolio investments 

for its own benefit rather than for the 

private fund’s benefit.752 In addition, we 

noted that such fees have the potential 

to distort the economic relationship 

between the private fund and the 

adviser because the adviser receives the 

benefit of such fees, at the expense of 

the fund, without incurring any costs 

associated with having to provide any 

services. 

We believe that charging a client fees 

for unperformed services (including 

indirectly by charging fees to a portfolio 

investment held by the fund) where the 

adviser does not, or does not reasonably 

expect to, provide such services is 

inconsistent with an adviser’s fiduciary 

duty.753 Typically by its nature charging 

a client fees for unperformed services, 

directly or indirectly, involves a 

misrepresentation or an omission of a 

material fact, whether in the private 

fund’s offering memorandum or 

otherwise, regarding the amount being 

charged to the client, directly or 

indirectly, by the adviser or the 

adviser’s related person, the nature of 

the services being provided by the 

adviser or the adviser’s related person, 

or both. An adviser’s fiduciary duty 

under the Advisers Act comprises a 

duty of care and a duty of loyalty. This 

fiduciary duty requires an adviser ‘‘to 

adopt the principal’s goals, objectives, 

or ends.’’ 754 This means the adviser 

must, at all times, serve the best interest 

of its client and not subordinate its 

client’s interest to its own.755 In other 

words, the adviser cannot place its own 

interests ahead of its client’s interests. 

Because charging fees without providing 

or reasonably expecting to provide a 

corresponding service to its private fund 

client, in our view, would cause the 

adviser to place its own interests ahead 

of its client’s interests, as more fully 

described in the paragraph below, we 

have determined that it is unnecessary 

to prohibit activity that is already 

indirectly inconsistent with the 

adviser’s fiduciary duty.756 Thus, we are 

not adopting the rule as originally 

proposed. Commenters’ statements that 

it is generally market practice for fund 

documents to prohibit advisers from 

charging fees for unperformed services 

may suggest that market participants are 

acting consistent with the adviser’s 

fiduciary duty and that private fund 

advisers do not engage in these 

compensation practices. 

Previously, we have charged advisers 

for violating section 206(2) of the 

Advisers Act when improperly charging 

monitoring, servicing, consulting, or 

other fees, which may accelerate upon 

the occurrence of certain events, to a 

portfolio investment.757 These fees 

reduce the value of the fund’s portfolio 

investment, which, in turn, reduces the 

amount available for distribution to the 

fund’s investors. Because the adviser or 

its related person receives these fees, it 

faces a significant conflict of interest 

and cannot effectively consent on behalf 

of the fund. The conflict of interest from 

these fee arrangements can lead an 

adviser in other ways to act to serve its 

interest over its client’s interest, in 

breach of its fiduciary duty. For 

example, fees for unperformed services 

may incentivize an adviser to cause a 

private fund to exit a portfolio 

investment earlier than anticipated or 

cause an adviser to seek portfolio 

investments for its own benefit rather 

than for the private fund’s benefit. If the 

adviser reasonably expects to provide 

services to a portfolio investment, the 

adviser may attempt to provide full and 

fair disclosure to all investors or a group 

representing all investors, such as a 

fund board or an LPAC.758 But, in some 

instances, disclosure may be 

insufficient. We have long brought 

enforcement actions based on the view 

that an adviser, as a fiduciary, may not 

keep prepaid advisory fees for services 

that it does not, or does not reasonably 

expect to, provide to a client.759 And an 

adviser cannot do indirectly what it is 

not permitted to do directly.760 Thus, 

where the adviser does not, or does not 

reasonably expect to, provide services to 

the portfolio investment, the adviser 

would be violating its fiduciary duty by 

using its position to extract payments 

indirectly from a fund, through a 

portfolio investment. 

Under our interpretation, an adviser 

could receive payment for services 

actually provided. An adviser could also 

receive payments in advance for 

services that it reasonably expects to 

provide to the portfolio investment in 

the future, whether such arrangements 

are based on a time-worked model (i.e., 

where fees are determined based on a 

fixed dollar amount and the amount of 

time worked) or a value-add model (i.e., 

where the fees are determined based on 

the value contributed by the adviser’s 

services).761 For example, if an adviser 

expects to provide monitoring services 

to a portfolio investment, the adviser is 

not prohibited from charging for those 

services. Rather, an adviser is not 

permitted to charge for services that it 

does not reasonably expect to provide. 

Further, to the extent that the adviser 

ultimately does not provide the services, 

the adviser would need to refund any 


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762Proposed rule 211(h)(2)–1(a)(5). 

763See, e.g., Comment Letter of Phil Thompson 

(Mar. 8, 2022) (‘‘Thompson Comment Letter’’); 

OPERS Comment Letter; CalPERS Comment Letter; 

Morningstar Comment Letter. 

764See, e.g., NYC Comptroller Comment Letter; 

OPERS Comment Letter; Thompson Comment 

Letter; Better Markets Comment Letter. 

765See NACUBO Comment Letter. 

766See ILPA Letter to Chairman Gensler (Apr. 21, 

2021). 

767See ILPA Comment Letter I. 

768See Invest Europe Comment Letter; MFA 

Comment Letter I. 

769See, e.g., SBAI Comment Letter; Thin Line 

Capital Comment Letter; ATR Comment Letter; 

ILPA Comment Letter I; Chamber of Commerce 

Comment Letter; Comment Letter of Real Estate 

Roundtable Comment Letter (Apr. 25, 2022); CVCA 

Comment Letter; AIMA/ACC Comment Letter. 

770See, e.g., Chamber of Commerce Comment 

Letter; MFA Comment Letter I. 

771See, e.g., Schulte Comment Letter; Comment 

Letter of Real Estate Board of New York (Apr. 21, 

2022) (‘‘REBNY Comment Letter’’); CVCA Comment 

Letter. 

772See, e.g., Invest Europe Comment Letter; 

Schulte Comment Letter; MFA Comment Letter I. 

773See, e.g., TIAA Comment Letter; SIFMA–AMG 

Comment Letter I; ILPA Comment Letter I; AIC 

Comment Letter I; NYC Bar Comment Letter II. 

774See, e.g., Invest Europe Comment Letter; 

Schulte Comment Letter; SBAI Comment Letter; 

SIFMA–AMG Comment Letter I; AIC Comment 

Letter I; MFA Comment Letter I; AIMA/ACC 

Comment Letter. 

775See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5; section 206 of the Advisers Act. 

776See section 215(a) of the Advisers Act; 2019 

IA Fiduciary Duty Interpretation, supra footnote 5, 

at n.29 (stating that an adviser’s Federal fiduciary 

obligations are enforceable through section 206 of 

the Advisers Act and that the SEC would view a 

waiver of enforcement of section 206 as implicating 

section 215(a) of the Advisers Act. Section 215(a) 

of the Advisers Act provides that any condition, 

stipulation or provision binding any person to 

waive compliance with any provision of the title 

shall be void.). See section 215(b) of the Advisers 

Act (stating that any contract made in violation of 

the Act or rules thereunder is void). 

777See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 558, at section I (reaffirming and 

clarifying the fiduciary duty that an adviser owes 

to its clients under section 206 of the Advisers Act). 778See id. and accompanying text. 779See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5, at n.87. See also In the Matter of 

Comprehensive Capital Management, Inc., 

Investment Advisers Act Release No. 5943 (Jan. 11, 

2022) (settled action) (alleging adviser included in 

its investment advisory agreement liability 

disclaimer language (i.e., a hedge clause), which 

could lead a client to believe incorrectly that the 

client had waived a non-waivable cause of action 

against the adviser provided by State or Federal 

law. Most, if not all, of the adviser’s clients were 

retail investors.). 

780See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5, at n.31 (discussing the nowwithdrawn Heitman no-action letter that analyzed 

an indemnification provision in an institutional 

client’s investment management agreement). 

prepaid amounts attributable to 

unperformed services. 

2. Limiting or Eliminating Liability 

We proposed to prohibit an adviser to 

a private fund, directly or indirectly, 

from seeking reimbursement, 

indemnification, exculpation, or 

limitation of its liability by the private 

fund or its investors for a breach of 

fiduciary duty, willful misfeasance, bad 

faith, negligence, or recklessness in 

providing services to the private fund 

(‘‘waiver or indemnification 

prohibition’’).762 As discussed further 

below, we are not adopting this 

prohibition, in part, because we believe 

that it is not necessary to achieve our 

goal to address this problematic 

practice. Rather, we discuss below our 

views on how an adviser’s fiduciary 

duty applies to its private fund clients 

and how the antifraud provisions apply 

to the adviser’s dealings with clients 

and fund investors. 

Some commenters supported this 

prohibition 763 stating that the 

prohibition is necessary to protect 

private fund investors, address the 

increasing erosion of private fund 

advisers’ fiduciary duties,764 and save 

investors time and legal fees when 

negotiating fund documents.765 One 

commenter that represents several 

limited partners and historically 

advocated for increased protections 

regarding fiduciary terms 766 supported 

allowing indemnification for an 

adviser’s simple negligence but 

maintaining the proposed prohibition 

on indemnification for simple 

negligence in scenarios where there is a 

material breach of the limited 

partnership agreement and side 

letters.767 Some commenters suggested 

narrowing this provision to align with 

the Commission’s statement in the 2019 

IA Fiduciary Duty Interpretation, 

instead of adopting a broader 

prohibition that, according to 

commenters, would implicate State and 

local law.768

In contrast, most commenters 

opposed it.769 Some commenters stated 

that the proposed prohibition would 

increase costs for investors 770

(including through insurance premiums, 

higher management fees, and revising 

existing agreements),771 increase the 

threat of private litigation,772 and cause 

advisers to take less risk, which could 

result in lower investor returns and 

fewer available strategies.773 Many 

commenters stated that the proposed 

prohibition would result in more 

onerous liability standards for 

sophisticated investors than for retail 

investors and that such a difference 

would result in better protection for 

institutional investors than for investors 

in retail products.774

After considering comments, we are 

not adopting this prohibition, in part, 

because we believe that it is not needed 

to address this problematic practice. 

Rather, we are reaffirming and clarifying 

our views on how an adviser’s fiduciary 

duty applies to its private fund clients 

and how the antifraud provisions apply 

to the adviser’s dealings with clients 

and fund investors. We remind advisers 

of their obligation to act consistently 

with their Federal fiduciary duty and 

their legal obligations under the 

Advisers Act, including the antifraud 

provisions.775 A waiver of an adviser’s 

compliance with its Federal antifraud 

liability for breach of its fiduciary duty 

to the private fund or otherwise, or of 

any other provision of the Advisers Act, 

or rules thereunder, is invalid under the 

Act.776

An adviser’s Federal fiduciary duty is 

to its clients and the obligations that 

flow from the adviser’s fiduciary duty 

depend upon what functions the 

adviser, as agent, has agreed to assume 

for the client, its principal.777 In 

addition, full and fair disclosure for an 

institutional client (including the 

specificity, level of detail, and 

explanation of terminology) can differ, 

in some cases significantly, from full 

and fair disclosure for a retail client 

because institutional clients generally 

have a greater capacity and more 

resources than retail clients to analyze 

and understand complex conflicts and 

their ramifications.778 Regardless of the 

nature of the client, the disclosure must 

be clear and detailed enough for the 

client to make an informed decision to 

consent to the conflict of interest or 

reject it. Accordingly, while the 

fiduciary duty itself applies to all clients 

of an adviser, the application of the 

fiduciary duty of an adviser to a retail 

client can be different from the specific 

application of the fiduciary duty of an 

adviser to a registered investment 

company or private fund.779 Whether 

contractual clauses that purport to limit 

an adviser’s liability (also known as 

‘‘hedge clauses’’ or ‘‘waiver clauses’’) in 

an agreement with an institutional 

client (e.g., private fund) would violate 

the Advisers Act’s antifraud provisions 

will be determined based on the 

particular facts and circumstances.780

To the extent that a hedge clause creates 

a conflict of interest between an adviser 

and its client, the adviser must address 

the conflict as required by its duty of 

loyalty. 

After considering comments on the 

waiver or indemnification prohibition, 

we provide the following examples, 

partly based on staff observations, of 

how this interpretation applies to 

certain facts and circumstances. We 

have taken the position that an adviser 

violates the antifraud provisions of the 


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781 In the Matter of Comprehensive Capital 

Management., Investment Advisers Act Release No. 

5943 (Jan. 11, 2022) (settled action). Also, we note 

that our staff has expressed the view that it would 

violate the antifraud provisions of the Advisers Act 

for an adviser to enter into a limited partnership 

agreement stating that the adviser to the private 

fund or its related person, which is the general 

partner of the fund, to the maximum extent 

permitted by applicable law, will not be subject to 

any duties or standards (including fiduciary or 

similar duties or standards) existing under the 

Advisers Act or that the adviser can receive 

indemnification or exculpation for breaching its 

Federal fiduciary duty. See, e.g., EXAMS Risk Alert: 

Observations from Examinations of Private Fund 

Advisers (Jan. 27, 2022), at 5 (discussing hedge 

clauses).), available at https://www.sec.gov/files/ 

private-fund-risk-alert-pt-2.pdf. See also Comment 

Letter of the Institutional Limited Partners 

Association on the Proposed Commission 

Interpretation Regarding Standard of Conduct for 

Investment Advisers; Request for Comment on 

Enhancing Investment Adviser Regulation (Aug. 6, 

2018) at 6, available at https://ilpa.org/wp-content/ 

uploads/2018/08/ILPA-Comment-Letter-on-SECProposed-Fiduciary-Duty-Interpretation-August-6- 

2018.pdf. 

782See, e.g., 2019 IA Fiduciary Duty 

Interpretation, supra footnote 5, at n.20 (explaining 

that claims arising under Section 206(1) of the 

Advisers Act require a showing of scienter but 

claims under Section 206(2) of the Advisers Act are 

not scienter based and can be adequately pled with 

only a showing of negligence). 

783See supra section II.E.2.a) (Investigation 

Expenses) (stating that charging fees and expenses 

related to a breach of an adviser’s Federal fiduciary 

duty to a private fund would effectively operate as 

a waiver of such duty, which would be invalid 

under the Act). 

784See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 558. 

785Proposed rules 211(h)(2)–3(a)(1) and (2). 

786Proposed rule 211(h)(2)–3(b). 

787See, e.g., Meketa Comment Letter; Albourne 

Comment Letter; NEBF Comment Letter; ILPA 

Comment Letter I; American Association for Justice 

Comment Letter; AFSCME Comment Letter; Segal 

Marco Comment Letter; Pathway Comment Letter. 

788See AFSCME Comment Letter; American 

Association for Justice Comment Letter. 

789See United for Respect Comment Letter I; 

Healthy Markets Comment Letter I. 

790See AIC Comment Letter I; CCMR Comment 

Letter II; NYC Bar Comment Letter II; IAA Comment 

Letter II; ICM Comment Letter; Dechert Comment 

Letter; Comment Letter of Tech Council Ventures 

(June 14, 2022); Proof Comment Letter; NVCA 

Comment Letter; Canada Pension Comment Letter. 

791See NYC Comptroller Comment Letter; NY 

State Comptroller Comment Letter; Thin Line 

Capital Comment Letter; OPERS Comment Letter. 

792See Ropes & Gray Comment Letter. 

793See NY State Comptroller Comment Letter; 

OPERS Comment Letter; SIFMA–AMG Comment 

Letter I. 

794Final rule 211(h)(2)–3. 

Advisers Act, for example, when (i) 

there is a contract provision waiving 

any and all of the adviser’s fiduciary 

duties or (ii) there is a contract 

provision explicitly or generically 

waiving the adviser’s Federal fiduciary 

duty, and in each case there is no 

language clarifying that the adviser is 

not waiving its Federal fiduciary duty or 

that the client retains certain nonwaivable rights (also known as a 

‘‘savings clause’’).781 A breach of the 

Federal fiduciary duty may involve 

conduct that is intentional, reckless, or 

negligent.782 Finally, we believe that an 

adviser may not seek reimbursement, 

indemnification, or exculpation for 

breaching its Federal fiduciary duty 

because such reimbursement, 

indemnification, or exculpation would 

operate effectively as a waiver, which 

would be invalid under the Act.783

We continue to not take a position on 

the scope or substance of any fiduciary 

duty that applies to an adviser under 

applicable State law.784 However, to the 

extent that a waiver clause is unclear as 

to whether it applies to the Federal 

fiduciary duty, State fiduciary duties, or 

both, we will interpret the clause as 

waiving the Federal fiduciary duty. 

G. Preferential Treatment 

We proposed to prohibit all private 

fund advisers, regardless of whether 

they are registered with the 

Commission, from: (i) granting an 

investor in a private fund or in a 

substantially similar pool of assets the 

ability to redeem its interest on terms 

that the adviser reasonably expects to 

have a material, negative effect on other 

investors in that private fund or in a 

substantially similar pool of assets and 

(ii) providing information regarding 

portfolio holdings or exposures of a 

private fund or of a substantially similar 

pool of assets to any investor if the 

adviser reasonably expects that 

providing the information would have a 

material, negative effect on other 

investors in that private fund or in a 

substantially similar pool of assets.785

We also proposed to prohibit these 

advisers from providing any other 

preferential treatment to any investor in 

the private fund unless the adviser 

delivers certain written disclosures to 

prospective and current investors 

regarding all preferential treatment the 

adviser or its related persons provide to 

other investors in the same fund.786 The 

timing of the proposed rule’s delivery 

requirements differed depending on 

whether the recipient is a prospective or 

existing investor in the private fund. For 

a prospective investor, the proposed 

rule required the adviser to deliver the 

notice prior to the investor’s investment. 

For an existing investor, the notice was 

required to be delivered annually, to the 

extent the adviser provided preferential 

treatment to other investors since the 

last notice. 

Some commenters supported the 

proposed rule.787 Some of these 

commenters stated that the rule would 

benefit investors by increasing 

transparency for all investors about the 

terms offered to other investors 788 and 

by ensuring that investors have the 

requisite information to determine 

whether they are being harmed by 

agreements between the adviser and 

other investors.789 Some commenters 

opposed the proposed rule.790 Some 

commenters, including fund investors, 

expressed concern that it would curtail 

their ability to enter into side letters 

because advisers may refuse to offer 

certain provisions.791 One commenter 

noted that this could negatively impact 

smaller investors because they would 

not be able to ‘‘piggy back’’ off of certain 

provisions negotiated by larger 

investors.792 Some commenters also 

expressed concern that requiring 

advisers to determine whether a 

provision has a material, negative effect 

on other investors may cause advisers to 

assert regulatory risk as a way to justify 

the adviser’s rejection of fund terms 

required by applicable law, rule, or 

regulation for public pension funds.793

After considering comments, we are 

adopting the preferential treatment rule 

in a modified form.794 First, we are 

adopting the prohibition on certain 

preferential redemption rights partly as 

proposed, but with two exceptions: (i) 

for redemptions required by applicable 

law, rule, regulation, or order of certain 

governmental authorities and (ii) if the 

adviser has offered the same redemption 

ability to all existing investors and will 

continue to offer the same redemption 

ability to all future investors in the 

private fund or similar pool of assets. 

These exceptions are designed to 

address commenters’ concerns that the 

rule would curtail their ability to secure 

important side letter provisions, 

especially ones required by applicable 

law. We also believe that the exception 

for terms offered to all investors will 

continue to allow smaller investors to 

benefit from rights negotiated by larger 

investors, such as different share classes 

offering different redemption terms. 

Second, we are adopting the prohibition 

on preferential information rights about 

portfolio holdings or exposures, but 

with an exception where the adviser 

offers such information to all other 

existing investors in the private fund 

and any similar pool of assets at the 

same time or substantially the same 

time. In response to commenters, this 

exception should allow advisers to 

discuss their portfolio holdings during 

investor meetings so long as all 

investors have access to the same 

information. Third, we are limiting the 

advance written notice requirement to 

prospective investors to apply only to 


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63278 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

material economic terms. We are still 

requiring advisers to provide to current 

investors comprehensive, annual 

disclosure of all preferential treatment 

provided by the adviser or its related 

persons since the last annual notice. 

However, in a change from the 

proposal, the final rule requires the 

adviser to distribute to current investors 

a written notice of all preferential 

treatment the adviser or its related 

persons has provided to other investors 

in the same private fund (i) for an 

illiquid fund, as soon as reasonably 

practicable following the end of the 

fund’s fundraising period and (ii) for a 

liquid fund, as soon as reasonably 

practicable following the investor’s 

investment in the private fund. Fourth, 

we are changing the defined term 

‘‘substantially similar pool of assets’’ to 

‘‘similar pool of assets’’ as used 

throughout the preferential treatment 

rule so that the term better reflects the 

breadth of the definition. Fifth, we are 

revising the rule text to apply the 

disclosure obligations in final rule 

211(h)(2)–3(b) to all preferential 

treatment, including any preferential 

treatment granted in accordance with 

final rule 211(h)(2)–3(a). We discuss 

each of these changes and provisions 

below. 

Under section 211(h)(2) of the 

Advisers Act, the Commission shall 

examine and, where appropriate, 

promulgate rules prohibiting or 

restricting certain sales practices, 

conflicts of interest, and compensation 

schemes for investment advisers that the 

Commission deems contrary to the 

public interest and the protection of 

investors. Our staff has examined 

private fund advisers to assess both the 

investor protection risks presented by 

their business models in terms of 

compensation schemes, conflicts of 

interest, and sales practices and the 

firms’ compliance with their existing 

legal obligations. As discussed below, 

the Commission deems granting 

preferential treatment a sales practice 

and conflict of interest under section 

211(h)(2), that is contrary to the public 

interest and the protection of investors 

and is restricting the practice and 

conflict by (i) prohibiting investment 

advisers from providing certain 

preferential treatment that the adviser 

reasonably expects to have a material 

negative effect on other investors and 

(ii) requiring investment advisers to 

disclose any other preferential treatment 

to prospective and current investors. We 

believe these activities give advisers an 

incentive to place their interests ahead 

of their clients’ (and, by extension, their 

investors’), and can result in private 

funds and their investors, particularly 

smaller investors that are not able to 

negotiate preferential deals with the 

adviser and its related persons, being 

misled, deceived, or otherwise harmed. 

Granting preferential treatment is a 

conflict of interest because advisers 

have economic and/or other business 

incentives to provide preferential terms 

to one or more investors (e.g., based on 

the size of the investor’s investment, the 

ability of the investor to provide 

services to the adviser, or the potential 

to establish or cultivate relationships 

that have the potential to provide 

benefits to the adviser). These 

incentives have the potential to cause 

the adviser to provide preferential terms 

to one or more investors that harm other 

investors or otherwise put the other 

investors at a disadvantage. For 

example, an adviser may agree to waive 

all or part of the confidentiality 

obligation set forth in the private fund’s 

governing agreement for one investor. 

Such a waiver has the potential to harm 

other investors because proprietary 

information may be made available to 

third parties, such as competitors of the 

private fund, which could negatively 

affect the fund’s competitive advantage 

in, for example, seeking and securing 

investments. There may be cases where 

preferential information may be 

reasonably expected to have a material, 

negative effect on other investors in the 

fund even when the preferred investor 

does not have the ability to redeem its 

interest in the fund, and so whether 

preferential information violates the 

final rule requires a facts and 

circumstances analysis. For example, a 

private fund may make an investment 

into an asset with certain trading 

restrictions, and then later receive 

notice that the investment is 

underperforming. If the private fund 

gives that information to a preferred 

investor before others, the preferred 

investor could front-run other investors 

in taking a (possibly synthetic) short 

position against the asset, driving its 

price down, and causing losses to other 

investors in the fund. An adviser could 

also operate multiple funds with 

overlapping investments but offer 

redemption rights only for one fund 

containing its preferred investors. An 

adviser granting preferential 

information to certain investors in its 

less liquid fund, which those preferred 

investors could use to redeem their 

interests in the more liquid fund, could 

harm the investors in the less liquid 

fund even though the preferred 

investors do not have redemption rights 

in the less liquid fund. 

Granting preferential treatment also 

involves a sales practice under section 

211(h)(2) of the Advisers Act. Advisers 

typically attract preferred, strategic, or 

large investors to invest in the fund by 

offering preferential terms as part of 

negotiating with those investors. The 

adviser typically enters into a separate 

agreement, commonly referred to as a 

‘‘side letter,’’ with the particular 

investor in connection with such 

investor’s admission to a fund. Side 

letters have the effect of establishing 

rights, benefits, or privileges under, or 

altering the terms of, the private fund’s 

governing agreement, which advisers 

offer to certain prospective investors to 

secure their investments in the private 

fund. Because advisers induce investors 

to invest in the private fund based on 

those rights, benefits, or privileges, the 

practice of granting preferential 

treatment is a sales practice under 

section 211(h)(2). 

The practice of granting certain 

preferential treatment (or, in some cases, 

granting preferential treatment without 

sufficient disclosure) is contrary to the 

public interest and the protection of 

investors because it can harm, mislead, 

or deceive other investors. For example, 

to the extent an investor has negotiated 

limitations on its indemnification 

obligations, other investors may be 

required to bear an increased portion of 

indemnification costs. As another 

example, to the extent an investor 

negotiates to limit its participation in a 

particular investment, the aggregate 

returns realized by other investors could 

be more adversely affected than 

otherwise by the unfavorable 

performance of such investment. 

Moreover, other investors will have a 

larger position in such investment and, 

as a result, their holdings will be less 

diversified. 

Like the proposed rule, the final rule 

includes a prohibitions component and 

a disclosure component that address 

activity across the spectrum of 

preferential treatment. We recognize 

that advisers provide a range of 

preferential treatment, some of which 

does not necessarily have a material, 

negative effect on other fund investors. 

In this case, we believe that disclosure 

effectively addresses our concerns 

related to this practice because 

transparency will provide investors 

with helpful information they otherwise 

may not receive. Investors can use this 

information to protect their interests, 

including through negotiations 

regarding new investments and renegotiations regarding existing 

investments, and make more informed 

business decisions. For example, an 

investor could seek to limit its liability 

or otherwise negotiate an expense cap if 

it knows that other investors have been 

granted similar rights by the adviser. In 


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795See supra section I (discussing pension plan 

assets invested in private funds). 

796Section 206(4) of the Advisers Act. 

797See In the Matter of Aria Partners GP, LLC, 

Investment Advisers Release No. 4991 (Aug. 22, 

2018) (settled action); Harbinger Capital, supra 

footnote 60; SEC v. Joseph W. Daniel, Litigation 

Release No. 19427 (Oct. 13, 2005) (settled action); 

In the Matter of Schwendiman Partners, LLC, 

Investment Advisers Act Release Nos. 2083 (Nov. 

21, 2002) and 2043 (July 11, 2002) (settled action). 

798See Harbinger Capital, supra footnote 60. 

799See In the Matter of Schwendiman Partners, 

LLC, supra footnote 797. 

800See SEC v. Joseph W. Daniel, supra footnote 

797. 

801See, e.g., In the Matter of Aria Partners GP, 

LLC, supra footnote 797. 

802See, e.g., Harbinger Capital, supra footnote 60. 

803See Harbinger Capital, supra footnote 60; see 

also In the Matter of Schwendiman Partners, LLC, 

supra footnote 797. 

addition to informing current decisions, 

investors can use this information to 

inform future investment decisions, 

including how to invest other assets in 

their portfolio, whether to invest in 

private funds managed by the adviser or 

its related persons in the future, and, for 

a liquid fund, whether to redeem or 

remain invested in the private fund. We 

are concerned that an adviser’s current 

sales practices often do not provide all 

investors with sufficient detail regarding 

preferential terms granted to other 

investors so that these investors can 

protect their interests and make 

informed decisions. We believe that 

disclosure of preferential treatment is 

necessary to guard against deceptive 

practices because it will ensure that 

investors have access to information 

necessary to diligence the prospective 

investment and better understand 

whether, and how, such terms affect the 

private fund overall. 

Other types of preferential treatment, 

however, have a material, negative effect 

on other fund investors or investors in 

a similar pool of assets. We are 

prohibiting these types of preferential 

treatment because they involve sales 

practices and conflicts of interest that 

are contrary to the public interest and 

protection of investors. These practices 

are contrary to the public interest 

because they have the potential to harm 

private funds and their investors, which 

include, among other investors, public 

and private pension plans, educational 

endowments, non-profit organizations, 

and high net worth individuals. 795 In 

addition, these practices are further 

contrary to the protection of investors to 

the extent that advisers stand to profit 

from advantaging a subset of investors 

over the broader group of investors. For 

example, in granting preferential terms 

to large investors as a way of inducing 

their investment in the fund, the adviser 

stands to benefit because its fees 

increase as fund assets under 

management increase. Further, in 

negotiating preferential terms with 

prospective investors, the interests of 

the adviser are not necessarily aligned 

with those of the fund or the fund’s 

existing investors. This results in a 

conflict between the adviser’s interests 

in seeking to secure the investment, on 

the one hand, and the interests of the 

fund (and its investors) to help ensure 

that the terms provided to a prospective 

investor do not harm the fund or its 

existing investors, on the other hand. 

Section 206(4) of the Advisers Act 

also authorizes the Commission to adopt 

rules and regulations that ‘‘define, and 

prescribe means reasonably designed to 

prevent, such acts, practices, and 

courses of business as are fraudulent, 

deceptive, or manipulative.’’ 796 We 

have observed instances of advisers 

granting preferential treatment to an 

investor or a group of investors in a way 

that directly favors the adviser’s interest 

or seeks to win favor with the preferred 

investor in hopes of inducing the 

preferred investor to take a certain 

action desired by the adviser to the 

detriment of other investors.797 For 

example, we have charged an adviser for 

engaging in fraud by secretly offering 

certain investors preferential 

redemption and liquidity rights in 

exchange for those investors’ agreement 

to vote in favor of restricting the 

redemption rights of the fund’s other 

investors and by concealing this 

arrangement from the fund’s directors 

and other investors.798 We have also 

charged an adviser for engaging in fraud 

by contravening the fund’s governing 

documents regarding liquidation and 

allowing preferred investors to exit the 

fund at the then current fair value in 

exchange for an agreement to invest in 

a similar fund offered by the adviser.799

In another example, we have charged an 

adviser for engaging in fraud by 

improperly failing to write down the 

value of a hedge fund’s private 

placement investments, even after some 

of those companies had declared 

bankruptcy, while simultaneously 

allowing certain investors to redeem 

their shares in the hedge fund based on 

those inflated valuations.800 These cases 

typically involve the adviser concealing 

its conduct by acting in contravention of 

the private fund’s governing documents 

or the adviser’s policies and 

procedures 801 and by failing to disclose 

its conduct to other investors or a fund 

governing body.802 These side 

arrangements with preferred investors 

may also financially benefit the adviser, 

leaving the remaining investors to bear 

the costs and market risk of any 

remaining assets in the fund.803 Thus, 

this practice of granting an investor in 

a private fund the ability to redeem its 

interest on terms that the adviser 

reasonably expects to have a material, 

negative effect on other investors is 

fraudulent and deceptive. 

The final rule applies to preferential 

treatment provided through various 

means, including written side letters. 

Side letters or side arrangements are 

generally agreements among the 

investor, general partner, adviser, and/ 

or the private fund that provide the 

investor with different or preferential 

terms than those set forth in the fund’s 

governing documents. Side letters 

generally grant more favorable rights 

and privileges to certain preferred 

investors (e.g., seed investors, strategic 

investors, those with large 

commitments, and employees, friends, 

and family) or to investors subject to 

government regulation (e.g., ERISA, 

BHCA, or public records laws). The 

final rule also applies even if the 

preferential treatment is provided 

indirectly, such as by an adviser’s 

related persons, because granting of 

preferential treatment also has the 

potential to harm the fund and its 

investors when performed indirectly. 

For example, the rule applies when the 

adviser’s related person is the general 

partner (or similar control person) and 

is a party (and/or caused the private 

fund to be a party, directly or indirectly) 

to a side letter or other arrangement 

with an investor, even if the adviser 

itself (or any related person of the 

adviser) is not a party to the side letter 

or other arrangement. The final rule will 

still apply under those circumstances 

because it prohibits an adviser from 

providing preferential treatment directly 

or indirectly. 

We are adopting the preferential 

treatment rule because all investors 

would benefit from information 

regarding the preferred terms granted to 

other investors in the same private fund 

(e.g., seed investors, strategic investors, 

those with large commitments, and 

employees, friends, and family) because, 

in some cases, these terms disadvantage 

certain investors in the private fund, 

impact the adviser’s decision making 

(e.g., by altering or changing incentives 

for the adviser), or otherwise impact the 

terms of the private fund as a whole. 

This new rule will help investors better 

understand marketplace dynamics and 

potentially improve efficiency for future 

investments, for example, by expediting 

the process for reviewing and 


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63280 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

804See infra sections VI.D.4 and VI.E. 

805See Haynes & Boone Comment Letter. 

806See PIFF Comment Letter. 

807See AIMA/ACC Comment Letter; Dechert 

Comment Letter. 

808See Comment Letter of Structured Finance 

Association (June 13, 2022) (‘‘SFA Comment Letter 

II’’); ILPA Comment Letter I; RFG Comment Letter 

II; AIMA/ACC Comment Letter; Schulte Comment 

Letter; Meketa Comment Letter. 

809See AIMA/ACC Comment Letter. 

810 Information is material if there is a substantial 

likelihood that the information would have been 

viewed by a reasonable investor as having 

significantly altered the total mix of information 

available. See TSC Industries, Inc. v. Northway, 

Inc., 426 U.S. 438, 449 (1976). 

811See SIFMA–AMG Comment Letter I. 

812See supra section I (Introduction and 

Background). 

813Proposed rule 211(h)(2)–3(a)(1). 

814See ICCR Comment Letter. 

815See United for Respect Comment Letter I. 

816See SBAI Comment Letter; MFA Comment 

Letter I. 

817See MFA Comment Letter I. 

818See Comment Letter of Curtis (Apr. 25, 2022) 

(‘‘Curtis Comment Letter’’); PIFF Comment Letter. 

819See PIFF Comment Letter; Comment Letter of 

the Regulatory Fundamentals Group (Dec. 3, 2022) 

(‘‘RFG Comment Letter III’’). 

820See Ropes & Gray Comment Letter; RFG 

Comment Letter III. 

821See NYC Comptroller Comment Letter; AIMA/ 

ACC Comment Letter; IAA Comment Letter II. 

negotiating fees and expenses. This has 

the potential to reduce the cost of 

negotiating the terms of future 

investments.804

Except in limited circumstances, the 

final rule prohibits preferential 

information and redemption terms 

when the adviser reasonably expects the 

terms to have a material, negative effect. 

Some commenters argued that the 

‘‘adviser reasonably expects’’ standard 

is unworkable because an adviser 

cannot predict how others will react to 

information 805 and the adviser’s 

decisions will be judged in hindsight.806

Other commenters suggested only 

applying the prohibition when the 

adviser ‘‘knows’’ the preferential 

treatment will have a material, negative 

effect or imposing a good faith 

standard.807 As proposed, we are 

adopting the rule with the ‘‘reasonably 

expects’’ standard, which imposes an 

objective standard that takes into 

account what the adviser reasonably 

expected at the time. This standard is 

designed to facilitate the effective 

operation of the rule and to help ensure 

that preferential treatment granted to 

one investor does not have deleterious 

effects on other investors. We were not 

persuaded by commenters that argued 

the standard is unworkable because an 

adviser cannot predict how others will 

react to information. This standard does 

not require advisers to make such 

predictions; rather, it requires advisers 

to form only a reasonable expectation 

based on the facts and circumstances. 

We were also not persuaded by 

commenters that stated the standard 

will result in adviser’s decisions being 

unfairly judged in hindsight. An 

adviser’s actions will be judged based 

on the facts and circumstances at the 

time the adviser grants or provides the 

preferential treatment, as set forth in the 

final rule. 

Other commenters asked us to 

provide more specificity around what 

constitutes a ‘‘material, negative effect,’’ 

and they stated that if advisers broadly 

interpret this term, then advisers could 

lack incentive to offer certain side letter 

terms to investors, including, for 

example, necessary investor-specific 

rights.808 Because many side letter terms 

generally do not harm other investors 

and are not related to liquidity rights 

(including investor-specific provisions 

relating to tax, legal, regulatory, or 

accounting matters), we do not believe 

that even a broad interpretation of this 

standard would discourage advisers 

from offering such side letter terms to 

investors. 

Another commenter stated that the 

materiality of preferential redemption 

terms or information rights should be 

assessed in the ‘‘basic framework under 

the securities laws (i.e., whether there is 

a substantial likelihood that a 

reasonable investor would consider 

such terms significant in its decision to 

invest or remain in the fund).’’809 This 

commenter stated that such a standard 

would allow the adviser to objectively 

assess the relevant facts and 

circumstances and consider both 

quantitative and qualitative factors in 

determining whether the prohibition 

should apply to the particular term. We 

believe, however, that requiring only a 

‘‘materiality’’ standard has the potential 

to result in a broader prohibition than 

the one we proposed, and we do not 

believe a broader prohibition is needed 

to address the conduct that the rule is 

intended to address.810

Commenters did not offer specific 

examples of what types of activity or 

information would have a ‘‘material, 

negative effect,’’ and we believe it is 

important for this standard to remain 

evergreen so that it can be applied to 

various types of arrangements between 

advisers and investors and fund 

structures. For example, we believe an 

adviser could form a reasonable 

expectation that certain redemption 

terms would have a material, negative 

effect on other fund investors if a 

majority of the portfolio investments 

were not likely to be liquid. 

One commenter stated that requiring 

advisers to determine whether a 

preferential term has a material, 

negative effect on other ‘‘investors’’ 

suggests that advisers are required to 

second-guess each investor’s individual 

circumstances rather than the impact 

such term has on the private fund as a 

whole.811 This commenter argued that 

such a requirement runs contrary to the 

DC Circuit Court’s decision in Goldstein 

v. SEC. However, the exercise of our 

statutory authority under sections 

211(h)(2) and 206(4) is consistent with 

the court’s ruling in Goldstein v. SEC 

because section 206(4) is not limited in 

its application to ‘‘clients’’ and section 

211(h) by its terms provides protection 

to ‘‘investors.’’ A plain interpretation of 

the statute supports a reading that the 

provision authorizes the Commission to 

promulgate rules to directly protect 

investors generally (rather than only the 

clients) and does not contradict the 

court’s ruling in Goldstein v. SEC.812

1. Prohibited Preferential Redemptions 

We proposed to prohibit a private 

fund adviser from, directly or indirectly, 

granting an investor in the private fund 

or in a substantially similar pool of 

assets the ability to redeem its interest 

on terms that the adviser reasonably 

expects to have a material, negative 

effect on other investors in that private 

fund or in a substantially similar pool 

of assets.813

One commenter stated that the 

proposed prohibition on preferential 

redemption terms would establish 

helpful baseline protections for all 

investors, including those who cannot 

negotiate for sufficient protections 814

due to bargaining power dynamics or 

lack of information or resources. One 

commenter stated that this provision 

would protect remaining fund investors 

who could find themselves invested in 

a materially different portfolio after 

other, preferred investors redeemed.815

Other commenters stated that the 

prohibition on preferential redemption 

terms would limit investor choice 816

and suggested excluding scenarios in 

which an investor elects to receive less 

liquidity in exchange for other rights or 

terms.817 Other commenters stated that 

the treatment of multi-class funds is 

unclear under the proposed rule.818

They expressed concern that the 

prohibition would result in less 

liquidity for investors 819 and that 

investors should be permitted to 

negotiate favorable liquidity terms since 

those investors might also negotiate 

other liquidity terms that benefit all 

investors.820 Some commenters 

recommended that we not move forward 

with the proposed prohibition 821 and 


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822See SBAI Comment Letter; NYC Bar Comment 

Letter II; RFG Comment Letter III; Ropes & Gray 

Comment Letter; PIFF Comment Letter. 

823See Ropes & Gray Comment Letter. 

824See PIFF Comment Letter; NYC Bar Comment 

Letter II; IAA Comment Letter II. 

825See, e.g., EXAMS Private Funds Risk Alert 

2020, supra footnote 188. 

826See, e.g., id. (Commission staff has observed 

advisers provide side letter terms to certain 

investors, including preferential liquidity terms). 

827See In the Matter of Deccan Value Investors 

LP, et al., Investment Advisers Act Release No. 6079 

(Aug. 3, 2022) (settled action) (alleging that 

registered investment adviser mismanaged 

significant redemptions by two university clients 

due in part to the adviser’s stated concern over the 

negative impact the redemptions could have on 

non-redeeming clients and investors). 

828See NYC Comptroller Comment Letter; 

SIFMA–AMG Comment Letter I; OPERS Comment 

Letter; RFG Comment Letter III; AIC Comment 

Letter II. 

829See Chamber of Commerce Comment Letter; 

RFG Comment Letter III; MFA Comment Letter I; 

Ropes & Gray Comment Letter; Dechert Comment 

Letter; PIFF Comment Letter; SIFMA–AMG 

Comment Letter I; Comment Letter of the Minnesota 

State Board of Investment (Apr. 25, 2022); OPERS 

Comment Letter; NYC Bar Comment Letter II; 

Meketa Comment Letter; SIFMA–AMG Comment 

Letter I. 

830See, e.g., Ropes & Gray Comment Letter; 

OPERS Comment Letter; RFG Comment Letter II. 

831See e.g., NY State Comptroller Comment Letter 

(stating that investor policies applied consistently 

across similar investments should be excepted); 

NYC Comptroller Comment Letter (stating that 

investor policies requiring different liquidity terms 

should be excepted). 

832See AIMA/ACC Comment Letter; RFG 

Comment Letter III; NACUBO Comment Letter; 

MFA Comment Letter I; SBAI Comment Letter; 

SIFMA–AMG Comment Letter I; Segal Marco 

Comment Letter. 

833This exception acknowledges that investors 

may prioritize one term over another (e.g., an 

Continued 

instead require disclosure of preferential 

liquidity terms.822 These commenters 

stated that a disclosure-based regime 

would be more consistent with market 

practice,823 and it would avoid 

unintended consequences, such as 

blanket bans on liquidity rights granted 

due to certain laws (e.g., the U.S. 

Employee Retirement Income Security 

Act of 1974).824

We understand, based on staff 

experience, that preferential terms 

provided to certain investors or one 

investor do not necessarily benefit the 

fund or other investors that are not party 

to the side letter agreement and, at 

times, we believe these terms can have 

a material, negative effect on other 

investors.825 For example, selective 

disclosure of certain information may 

entitle the investor privy to such 

information to avoid a loss (e.g., by 

submitting a redemption request) at the 

expense of the non-privy investors. 

After considering comments, we are 

adopting the prohibition on certain 

preferential redemption terms, but with 

two exceptions. In general, we believe 

that granting preferential liquidity rights 

on terms that the adviser reasonably 

expects to have a material, negative 

effect on other investors in the private 

fund or in a similar pool of assets is a 

sales practice that is harmful to the fund 

and its investors. An adviser can attract 

preferred investors to invest in the fund 

by offering preferential terms, such as 

more favorable liquidity rights.826 Such 

practices often have conflicts of interest, 

however, that can harm other investors 

in the private fund. For example, in 

granting preferential liquidity rights to a 

large investor, the adviser stands to 

benefit because its fees increase as fund 

assets under management increase. 

While the fund also may experience 

some benefits, including the ability to 

attract additional investors and to 

spread expenses over a broader investor 

and asset base and the ability to raise 

sufficient capital to implement the 

fund’s investment strategy and complete 

investments that meet the fund’s target 

investment size (particularly for illiquid 

funds), there are scenarios where the 

preferential liquidity terms harm the 

fund and other investors. For example, 

if an adviser allows a preferred investor 

to exit the fund early and sells liquid 

assets to accommodate the preferred 

investor’s redemption, the fund may be 

left with a less liquid pool of assets, 

which can inhibit the fund’s ability to 

carry out its investment strategy or 

promptly satisfy other investors’ 

redemption requests. This can dilute 

remaining investors’ interests in the 

fund and make it difficult for those 

investors to mitigate their investment 

losses in a down market cycle.827 These 

concerns can also apply when an 

adviser provides favorable redemption 

rights to an investor in a similar pool of 

assets, such as another feeder fund 

investing in the same master fund. The 

Commission believes that the potential 

harms to other investors justify this 

restriction. 

In a change from the proposal, and 

after considering comments, we are 

adopting two exceptions from this 

prohibition. First, an adviser is not 

prohibited from offering preferential 

redemption rights if the investor is 

required to redeem due to applicable 

laws, rules, regulations, or orders of any 

relevant foreign or U.S. Government, 

State, or political subdivision to which 

the investor, private fund, or any similar 

pool of assets is subject. Commenters 

suggested that, if we retain the rule, we 

should permit an exclusion from this 

rule with respect to investors that are 

required to obtain such liquidity terms 

because of regulations and laws (i.e., 

institution-specific requirements).828

Some commenters argued that this 

exception is necessary to prevent the 

fund or investors from suffering harm 

related to legal or regulatory issues 829

(e.g., certain investors may require 

special redemption rights to comply 

with pay-to-play laws) and to ensure 

that certain investors, such as pension 

plans, can continue to invest in private 

funds.830 We do not intend for this 

prohibition to result in the exclusion of 

certain investors from funds or in an 

investor violating other applicable laws. 

For example, under this exception, 

pension plan subject to State or local 

law may be required to redeem its 

interest under certain circumstances, 

such as a violation by the adviser of 

State pay-to-play, anti-boycott, or 

similar laws. Advisers that use this 

exception will still be subject to the 

disclosure obligations under rule 

211(h)(2)–3(b). For example, with 

respect to a pension plan that receives 

preferential redemption rights under 

this exception, an adviser will need to 

disclose this preferential treatment 

pursuant to rule 211(h)(2)–3(b). Certain 

commenters suggested that we broaden 

the exception to include redemptions 

pursuant to an investor’s policies or 

resolutions.831 We are concerned, 

however, that excluding redemptions 

pursuant to these more informal 

arrangements could compromise the 

investor protection goals of the rule and 

would incentivize investors to adopt 

policies or resolutions to circumvent the 

rule. We also believe that any exception 

from this rule should be narrowly 

tailored to limit potential harms to other 

investors to those cases that are 

absolutely necessary. We believe that 

redemption terms required by more 

informal arrangements, such as policies 

or resolutions, would therefore not be 

permissible. Accordingly, the final rule 

does not provide an exception for more 

informal arrangements, such as policies 

and resolutions. 

Second, an adviser is not prohibited 

from offering preferential redemption 

rights if the adviser has offered the same 

redemption ability to all other existing 

investors and will continue to offer such 

redemption ability to all future investors 

in the same private fund or any similar 

pool of assets. Several commenters 

supported giving investors a choice of 

various liquidity options and disclosing 

this in the fund’s governing and offering 

documents.832 We understand that 

advisers have many methods to provide 

different liquidity terms to private fund 

investors, including through side letters 

as well as by embedding these terms in 

the fund’s governing documents.833


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investor may be willing to pay higher fees in 

exchange for better liquidity). Thus, we believe that 

this exception is responsive to commenters who 

stated that the Commission should provide an 

exception for scenarios in which an investor elects 

to receive less liquidity in exchange for other rights 

or terms. 

834An adviser could not avail itself of this 

exception, for example, if it offered a share class 

that is only available to investors that meet a certain 

minimum commitment size. 

835See rule 211(h)(2)–3. 

836Proposed rule 211(h)(2)–3(a)(2). 

837See Comment Letter of Pattern Recognition: A 

Research Collective (Apr. 25, 2022) (‘‘Pattern 

Recognition Comment Letter’’); Segal Marco 

Comment Letter. 

838See Pattern Recognition Comment Letter. 

839See Meketa Comment Letter; MFA Comment 

Letter I. 

840See NYC Comptroller Comment Letter; NY 

State Comptroller Comment Letter; RFG Comment 

Letter II. 

841See NYC Bar Comment Letter II; SBAI 

Comment Letter. 

842See Selective Disclosure and Insider Trading, 

Securities Act Release No. 7881 (Aug. 15, 2000) [65 

FR 51715 (Aug. 24, 2000)]. 

843See id. 

844See infra section VI.D.4. 

845See MFA Comment Letter I; Haynes & Boone 

Comment Letter; Dechert Comment Letter; RFG 

Comment Letter II; AIMA/ACC Comment Letter. 

While preferential liquidity terms 

provided via side letter are more 

explicitly targeted to particular 

investors, we believe that favorable 

liquidity terms provided through the 

fund’s governing documents (i.e., by a 

fund offering different share classes, 

some with more favorable liquidity 

terms than others) presents the same 

concerns that our final rule seeks to 

address. Overall, we believe that this 

exception balances our policy goals of 

protecting against potential fraud and 

deception and certain conflicts of 

interest, while preserving investor 

choice regarding liquidity and price. To 

qualify for the exception, an adviser 

must have offered the same redemption 

ability to all other existing investors and 

must continue to offer such redemption 

ability to all future investors without 

qualification (e.g., no commitment 

size,834 affiliation requirements, or other 

limitations). For example, an adviser 

offering a fund with three share classes, 

each with different liquidity options but 

that are otherwise subject to the same 

terms (Class A, Class B, and Class C), 

cannot restrict Class A to friends and 

family investors if the adviser 

reasonably expects such liquidity rights 

to have a material, negative effect on 

other investors. 

Advisers are prohibited from acting 

directly or indirectly under the final 

rule.835 For example, an adviser could 

not avail itself of the exception by 

offering Class A (annual redemption, 

1% management fee, 15% performance 

fee) and Class B (quarterly redemption, 

1.5% management fee, 20% 

performance fee) while requiring Class 

B investors also to invest in another 

fund managed by the adviser, to the 

extent the adviser reasonably expects 

such liquidity terms would have a 

material, negative effect on other 

investors. We would interpret such an 

incentive structure as failing to satisfy 

the requirement to offer investors the 

same redemption ability as required 

under the final rule because the 

obligation to invest in another fund 

managed by the adviser serves to 

indirectly prevent investors from 

selecting Class B. We similarly would 

interpret an arrangement where Class B 

investors (quarterly redemption, 1.5% 

management fee, 20% performance fee) 

would be required to agree to uncapped 

liability when the adviser has reason to 

believe that certain investors (e.g., 

government entities) cannot agree to 

uncapped liability, while Class A 

investors would not be subject to such 

an obligation, as not satisfying the 

requirements of the exception. 

2. Prohibited Preferential Transparency 

We proposed to prohibit an adviser 

and its related persons from providing 

information regarding the portfolio 

holdings or exposures of the private 

fund or of a substantially similar pool of 

assets to any investor if the adviser 

reasonably expects that providing the 

information would have a material, 

negative effect on other investors in that 

private fund or in a substantially similar 

pool of assets.836

Some commenters supported the 

proposal,837 and one commenter stated 

that all investors should receive basic 

information about portfolio holdings.838

Others argued that the proposed rule 

could negatively impact investors to the 

extent it would prohibit them from 

receiving information required under 

applicable laws or regulations.839

Certain commenters argued that the 

proposed rule could harm investors if 

they are prohibited from receiving 

certain information or material as 

members of the fund’s limited partner 

advisory committee.840 As with the 

proposed prohibition on preferential 

liquidity, some commenters 

recommended that we not move forward 

with this prohibition and instead allow 

preferential information rights, if they 

are disclosed to other investors.841

We have decided to adopt the 

prohibition on certain preferential 

transparency as proposed but with an 

exception that is discussed below. We 

continue to believe that selective 

disclosure of portfolio holdings or 

exposures can result in profits or 

avoidance of losses among those who 

were privy to the information 

beforehand at the expense of investors 

who did not benefit from such 

transparency. In addition, providing 

such information in a fund with 

redemption rights could enable an 

investor to trade in a way that ‘‘frontruns’’ or otherwise disadvantages the 

fund or other clients of the adviser. 

Granting preferential transparency if the 

adviser reasonably expects that 

providing the information would have a 

material, negative effect on other 

investors in that private fund or in a 

substantially similar pool of assets, for 

example through side letters, is contrary 

to the public interest and protection of 

investors because it preferences one 

investor at the expense of another. For 

example, if an adviser provides 

preferential information about a hedge 

fund’s holdings to one investor as 

opposed to another investor, the 

investor with preferential information 

may use that information to redeem 

from the hedge fund during the next 

redemption cycle, even if both investors 

have the same redemption rights. In 

addition, an adviser can have a conflict 

of interest that may cause it to agree to 

provide preferential information rights 

to a certain investor in exchange for 

something of benefit to the adviser. For 

example, an adviser may agree to offer 

preferential terms to a large financial 

institution that agrees to provide 

services to the adviser. The rule is 

designed to neutralize the potential for 

private fund advisers to treat portfolio 

holdings information as a commodity to 

be used to gain or maintain favor with 

particular investors.842

Selective disclosure to certain parties 

is a fundamental concern often 

prohibited or restricted under other 

Federal securities laws. For example, 

the Commission adopted Regulation FD 

to address selective disclosure by 

certain issuers of material nonpublic 

information under the Exchange Act. 

The Commission stated that selective 

disclosure occurs when issuers release 

material nonpublic information about a 

company to selected persons, such as 

securities analysts or institutional 

investors, before disclosing the 

information to the general public.843

This practice undermines the integrity 

of the securities markets—both public 

and private—and reduces investor 

confidence in the fairness of those 

markets.844

Many commenters stated that the 

proposed rule would have a chilling 

effect on ordinary course investor 

communications 845 and that it was 

unclear whether the proposed rule 


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846See RFG Comment Letter II. 

847See MFA Comment Letter I; AIMA/ACC 

Comment Letter. 

848See Dechert Comment Letter; RFG Comment 

Letter II. 

849See Dechert Comment Letter; Haynes & Boone 

Comment Letter. 

850We are clarifying that the final rule applies to 

all types of communications: formal and informal 

as well as written, visual, and oral. 

851See final rule 211(h)(2)–3(b). 

852See SBAI Comment Letter; Schulte Comment 

Letter. 

853See NY State Comptroller Comment Letter; 

CalPERS Comment Letter; Predistribution Initiative 

Comment Letter II; Ropes & Gray Comment Letter; 

PIFF Comment Letter; NYC Comptroller Comment 

Letter; AIMA/ACC Comment Letter; NY State 

Comptroller Comment Letter; IAA Comment Letter 

II. 

854See, e.g., section 7514.7 of the California 

Government Code. This law requires California 

public investment funds to disclose certain 

information annually in a report presented at a 

meeting open to the public, such as the fees and 

expenses that the California public investment fund 

paid directly to the alternative investment vehicle; 

the California public investment fund’s pro rata 

share of carried interest distributed to the fund 

manager or related parties; and the California public 

investment fund’s pro rata share of aggregate fees 

and expenses paid by all of the portfolio companies 

held within the alternative investment vehicle to 

the fund manager or related parties. 

855See NY State Comptroller Comment Letter; 

Top Tier Comment Letter. 

856Proposed rule 211(h)(1)–1. 

would apply only to formal 

communications (e.g., side letters, other 

written communications) or whether 

informal communications (e.g., oral 

statements,846 such as phone 

conversations) would be included.847

Because advisers might fear liability 

under the proposed rule, commenters 

stated that an outright prohibition on 

preferential transparency might prevent 

advisers from providing investors with 

important information desired by 

investors or, in some instances, required 

by investors because of the operation of 

a law, rule, regulation, or order.848

Commenters also expressed concern 

regarding a lack of clarity under the 

‘‘material, negative effect’’ standard.849

We have considered these concerns in 

adopting the rule. While we understand 

commenter concerns that this 

prohibition could chill adviser/investor 

communications, the rule serves a 

compelling government interest in 

protecting all investors not just some 

investors, ensuring confidence in the 

fairness and integrity of our capital 

markets, and addressing conflicts of 

interest in private fund structures, 

which have been historically opaque. 

We also believe that the rule is closely 

drawn because it applies only in a 

narrow set of circumstances: when the 

adviser reasonably expects that 

providing information would have a 

material, negative effect on other 

investors in the private fund or similar 

pool of assets.850 Any preferential 

information that does not meet this 

criterion would only be subject to the 

disclosure portions of this rule.851

In addition, any chilling effect is 

further reduced as, in a change from the 

proposal, we are adopting an exception 

to this prohibition for preferential 

information made broadly available by 

the adviser. Specifically, the rule states 

that an adviser is not prohibited from 

providing preferential information if the 

adviser offers such information to all 

existing investors in the private fund 

and any similar pool of assets at the 

same time or substantially the same 

time. Although the disclosure-based 

exception we are adopting is not 

identical to commenters’ suggestions, 

we believe the final rule is responsive 

to suggestions that the rule should be 

disclosure based rather than prohibition 

based.852

As discussed above, we agree with 

commenters that it is important for 

investors to be able to continue to 

receive information and, without an 

exception, they may not be able to do 

so under the proposed rule. As a result, 

the exception requires that when an 

adviser discloses otherwise prohibited 

information to one investor, it must also 

provide such information to all 

investors. This is designed to help 

ensure that investors are treated fairly 

and that investors have equal access to 

the same information. We believe that 

this exception balances our policy goals 

while preserving the ability for investors 

to access information that is important 

to their investment decisions. To qualify 

for the exception, an adviser must offer 

the information to all other investors at 

the same time or substantially the same 

time. For example, an adviser could 

provide, to one current investor, ESG 

data related to a specific portfolio 

company that the private equity fund 

holds only if the adviser offers that same 

information to all other investors in the 

private equity fund and any similar 

pools of assets. To qualify for the 

exception, the adviser must offer to 

provide the information to other 

investors at the same time or 

substantially the same time. 

As with the redemptions prohibition, 

some commenters requested that we 

provide an exception from this 

prohibition for preferential information 

that an investor must obtain as a 

requirement of State or other law.853 We 

do not believe it is necessary to grant 

such an exception because advisers can 

now rely on the exception discussed 

above by offering to disclose 

information to all investors. This 

ensures that investors can still obtain 

necessary information, whether required 

by law or contract, without sacrificing 

the policy goals of the rule. We also 

believe that State laws generally require 

disclosure of information that would not 

have a material, negative effect on other 

investors, such as fee and expense 

transparency.854

The prohibition is narrowly drawn in 

that it applies only to preferential 

information that would have a material, 

negative effect on other investors in that 

private fund or in a similar pool of 

assets. Commenters suggested that the 

preferential treatment rule should apply 

only to open-end funds because the 

redemption ability in the open-end fund 

structure makes it more likely for 

preferential information rights to 

materially harm other investors.855 We 

agree that is easier to trigger the 

material, negative effect provision in a 

scenario where certain investors receive 

preferential information and an ability 

to redeem their interests because those 

investors can exit the fund sooner than 

others, potentially harming remaining 

investors. As a result, the ability to 

redeem is an important part of 

determining whether providing 

information would have a material, 

negative effect on other investors and 

thus whether an adviser triggers the 

preferential information prohibition. We 

would generally not view preferential 

information rights provided to one or 

more investors in an illiquid private 

fund as having a material, negative 

effect on other investors. We do not 

believe, however, that a blanket 

exemption for all closed-end funds 

would be appropriate because, for 

example, even closed-end funds offer 

redemption rights in certain 

extraordinary circumstances. Whether 

preferential information provided to an 

investor in a closed-end fund violates 

the final rule requires a facts and 

circumstances analysis. 

3. Similar Pool of Assets 

We proposed to define the term 

‘‘substantially similar pool of assets’’ as 

a pooled investment vehicle (other than 

an investment company registered 

under the Investment Company Act of 

1940 or a company that elects to be 

regulated as such) with substantially 

similar investment policies, objectives, 

or strategies to those of the private fund 

managed by the adviser or its related 

persons.856

We are adopting the definition as 

proposed, but we are changing the 

defined term to ‘‘similar pool of assets’’ 

so that the defined term better reflects 


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857 In the marketing rule, we defined the term 

‘‘related portfolio’’ to mean ‘‘a portfolio with 

substantially similar investment policies, 

objectives, and strategies. . .’’ (emphasis added). In 

this final rule, the scope of similar pool of assets 

is broader because the term includes a pooled 

investment vehicle with ‘‘substantially similar 

investment policies, objectives, or strategies. . .’’ 

(emphasis added). We are removing the word 

‘‘substantially’’ from the defined term in order to 

signal the broader scope. See rule 206(4)–1I(15) 

under the Advisers Act. 

858See, e.g., Proposing Release, supra footnote 3, 

at 168. 

859See EXAMS Private Funds Risk Alert 2020, 

supra footnote 188. 

860See SIFMA–AMG Comment Letter I; NYC Bar 

Comment Letter II; ILPA Comment Letter I; AIMA/ 

ACC Comment Letter; PIFF Comment Letter; SFA 

Comment Letter II; Ropes & Gray Comment Letter; 

Haynes & Boone Comment Letter. 

861See SIFMA–AMG Comment Letter I; NYC Bar 

Comment Letter II; ILPA Comment Letter I; AIMA/ 

ACC Comment Letter. 

862See AIMA/ACC Comment Letter. 

863See Anonymous (Mar. 2, 2022) at 1. 864See Exemptions Adopting Release, supra 

footnote 9, at 78–79. 865 In some cases, advisers use co-investment 

opportunities to attract new investors and retain 

existing investors. Advisers may offer these existing 

or prospective investors the opportunity to invest 

in co-investment vehicles with materially different 

fee and expense terms than the main fund (e.g., no 

fees or no obligation to bear broken deal expenses). 

These co-investment opportunities may raise 

conflicts of interest, particularly when the 

opportunity to invest arises because of an existing 

investment and the fund itself would otherwise be 

the sole investor. 

866See AIC Comment Letter II; Segal Marco 

Comment Letter (stating that the proposed rule 

the broad scope of the definition.857

This conforming change is appropriate 

because we believe that, depending on 

the facts and circumstances, the 

definition will likely capture vehicles 

outside of what the private funds 

industry would typically view as 

‘‘substantially similar pools of assets.’’ 

For example, an adviser’s healthcarefocused private fund may be considered 

a ‘‘similar pool of assets’’ to the 

adviser’s technology-focused private 

fund under the definition. Thus, we 

believe the appropriate term to use is 

‘‘similar,’’ rather than substantially 

similar pool of assets. 

We are also excluding securitized 

asset funds from the definition of 

similar pool of assets. We believe that 

this change is appropriate because, as 

discussed above, we believe that certain 

distinguishing structural and 

operational features of SAFs have 

prevented or deterred SAF advisers 

from engaging in the type of conduct 

that the final rules seek to address, such 

as the granting of preferential treatment. 

We believe the final definition 

provides the appropriate scope to 

address our concerns, which include an 

adviser providing more favorable terms 

to investors in another similar pool of 

assets to the detriment of private fund 

investors.858 A comprehensive 

definition of ‘‘similar pool of assets’’ 

will help prevent advisers from 

attempting to structure around the 

preferential treatment prohibitions by, 

for example, creating parallel funds 

solely for investors with preferential 

terms. 

Whether a pool of assets managed by 

the adviser is ‘‘similar’’ to the private 

fund requires a facts and circumstances 

analysis. A pool of assets with a 

materially different target return or 

sector focus, for example, would likely 

not have substantially similar 

investment policies, objectives, or 

strategies to those of the subject private 

fund, depending on the facts and 

circumstances. 

The types of asset pools that would be 

included in this term would include a 

variety of pools, regardless of whether 

they are private funds. For example, this 

term would include limited liability 

companies, partnerships, and other 

organizational structures, regardless of 

the number of investors; feeders to the 

same master fund; and parallel fund 

structures and alternative investment 

vehicles. It would also include pooled 

vehicles with different base currencies 

and pooled vehicles with embedded 

leverage to the extent such pooled 

vehicles have substantially similar 

investment policies, objectives, or 

strategies as those of the subject private 

fund. In addition, an adviser would be 

required to consider whether its 

proprietary vehicles meet the definition 

of ‘‘similar pool of assets.’’ We believe 

this scope is appropriate, and we note 

our staff also has observed scenarios 

where an adviser establishes investment 

vehicles that invest side-by-side along 

with the private fund that have better 

liquidity terms than the terms provided 

to investors in the private fund.859

This definition is designed to capture 

most commonly used private fund 

structures (or similar arrangements) and 

prevent advisers from structuring 

around the prohibitions on preferential 

treatment. For example, in a masterfeeder structure, some advisers create 

custom feeder funds for favored 

investors. Without a broad definition of 

similar pool of assets, the rule would 

not preclude such advisers from 

providing preferential treatment to 

investors in these custom feeder funds 

to the detriment of investors in standard 

commingled feeder funds within the 

master-feeder structure. 

Many commenters argued that the 

proposed definition of ‘‘substantially 

similar pool of assets’’ was overbroad 

and suggested that we narrow the 

definition.860 These commenters 

suggested that we limit the definition to, 

for example, funds that invest side by 

side, pari passu, with the main fund in 

substantially all investment 

opportunities (which would, among 

other things, make it easier for advisers 

to determine their compliance 

obligations under the rule and prevent 

investors from being subject to 

limitations on liquidity and information 

rights) 861 and that we exclude coinvestment vehicles and separately 

managed accounts.862 In contrast, one 

commenter suggested broadening the 

proposed definition beyond pooled 

vehicles to include separately managed 

accounts because separately managed 

accounts can pose similar risks to 

pooled vehicles.863 This rule is designed 

to address the specific concerns that 

arise out of the lack of transparency and 

governance mechanisms prevalent in 

the private fund structure and protects 

underlying investors in those funds 

from being disadvantaged as a result of 

preferential treatment given to 

underlying investors in other similar 

pools because the adviser does not have 

a fiduciary duty to those underlying 

investors. It is not designed to protect 

against the adviser disadvantaging one 

client (a private fund) as a result of 

preferential treatment given to another 

client (a separately managed account 

client) because the fiduciary duty 

protects against such preferential 

treatment. Accordingly, there is no need 

to include separately managed accounts 

in the definition of ‘‘similar pool of 

assets.’’ There are, however, certain 

circumstances in which a fund of one or 

single investor fund can be a pooled 

investment vehicle and therefore can 

fall within the definition of ‘‘similar 

pool of assets.’’ 864

Certain advisers offer existing 

investors, related persons, or third 

parties the opportunity to co-invest 

alongside the private fund through one 

or more co-investment vehicles 

established or advised by the adviser or 

its related persons.865 These coinvestment vehicles may be set up for 

one or more specific investments. Coinvestment vehicles have the effect of 

increasing the capital available for the 

adviser to complete a prospective 

investment. Commenters expressed 

concern that the rule would impede the 

co-investment process because the rule 

could be interpreted to prohibit 

selective disclosure of portfolio holding 

information to investors with coinvesting rights and advisers would 

need to assess whether information 

provided to co-investors triggers the 

prohibition.866 One commenter 


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would require advisers to offer every co-investment 

opportunity to every investor, which could prevent 

private funds from maximizing value for investors). 867See AIMA/ACC Comment Letter. 868Proposed rule 211(h)(2)–3(b). 

869Proposed rule 211(h)(2)–3(b)(1). 

870Proposed rule 211(h)(2)–3(b)(2). 

871As discussed above, investors can use this 

information to protect their interests, including 

through negotiations regarding new investments 

and renegotiations regarding existing investments, 

and to make more informed business decisions. We 

believe that disclosure of preferential treatment is 

necessary to guard against deceptive and/or 

fraudulent practices because it will increase 

investor access to information necessary to 

diligence the prospective investment and better 

understand whether, and how, such terms affect the 

private fund overall. For example, an investor could 

seek assurances that it will not bear more than its 

pro rata portion of expenses as a result of economic 

arrangements provided to other investors As 

another example, disclosure of significant 

governance rights provided to one investor, such as 

the ability to terminate the investment period of the 

fund or remove the adviser, will guard against other 

investors being misled about the terms of their 

investment and how preferential treatment 

provided to certain, but not all, investors impacts 

those terms. 

872See OPERS Comment Letter. 

873See IAA Comment Letter II. 

874See BVCA Comment Letter; Invest Europe 

Comment Letter; GPEVCA Comment Letter. 

875See RFG Comment Letter II; Healthy Markets 

Comment Letter I. 

876See AIC Comment Letter I. 

877See MFA Comment Letter I; PIFF Comment 

Letter; Chamber of Commerce Comment Letter; 

AIMA/ACC Comment Letter; Correlation Ventures 

Comment Letter; SIFMA–AMG Comment Letter I; 

ATR Comment Letter; Ropes & Gray Comment 

Letter. 

878See NY State Comptroller Comment Letter. 

879See ILPA Comment Letter I; BVCA Comment 

Letter; Invest Europe Comment Letter; GPEVCA 

Comment Letter. 

880See Ropes & Gray Comment Letter; PIFF 

Comment Letter. 

suggested excluding co-investment 

vehicles from the definition.867 While 

we understand commenter concerns, we 

believe that we should adopt the 

definition as proposed because 

excluding co-investment vehicles that 

have substantially similar investment 

policies, objectives, or strategies would 

expose investors to similar risks that the 

rule is intended to address and 

potentially allow advisers to circumvent 

the rule. Co-investment vehicles operate 

in a similar fashion as other pooled 

investment vehicles that invest 

alongside the adviser’s main fund, such 

as parallel funds, because they typically 

enter and exit the applicable 

investment(s) at substantially the same 

time and on substantially the same 

terms as the adviser’s main fund. 

Providing investors in these vehicles 

with preferential information presents 

the same risks and circumvention 

concerns as other pooled investment 

vehicles captured by the definition. 

Thus, we do not believe that coinvestment vehicles should be treated 

differently. 

4. Other Preferential Treatment and 

Disclosure of Preferential Treatment 

We proposed to prohibit other 

preferential terms unless the adviser 

provided certain written disclosures to 

prospective and current investors.868

Specifically, we proposed to require an 

adviser to provide to prospective private 

fund investors, prior to the investor’s 

investment in the fund, a written notice 

with specific information about any 

preferential treatment the adviser or its 

related persons provide to other 

investors in the same private fund.869

We also proposed to require advisers to 

distribute an annual written notice to 

current investors in a private fund 

where such notice provides specific 

information about any preferential 

treatment the adviser or its related 

persons provide to other investors in the 

same private fund since the last written 

notice.870

We are adopting this aspect of the rule 

largely as proposed because we are 

concerned that an adviser’s current sales 

practices do not provide all investors 

with sufficient detail regarding 

preferential terms granted to certain 

investors. Increased transparency will 

better inform investors about the 

breadth of preferential treatment, the 

potential for those terms to affect their 

investment in the private fund, and the 

potential costs (including compliance 

costs) associated with these preferential 

terms. This disclosure will help 

investors understand whether, and how, 

such terms present conflicts of interest 

or otherwise impact the adviser’s 

compensation schemes with the private 

fund. The disclosure will also help 

prevent investors from being potentially 

defrauded or deceived by preferential 

treatment that negatively impacts their 

investment in the private fund.871

One commenter generally opposed 

the disclosure portion of the preferential 

treatment rule because advisers may 

seek to deny investors certain terms to 

avoid being required to disclose those 

concessions to all investors.872 One 

commenter asserted that the disclosure 

obligation could compromise the 

anonymity of investors.873 Other 

commenters suggested narrowing the 

scope of the proposed rule by requiring 

disclosure only of material preferential 

treatment.874 In contrast, some 

commenters supported the disclosure 

requirements because they said they 

would assist the investor in the 

negotiation process.875

In response to commenter concerns, 

we are making three changes to the 

proposal. First, we are limiting the 

advance written notice requirement to 

‘‘any preferential treatment related to 

any material economic terms’’ rather 

than requiring advance disclosure of all 

preferential treatment. Commenters 

stated that the advance notice 

requirement would impede the closing 

process because it would incentivize 

investors to wait until the last minute to 

invest in order to maximize the amount 

of information they receive about the 

terms other investors negotiated.876

They asserted that, because of the 

dynamic nature of negotiations leading 

up to a closing (i.e., advisers 

simultaneously negotiate with multiple 

investors), it would be impractical for 

an adviser to provide advance written 

notice to a prospective investor because 

doing so would result in a repeated 

cycle of disclosure, discussion, and 

potential renegotiation.877 Several 

commenters argued that the most 

favored nations (‘‘MFN’’) clause process 

addresses the policy concerns raised by 

the proposed rule,878 and they suggested 

that instead of applying the rule to 

funds that offer MFN rights to investors, 

especially closed-end funds, we should 

allow such funds to adopt a best-in-class 

MFN process.879 In an MFN clause, an 

adviser or its related person generally 

agrees to provide an investor with 

contractual rights or benefits that are 

equal to or better than the rights or 

benefits provided to certain other 

investors, subject to certain exceptions. 

Closed-end fund investors are typically 

entitled to elect these rights or benefits 

after the end of the private fund’s 

fundraising period, and open-end fund 

investors are typically entitled to elect 

these rights or benefits after the closing 

of their investment. As a result, adopting 

a best-in-class MFN process would not 

provide prospective investors with 

information that they can act upon 

when negotiating the terms of their 

investment because investors would not 

receive such information until after the 

closing of their investment. Some 

commenters supported limiting any 

advance disclosure requirement to 

certain key terms with more 

comprehensive disclosure to follow post 

investment.880

While we understand commenter 

views about the timing concerns 

associated with advance disclosure, we 

believe that it is crucial for prospective 

investors to have access to certain 

information before they invest. This is 

designed to prevent investors from 

being misled because it will provide 

them with transparency regarding how 

the terms may affect their investment, 

how the terms may affect the adviser’s 

relationship with the private fund and 


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881For example, to the extent a private equity 

manager sought to limit or narrow the fund’s overall 

investment strategy via a side letter provision with 

one investor, the other investors would likely be 

misled about the fund’s actual investment strategy. 

882Co-investment rights will generally qualify as 

a material, economic term to the extent they include 

materially different fee and expense terms from 

those of the main fund (e.g., no fees or no obligation 

to bear broken deal expenses). Even if coinvestment rights do not include different fee and 

expense terms, and for example, are offered to 

provide an investor with additional exposure to a 

particular investment or investment type, investors 

often negotiate for those rights and give up other 

terms in the bargaining process in order to secure 

access to co-investment opportunities. As a result, 

co-investment terms generally will be material 

given their impact on an investor’s bargaining 

position. 

883See AIMA/ACC Comment Letter. 

884See, e.g., final rule 211(h)(2)–3(b) (referring to 

preferential treatment ‘‘the adviser or its related 

persons provide. . .’’ (emphasis added). 

885The disclosure requirements are not limited to 

an investor’s initial investment in the fund. For 

example, if an existing investor increases its 

investment in the fund, the adviser is required to 

disclose all preferential treatment to such investor 

following such additional investment in accordance 

with the timelines set forth in the rule. 

886See ILPA Comment Letter I. 

887This example assumes that the relevant excuse 

rights are not material economic terms required to 

be disclosed pre-investment by final rule 

211(h)(2)(3)–(b)(1). 

888See AIMA/ACC Comment Letter. 

889See RFG Comment Letter II; Ropes & Gray 

Comment Letter; PIFF Comment Letter. 

890See SBAI Comment Letter. 

its investors, and whether the terms 

create any additional conflicts of 

interest.881 To address commenter 

concerns about timing and impeding the 

closing process, the final rule will limit 

advance disclosure to those terms that a 

prospective investor would find most 

important and that would significantly 

impact its bargaining position (i.e., 

material economic terms, including, but 

not limited to, the cost of investing, 

liquidity rights, fee breaks, and coinvestment rights 882). One commenter 

stated that the final rule should not 

apply to preferential terms an adviser 

offers to investors and instead should 

apply only to preferential terms actually 

provided.883 We agree with this 

interpretation of the scope of the 

disclosure obligations under this aspect 

of the rule and believe this is clear from 

the rule text.884

Second, we are requiring advisers to 

disclose all other preferential treatment, 

in writing, to current investors on the 

following timeline: for illiquid funds, as 

soon as reasonably practicable following 

the end of the private fund’s fundraising 

period, and for liquid funds, as soon as 

reasonably practicable following the 

investor’s investment in the private 

fund.885 This change is in response to 

commenter concerns that requiring 

advisers to disclose all preferential 

treatment would impede the closing 

process. As a result, we are allowing 

advisers to wait until after an investor 

has invested in the fund to disclose the 

remaining preferential terms (i.e., all 

preferential terms that are not material 

economic terms). Although investors 

may not receive this information until 

after the closing of their investment, this 

information will nonetheless enable 

investors to protect their interests more 

effectively and make more informed 

investment decisions with a broader 

understanding of market terms, 

including with respect to negotiations of 

new investments with the adviser or 

renegotiations (or liquidations, if 

applicable) of existing investments. This 

change also addresses a commenter’s 

suggestion that any final rule account 

for the different negotiating processes 

for open-end and closed-end funds.886

An example of preferential treatment 

that the final rule prohibits unless it is 

disclosed post investment and/or 

pursuant to the annual notice 

requirement is if an adviser to a private 

equity fund provides ‘‘excuse rights’’ 

(i.e., the right to refrain from 

participating in a specific investment 

the private fund plans to make) to 

certain private fund investors.887 We 

believe that post-investment and annual 

disclosure is important because it helps 

investors learn whether other investors 

are receiving a better or different deal 

and whether any such arrangements 

pose potential conflicts of interest, 

potential harms, or other disadvantages 

(e.g., to the extent other investors are 

excused from participating in certain 

types of investments, such as alcoholrelated investments, the participating 

investors may become over concentrated 

in such investments). 

Third, we are revising the rule text to 

apply the disclosure obligations in final 

rule 211(h)(2)–3(b) to all preferential 

treatment, including any preferential 

treatment granted in accordance with 

final rule 211(h)(2)–3(a). Specifically, 

we are removing the reference to 

‘‘other’’ from the first sentence in rule 

211(h)(2)–3(b) to avoid the implication 

that the preferential treatment granted 

pursuant to the disclosure exceptions in 

final rule 211(h)(2)–3(a) would not be 

captured. This change is a necessary 

clarification because the granting of 

preferential treatment with respect to 

redemption rights or fund portfolio 

holdings or exposures information 

would have been prohibited under 

proposed rule 211(h)(2)–3(a) and, 

accordingly, there would have been 

nothing to disclose under proposed rule 

211(h)(2)–3(b) with respect to these 

types of preferential treatment. 

Transparency into these terms will 

better inform investors regarding the 

breadth of preferential treatment, the 

potential for such terms to affect their 

investment in the private fund, and the 

potential costs associated with these 

preferential terms. Moreover, such 

disclosure may assist investors in 

determining whether the adviser offered 

the same redemption ability or 

information to all investors in the 

private fund, if applicable. 

We are adopting the annual written 

notice requirement as proposed. One 

commenter supported the ability of an 

adviser to choose when to provide the 

annual disclosure as long as the adviser 

provides it on an annual basis.888 Some 

commenters suggested that the final rule 

only require annual disclosure (instead 

of also requiring pre-investment 

disclosure).889 We believe that the 

annual notice requirement will require 

advisers to reassess periodically the 

preferential terms they provide to 

investors in the same fund, and 

investors will benefit from receiving 

periodic updates on preferential terms 

provided to other investors in the same 

fund (e.g., investors will benefit because 

they will be able to assess whether such 

preferential treatment presents new 

conflicts for the adviser). We also 

believe that providing this information 

annually will not overwhelm investors 

with disclosure. 

We were not persuaded by 

commenters who urged us not to adopt 

this portion of the rule on the basis that 

advisers may use it to deny investors 

certain terms. Continuing to allow 

advisers to negotiate undisclosed side 

arrangements with certain investors that 

may impact other investors would be 

contrary to the public interest and the 

protection of investors because such 

arrangements can harm, mislead, or 

deceive other investors. It would also be 

inconsistent with promoting 

transparency into such arrangements. 

Moreover, even if advisers cease to offer 

certain provisions to investors, we 

believe the benefits associated with 

disclosure of preferential treatment 

justify such incremental burden. 

Like the proposed rule, the final rule 

will require an adviser to describe 

specifically the preferential treatment to 

convey its relevance. One commenter 

argued that advisers should not be 

required to disclose the exact fees or 

other contractual terms that they 

negotiated and instead disclosure that 

some investors received preferential fees 

should be sufficient.890 We do not 

believe that mere disclosure of the fact 

that other investors are paying lower 


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891Advisers are not required to disclose the 

names or even types of investors provided 

preferential terms as part of this disclosure 

requirement. Thus, we do not believe commenters’ 

concerns regarding investor confidentiality are 

supported. 

892Final rule 211(h)(2)–3(b)(2). 

893As a practical matter, a private fund that does 

not admit new investors or provide new terms to 

existing investors does not need to deliver an 

annual notice. However, an adviser that enters into 

a side letter after the closing date of the fund must 

disclose any preferential terms in the side letter to 

investors that are locked into the fund. 

894See supra section II.B.3 (Preparation and 

Distribution of Quarterly Statements). 

895We recognize that the quarterly statement rule 

includes specified distribution timelines. The 

primary reason for this is to help ensure that 

investors can monitor their investments with 

regular and consistent disclosures from the adviser. 

Moreover, this flexible standard acknowledges that 

there will likely be more variance in the time 

required to prepare these notices as compared to the 

quarterly statements. 

896See AIMA/ACC Comment Letter. 

897See AIMA/ACC Comment Letter (suggesting 

that the final rule allow advisers to make the 

written notices available via a data room, where 

appropriate). If delivery of the required disclosure 

is made electronically, it should be done in 

accordance with the Commission’s guidance 

regarding electronic delivery. See Use of Electronic 

Media Release, supra footnote 435; see also supra 

section II.B.3 (discussing the distribution 

requirements). 

898Proposed rule 211(h)(2)–3(b). 

899See CFA Comment Letter I; Convergence 

Comment Letter. 

900See AIMA/ACC Comment Letter. 

901See id. 

fees is specific enough. For example, if 

an adviser provides an investor with 

lower fee terms in exchange for a 

significantly higher capital contribution 

than paid by others, an adviser must 

describe the lower fee terms, including 

the applicable rate (or range of rates if 

multiple investors pay such lower fees), 

in order to provide specific information 

as required by the rule. An adviser 

could comply with the disclosure 

requirements by providing copies of 

side letters (with identifying 

information regarding the other 

investors redacted).891 Alternatively, an 

adviser could provide a written 

summary of the preferential terms 

provided to other investors in the same 

private fund, provided the summary 

specifically describes the preferential 

treatment. We believe information about 

fee arrangements such as those 

described in the example immediately 

above qualify as information about 

material economic terms that the 

adviser must disclose prior to the 

prospective investor’s investment. 

5. Delivery 

As proposed, the timing of the final 

rule’s delivery requirements differs 

depending on whether the recipient is a 

prospective or current investor in the 

private fund. For a prospective investor 

the notice needs to be provided, in 

writing, prior to the investor’s 

investment in the fund. For a current 

investor, the adviser must ‘‘distribute’’ 

the notice as soon as reasonably 

practicable after the end of the fund’s 

fundraising period (for illiquid funds) or 

as soon as reasonably practicable 

following the investor’s investment in 

the fund (for liquid funds).892 Also, for 

a current investor, the adviser must 

distribute an annual notice if any 

preferential treatment is provided to an 

investor since the last notice.893 This 

includes preferential information 

provided to any transferees during such 

period. If an investor is a pooled 

investment vehicle that is in a control 

relationship with the adviser, the 

adviser must look through that pool in 

order to send the notice to investors in 

those pools.894

We are not adopting a requirement for 

advisers to distribute the various notices 

within a specified deadline (e.g., five 

days after an investor’s investment in 

the fund or five days after year end). 

Because notices for certain funds, 

especially funds that provide extensive 

or complex preferential treatment, may 

take more time to prepare, a one-sizefits-all approach is not appropriate for 

purposes of this rule.895 We believe that 

the ‘‘as soon as reasonably practicable’’ 

is the appropriate standard because it 

emphasizes the need for the notices to 

be distributed to investors without delay 

to help ensure their timeliness while 

affording advisers a limited degree of 

flexibility. Whether a written notice is 

furnished ‘‘as soon as reasonably 

practicable’’ will depend on the facts 

and circumstances. While this standard 

imposes no specific time limit, we 

believe that it would generally be 

appropriate for advisers to distribute the 

notices within four weeks. 

One commenter suggested that we 

require advisers to provide the 

preferential treatment disclosures only 

upon request to reduce the burden on 

advisers and require investors to 

consider what information is important 

to them.896 We believe that requiring 

advisers to provide and distribute the 

disclosures under this rule is essential 

to placing investors in the best position 

to negotiate the terms of their 

investment (with regard to the advance 

disclosure) and, with regard to the postinvestment and annual disclosures, in 

the best position to consider and 

negotiate future investment 

opportunities, including with the 

adviser providing the disclosures. We 

are concerned that, especially with the 

advance disclosure requirement, 

requiring investors to first request 

information that they believe is essential 

to their negotiation process would serve 

only to disadvantage these investors 

both from a time and information 

perspective. Requiring investors to 

request this information could change 

the relationship dynamics between the 

adviser and investors. For example, an 

adviser may decide not to allow an 

investor with significant information 

requests to invest in the adviser’s future 

funds. Similarly, investors may hesitate 

to request information (even though the 

rules permit them to) for fear of 

burdening the adviser or potentially 

increasing the fees and expenses 

charged to the fund. We are not 

prescribing the method of delivery (e.g., 

electronic, data room, via mail) for the 

written notices.897

6. Recordkeeping for Preferential 

Treatment 

We proposed amending rule 204–2 

under the Advisers Act to require 

advisers registered with the Commission 

to retain books and records to support 

their compliance with the proposed 

preferential treatment rule.898 Some 

commenters supported this amendment 

to the recordkeeping rule and stated that 

the recordkeeping obligation would 

ensure compliance with the rule as well 

as support the completeness and 

accuracy of records.899 Another 

commenter stated that advisers should 

not be required to retain records if the 

prospective investor does not ultimately 

invest in the fund since, in that case, the 

prospective investor would not have 

received any preferential treatment.900

From a practical standpoint, advisers 

may find it more burdensome to sort out 

prospective investors who did not 

ultimately invest from prospects that 

did invest in the fund. This commenter 

also stated that requiring an adviser to 

retain records from a prospective 

investor that does not invest in the fund 

could conflict with other legal 

obligations an adviser has (e.g., data 

protection rules in another 

jurisdiction).901 We recognize that 

advisers and their related persons may 

have to navigate different or potentially 

competing obligations under other laws, 

including data protection laws and 

marketing laws applicable in other 

countries; however, we do not believe 

that such other obligations warrant 

removing this requirement. Advisers 

will need to determine whether, and 

how, they can engage prospective 


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63288 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

902See supra footnote 452 (describing the record 

retention requirements under the books and records 

rule). 

903See the discussion of recordkeeping 

requirements above in section II.B.6. 

904Final amended rule 206(4)–7(b). 

905See Compliance Programs of Investment 

Companies and Investment Advisers, Investment 

Advisers Act Release No. 2204 (Dec. 17, 2003) [38 

FR 74714 (Dec. 24, 2003)] (‘‘Compliance Rule 

Adopting Release’’). When adopting the compliance 

rule, the Commission adopted amendments to the 

books and records rule requiring advisers to make 

and keep true a copy of the adviser’s compliance 

policies and procedures and any records 

documenting an adviser’s annual review of its 

compliance policies and procedures. The 

Commission noted that this recordkeeping 

requirement was designed to allow our examination 

staff to determine whether the adviser has complied 

with the compliance rule. See also final amended 

rule 204–2(a)(17)(i) and (ii). 

906See Compliance Programs of Investment 

Companies and Investment Advisers, Investment 

Advisers Act Release No. 2107 (Feb. 5, 2003) [68 

FR 7038 (Feb. 11, 2003)]. 

907The adviser is required to maintain the written 

documentation of its annual review in an easily 

accessible place for at least five years after the end 

of the fiscal year in which the review was 

conducted, the first two years in an appropriate 

office of the investment adviser. See rule 204– 

2(a)(17)(ii). 

908CFA Comment Letter I; IAA Comment Letter 

II; Convergence Comment Letter; Comment Letter of 

National Regulatory Services, a ComplySci 

Company (Apr. 25, 2022) (‘‘NRS Comment Letter’’). 

909ATR Comment Letter; NYC Bar Comment 

Letter II; SBAI Comment Letter. 

910See generally SBAI Comment Letter and IAA 

Comment Letter II. 

911NYC Bar Comment Letter II. 

912Curtis Comment Letter. 

913SBAI Comment Letter. 

914See Compliance Rule Adopting Release, supra 

footnote 905. 

investors based on the facts and 

circumstances and applicable law. 

Regardless of whether the investor 

actually receives any preferential 

treatment, this recordkeeping obligation 

is necessary to help ensure that advisers 

complied with the preferential 

treatment rule. Many advisers track 

which prospective investors have been 

contacted and what documents have 

been provided to them, whether through 

a virtual data room or otherwise. They 

also typically require placement agents 

or other third parties that are 

distributing fund documents on their 

behalf to retain an investor log, which 

typically includes prospective investors. 

Accordingly, we believe that the 

benefits justify the burdens associated 

with the rule. 

We are adopting these amendments as 

proposed, and advisers are required to 

retain copies of all written notices sent 

to current and prospective investors in 

a private fund pursuant to the 

preferential treatment rule.902 In 

addition, advisers are required to retain 

copies of a record of each addressee and 

the corresponding dates sent. In a 

change from the proposal, we are not 

requiring private fund advisers to make 

and retain records of the addresses or 

delivery methods used to disseminate 

any such written notices.903 These 

requirements will facilitate our staff’s 

ability to assess an adviser’s compliance 

with the rule and will enhance an 

adviser’s compliance efforts. 

III. Discussion of Written 

Documentation of All Advisers’ Annual 

Reviews of Compliance Programs 

We are adopting the proposed 

amendments to the Advisers Act 

compliance rule to require all SECregistered advisers to document the 

annual review of their compliance 

policies and procedures in writing, as 

proposed.904 This requirement focuses 

attention on the importance of the 

annual compliance review process. In 

addition, we believe that the 

amendments will result in records of 

annual compliance reviews that allow 

our staff to determine whether an 

adviser has complied with the review 

requirement of the compliance rule.905

The amendment to the compliance 

rule requires advisers to review and 

document in writing, no less frequently 

than annually, the adequacy of their 

compliance policies and procedures and 

the effectiveness of their 

implementation. The annual review 

requirement was intended to require 

advisers to evaluate periodically 

whether their compliance policies and 

procedures continue to work as 

designed and whether changes are 

needed to assure their continued 

effectiveness.906 As we stated in the 

Compliance Rule Adopting Release, 

‘‘the annual review should consider any 

compliance matters that arose during 

the previous year, any changes in the 

business activities of the adviser or its 

affiliates, and any changes in the 

Advisers Act or applicable regulations 

that might suggest a need to revise the 

policies and procedures.’’ 

Based on staff experience, we 

understand that some investment 

advisers do not make and preserve 

written documentation of the annual 

review of their compliance policies and 

procedures. Our examination staff relies 

on documentation of the annual review 

to help the staff understand an adviser’s 

compliance program, determine 

whether the adviser is complying with 

the rule, and identify potential 

weaknesses in the compliance program. 

Without documentation that the adviser 

conducted the review, including 

information about the substance of the 

review, our staff has had limited 

visibility into the adviser’s compliance 

practices. The amendment to rule 

206(4)–7 establishes a written 

documentation requirement applicable 

to all advisers subject to the compliance 

rule.907

Some commenters supported this 

rule,908 while other commenters 

opposed it.909 Commenters who 

supported the rule explained that 

written documentation of the annual 

review has been widely adopted as a 

standard practice by investment 

advisers and would not have a large 

impact.910 The commenters that 

opposed it indicated that it may 

increase costs,911 and deter an adviser 

from having compliance consultants or 

outside counsel.912 A commenter that 

generally supported the rule cautioned 

that a prescriptive approach could lead 

to less tailored compliance reviews.913

Although we acknowledge 

commenters’ concerns, we continue to 

believe that written documentation of 

the annual review is necessary for three 

key reasons. First, written 

documentation of the annual review 

may help advisers better assess whether 

they have considered any compliance 

matters that arose during the previous 

year, any changes in the adviser’s or an 

affiliate’s business activities during the 

year, and any changes to the Advisers 

Act or other rules and regulations that 

may suggest a need to revise an 

adviser’s policies and procedures. 

Second, the availability of written 

documentation of the annual review 

should allow the Commission and the 

Commission staff to determine if the 

adviser is regularly reviewing the 

adequacy of the adviser’s policies and 

procedures. Third, clients and investors 

conducting due diligence may request 

written documentation of the annual 

review to assess whether the adviser 

applies a structured framework and 

rigor to its compliance program. 

We do not believe the amended rule 

will significantly increase costs for 

advisers. Since adopting the annual 

review requirement,914 the Commission 

has observed that most advisers already 

document this review in writing. Some 

advisers may see benefits in the form of 

increased efficiency because of the 

written documentation of an annual 

review each year. Having written 

documentation year over year provides 

the adviser a starting point so that 

advisers, internal service providers (e.g., 

internal auditors), external service 

providers (e.g., compliance consultants), 

or outside counsel can be more targeted 

when conducting future annual reviews. 

And, in instances where an adviser 

hires external service providers or 


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915 Id. 

916SIFMA–AMG Comment Letter I. 

917 Id. 

918See infra section VI.D.7 (Benefits and Costs— 

Written Documentation of All Advisers’ Annual 

Review of Compliance Programs). 919NSCP Comment Letter; AIMA/ACC Comment 

Letter; SIFMA–AMG Comment Letter I. 

920Compliance Rule Adopting Release, supra 

footnote 905. 

921See generally NSCP Comment Letter. 

922See generally NSCP Comment Letter 

(describing a wide range of ‘‘other responses’’ for 

how advisers currently document their annual 

review in writing). 

923Convergence Comment Letter. 

924We have previously stated that ‘‘[w]hile the 

‘‘promptly’’ standard [for producing books and 

records] imposes no specific time limit, we expect 

that a fund or adviser would be permitted to delay 

furnishing electronically stored records for more 

than 24 hours only in unusual circumstances. At 

the same time, we believe that in many cases funds 

and advisers could, and therefore will be required 

to, furnish records immediately or within a few 

hours of request.’’ Electronic Recordkeeping by 

Investment Companies and Investment Advisers, 

Investment Advisers Act Rel. No. 1945 (May 24, 

2001). 

925 In connection with the written report required 

under rule 38a-1, the Compliance Rule Adopting 

Release stated that ‘‘[a]ll reports required by our 

rules are meant to be made available to the 

Commission and the Commission staff and, thus, 

they are not subject to the attorney-client privilege, 

the work-product doctrine, or other similar 

protections.’’ See Compliance Rule Adopting 

Release, supra footnote 905. 

926Compliance Rule Adopting Release, supra 

footnote 905, at n.94. Staff also has observed delays 

in production of other non-privileged records. 

Delays undermine the staff’s ability to conduct 

examinations and may be inconsistent with 

production obligations. See OCIE National 

Examination Program Risk Alert: Investment 

Adviser Compliance Programs (Nov. 19, 2020) 

(‘‘EXAMS Investment Adviser Compliance 

Programs Risk Alert 2020’’), available at https://

www.sec.gov/files/Risk%

20Alert%20IA%20Compliance%20Programs_0.pdf 

(the staff has observed instances of advisers failing 

to respond in a timely manner to requests for 

required books and records). 

outside counsel to participate in the 

annual review, the adviser may take 

steps to defray any potential costs. For 

example, some advisers may choose to 

have their employees document a 

summary of results as explained to them 

by service providers or outside counsel, 

rather than request that the service 

provider or outside counsel produce a 

written summary. 

Nor do we believe that the amended 

rule will deter an adviser from using 

service providers (e.g., compliance 

consultants) or outside counsel. Since 

early 2004, advisers have had an 

obligation to review, at least annually, 

the adequacy and effectiveness of their 

policies and procedures.915 Many 

advisers that already document the 

annual review in writing communicate 

with service providers or outside 

counsel, either throughout the entire 

annual review or for discrete issues. 

Nothing in this rule prohibits advisers 

from seeking the guidance of service 

providers or outside counsel during 

their annual review. Although this rule 

will now require that the adviser 

document the annual review in writing, 

it still provides advisers the flexibility 

to determine the scope of that review, 

including when, if at all, and how to 

communicate with service providers or 

outside counsel. 

One commenter stated that the 

amendment would be unnecessarily 

burdensome and duplicative for asset 

managers that have multiple registered 

investment advisers operating under a 

common compliance program.916 The 

commenter stated that, under the 

proposed amendment, advisers in an 

advisory complex would be producing 

multiple duplicative reports with little 

variation.917 While the benefits of the 

produced reports may diminish with 

each marginal report produced with 

little variation, the costs will likely also 

decrease. We also do not believe that the 

marginal benefits of each report will be 

de minimis. For advisers in an advisory 

complex with many advisers, producing 

each report may help advisers assess 

whether they have considered any 

compliance matters that arose during 

the previous year, changes in business 

activities, or changes to the Advisers 

Act or other rules and regulations that 

may impact that particular adviser. Even 

if, in certain cases, consideration of 

such issues produces a similar report to 

a previous one, there may be broader 

benefits across the industry from 

standardizing the practice of advisers 

making such assessments throughout 

their entire advisory complex.918

The amended rule does not enumerate 

specific elements that advisers must 

include in the written documentation of 

their annual review. The written 

documentation requirement is intended 

to be flexible to allow advisers to 

continue to use the review procedures 

they have developed and found most 

effective. For example, some advisers 

may review the adequacy of their 

compliance policies and procedures (or 

a subset of those compliance policies 

and procedures) and the effectiveness of 

their implementation on a quarterly 

basis. In such a case, we believe that the 

written documentation of the annual 

review could comprise written quarterly 

reports. Some commenters suggested 

that we offer flexibility in the approach 

to the written annual review 

requirement.919 We have previously 

stated our views regarding the areas that 

we expect an adviser’s policies and 

procedures to address, at a minimum, if 

they are relevant to the adviser.920 We 

understand that some advisers may 

choose to document the annual review 

of their written policies and procedures: 

(i) in a lengthy written report with 

supporting documentation; (ii) quarterly 

documentation, aggregated at year end; 

(iii) a presentation to the board or 

another governing body, such as a 

limited partner advisory committee 

(LPAC); (iv) a short memorandum 

summarizing the findings; and (v) 

informal documentation, such a 

compilation of notes throughout the 

year.921 There are a number of other 

ways that an adviser may choose to 

document its annual review.922 This 

rule does not prescribe a specific format 

of the written documentation, instead, 

allowing an adviser to determine what 

would be appropriate. 

A commenter suggested that we 

should require advisers to provide the 

written documentation to the private 

fund’s LPAC.923 The commenter argued 

that this would provide evidence that 

the adviser has a systematic process in 

place to identify and address changes in 

the adviser’s business model. While an 

adviser may choose to share the results 

of its annual review with the LPAC, or 

even investors in the fund, we are not 

requiring this. We do not believe that 

LPAC delivery is required to help 

ensure that advisers periodically 

evaluate whether their compliance 

policies and procedures continue to 

work as designed and whether changes 

are needed to assure their continued 

effectiveness. 

The required written documentation 

of the annual review under the 

compliance rule is meant to be made 

available to the Commission and the 

Commission staff and therefore should 

promptly 924 be produced upon 

request.925 Commission staff has 

observed improper claims of the 

attorney-client privilege, the workproduct doctrine, or other similar 

protections over required records, 

including any records documenting the 

annual review under the compliance 

rule, based on reliance on attorneys 

working for the adviser in-house or the 

engagement of law firms and other 

service providers (e.g., compliance 

consultants) through law firms.926

Attempts to improperly shield from, or 

unnecessarily delay production of any 

non-privileged record is inconsistent 

with prompt production obligations and 

undermines Commission staff’s ability 

to conduct examinations. Prompt access 

to all records is critical for protecting 

investors and to an effective and 

efficient examination program. 


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63290 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

927SIFMA–AMG Comment Letter I; Schulte 

Comment Letter; PIFF Comment Letter; CFA 

Comment Letter I; NSCP Comment Letter. 

928MFA Comment Letter I; SBAI Comment Letter; 

AIC Comment Letter II. 

929AIMA/ACC Comment Letter; Chamber of 

Commerce Comment Letter. 

930Comment Letter of Los Angeles City 

Employees’ Retirement System (Apr. 12, 2022) 

(‘‘LACERS Comment Letter’’). 

931 ILPA Comment Letter I. See also SEC Small 

Business Capital Formation Advisory Committee 

letter to Chair Gensler (Feb. 28, 2023) (expressing 

concern that the proposal could adversely impact 

small funds that attract sophisticated investors for 

small companies’ growth). 

932E&Y Comment Letter. 

933Curtis Comment Letter; NRS Comment Letter; 

see generally NSCP Comment Letter. 

934SBAI Comment Letter; REBNY Comment 

Letter; see generally AIC Comment Letter I. 

935AIC Comment Letter I; see also Chamber of 

Commerce Comment Letter (advisers may need to 

build and implement compliance structures and 

systems to address new elements of the rules). 

936 ILPA Comment Letter I; CVCA Comment 

Letter. 

937Regulatory assets under management are 

calculated in accordance with Part 1A, Instruction 

5.b of Form ADV. 

938See 17 CFR 275.204(b)–1. 

IV. Transition Period, Compliance Date, 

Legacy Status 

For the audit rule and the quarterly 

statement rule, we are adopting an 18- 

month transition period for all private 

fund advisers. For the adviser-led 

secondaries rule, the preferential 

treatment rule, and the restricted 

activities rule, we are adopting 

staggered compliance dates that provide 

for the following transition periods: for 

advisers with $1.5 billion or more in 

private funds assets under management 

(‘‘larger private fund advisers’’), a 12- 

month transition period and for advisers 

with less than $1.5 billion in private 

funds assets (‘‘smaller private fund 

advisers’’), an 18-month transition 

period. Compliance with the amended 

Advisers Act compliance rule will be 

required 60 days after publication in the 

Federal Register. 

We proposed a one-year transition 

period to provide time for advisers to 

come into compliance with these new 

and amended rules. Some commenters 

suggested adopting a longer transition 

period, such as 18 months,927 two 

years,928 or at least three years,929 while 

other commenters have called for a 

swifter implementation.930 Commenters 

also suggested an extended transition 

period for smaller or newer 

managers.931 Although we considered a 

longer transition period for all private 

fund advisers, we have concerns that 

activity involving problematic sales 

practices, compensation schemes, and 

conflicts of interest would persist 

during any extended transition period to 

the detriment of investors. 

Audit Rule and Quarterly Statement 

Rule 

We believe that the audit rule and the 

quarterly statement rule warrant longer 

transition periods because they may 

require advisers to enter into new, or 

renegotiate existing, contracts with 

third-party service providers, such as 

accountants and administrators. 

First, for the mandatory audit 

requirement, commenters suggested that 

the Commission extend, for at least one 

additional year, the transition period to 

allow private funds and their auditors 

enough time to properly assess auditor 

independence requirements.932 Under 

the mandatory private fund adviser 

audit rule, there will not be an option 

for a surprise examination as there is 

under the current custody rule. That is, 

a private fund adviser will not be able 

to satisfy the requirements of the audit 

rule by undergoing a surprise 

examination that would comply with 

the custody rule. In light of these 

considerations, we believe that 

additional time of up to 18 months is 

appropriate to allow advisers time to 

either hire an audit firm that meets the 

SEC independence requirements or 

cause the auditor to cease providing any 

services that impair independence for 

purposes of the SEC independence 

requirements. 

Second, under the quarterly statement 

requirement, commenters expressed 

concern that one year may not be 

enough time to come into compliance 

with a new rule as many advisers will 

need to find new reporting vendors or 

renegotiate agreements with existing 

vendors to implement the required rule 

changes 933 and create and update 

reporting templates.934 Commenters also 

highlighted that advisers may need 

additional time to make the necessary 

adjustments to their operational and 

compliance systems.935 Based on these 

comments, we have also decided to 

allow up to 18 months to comply with 

the quarterly statement requirement. We 

believe this transition period will 

provide an appropriate period of time 

that balances the needs of advisers to 

engage third parties and amend existing 

forms, with the needs of investors to 

receive this information. 

Adviser-Led Secondaries, Preferential 

Treatment, and Restricted Activities 

Rules 

Commenters requested an extended 

transition period for smaller or newer 

managers, stating that smaller or newer 

managers may require more time to 

modify practices to come into 

compliance.936 We agree with these 

commenters that smaller private fund 

advisers will likely need additional time 

to modify existing practices, policies, 

and procedures to come into 

compliance. Accordingly, we are 

providing staggered compliance dates, 

with a longer transition period for 

smaller private fund advisers. The 

compliance date for larger private fund 

advisers will provide for a 12-month 

transition period, while the compliance 

date for smaller private fund advisers 

will provide for an 18-month transition 

period. This additional time will allow 

smaller private fund advisers, and their 

service providers, to adequately address 

the various new requirements under the 

rules and promote a smooth and 

efficient implementation of the rules. 

We believe that, by allowing a longer 

transition period for smaller advisers, 

the costs of compliance would be 

lessened by the sharing of industry 

knowledge from larger advisers that 

were required to comply at least six 

months earlier. For example, smaller 

advisers would be afforded more time to 

assess which parts of the 

implementation process can be 

performed in house versus those that 

must be outsourced and to identify, and 

negotiate with, appropriate service 

providers. Smaller private fund advisers 

will also likely receive the benefit of 

model forms and templates developed 

by larger private fund advisers and their 

service providers, which may reduce 

costs for smaller private fund advisers. 

We are differentiating between larger 

private fund advisers and smaller 

private fund advisers based on private 

fund assets under management, 

calculated as of the last day of the 

adviser’s most recently completed fiscal 

year. An adviser’s private fund assets 

under management are the portion of 

such adviser’s regulatory assets under 

management that are attributable to 

private funds it advises.937 We chose to 

use the term ‘‘private fund assets under 

management’’ because many advisers 

are familiar with such term under Form 

PF. Investment advisers registered (or 

required to be registered) with the 

Commission with at least $150 million 

in private fund assets under 

management generally must file Form 

PF.938 Accordingly, we believe that 

private fund assets under management 

is appropriate to use here because many 

advisers will already be familiar with 

how to calculate their private fund 

assets under management. 

One commenter suggested 

differentiating between advisers based 

on specific parameters (e.g., assets 


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939 ILPA Comment Letter I. 940Predistribution Initiative Comment Letter II. 941We note that Form ADV, Part 1, Item 5 

requires an adviser to disclose certain information 

regarding its employees, including the number of 

full- and part-time employees. 942Form PF also uses a $1.5 billion threshold. 

Specifically, a private fund adviser must complete 

section 2 of Form PF if it had at least $1.5 billion 

in hedge fund assets under management as of the 

last day of any month in the fiscal quarter 

immediately preceding the adviser’s most recently 

completed fiscal quarter. Section 2a requires a large 

hedge fund adviser to report certain aggregate 

information about any hedge fund it advises and 

section 2b requires a large hedge fund adviser to 

report certain additional information about any 

hedge fund it advises that has a net asset value of 

at least $500 million as of the last day of any month 

in the fiscal quarter immediately preceding the 

adviser’s most recently completed fiscal quarter. 

943See Form ADV data (as of Dec. 2022). This 

$1.5 billion in private fund assets threshold does 

not include SAF advisers with respect to SAFs they 

advise. 944 Id. Aggregate totals may include duplicative 

data to the extent a private fund is reported on 

Form ADV by both a registered investment adviser 

and an exempt reporting adviser (e.g., in the case 

of a sub-advisory or co-advisory relationship). 

945See SBAI Comment Letter (the written annual 

review ‘‘is already common practice in the industry 

and would not have a large impact’’); see also IAA 

Comment Letter II (‘‘a written annual review has 

been a widely adopted best practice for investment 

advisers, including private fund advisers, for 

years’’); see also NRS Comment Letter (‘‘most SEC 

registered investment advisers regularly document 

their annual reviews, though the format, scope, and 

detail provided in this documentation varies widely 

from firm to firm’’); see generally NSCP Comment 

Letter (noting that, in a survey of members, 213 out 

of 214 members responded that they already 

document the annual review in writing). 

946See supra section III. 

947For an adviser that completed its annual 

review immediately before the Commission voted to 

adopt this rule, this could mean that the adviser 

documents the annual review, in writing, for the 

first time up to 14 months after the Commission’s 

vote, which should allow an adviser more than 

enough time to determine how to document the 

annual review. To the extent an adviser has a 

review year that is partially complete by the 

compliance date and the adviser has already 

reviewed the adequacy of its policies and 

procedures in accordance with rule 206(4)–7 for 

such period prior to the compliance date, the new 

documentation requirement will not apply 

retroactively to such period. 

under management).939 Another 

commenter suggested using a 

combination of specific metrics, such as 

employee headcount and assets under 

management, to determine if a firm 

meets the threshold for being a larger 

private fund adviser.940 We considered 

using metrics other than, or in addition 

to, private fund assets under 

management for purposes of this 

threshold, but we anticipate that they 

would be more likely to lead to adverse 

incentives or otherwise be less reliable 

metrics. For instance, if we were to 

define larger private fund advisers based 

on number of employees, advisers may 

be incentivized to outsource operations 

and minimize compliance personnel. 

Also, unlike private fund assets under 

management, employee headcount 

attributable to an adviser’s private funds 

is generally not tracked or reported to 

the Commission.941 We believe that 

private fund assets under management 

is the appropriate metric because it is 

less likely to create adverse incentives 

and is more likely to be tracked and 

reported by private fund advisers than 

other metrics. 

We believe that $1.5 billion in private 

fund assets under management is the 

appropriate threshold for a tiered 

compliance date for smaller private 

fund advisers.942 The threshold is 

designed so that the group of larger 

private fund advisers will be relatively 

small in number but represent a 

substantial portion of the assets of the 

private funds industry. For example, we 

estimate that approximately 1,478 SEC 

registered investment advisers each 

managing at least $1.5 billion in private 

fund assets represent approximately 

75% of private fund assets under 

management advised by registered 

private fund advisers and exempt 

reporting advisers.943 Similarly, we 

estimate that approximately 491 exempt 

reporting advisers each managing at 

least $1.5 billion in private fund assets 

represent approximately 16% of private 

fund assets under management advised 

by exempt reporting advisers and 

registered private fund advisers.944 We 

considered selecting a different 

threshold, such as $2 billion in private 

fund assets under management. 

However, we believe that $1.5 billion is 

appropriate because, as discussed 

above, it captures a relatively small 

number of advisers but represents a 

substantial portion of the assets under 

management advised by registered 

private fund advisers and exempt 

reporting advisers. We do not believe a 

$2 billion threshold would capture a 

significant enough portion of the assets 

in the private fund adviser industry. 

We also chose the $1.5 billion 

threshold because we believe advisers 

with $1.5 billion or more in private fund 

assets generally have larger back offices 

to assist with the adoption and 

implementation of the new rules. Larger 

advisers are more likely to have 

launched more than one private fund 

and thus may have more experience in 

complying with Commission rules and 

potentially have been registered with us 

for a longer period of time. Accordingly, 

we believe that the $1.5 billion 

threshold strikes an appropriate balance 

between ensuring that a significant 

portion of private fund advisers 

implements the various rules reasonably 

quickly, while seeking to minimize the 

initial burdens imposed on certain 

private fund advisers. 

Amended Advisers Act Compliance 

Rule 

The written documentation of an 

adviser’s annual review impacts all 

advisers, whether they advise private 

funds or not. This requirement to 

document in writing, at least annually, 

the adviser’s annual review of the 

adequacy and effectiveness of its 

policies and procedures is an important 

part of an effective compliance program. 

Because of this importance, we have 

decided to require compliance with this 

rule 60 days after publication in the 

Federal Register. We also believe that 

documenting an existing practice in 

writing does not warrant a longer 

transition period because the additional 

burden should be relatively low for two 

important reasons. First, most advisers 

are already documenting their annual 

review in writing, so these advisers 

would have to make limited, if any, 

changes to existing practices.945 Second, 

we did not prescribe a specific format 

for the written documentation, allowing 

advisers flexibility to record the results 

of the annual review in a manner that 

best fits their business and to use the 

review procedures that they have found 

most effective.946 Thus, whenever the 

adviser commences its review within 

the next 12 months after the compliance 

date, the review must be documented in 

writing.947

In summary, the following tables set 

forth the compliance dates: 

Rule Larger private fund advisers Smaller private fund advisers 

211(h)(1)–2 ....... 18 months after date of publication in the FEDERAL REGISTER 18 months after date of publication in the FEDERAL REGISTER. 

206(4)–10 ......... 18 months after date of publication in the FEDERAL REGISTER 18 months after date of publication in the FEDERAL REGISTER. 

211(h)(2)–1 ....... 12 months after date of publication in the FEDERAL REGISTER 18 months after date of publication in the FEDERAL REGISTER. 

211(h)(2)–2 ....... 12 months after date of publication in the FEDERAL REGISTER 18 months after date of publication in the FEDERAL REGISTER. 

211(h)(2)–3 ....... 12 months after date of publication in the FEDERAL REGISTER 18 months after date of publication in the FEDERAL REGISTER. 


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948See, e.g., SIFMA–AMG Comment Letter I; 

NSCP Comment Letter; Chamber of Commerce 

Comment Letter; Segal Marco Comment Letter; 

Schulte Comment Letter; BVCA Comment Letter; 

Invest Europe Comment Letter; PIFF Comment 

Letter; MFA Comment Letter I; AIMA/ACC 

Comment Letter; SBAI Comment Letter; GPEVCA 

Comment Letter; Top Tier Comment Letter; George 

T. Lee Comment Letter; CCMR Comment Letter I; 

Andreessen Comment Letter; Ropes & Gray 

Comment Letter; NYC Bar Comment Letter II; 

Pathway Comment Letter; Cartwright et al. 

Comment Letter; Canada Pension Comment Letter. 

949See, e.g., Comment Letter of Michelle 

Katauskas (Apr. 19, 2022); CVCA Comment Letter. 

950See, e.g., Cartwright et al. Comment Letter. 

951See final rule 211(h)(2)–1(b). For the 

avoidance of doubt, and for the reasons specified 

in section II.E.2.a) above, we have specified that the 

legacy status provision does not permit advisers to 

charge for fees and expenses related to an 

investigation that results or has resulted in a court 

or governmental authority imposing a sanction for 

a violation of the Act or the rules promulgated 

thereunder. 

952See final rules 211(h)(2)–1(b) and 211(h)(2)– 

3(a). 

953See, e.g., SBAI Comment Letter; Comment 

Letter of CompliDynamics APC (Apr. 24, 2022); 

Dechert Comment Letter; NYC Comptroller 

Comment Letter; Ropes & Gray Comment Letter. 954See, e.g., SBAI Comment Letter; Dechert 

Comment Letter (stating that ‘‘[t]hese arrangements 

were reached with the general expectation of 

confidentiality’’). 955See, e.g., NYC Comptroller Comment Letter; 

SBAI Comment Letter. 956See, e.g., Canada Pension Comment Letter; 

Pathway Comment Letter. 

957MFA Comment Letter I; PIFF Comment Letter; 

AIMA/ACC Comment Letter; SIFMA–AMG 

Comment Letter I. 

958We would also interpret the legacy status 

provision for the borrowing restriction to apply to 

existing borrowings from a private fund that has 

commenced operations as of the compliance date 

and that were entered into in writing prior to the 

compliance date. Thus, an adviser would not be 

required to seek consent for such existing 

borrowings for purposes of the final rule. 

Rule All investment advisers 

206(4)– 

7(b).

60 days after publication in the 

FEDERAL REGISTER. 

Legacy Status 

Commenters requested the 

Commission not to apply the final rules 

to existing funds and their contractual 

agreements (i.e., provide ‘‘legacy status’’ 

for such funds and agreements). Several 

commenters suggested providing legacy 

status for all existing funds,948 while 

some commenters recommended legacy 

status for all funds currently in 

compliance 949 and other commenters 

recommended permitting legacy status 

for 10 years.950

After considering these comments, we 

are providing legacy status under the 

prohibitions aspect of the preferential 

treatment rule, which prohibits advisers 

from providing certain preferential 

redemption rights and information 

about portfolio holdings. We are also 

providing legacy status for the aspects of 

the restricted activities rule that require 

investor consent, which restrict an 

adviser from borrowing from a private 

fund and from charging for certain 

investigation fees and expenses. 

However, such legacy status does not 

permit advisers to charge for fees or 

expenses related to an investigation that 

results or has resulted in a court or 

governmental authority imposing a 

sanction for a violation of the Act or the 

rules promulgated thereunder.951

The legacy status provisions apply to 

governing agreements, as specified 

below, that were entered into prior to 

the compliance date if the rule would 

require the parties to amend such an 

agreement.952 To prevent advisers from 

abusing this provision, legacy status 

applies only to such agreements with 

respect to private funds that had 

commenced operations as of the 

compliance date. The commencement of 

operations includes any bona fide 

activity directed towards operating a 

private fund, including investment, 

fundraising, or operational activity. 

Examples of activity that could indicate 

a private fund has commenced 

operations include issuing capital calls, 

setting up a subscription facility for the 

fund, holding an initial fund closing 

and conducting due diligence on 

potential fund investments, or making 

an investment on behalf of the fund. 

Some commenters suggested that we 

also apply legacy status to the 

disclosure portions of the preferential 

treatment rule so that the rule would 

only apply to new agreements (e.g., side 

letters) entered into after the effective/ 

compliance date.953 These commenters 

noted that side letters are negotiated on 

a confidential basis and requiring 

disclosure of such bespoke terms would 

violate existing agreements.954 Also, 

they argued that applying the rule to 

existing side letters would result in 

repapering costs to advisers and 

investors.955 We are not applying legacy 

status to the disclosure portions of the 

preferential treatment rule because we 

believe that transparency of these terms 

is important and will not harm investors 

in the private fund. As a result, 

information in side letters that existed 

before the compliance date will be 

disclosed to other investors that invest 

in the fund post compliance date. 

Advisers are not required to disclose the 

identity of the specific investor that 

received a preferential term and can 

choose to anonymize that information. 

Commenters also opposed any 

application of the rule that would 

require retroactive changes to existing 

side letters, and we believe requiring the 

disclosure of side letters that were 

entered into before the compliance date, 

rather than the outright prohibition of 

preferential terms under existing side 

letters, is the best path forward to avoid 

the costs associated with rewriting and 

renegotiating existing agreements.956

Similarly, we are not applying legacy 

status to the aspects of the restricted 

activities rule with disclosure-based 

exceptions because transparency into 

these practices is important and will not 

harm investors in the private fund. 

This legacy treatment is designed to 

address commenters’ concerns that the 

rules would require advisers and 

investors to renegotiate contractual 

agreements at a significant cost to the 

industry,957 including for investors that 

may not have internal counsel to 

renegotiate contracts with advisers. 

Moreover, requiring advisers and 

investors to modify fund terms or alter 

their rights in order to comply with the 

rules would likely require the private 

funds industry to devote substantial 

time to such process (rather than 

focusing on the investment process) and 

yield unintended consequences for the 

industry. 

The legacy provisions apply with 

respect to contractual agreements that (i) 

govern the fund, which include, but are 

not limited to, the private fund’s 

operating or organizational agreements 

(e.g., the limited partnership agreement, 

the limited liability company 

agreement, articles of association, or bylaws), the subscription agreements, and 

side letters and (ii) govern the 

borrowing, loan, or extension of credit 

entered into by the fund, which include, 

but are not limited to, the foregoing 

agreements from clause (i), if applicable, 

as well as promissory notes and credit 

agreements. As discussed above, 

amendments to governing documents 

warrant legacy treatment because of 

how disruptive and costly that process 

can be. We view the following as 

examples of amendments to such 

governing agreements: (i) changing or 

removing redemption terms for one or 

more investors where such terms are 

specified in the governing agreement; 

and (ii) removing terms from a side 

letter that granted an investor 

redemption rights or periodic reporting 

about the fund’s holdings or 

exposures.958 In contrast, disclosure of 

information (e.g., under the disclosure 

portion of the preferential treatment rule 

and the restricted activities rule) is not 

as burdensome or disruptive and 

therefore does not warrant legacy 

treatment. 

The legacy provisions apply only with 

respect to advisers’ existing agreements 

with parties as of the compliance 


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959We anticipate that the applicable parties to 

fund governing documents generally would be the 

general partner/adviser and investors; however, we 

used a broader term because some investors may 

authorize other persons to sign documents on their 

behalf, such as nominees. Similarly, in the context 

of certain non-U.S. funds, the parties to the 

governing agreements may be a board of directors 

or certain other persons, acting on the fund’s or the 

adviser’s behalf. 

960See section 208(d) of the Advisers Act. 

961 5 U.S.C. 801 et seq. 

962See supra section I; see also infra section 

VI.C.1. 

963 Id. 

964 Id. 

965See, e.g., MFA Comment Letter I, Appendix A 

(‘‘The Commission fails to consider that 

sophisticated investors invest in private funds and 

does not establish that sophisticated investors need 

the purported protections outlined in the 

Proposal.’’); AIC Comment Letter I, Appendix 1 

(‘‘Private equity is a competitive industry with 

thousands of advisory firms on one side and 

sophisticated investors on the other side. Certain 

characteristics of the private equity industry, which 

the Commission is concerned about, emerge as a 

result of negotiations between sophisticated parties, 

and the literature provides economic reasons for 

these patterns in the data.’’); AIC Comment Letter 

I, Appendix 2 (‘‘If investment advisers all have 

market power and private funds are in short supply, 

LPs will have little bargaining power if they wish 

to be included in a particular fund. By contrast, if 

the IAs compete to attract investable resources, the 

supply of private funds should be substantial and 

LPs should be able to negotiate contractual terms 

that reflect their preferences and trade-offs. In 

particular, if the SEC has identified practices that 

are generally viewed negatively by LPs, an adviser 

that tried to impose these practices will find it more 

difficult to attract investments than one who offers 

some flexibility. There are many IAs offering 

private funds but, unfortunately, the Proposal and 

economic analysis provide no evidence about their 

market power. Yet this assessment should have a 

first-order impact on appropriate regulatory 

changes.’’); Comment Letter of Professor William 

Clayton (Apr. 21, 2022) (‘‘Clayton Comment Letter 

I’’) (‘‘The Proposal also includes various 

explanations for why bargaining in private funds 

might be leading to unsatisfying outcomes. 

Interestingly, these claims are not presented as part 

of a clear and unified thesis for why suboptimal 

bargaining happens in this industry. Instead, the 

staff’s discussion of bargaining problems is 

scattered throughout the Proposal, and one might 

miss the descriptions of these bargaining problems 

if one is not looking carefully for them.’’). 

966See, e.g., ATR Comment Letter; Comment 

Letter of Harvey Pitt (Apr. 18, 2022) (‘‘Harvey Pitt 

Comment Letter’’); SBAI Comment Letter; LSTA 

Comment Letter, Exhibit C; Cartwright et al. 

Comment Letter. 

967See, e.g., AIC Comment Letter I, Appendix 1; 

Segal Marco Comment Letter; SBAI Comment 

Letter. 

968See, e.g., Clayton Comment Letter I; MFA 

Comment Letter I; Dechert Comment Letter. 

date.959 As a result, an adviser may not 

add parties to the side letter after the 

compliance date in order to do 

indirectly what it is prohibited from 

doing directly.960 However, we would 

not view an adviser to a fund who 

admits new investors to an existing fund 

as violating the legacy provisions to the 

extent the applicable terms are set forth 

in the fund’s limited partnership (or 

similar) agreement and applicable to all 

investors. 

We are not providing legacy status 

under the other final rules because we 

do not believe that the requirements of 

those rules will typically require 

advisers and investors to amend binding 

contractual agreements. Also, the 

quarterly statement rule, the audit rule, 

the disclosure aspects of the restricted 

activities rule, and the adviser-led 

secondaries rule do not flatly prohibit 

activities, except for the charging of fees 

and expenses related to sanctions for 

violations of the Act. Rather, these rules 

generally require advisers to provide 

certain information to or obtain consent 

from investors. 

V. Other Matters 

Pursuant to the Congressional Review 

Act,961 the Office of Information and 

Regulatory Affairs has designated this 

rule a ‘‘major rule’’ as defined by 5 

U.S.C. 804(2). If any of the provisions of 

these rules, or the application thereof to 

any person or circumstance, is held to 

be invalid, such invalidity shall not 

affect other provisions or application of 

such provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

VI. Economic Analysis 

A. Introduction 

We are mindful of the costs imposed 

by, and the benefits obtained from, the 

final rules. Whenever we engage in 

rulemaking and are required to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, section 202(c) of the Advisers 

Act requires the Commission to 

consider, in addition to the protection of 

investors, whether the action would 

promote efficiency, competition, and 

capital formation. The following 

analysis considers, in detail, the 

potential economic effects that may 

result from these final rules, including 

the benefits and costs to market 

participants as well as the implications 

of the final rules for efficiency, 

competition, and capital formation. 

Where possible, the Commission 

quantifies the likely economic effects of 

its final amendments and rules. 

However, the Commission is unable to 

quantify certain economic effects 

because it lacks the information 

necessary to provide estimates or ranges 

of costs. Further, in some cases, 

quantification would require numerous 

assumptions to forecast how investment 

advisers and other affected parties 

would respond to the amendments and 

rules, and how those responses would 

in turn affect the broader markets in 

which they operate. In addition, many 

factors determining the economic effects 

of the amendments and rules would be 

firm-specific and thus inherently 

difficult to quantify, such that, even if 

it were possible to calculate a range of 

potential quantitative estimates, that 

range would be so wide as to not be 

informative about the magnitude of the 

benefits or costs associated with the 

rules and amendments. Many parts of 

the discussion below are, therefore, 

qualitative in nature. As described more 

fully below, the Commission is 

providing a qualitative assessment and, 

where feasible, a quantified estimate of 

the economic effects. 

B. Broad Economic Considerations 

As discussed above, private fund 

assets under management have steadily 

increased over the past decade.962

Additionally, private funds and their 

advisers play an increasingly important 

role in the lives of millions of 

Americans planning for retirement.963

While private funds typically issue their 

securities only to certain qualified 

investors, such as institutions and high 

net worth individuals, individuals have 

indirect exposure to private funds 

through those individuals’ participation 

in public and private pension plans, 

endowments, foundations, and certain 

other retirement plans, which all invest 

directly in private funds.964

Many commenters argued in response 

to the Proposing Release that the private 

fund industry is competitive and not in 

need of further regulation, and that 

private incentives and negotiations 

already yield competitive outcomes.965

Other commenters stated that the 

Proposing Release did not demonstrate 

or provide evidence of a market failure 

to provide a rationale for the proposed 

rules, or did not provide sufficient 

quantifiable justification of the benefits 

of the rule relative to the costs.966 These 

comments also generally stated that 

financial regulation in the absence of 

such market failures results in negative 

unintended consequences, such as 

reduced capital formation, higher 

prices, or lower overall economic 

activity.967 Commenters stated that new 

regulations, if any, should prioritize or 

be limited to ensuring full and fair 

disclosure.968

One commenter representing a fund 

adviser group stated that the 

development of the potentially harmful 

practices at issue in the proposal is 

evidence of market efficiency, as it 

shows the development of differentiated 

investor terms that are responsive to 


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969AIMA/ACC Comment Letter. 

970See, e.g., AIMA/ACC Comment Letter; AIC 

Comment Letter I, Appendix 1; MFA Comment 

Letter I, Appendix A. 

971Comment Letter of Committee on Capital 

Market Regulation (May 25, 2023) (‘‘CCMR 

Comment Letter IV’’); CCMR, A Competitive 

Analysis of the U.S. Private Equity Fund Market 

(Apr. 2023), available at https://capmktsreg.org/wpcontent/uploads/2023/04/CCMR-Private-EquityFunds-Competition-Analysis-04.11.20231.pdf. 

972OPERS Comment Letter. 

973We discuss other commenter concerns, such 

as commenter concerns on specific economic 

aspects of individual rules, throughout the 

remainder of section VI. 

974See, e.g., Harvey Pitt Comment Letter; AIC 

Comment Letter I, Appendix 2; OPERS Comment 

Letter. 

975See, e.g., AIC Comment Letter I; AIC Comment 

Letter I, Appendix 1; MFA Comment Letter I; CCMR 

Comment Letter IV. 

976 Id. 

977See, e.g., Clayton Comment Letter I; MFA 

Comment Letter I; Dechert Comment Letter. 

978See LSTA Comment Letter, Exhibit C. 

979The Commission is subject to the Paperwork 

Reduction Act of 1995 (‘‘PRA’’), the Small Business 

Regulatory Enforcement Fairness Act of 1996 

(‘‘SBREFA’’), and the Regulatory Flexibility Act 

(‘‘RFA’’). See also Staff’s ‘‘Current Guidance on 

Economic Analysis in SEC Rulemaking’’ (March 16, 

2012), available at https://www.sec.gov/divisions/ 

riskfin/rsfi_guidance_econ_analy_

secrulemaking.pdf (‘‘Staff’s Current Guidance on 

Economic Analysis in SEC Rulemaking’’). The 

commenter also referred to the Unfunded Mandate 

Reform Act of 1995, but that Act does not apply to 

rules issued by independent regulatory agencies. 

See 2 U.S.C. 1501 et seq, stating ‘‘The term ‘agency’ 

has the same meaning as defined in section 551(1) 

of title 5, United States Code, but does not include 

independent regulatory agencies.’’ See also Cong. 

Research Serv., Unfunded Mandates Reform Act: 

History, Impact, and Issues (July 17, 2020), 

available at https://crsreports.congress.gov/ 

product/pdf/R/R40957/108 (noting ‘‘[UMRA] does 

not apply to duties stemming from participation in 

voluntary federal programs [or] rules issued by 

independent regulatory agencies’’). See also infra 

section VIII. 

980The Proposing Release also considered 

whether conflicts of interest associated with 

specific contractual terms themselves constituted a 

market failure preventing private reform. Proposing 

Release, supra footnote 3, at 214–215. However, 

commenters argued that conflicts of interest arising 

from specific contractual terms after the investor 

enters into a relationship cannot constitute a market 

failure, and the analysis must instead consider why 

investors accept contractual terms associated with 

conflicts of interest in the first place. See, e.g., 

Clayton Comment Letter I. 

981See infra section VI.E. See also, e.g., Consumer 

Federation of America Comment Letter. 

982Stephen G. Dimmock & William Christopher 

Gerken, Regulatory Oversight and Return 

Misreporting by Hedge Funds, 20 Rev. Fin., Euro. 

Fin. Assoc. 795–821 (2016), available at https://

ssrn.com/abstract=2260058. 

unique investor needs.969 Commenters 

representing advisers also stated that the 

growth of private funds provides 

evidence that the market is not in need 

of further regulation,970 and that the 

number of private fund advisers and 

low concentration of assets under 

management indicate the private equity 

market is competitive.971 One investor 

comment letter also stated that private 

markets have ‘‘thrived,’’ stating that 

investors are well-compensated for the 

risks they face.972

We view these commenters’ 

statements as contributing to three 

principal arguments that will be 

analyzed in this section.973 First, 

commenters’ statements contribute to an 

argument that the size and 

sophistication of private fund investors 

indicates they are able to negotiate with 

their advisers for themselves.974 Second, 

commenters’ statements contribute to an 

argument that if any potential private 

fund investor were arguably unable to 

sufficiently negotiate for its interests in 

a private fund, the investor could 

instead invest in publicly-traded 

securities along with a range of other 

available investment options.975 This 

would indicate that private fund 

investors allocating to private fund 

investments must have sufficient 

information to be responsibly making 

their current allocations.976 Third, as a 

closely related matter, commenters’ 

statements contribute to an argument 

that new regulations, if any, should 

prioritize enhancing disclosures to help 

ensure private fund investors have 

sufficient information.977

Separately, one commenter stated that 

the proposal failed to meet the Office of 

Management and Budget’s guidelines 

for performing a regulatory impact 

analysis as set out under certain 

executive orders and laws.978 The 

Commission was not required to 

perform a regulatory impact analysis but 

complied with the Regulatory 

Flexibility Act and the Paperwork 

Reduction Act and included a robust 

economic analysis in the Proposing 

Release.979

Conversely, several investor 

commenters provided insight into the 

specific private fund market structures 

and resulting market failures that 

motivate regulation of private fund 

advisers and inform the specific types of 

regulations that would be appropriate. 

Specifically, investor commentary 

suggests that investors face difficulties 

in negotiating reforms because of the 

bargaining power held by fund advisers 

and because of the bargaining power 

held by larger investors who are able to 

secure preferential terms that carry a 

risk of having a material, negative effect 

on other investors. 

Analysis of industry comments 

demonstrates that fund advisers have 

multiple sources of bargaining power, 

which we discuss in turn, and we also 

discuss the bargaining power held by 

certain investors that may harm other 

investors with less bargaining power.980

We specifically have analyzed all three 

categories of the broad arguments above. 

That is, we have analyzed below market 

failures that can prevent private fund 

investors from efficiently negotiating for 

themselves with private fund advisers. 

Second, we have analyzed below market 

failures that can prevent private fund 

investors from being able to exit their 

private fund adviser negotiations, 

including market failures that prevent 

private fund investors from exiting 

private fund allocations entirely in favor 

of publicly traded securities or other 

investment options. Third, we have 

analyzed the extent to which market 

failures could have been addressed by 

disclosure and, in some cases, consent 

requirements alone. To the extent that 

these market failures negatively affect 

the efficiency with which investors 

search for and match with advisers, the 

alignment of investor and adviser 

interests, investor confidence in private 

fund markets, or competition between 

advisers, then the final rules may 

improve efficiency, competition, and 

capital formation in addition to 

benefiting investors.981 For example, an 

academic study found that the passing 

of regulation requiring advisers to hedge 

funds to register with the SEC reduced 

misreporting of results to hedge fund 

investors, misreporting increased on the 

overturn of that legislation, and that the 

passing of the Dodd-Frank Act (which 

reinstated certain regulations for hedge 

funds) resulted in higher inflows of 

capital to hedge funds, indicating that 

hedge fund investors view regulatory 

oversight as protecting their interests.982

This analysis yields six key 

conclusions. First, investors and 

advisers may have asymmetric abilities 

to gather information, as fund advisers 

often have greater information as to 

their negotiation options available to 

them than do many investors. Second, 

it may be difficult solely as a matter of 

coordination for private fund advisers to 

adopt a common, standardized set of 

detailed disclosures and possibly 

further consent requirements that 

achieve sufficient transparency. The 

remaining sources of asymmetric 

bargaining power between investors and 

advisers and among investors 

necessitate reforms beyond disclosures 

and consent requirements. Third, 

investors have worse outside options to 

a given negotiation than the adviser, 

including cases where investors are 

limited in their ability to exit a 

negotiation with a private fund adviser 

in favor of turning to public markets or 

other investment options. Fourth, these 

descriptions of bargaining difficulties 

for investors are consistent with a view 


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983Comment Letter of Prof. William Clayton (Dec. 

22, 2022) (‘‘Clayton Comment Letter II’’) (citing 

‘‘Insufficient information on ‘what’s market’ in fund 

terms’’ as a reason LPs are accepting poor legal 

terms in LPAs). This evidence has been 

corroborated in industry literature and by another 

commenter. See Comment Letter of Institutional 

Limited Partners Association (Mar. 9, 2023) (‘‘ILPA 

Comment Letter II’’); ILPA, The Future of Private 

Equity Regulation, Insight Into the Limited Partner 

Experience & the SEC’s Proposed Private Fund 

Advisers Rule (2023), available at https://ilpa.org/ 

wp-content/uploads/2023/03/ILPA-SEC-PrivateFund-Advisers-Analysis.pdf; ILPA, Private Fund 

Advisers Data Packet, Companion Data Packet to 

the Future of Private Equity Regulation Analysis 

(2023), available at https://ilpa.org/wp-content/ 

uploads/2023/03/ILPA-Private-Fund-Advisers-DataPacket-March-2023-Final.pdf; William W. Clayton, 

High-End Bargaining Problems, 75 Vand. L. Rev. 

703 (2022), available at https://

vanderbiltlawreview.org/lawreview/wp-content/ 

uploads/sites/278/2022/04/1-Clayton-Paginatedv3.pdf; Leo E. Strine, Jr. & J. Travis Laster, The Siren 

Song of Unlimited Contractual Freedom, in 

Research Handbook on Partnerships, LLCs and 

Alternative Forms of Business Organizations 

(Robert W. Hillman and Mark J. Loewenstein eds., 

2015) (‘‘Based on the cases we have decided and 

our reading of many other cases decided by our 

judicial colleagues, we do not discern evidence of 

arms-length bargaining between sponsors and 

investors in the governing instruments of 

alternative entities. Furthermore, it seems that 

when investors try to evaluate contract terms, the 

expansive contractual freedom authorized by the 

alternative entity statutes hampers rather than 

helps. A lack of standardization prevails in the 

alternative entity arena, imposing material 

transaction costs on investors with corresponding 

effects for the cost of capital borne by sponsors, 

without generating offsetting benefits. Because 

contractual drafting is a difficult task, it is also not 

clear that even alternative entity managers are 

always well served by situational deviations from 

predictable defaults.’’). 

984See NY State Comptroller Comment Letter. 

985 Id.; see also, e.g., Pension Funds, What is a 

Pension Fund?, CFA Institute (2023), available at 

https://www.cfainstitute.org/en/advocacy/issues/ 

pension-funds#sort=%40pubbrowsedate%

20descending. 

986 ILPA Comment Letter II; The Future of Private 

Equity Regulation, supra footnote 983, at 30. While 

commenters also discussed limitations based on 

institutional track records, we do not consider those 

to be as relevant of restrictions contributing to 

market failures, because competitive forces 

operating correctly will also result in advisers with 

stronger institutional track record having greater 

bargaining power. 

987For example, an employee benefit plan or 

pension plan subject to ERISA may be required to 

redeem its interest under certain circumstances to 

prevent the fund’s assets from becoming plan assets 

of the investor, and such requirements for those 

investors may limit an adviser’s ability to admit 

those plans as an investor. See, e.g., NEBF 

Comment Letter. 

988 ILPA Comment Letter II; The Future of Private 

Equity Regulation, supra footnote 983, at 4. 

989Carmela Mendoza, PEI Fund Formation 

League Table Reveals Industry’s Top Law Firms, 

Priv. Equity Int’l (Feb. 15, 2023), available at 

https://www.privateequityinternational.com/peifund-formation-league-table-reveals-industrys-toplaw-firms/. 

990 Id. 

991Carmela Mendoza, Fundraising Sees $122 

Billion Drop in the First Half of 2022, Priv. Equity 

Int’l (July 28, 2022), available at https://

www.privateequityinternational.com/fundraisingsees-122bn-drop-in-the-first-half-of-2022. 

992 Id. These figures are global, and so comparable 

figures for the U.S. market that will be subject to 

the final rules may differ from those presented here. 

We are not aware of data on comparable figures for 

the U.S. market that will be subject to the final 

rules. However, North American private equity 

funds accounted for more than 40% of all private 

equity capital raised in the first half of 2022, which 

limits how much the law firm concentration of 

private fund capital raises may differ for U.S. 

markets in comparison to global markets. Id. 

993See, e.g., Services, Albourne, available at 

https://www-us.albourne.com/albourne/services. 

that smaller investors who lack 

bargaining power also face a collective 

action problem. Fifth, even if investors 

could coordinate, there is substantial 

variation across investors in terms of 

their ability to bargain with private fund 

advisers, and larger investors with more 

bargaining power may benefit from 

using their bargaining power to extract 

terms that may risk materially, 

negatively affecting other investors. 

Lastly, there may be additional internal 

principal-agent problems at private fund 

investors, between investment 

committees and their own beneficiaries, 

in which investment committees have 

limited incentives to intensely negotiate 

for reforms that are in the interests of 

their beneficiaries. We discuss each of 

these issues in turn in the remainder of 

this section. 

First, investors and advisers may have 

asymmetric abilities to gather 

information, as fund advisers often have 

greater information as to their 

negotiation options available to them 

than do many investors.983 We 

understand many investors lack the 

resources to negotiate and conduct due 

diligence with a large number of fund 

advisers simultaneously. As one 

commenter states, each investor 

negotiates the private fund terms on a 

separate basis with the fund adviser.984

This problem is exacerbated by the fact 

that many investors’ internal 

diversification requirements and 

objectives and underwriting standards 

generally leave them with a smaller pool 

of advisers with whom they can 

negotiate.985 One commenter and 

industry report further stated that 

‘‘[c]onversations with industry parties 

(including several advisers and 

consultants) and directly with 

[investors] suggest that there may only 

be a ‘handful’ or ‘a dozen’ eligible funds 

for a given investment’’ when taking 

into account the investor’s limitations 

on the size of the investor’s potential 

investments, and diversification across 

vintage years, size, sector, strategy, and 

geography.986 Having a smaller pool of 

advisers with whom investors can 

negotiate reduces their access to 

information on what terms are 

consistent with the market. 

Meanwhile, and by contrast, many 

fund advisers can negotiate with 

comparatively more investors 

simultaneously. In particular, although 

advisers face restrictions around their 

ability to admit certain investors such as 

benefit plans subject to ERISA,987

advisers are typically less restricted in 

their ability to market to and accept 

investments from a wide variety of 

investors as compared to investor ability 

to negotiate and invest with a wide 

variety of advisers. This increases the 

adviser’s information as to what terms 

may be accepted by different investors. 

The ILPA comment letter and 

industry report also states that many 

investor negotiations are with advisers 

that are represented by the same law 

firms. As a result, advisers represented 

by those law firms gain bargaining 

power from being able to gather 

information about negotiations between 

other investors and other advisers 

represented by the same law firm.988 For 

example, in private equity, the leading 

five global law firms represented 

advisers to private funds that raised 

over $380 billion in capital from 

October 2021 to September 2022 from 

global investors, and the leading 10 

represented advisers who raised almost 

$500 billion in capital.989 A single law 

firm represented advisers to private 

funds that accounted for $171 billion of 

that capital.990 In the first half of 2022, 

total capital raised by private equity 

funds globally accounted for $337 

billion.991 Comparing this to the 

amounts raised by private funds 

represented by leading law firms 

indicates the leading 10 law firms 

represented funds that likely accounted 

for approximately 75% of global private 

equity capital raised in 2022, and one 

law firm alone represented funds that 

likely accounted for approximately 25% 

of global private equity capital raised in 

2022.992

However, investor consultants can 

also provide services such as negotiating 

for fee reductions, providing analytics 

on a specific fund or investor portfolio 

performance, or valuation reporting, 

among others.993 These investor 

consultants may partially or fully offset 

the information asymmetry and 

resulting bargaining power that advisers 

receive from industry consolidation of 

law firms. We have considered that the 

ILPA comment letter and report does 

not discuss how enhanced information 

for advisers from adviser law firm 

concentration may be mitigated by 

investors relying on investment 

consultants, who provide advice to 

investors with large amounts of assets 

and may provide preliminary screens of 


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994See, e.g., Asset Managers’ Latest Big 

Investment: Consultant Relations, Chief Investment 

Officer (July 8, 2016), available at https://www.aicio.com/news/asset-managers-latest-big-investmentconsultant-relations/. 

995 ILPA Comment Letter II; The Future of Private 

Equity Regulation, supra footnote 983. If the 

industry were unconcentrated and investors were 

free to flexibly switch advisers, economic theory 

would predict that competition between advisers 

would absolve asymmetries of bargaining power, as 

advisers would have to offer investors more 

attractive terms, such as more transparency and 

disclosure rights, in order to secure investor 

business. 

996 ILPA Comment Letter II; The Future of Private 

Equity Regulation, supra footnote 983. 

997See, e.g., Harvey Pitt Comment Letter. 

998Andre ́s Ramos, Content Marketing Specialist, 

Nasdaq Private Fund Solutions, Understanding the 

Consultant Landscape in the Private Markets, 

available at https://privatemarkets.evestment.com/ 

blog/understanding-the-consultant-landscape-inthe-private-markets/; NASDAQ, Private Fund 

Trends Report 2021–2022, available at https://

www.nasdaq.com/solutions/asset-owners/insights/ 

private-fund-trends. 

999Private Fund Trends Report 2022–2023, supra 

footnote 998. 

1000Academic literature discussed in the 

comment file debates whether privately organized 

standardized disclosures are more or less efficient 

than regulated or mandated disclosures. See, e.g., 

Memo Re: Aug. 18, 2022, Meeting with Prof. 

William Clayton; see also, e.g., Frank H. 

Easterbrook & Daniel R. Fischel, Mandatory 

Disclosure and the Protection of Investors, 70 Va. 

L. Rev. 669 (1984). Certain investors and industry 

groups have encouraged advisers to adopt uniform 

reporting templates to promote transparency and 

alignment of interests between advisers and 

investors. See, e.g., Reporting Template, ILPA, 

available at https://ilpa.org/reporting-template/. 

Despite these efforts, many advisers still do not 

provide adequate disclosure to investors. In 2021, 

59% of LPs in a survey reported receiving the 

template more than half the time, indicating that 

LPs must continue to use their negotiating resources 

to receive the template. See infra section VI.C.3; see 

also ILPA Comment Letter II; The Future of Private 

Equity Regulation, supra footnote 983, at 17; ILPA 

Private Fund Advisers Data Packet, supra footnote 

983. 

1001See infra section VI.C.3; see also ILPA, 

Enhancing Transparency Around Subscription 

Lines of Credit, Recommended Disclosures 

Regarding Exposure, Capital Calls and Performance 

Impacts (June 2020), available at https://ilpa.org/ 

wp-content/uploads/2020/06/ILPA-Guidance-onDisclosures-Related-to-Subscription-Lines-ofCredit_2020_FINAL.pdf. 

1002Clayton Comment Letter II. 

1003 Id. 

1004 Id. 

1005See, e.g., BVCA Comment Letter; MFA 

Comment Letter I; AIMA/ACC Comment Letter. 

1006See infra sections VI.D, VI.F. 

1007See, e.g., SBAI Comment Letter; CFA 

Comment Letter I; AIC Comment Letter I. 

1008Proposing Release, supra footnote 3, at 232. 

advisers or databases of information on 

advisers.994 For example, in principle 

and given sufficient bargaining power 

by investor consultants, investor 

consultant screens of advisers could 

filter advisers based on offerings of 

investor-friendly contractual terms and 

quickly provide investors with complete 

information as to the landscape of those 

investor-friendly contractual terms, 

thereby inducing advisers to offer more 

investor-friendly terms over time. 

However, there are two reasons we 

believe the involvement of investor 

consultants may not sufficiently offset 

all information asymmetries and 

resulting bargaining asymmetries. First, 

one survey result indicates that these 

consultants may not entirely offset all 

such information asymmetries, as the 

survey reports that 73% of private 

equity investor respondents disagree or 

strongly disagree with the statement that 

the private equity industry is 

unconcentrated, such that investors 

have flexibility to switch advisers.995

Almost all respondents reported that the 

starting point of contractual LPA terms 

and the final negotiated LPA terms have 

become more adviser-friendly over the 

last three years.996 Because at least one 

commenter has stated that such survey 

results may not be reliable, based on a 

statement that investors bargaining with 

advisers may rationally seek the 

assistance of outside parties such as 

industry researchers to alter negotiation 

outcomes even absent any market 

failure,997 we have further considered 

non-survey evidence. Second, while 

there is not comprehensive data 

comparing industry concentration of 

investor consultants to industry 

concentration of adviser law firms, one 

industry report shows that the investor 

consultant industry may be 

substantially less concentrated than the 

adviser law firm industry, as the report 

shows 231 public pension plans 

reported commitments of $190.8 billion 

to private funds in 2021, and the top 

five consultants advised $23.5 

billion.998 Similarly, for private equity 

in 2022, a report shows 155 public 

pension plans reported commitments of 

$88.4 billion to private equity funds, the 

top consultant advised $7.2 billion 

(8.2%), top five consultants advised 

$18.2 billion (20.6%) and the top 10 

consultants advised $21.7 billion 

(24.5%).999 While these data points may 

have some differences in focus from the 

industry report on adviser law firm 

concentration above (for example, this 

concentration measure pertains to the 

United States, while the report above 

considers global concentration), the 

concentration measures of the two 

industries in these reports differ so 

substantially that we believe they are 

informative of potential overall 

differences in market power between 

adviser law firms and investor 

consultants. 

The second factor that may give 

advisers bargaining power is that it may 

be difficult solely as a matter of 

coordination for private fund advisers to 

adopt a common, standardized set of 

detailed disclosures and consent 

practices that achieve sufficient 

transparency, because investors and 

advisers compete and negotiate 

independently of each other on many 

dimensions, including performance 

statistics, management fees, fund 

expenses, performance-based 

compensation, and more.1000 For 

example, recent industry literature has 

documented ongoing challenges in 

achieving standardization of disclosures 

around the impact of subscription lines 

of credit on performance.1001

While asymmetric information and 

difficulties in coordinating standardized 

disclosures and consent practices 

provide an economic rationale for new 

regulations for practices of private fund 

advisers to the extent that those issues 

result in investor harm or negatively 

affect efficiency, competition, or capital 

formation, they do not offer a complete 

picture as to the necessary degree of 

regulation. As one commenter states, 

many imbalances in bargaining power 

can be resolved through enhanced 

disclosure alone, and do not necessitate 

either prohibiting any activities or 

making any non-disclosure activities 

mandatory.1002 We agree that policy 

decisions can benefit from taking into 

account the causes of bargaining failures 

or other market frictions.1003

While this commenter did not discuss 

consent requirements,1004 commenters 

generally contemplated consent 

requirements as potential policy choices 

for certain aspects of the final rules.1005

We have therefore also considered 

consent requirements, in addition to 

disclosure requirements, as potential 

policy solutions to the bargaining 

imbalances described in this release.1006

In particular, consent requirements may 

be effective policy solutions in cases 

where investors and advisers have 

asymmetric information, but the nature 

and degree of asymmetric information is 

uncertain or may change over time, such 

that disclosure requirements may be 

difficult to tailor in a way that resolves 

the asymmetry of information on their 

own without further consent practices. 

For example, commenters stated that 

several of the proposed prohibited 

activities, such as advisers borrowing 

from their funds, may be beneficial to 

the fund and its investors,1007 while the 

Proposing Release contemplated ways 

in which these activities may harm the 

fund and its investors.1008 Whether the 

activity benefits the fund and its 

investors, or the adviser at the expense 

of the fund and its investors, can 


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1009See infra section VI.E. 

1010See, e.g., AIC Comment Letter I, Appendix 1. 

1011See supra footnote 983–986 and 

accompanying text. 

1012See supra footnote 993 and accompanying 

text. 

1013See, e.g., CalPERS Investment Fund Values, 

CalPERS (Nov. 18, 2022), available at https://

www.calpers.ca.gov/page/investments/aboutinvestment-office/investment-organization/ 

investment-fund-values (showing $48.8 billion or 

11.5% asset allocation towards private equity); 

Oklahoma Municipal Retirement Fund, Audit 

Reports (2022), available at https://www.okmrf.org/ 

financial/#investments (showing an allocation of 

approximately $50 million out of total investments 

of $600 million allocated to hedge fund 

investments); Healthy Markets Comment Letter I 

(‘‘Many institutional private fund investors, such as 

public pension funds, have predetermined 

investment allocations to alternative investment 

strategies. As allocations to private fund 

investments have generally risen in recent years, 

investors have faced increased competition to 

participate in investment vehicles offered by 

leading advisers or specific attractive opportunities. 

In fact, as this competition for the opportunity to 

invest has increased, many institutional investors 

have been compelled to lower their demands upon 

private fund advisers, including accepting even 

egregious, anti-investor contractual provisions, such 

as purported waivers of liability.’’). 

1014Clayton Comment Letter II. 

1015This is driven in part by private markets 

outperforming public benchmarks. Some 

commenters discussed the relative performance of 

private markets and public benchmarks. See, e.g., 

CCMR Comment Letter IV. 

1016See, e.g., Professor Clayton Public Investors 

Article, supra footnote 12; Sarah Krouse, The 

Pension Hole for U.S. Cities and States Is the Size 

of Germany’s Economy, Wall St. J. (July 30, 2018), 

available at https://www.wsj.com/articles/thepension-hole-for-u-s-cities-and-states-is-the-size-ofjapans-economy-1532972501 (retrieved from 

Factiva database); Pew Charitable Trusts, The State 

Pension Funding Gap: 2017, Issue Brief (June 27, 

2019), available at https://www.pewtrusts.org/en/ 

research-and-analysis/issue-briefs/2019/06/thestate-pension-funding-gap-2017. 

1017The asymmetries of information also 

contribute to investors having poor outside options 

to their negotiations: Because investors have less 

information as to what terms are market than do 

their private fund advisers, they face a more 

uncertain outcome as to what terms they might 

receive with their next adviser if they leave their 

current adviser. For risk-averse investors, this 

uncertainty incentivizes investors to accept terms in 

their current negotiation that they otherwise might 

not. See, e.g., Clayton Comment Letter II; ILPA 

Comment Letter II; The Future of Private Equity 

Regulation, supra footnote 983; ILPA Private Fund 

Advisers Data Packet, supra footnote 983. 

1018Clayton Comment Letter II. This evidence has 

been corroborated in industry literature and by 

another commenter. See ILPA Comment Letter II; 

The Future of Private Equity Regulation, supra 

footnote 983; ILPA Private Fund Advisers Data 

Packet, supra footnote 983. 

depend on the terms and price of the 

advisers’ activity, the reasons for the 

adviser undertaking the activity, or 

both. In these cases, it may be difficult 

for investors, with disclosure alone, to 

analyze the implications of the advisers’ 

activity, and it may be difficult for 

disclosure requirements alone to 

capture the asymmetric information 

possessed by the adviser that would 

benefit the investor. We believe these 

cases motivate consent requirements in 

addition to disclosure requirements in 

certain cases. 

We believe that many of the 

bargaining imbalances described in the 

Proposing Release and in this release 

may be improved through enhanced 

disclosure and, in some cases, consent 

requirements, and have tailored many of 

the final rules accordingly. This 

includes revising several proposed rules 

that would have prohibited certain 

activities outright to instead provide for 

certain exceptions in the final rules 

where the adviser makes an appropriate 

enhanced disclosure and, in some cases, 

obtains investor consent. We believe 

these revisions substantially preserve 

economic benefits, including positive 

effects on the process by which 

investors search for and match with 

advisers, the alignment of investor and 

adviser interests, investor confidence in 

private fund markets, and competition 

between advisers. Because consent 

requirements for certain restricted 

activities also directly enhance the 

bargaining power of investors, by 

providing investors an opportunity to 

offer consent only upon receiving 

certain concessions, the inclusion of 

certain consent requirements also 

enhances investor ability to secure 

additional information from advisers. 

These positive effects may improve 

efficiency, competition, and capital 

formation in addition to benefiting 

investors,1009 while reducing the risks 

of the negative unintended 

consequences identified by 

commenters.1010

However, we believe that certain 

targeted further reforms, namely the 

prohibition of certain preferential terms 

that the adviser reasonably expects 

would have a material, negative effect 

on other investors and the mandatory 

audits, are necessitated by several 

additional sources of asymmetric 

bargaining power between investors and 

advisers and among investors. We 

believe those imbalances are not fully 

resolved by enhanced disclosure and 

would also not be fully resolved by 

requiring investor consent, and that 

those imbalances may further negatively 

affect the efficiency with which 

investors search for and match with 

advisers, the alignment of investor and 

adviser interests, investor confidence in 

private fund markets, and competition 

between advisers. 

As a third source of bargaining power 

imbalances between investors and 

advisers, investors have worse outside 

options to a given negotiation than the 

adviser. As discussed above, many 

investors face complex internal 

administrative and regulatory 

requirements that govern their 

negotiations with advisers.1011 This 

means that investors in private funds 

often face high upfront costs of 

identifying advisers who meet their 

administrative and regulatory 

requirements, with due diligence costs 

such as fees for investment 

consultants.1012 The result is that, once 

a relationship with such an adviser is 

established, the cost of leaving that 

adviser to search for another adviser can 

be high, because many of these upfront 

costs of administrative and regulatory 

due diligence must be repeated. 

Investors may also have predetermined 

investment allocations to private funds, 

as stated by one commenter.1013 For an 

investment committee of an investor 

with a predetermined investment 

allocation to private funds, they may 

have no outside option to a given 

negotiation at all, as they are required to 

allocate a set amount of funds to a 

private investment. Advisers may also 

benefit in the negotiation from knowing 

that an investment committee with a 

predetermined investment allocation to 

private funds must select an adviser 

within a certain time frame, and 

therefore may have limited ability to 

walk away from the negotiation and find 

a new adviser. This is consistent with 

one recent survey of attorneys 

representing private equity investors, in 

which over 40% of respondents 

reported that the investors were 

‘‘unable’’ or unwilling to walk away 

from bad terms.1014

As a related matter, even outside 

these predetermined allocations, many 

public pension plans have turned to 

private funds in an attempt to address 

underfunding problems.1015 The 

academic and industry literature has 

documented that U.S. public pension 

plans face a stark funding gap, in which 

states on average had less than 70% of 

the assets needed to fund their pension 

liabilities, with that figure for some 

states reaching as low as 34%.1016 This 

further limits the ability of public 

pension plans, an important category of 

private fund investor, to exit a private 

fund negotiation and, for example, 

invest in public markets instead. 

These issues indicate that many 

investors therefore have strong 

incentives to compromise to pursue 

repeat business with the same fund 

adviser,1017 and that many investors 

negotiating with fund advisers simply 

do not have the outside option of 

turning to public markets. In the survey 

described above,1018 nearly 60% of 


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1019 Id. 

1020 Id. 

1021One commenter also stated that law firms 

that serve as external counsel to private equity 

managers have incentives to push back on investorfriendly terms. See Clayton Comment Letter II. 

1022See supra footnote 987 and accompanying 

text. 

1023Comment Letter of Americans for Financial 

Reform Education Fund, et al. (May 8, 2023) 

(‘‘AFREF Comment Letter IV’’). 

1024See infra section VI.D.4. 

1025Similar outcomes can arise in the case of 

preferential information. See infra section VI.D.4. 

1026Clayton Comment Letter II. 

respondents reported ‘‘fear of losing 

allocation’’ as an explanation for why 

investors have accepted poor legal terms 

in LPAs.1019 These asymmetries in 

bargaining power may be exacerbated 

for smaller investors: Nearly 50% of 

respondents reported having too small 

of a commitment size as an explanation 

for why investors have accepted poor 

legal terms.1020

Investors may have fewer outside 

options as to who their next negotiating 

partner will be if they leave their 

current private fund or other funds with 

the same adviser, for example because 

of the consolidation of law firms 

representing advisers.1021 As a result, 

investors considering leaving a 

negotiation have a high probability of 

having to pay high fixed costs to find a 

new negotiating partner, only to end up 

negotiating with the same law firm 

again. As noted above, while many 

advisers benefit from the reliability and 

security of repeat investors, and face 

certain regulatory burdens such as 

restrictions around ERISA funds they 

are typically otherwise less restricted in 

their ability to market to and accept 

investments from a wide variety of 

investors.1022 We believe these 

imbalances in bargaining power may be 

a factor in the cases of disadvantaged 

investors accepting fund terms in which 

the fund will not be audited or in which 

other investors will receive preferential 

treatment that may have a material, 

negative effect on other investors in the 

fund, and these imbalances are not 

resolved by disclosure. 

Fourth, these descriptions of 

bargaining difficulties for investors are 

consistent with a view that smaller 

investors who lack bargaining power 

also face a collective action problem. 

Investors are unable to negotiate with 

each other because advisers often 

impose non-disclosure agreements or 

other confidentiality provisions that 

restrict each investor from being able to 

learn from the adviser who the other 

investors are, and as a result investors 

are hindered from collectively 

negotiating. To the extent that advisers 

have differential pricing power over 

different kinds of investors, they are 

incentivized to offer terms to some 

investors that extract surplus from 

investors with the least bargaining 

power and transfer it to the investors 

with the most bargaining power. The 

non-disclosure agreements and other 

confidentiality restrictions currently 

benefit larger investors who have 

sufficient bargaining power to negotiate 

unilaterally but may prevent smaller 

investors from engaging in collective 

action. 

Specifically, contract terms that offer 

preferential treatment to advantaged 

investors may impose a negative 

externality on disadvantaged investors. 

If the disadvantaged investors could 

collectively bargain with the advantaged 

investors and the adviser, all parties 

could potentially agree to terms in 

which the disadvantaged investors 

would pay greater fees, the advantaged 

investors would pay reduced fees (or 

even received some fixed payout), and 

the preferential terms would be 

removed from the contract. As one 

commenter states, ‘‘[p]rivately 

negotiating various side letters[,] 

however[,] has instead pitted LPs 

against one another rather than 

collectively trying to negotiate for a 

standard set of disclosures and 

investment terms from the GPs.’’ 1023

For example, when advisers offer 

preferential redemption terms to only 

certain advantaged investors that 

materially negatively affect other 

investors, those advantaged investors 

experience a reduction in the risk of 

their payouts from the private fund, and 

the disadvantaged investors who do not 

receive preferential redemption terms 

face an increase in the risk of their 

payouts from the private fund. 

Depending on the relative risk 

preferences of the two sets of investors, 

there may exist some payout from the 

disadvantaged investors to the 

advantaged investors in exchange for 

the removal of the preferential 

redemption terms that could leave all 

parties better off. Because contracts are 

individually negotiated between single 

investors and the adviser and because 

advisers are typically not permitted to 

reveal identities of other investors, 

which prevents investors from 

communicating with each other, there is 

no scope for a private resolution to this 

collective action problem. 

Fifth, even if investors could 

coordinate, there is substantial variation 

across investors in the private fund 

space in terms of their ability to bargain, 

and larger investors with more 

bargaining power may benefit from 

using their bargaining power to extract 

terms that may risk materially, 

negatively affecting other investors. Not 

all private fund investors are large 

negotiators with the resources to bargain 

effectively, and the largest investors 

who negotiate the most intensely may 

not want to coordinate or collectively 

negotiate with smaller advisers or may 

benefit from negotiating separately from 

smaller advisers. 

Specifically, as we discuss in detail 

further below, the ability for certain 

preferred investors with sufficient 

bargaining power to secure preferential 

terms that would have a material, 

negative effect on other investors leaves 

the preferred investors in a scenario 

where they can opportunistically ‘‘holdup’’ other investors, exploiting their 

preferred terms.1024 As a specific 

example of how this might occur, an 

adviser with repeat business from a 

large investor with early redemption 

rights and smaller investors with no 

early redemption rights may have 

adverse incentives to take on extra risk, 

as the adviser’s preferred investor could 

exercise its early redemption rights to 

avoid the bulk of losses in the event an 

investment begins to fail. The result is 

that the larger investors, who can secure 

preferential redemption terms, benefit 

from having smaller investors in their 

funds who must negotiate 

independently and do not have the 

same bargaining resources as the larger 

investors.1025 This is because 

preferential redemption rights gain 

value from the presence of other 

investors who can be ‘‘held up,’’ with 

investors sharing returns equally when 

investments succeed but 

disproportionately allocating losses to 

the smaller investors when an 

investment begins to fail. 

Those private fund investors who are 

smaller than the largest investors, and 

therefore may be less able to bargain 

than the largest investors, may not be 

able to appreciate, even with disclosure, 

and also may not be able to appreciate 

after providing investor consent, the full 

ramifications of these bargaining 

outcomes or the contractual terms that 

they agree to in the case of preferential 

treatment that the adviser reasonably 

expects to have a material, negative 

effect on the investors who do not 

receive it. As stated above, in one recent 

survey of private equity investors, 

nearly 50% of respondents reported that 

they accept poor legal terms because the 

commitment size of their institution is 

too small,1026 indicating potential 

unlevel playing fields for smaller 

investors who are the most likely to be 

the investors lacking bargaining power. 


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1027Healthy Markets Comment Letter I. 1028 Id. 1029See, e.g., AFREF Comment Letter IV; LACERS 

Comment Letter; NEBF Comment Letter; OFT 

Comment Letter. 1030See, e.g., Carta Comment Letter; Meketa 

Comment Letter; Lockstep Ventures Comment 

Letter; LACERS Comment Letter; AFREF Comment 

Letter IV; NY State Comptroller Comment Letter; 

Weiss Comment Letter; AIC Comment Letter I, 

Appendix 2; MFA Comment Letter II. 

1031See infra section VI.D.4. 

1032See supra section VI.B. 

1033See Clayton Comment Letter II; see also, e.g., 

Yael V. Hochberg & Joshua D. Rauh, Local 

Overweighting and Underperformance: Evidence 

from Limited Partner Private Equity Investments, 26 

Rev. Fin. Stds. 403 (2013); Blake Jackson, David C. 

Ling & Andy Naranjo, Catering and Return 

Manipulation in Private Equity (Oct. 11, 2022), 

available at https://ssrn.com/abstract=4244467 

(retrieved from SSRN Elsevier database). 

1034 Id. 

1035 Id. 

1036Clayton Comment Letter II; see also, e.g., 

Professor Clayton Public Investors Article, supra 

footnote 12. 

1037CCMR Comment Letter IV; A Competitive 

Analysis of the U.S. Private Equity Fund Market, 

supra footnote 971. This commenter’s analysis is 

limited to the private equity market. Other 

commenters also stated that there are a large 

number of private fund advisers in the industry 

more generally, without analyzing the 

concentration of capital raised or assets under 

management. See supra footnote 970 and 

accompanying text; see also, e.g., AIMA/ACC 

Comment Letter; AIC Comment Letter I, Appendix 

1; MFA Comment Letter I, Appendix A. 

1038 Id. 

1039 Id. 

1040See supra footnote 986. 

1041See supra footnotes 988 and accompanying 

text. 

1042See supra footnotes 1013–1014 and 

accompanying text. 

One commenter stated that smaller 

investors receive less timely and 

complete information than other 

investors, indicating only certain 

investors receive preferential 

information.1027 That commenter also 

stated that preferential fund terms 

primarily benefit larger, more 

advantaged investors.1028

This asymmetry in bargaining power 

across investors, and the lack of 

incentive to coordinate across investors 

with different levels of bargaining 

power, provides a specific economic 

rationale for the prohibition of certain 

preferential terms that would have a 

material, negative effect on other 

investors. Several commenters’ letters 

supported this economic rationale, 

commenting on these types of 

asymmetries across investors for all 

categories of private funds.1029 Because 

the preferential terms that are 

prohibited in the final rule are only 

those that the adviser reasonably 

expects to have a material, negative 

effect on other investors, we believe the 

rule is focused on the case where an 

investor’s ability to extract such terms is 

itself evidence of substantial bargaining 

power on the part of the investor. This 

economic rationale is bolstered by the 

variation in commenter response to the 

proposal to prohibit certain preferential 

terms, with certain investors themselves 

opposing the prohibition and others 

supporting it.1030

These specific problems may be 

difficult, or unable, to be addressed via 

enhanced disclosures and consent 

requirements alone. For example, 

investors facing a collective action 

problem today, in which they are unable 

to coordinate their negotiations, would 

still be unable to coordinate their 

negotiations even if consent was sought 

from each investor for a particular 

adviser practice. As another example, in 

cases where certain preferred investors 

with sufficient bargaining power secure 

preferential terms over disadvantaged 

investors, majority consent by investor 

interest requirements may have minimal 

ability to protect the disadvantaged 

investors, as we would expect the larger, 

preferred investors to outvote the 

disadvantaged investors. 

While there are cases where the 

prohibited preferential treatment terms 

can result in investor harm outside the 

context of redemptions, and we discuss 

all such cases below,1031 the leading 

cases are focused on redemption rights, 

which may on average be more relevant 

for hedge funds and other liquid funds 

than for illiquid funds or other funds 

that offer more limited redemption or 

withdrawal rights. Therefore, with 

respect to the final rules prohibiting 

certain preferential treatment, we again 

believe the policy decision has 

benefited from taking into account the 

causes of bargaining failures or other 

market frictions.1032

As a final matter, one commenter 

points to additional internal principalagent problems at private fund 

investors, between investment 

committees and their own beneficiaries, 

in which investment committees have 

limited incentives to intensely negotiate 

for reforms that are in the interests of 

their beneficiaries, but not necessarily 

further the interests of the investment 

committee.1033 Conversely, investment 

committees may have incentives to 

maintain existing structures that are to 

their benefit, but are not in the interest 

of fund beneficiaries.1034 For example, 

academic literature has theorized that 

staff members of institutional investors 

may have incentives to structure 

contracts in opaque ways to advance 

their own career interests, that staff at 

institutional investors may have 

incentives to demand overstated 

reported returns from fund advisers, or 

that institutional investor committees 

may have incentives to overinvest in 

private equity funds making 

investments in their local markets.1035

Other literature has analyzed public 

pension plan investments in private 

funds more broadly and raised concerns 

as to whether public pension plan 

trustees and officials adequately protect 

the interests of their beneficiaries when 

negotiating.1036

In light of these enhanced 

considerations from the comment file, 

we can more closely evaluate statements 

by commenters presenting arguments 

that no further regulation is needed. In 

particular, and as briefly noted above, 

one commenter and industry report 

stated that, because the private equity 

industry has a large number of advisers 

and funds with low concentrations of 

assets under management and capital 

raised, the industry must already be 

competitive.1037 While that commenter 

and report did not discuss hedge funds, 

that commenter and report stated that, 

for example, the capital raised by new 

funds established by the five largest PE 

fund advisers has not exceeded 15% of 

total capital raised by new PE funds 

from 2013–2021.1038 The commenter 

and report conclude that, because the 

private equity industry is already highly 

competitive, further regulation would 

reduce competition in that market.1039

However, we believe this analysis 

may not fully take into account the 

imbalances and inefficiencies in the 

bargaining process discussed above. For 

example, this analysis does not take into 

account investor limitations on size of 

the investors’ potential investments 

institutional track record, and 

diversification across vintage years, size, 

sector, strategy, and geography, and 

therefore overstates the number of 

advisers and funds available to any 

given investor.1040 As another example, 

even though adviser law firm 

concentration may be offset by investor 

consultant concentration, an analysis of 

private equity industry concentration 

solely by counts of the number of 

private equity funds and advisers, and 

the distribution by assets under 

management, fails to take into account 

the effects of either adviser law firms or 

investor consultants.1041 As a third 

example, the analysis does not take into 

consideration the fact that investors can 

have predetermined investment 

allocations to private funds that must be 

satisfied within a certain time frame, 

limiting their ability to freely exit 

negotiations.1042 While these 

efficiencies and imbalances may be 

mitigated by having a marketplace with 

a large number of advisers, it may be 


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63300 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1043CCMR Comment Letter IV; A Competitive 

Analysis of the U.S. Private Equity Fund Market, 

supra footnote 971. 

1044Clayton Comment Letter II; Paul Gompers & 

Josh Lerner, The Venture Capital Cycle, at 31–32, 

45–47 (The MIT Press, 2002). 

1045The Future of Private Equity Regulation, 

supra footnote 983; ILPA Private Fund Advisers 

Data Packet, supra footnote 983. 

1046 Itzhak Ben-David, Justin Birru & Andrea 

Rossi, The Performance of Hedge Fund 

Performance Fees, Fisher College of Bus. Working 

Paper No. 2020–03–014, Charles A. Dice Working 

Paper No. 2020–14, (June 24, 2020), available at 

https://ssrn.com/abstract=3630723 (retrieved from 

SSRN Elsevier database). 

1047That is, these additional bargaining power 

asymmetries are unlikely to be resolved by 

disclosure alone. Moreover, because the preferential 

treatment rule specifically considers the case where 

the adviser benefits larger investors at the expense 

of smaller investors, and because smaller investors 

generally have more limited ability to identify 

outside options to their current adviser, these 

market failures also are unlikely to be resolved by 

consent requirements. See infra section VI.D.4. 

1048See, e.g., PIFF Comment Letter; IAA 

Comment Letter; AIMA/ACC Comment Letter; 

BVCA Comment Letter; Comment Letter of Bill 

Huizenga and French Hill (Apr. 25, 2022); MFA 

Comment Letter I; Grundfest Comment Letter. 

1049See, e.g., Grundfest Comment Letter; AIC 

Comment Letter I; Ropes & Gray Comment Letter; 

SBAI Comment Letter; AIMA/ACC Comment Letter. 

1050See, e.g., Carta Comment Letter; Meketa 

Comment Letter; Lockstep Ventures Comment 

Letter; NY State Comptroller Comment Letter; AIC 

Comment Letter I, Appendix 1; AIC Comment Letter 

I, Appendix 2; MFA Comment Letter I, Appendix 

A. 

1051See, e.g., AIC Comment Letter I, Appendix 1; 

AIC Comment Letter I, Appendix 2; MFA Comment 

Letter I, Appendix A; NAIC Comment Letter. These 

commenters also expressed concerns that the loss 

of smaller advisers would result in reduced 

diversity of investment advisers, based on an 

assertion that most women- and minority-owned 

advisers are smaller and are smaller and associated 

with first time funds. To the extent compliance 

costs cause smaller advisers to exit, reduced 

diversity of investment advisers may be a negative 

effect of the rule. We discuss these effects further 

in section VI.E.2. 

1052See infra section VI.C.1. 

1053Clayton Comment Letter II; ILPA Comment 

Letter II; The Future of Private Equity Regulation, 

supra footnote 983; ILPA Private Fund Advisers 

Data Packet, supra footnote 983. 

1054See, e.g., Ropes & Gray Comment Letter. 

1055See infra sections VI.C.1, VI.D.4. 

1056 ICCR Comment Letter. 

1057See, e.g., Harvey Pitt Comment Letter. 

difficult for competitive forces solely 

driven by low industry concentration to 

fully resolve these issues with the 

bargaining process itself. 

The commenter and report also argue 

that the presence of price competition in 

the market for private equity is evidence 

that the market is competitive and not 

in need of further regulation.1043

However, the analysis considers only 

price competition and ignores 

competition over non-price contractual 

terms. An analysis of price competition 

overlooks the staff observations on 

harmful practices and non-price 

contractual terms contemplated in the 

Proposing Release and in this release, 

such as private fund advisers offering 

preferential redemption terms to only 

certain investors. Competition between 

advisers over whether they offer 

preferential redemption terms, or other 

non-price contractual terms, cannot be 

reliably measured in an analysis solely 

focused on price competition across 

advisers. As another commenter notes, 

academic literature has documented 

that among private fund advisers, there 

is substantial negotiation over non-price 

contractual terms.1044 In particular, in a 

recent industry survey of ILPA 

members, almost all respondents 

reported that the starting point of 

contractual LPA terms and the final 

negotiated LPA terms have become 

more adviser-friendly over the last three 

years.1045 As a final matter, price 

competition may vary in its intensity 

between different types of private funds 

in a way not accounted for by the CCMR 

comment letter and report. In a recent 

study on the performance of hedge fund 

fees, the authors find that hedge fund 

compensation structures have resulted 

in investors collecting only 36% of the 

returns earned on their invested capital 

(over the risk-free rate).1046

For these reasons, we believe certain 

particularly harmful practices can 

warrant stricter regulation, such as 

mandating protective actions like audits 

or prohibiting particularly problematic 

or harmful practices.1047 For smaller 

investors with less bargaining power 

who may be more vulnerable, advisers 

may have conflicts of interest between 

the fund’s interests and their own 

interests (or ‘‘conflicting 

arrangements’’). These conflicts reduce 

advisers’ incentives to act in the best 

interests of the fund. For example, an 

adviser attempting to raise capital for a 

successor fund has an incentive to 

inflate valuations and performance 

measurements of the current fund. 

Many commenters argued that private 

fund investors are sophisticated 

negotiators, and that the Commission 

should not insert itself into commercial 

negotiations between sophisticated 

parties.1048 Other commenters 

highlighted specific proposed 

prohibited activities such as the 

prohibition on reducing adviser 

clawbacks for taxes paid and the 

prohibition on borrowing, and stated 

that the prohibited activities represent 

outcomes of sophisticated 

negotiations.1049 Commenters also cited 

the overall burden of the rule, and 

expressed concern that the rule would 

negatively impact private fund 

competition and capital formation.1050

Some of these commenters specifically 

expressed a concern that the impact on 

competition would occur because the 

compliance costs of the rule would 

cause smaller advisers to exit.1051

While we acknowledge commenters’ 

concerns, we remain convinced by the 

evidence of market failures in the 

private fund adviser industry. We 

believe, as discussed further below, that 

these commenters fail to acknowledge 

that (i) the substantial growth of private 

funds has included interest and 

participation by smaller investors who 

may lack bargaining resources, and be 

more vulnerable than the largest 

investors,1052 and (ii) many attorneys 

representing investors report in survey 

evidence that investors accept poor legal 

terms in negotiations because the 

commitment size of their institution is 

too small, or they have a fear of losing 

their allocation, or they are unable or 

unwilling to walk away from bad 

terms.1053 Some commenters stated that 

the proposed prohibitions on certain 

preferential treatment would cause 

advisers to be less inclined to accept 

smaller investors,1054 and while we 

agree that this could occur and some 

investors may face additional 

difficulties securing an investment in a 

private fund, we also believe this 

observation concedes the existence of 

smaller investors, who are more likely 

to lack bargaining resources.1055

Another commenter, even though they 

did not describe specific structural 

elements of the private fund 

marketplace that result in market 

failures, broadly supported the view 

that the bargaining process in private 

fund negotiations is not even and 

requires further regulation.1056

We have revised the final rules 

accordingly to take into consideration 

the specific causes of bargaining failure. 

In doing so, we also believe we have not 

overly prescribed market practices. We 

also believe we have addressed 

commenters’ concerns that overly 

prescriptive market practices should not 

be imposed based solely on selfreported survey evidence from 

investors, who may be incentivized to 

seek the assistance of industry 

researchers or the Commission to 

improve their negotiation outcomes, 

even absent any market failure.1057 We 

have addressed this issue both by 

revising the final rules relative to the 

proposal, such as by revising the 

restricted activities rule to provide for 

certain exceptions where required 

disclosures are made and, in some 

cases, where investor consent is 

obtained, and by considering a wider 


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1058See, e.g., supra footnotes 989, 1013, 1046 and 

accompanying text. 

1059See, e.g., AIC Comment Letter I, Appendix 2; 

Schulte Comment Letter; PIFF Comment Letter. 

1060Clayton Comment Letter II; ILPA Comment 

Letter II; The Future of Private Equity Regulation, 

supra footnote 983; ILPA Private Fund Advisers 

Data Packet, supra footnote 983. 

1061See, e.g., PIFF Comment Letter; NYC 

Comptroller Letter. 

1062See, e.g., Carta Comment Letter; Meketa 

Comment Letter; Lockstep Ventures Comment 

Letter; NY State Comptroller Comment Letter; 

Weiss Comment Letter; AIC Comment Letter I; AIC 

Comment Letter I, Appendix 2; MFA Comment 

Letter II. 

1063See, e.g., LSTA Comment Letter. 

1064See supra footnote 1050 and accompanying 

text; see also, e.g., Carta Comment Letter; Meketa 

Comment Letter; Lockstep Ventures Comment 

Letter; NY State Comptroller Comment Letter; 

Weiss Comment Letter; AIC Comment Letter I; AIC 

Comment Letter I, Appendix 2; MFA Comment 

Letter II. 

1065See, e.g., PIFF Comment Letter; NYC 

Comptroller Letter; see also supra section II.B. 

1066See supra section II.F. 

1067See infra section VI.D.4. 

1068See supra section II.E. 

1069 Id., see also infra section VI.D.3. 

1070See supra section II.A. 

1071See supra section II.C.7. 

1072See supra sections II.E, II.F; see also infra 

sections VI.D.3, VI.D.4, VI.E. 

1073See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 

1111–15 (D.C. Cir. 2022). This approach also 

follows SEC staff guidance on economic analysis for 

rulemaking. See Staff’s Current Guidance on 

Economic Analysis in SEC Rulemaking, supra 

footnote 979 (‘‘The economic consequences of 

proposed rules (potential costs and benefits 

including effects on efficiency, competition, and 

capital formation) should be measured against a 

baseline, which is the best assessment of how the 

world would look in the absence of the proposed 

action.’’); Id. at 7 (‘‘The baseline includes both the 

economic attributes of the relevant market and the 

existing regulatory structure.’’). The best assessment 

of how the world would look in the absence of the 

proposed or final action typically does not include 

recently proposed actions, because doing so would 

improperly assume the adoption of those proposed 

actions. However, in some cases, proposals may 

impact the behavior of market participants, for 

example if market participants expect adoption to 

be likely to occur. In those cases, the effects of the 

proposal may be analyzed, to the extent it is 

possible to measure or infer changing behavior of 

market participants over time or in response to 

specific events, as part of baseline’s assessment of 

relevant market conditions. 

variety of evidence than self-reported 

survey evidence from investors.1058

In particular, we disagree with 

commenters who believe the 

Commission conceptualizes all 

investors as alike, or who interpret the 

Commission’s goal as creating a onesize-fits-all solution for all private fund 

advisers.1059 The variation in responses 

to surveys of investor groups,1060 the 

variation identified by commenters in 

reporting preferences of investors,1061

the variation identified by commenters 

in the degree to which different 

investors receive preferential 

treatment,1062 the variation identified by 

commenters in terms of the different 

types of structures of private funds and 

how those structures meet investor 

needs,1063 and all other instances of 

variation across fund outcomes are all 

substantial evidence of the variation in 

private fund investors. Moreover, the 

economic rationale for the prohibition 

on certain preferential terms that the 

adviser reasonably expects would have 

a material, negative effect on other 

investors relies substantially on a view 

that certain investors are larger, with 

more bargaining resources, and able to 

secure terms that leave them in an 

advantaged position relative to other 

investors. As stated above, this 

economic rationale is bolstered by the 

variation in commenter response to the 

proposal to prohibit certain preferential 

terms, with certain investors themselves 

opposing the prohibition and others 

supporting it.1064

We also believe we have preserved 

the ability for advisers and investors to 

flexibly negotiate fund terms, including 

via certain changes that are in response 

to commenters. For example, advisers 

and investors may still negotiate to 

identify any performance metrics that 

they believe will be beneficial to 

investors, so long as the minimum 

requirements of the quarterly statement 

rule are met.1065 Advisers and investors 

may also still negotiate for preferential 

terms for certain investors, as long as 

those terms are properly disclosed and 

are not redemption rights or information 

that would likely have a material 

negative effect on other investors.1066

Different investors with different risk 

preferences or different needs may also 

accept different redemption rights or 

information rights, as long as those 

rights and information are offered to all 

existing and future investors.1067

Investors and advisers may further 

negotiate whether the adviser will 

engage in the restricted activities under 

the rule, subject to certain disclosure 

and, in some cases, consent 

requirements.1068 Investor and adviser 

negotiation over the restricted activities 

may still include negotiations over 

which party will bear certain categories 

of risks based on investor and adviser 

risk preference, including compliance 

risks of the fund or adviser facing 

regulatory expenses, such as 

investigation expenses.1069 Lastly, we 

have respected the different types of 

private fund structures and the needs of 

their investors, for example by not 

applying the private fund rules to 

advisers with respect to SAFs they 

advise,1070 and with a provision of the 

mandatory audit rule that an adviser is 

only required to take all reasonable 

steps to cause its private fund client to 

undergo an audit that satisfies the rule 

when the adviser does not control the 

private fund and is neither controlled by 

nor under common control with the 

fund.1071 We therefore believe the final 

rules mitigate burden where possible 

and continue to facilitate competition 

and facilitate flexible informed 

negotiations between private fund 

parties.1072

C. Economic Baseline 

The economic baseline against which 

we evaluate and measure the economic 

effects of the final rules, including their 

potential effects on efficiency, 

competition, and capital formation, is 

the state of the world in the absence of 

the final rules. The economic analysis 

appropriately considers existing 

regulatory requirements, including 

recently adopted rules, as part of its 

economic baseline against which the 

costs and benefits of the final rule are 

measured.1073

Specifically, we consider the current 

business practices and disclosure 

practices of private fund advisers, as 

well as the current regulation and the 

forms of external monitoring and 

investor protections that are currently in 

place. In addition, in considering the 

current business, disclosure, and 

consent practices, we consider the 

usefulness of the information that 

investment advisers provide to investors 

about the private funds in which those 

investors invest, including information 

that may be helpful for deciding 

whether to invest (or remain invested) 

in the fund, monitoring an investment 

in the fund (in relation to fund 

documents and in relation to other 

funds), consenting to certain adviser 

activities, and other purposes. We 

further consider the effectiveness of 

current disclosures and consent 

practices in providing useful 

information to the investor. For 

example, fund disclosures and 

requirements to obtain investor consent 

can have direct effects on investors by 

affecting their ability to assess costs and 

returns and to identify the funds that 

align with their investment preferences 

and objectives. Disclosures and consent 

requirements can also help investors 

monitor their private fund advisers’ 

conduct, depending in part on the 

extent to which private funds lack 

governance mechanisms that would 

otherwise help check adviser conduct. 

Disclosures and consent requirements 

can therefore influence the matches 

between investor choices of private 

funds and preferences over private fund 

terms, investment strategies, and 

investment outcomes, with more 


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1074See final rules 206(4)–10, 211(h)(1)–2, 

211(h)(2)–2. As discussed above, the final rules that 

pertain to registered investment advisers apply to 

all investment advisers registered, or required to be 

registered, with the Commission. See supra section 

II. 

1075See final amended rules 204–2(a)(20) through 

(23). 

1076See final rule 211(h)(1)–2(d). 

1077Of these 230 RIAs to SAFs, 68 RIAs with 

combined SAF assets under management of 

approximately $166 billion only advise SAFs, and 

162 RIAs with combined SAF assets under 

management of approximately $842 billion also 

manage at least one non-SAF private fund. 

1078See Form ADV data between Oct. 1, 2021 and 

Sept. 30, 2022. 

1079See Form ADV data as of Dec. 31, 2022. See 

also infra section VII. 

1080See supra section II.A. 

1081See supra footnote 123. 

1082 Id. 

1083See final amended rules 204–2I(1), 204– 

2(a)(21), 204–2(a)(23), and 204–2(a)(7)(v). 

1084See infra footnote 1845 (with accompanying 

text). 

1085See, e.g., Lucian Bebchuk, Alma Cohen & 

Scott Hirst, The Agency Problems of Institutional 

Investors, J. Econ. Perspectives (2017); see also John 

Morley, The Separation of Funds and Managers: A 

Theory of Investment Fund Structure and 

Regulation, 123 Yale L. J. 1231 (2014); Paul G. 

Mahoney, Manager-Investor Conflicts in Mutual 

Funds, 18 J. Econ. Perspectives 161 (2004). 

1086See supra section II.E. 

1087See, e.g., The ILPA Model Limited 

Partnership Agreement (Whole-of-Fund Waterfall), 

ILPA, July 2020, available at https://ilpa.org/wpcontent/uploads/2020/07/ILPA-Model-LimitedPartnership-Agreement-WOF.pdf. 

1088 Id. 

1089 Id. 

effective disclosures resulting in 

improved matches. 

1. Industry Statistics and Affected 

Parties 

The final quarterly statement, audit, 

and adviser-led secondary rules will 

apply to all SEC registered investment 

advisers (‘‘RIAs’’) with private fund 

clients.1074 The final amendments to the 

books and records rule will also impose 

corresponding recordkeeping 

obligations on these advisers.1075 The 

performance requirements of the 

quarterly statement rule will vary 

according to whether the RIA 

determines the fund is a liquid fund, 

such as an open-end hedge fund, or an 

illiquid fund, such as a closed-end 

private equity fund.1076

According to Form ADV filing data 

between October 1, 2021, and 

September 30, 2022, there were 5,517 

RIAs with private fund clients. This 

includes 230 RIAs to 2554 SAFs.1077

While Form ADV does not include 

questions for advisers to SAFs to further 

specify the type of securitized asset 

strategy the fund invests in, staff review 

of fund names in Form ADV indicates 

that SAFs are comprised of CLOs, CDOs, 

CBOs, and other structured products 

that issue asset-backed securities and 

primarily issue debt to their 

investors.1078 We estimate, based on a 

review of fund names and their advisers 

in Form ADV, that funds reporting as 

SAFs advised by RIAs in Form ADV are 

almost 90% CLOs by assets under 

management and almost 70% by counts 

of funds.1079 As discussed above, 

advisers will not be subject to the final 

rules with respect to their relationships 

with SAFs.1080

The final prohibited activity and 

preferential treatment rules will apply 

to all advisers to private funds, 

regardless of whether the advisers are 

registered with, required to be registered 

with, or reporting as exempt reporting 

advisers (‘‘ERAs’’) to the Commission or 

one or more State securities 

commissioners or are otherwise not 

required to register. ERAs generally rely 

on two possible exemptions to forgo 

registration: (1) an exemption for 

advisers that solely manage private 

funds and have less than $150 million 

regulatory assets under management in 

the United States, and (2) investment 

advisers that solely advise venture 

capital funds.1081 To qualify as a 

venture capital fund, a fund must 

represent itself as pursuing a venture 

capital strategy, meet certain leverage 

limitations, prohibit redemptions by 

investors except in extraordinary 

circumstances, and have at least 80% of 

a fund’s investments be direct equity 

investments into private companies.1082

The final amendments to the books 

and records rule will also impose 

corresponding recordkeeping 

obligations on private fund advisers if 

they are registered or required to be 

registered with the Commission.1083

Based on Form ADV filing data between 

October 1, 2021, and September 30, 

2022, this will include 5,517 advisers to 

private funds.1084

The final amendments to the 

compliance rule will affect all RIAs, 

regardless of whether they have private 

fund clients. According to Form ADV 

filing data between October 1, 2021, and 

September 30, 2022, there were 15,330 

RIAs, across both those who did and did 

not have private fund clients. 

The parties affected by the rules and 

amendments will include private fund 

advisers, advisers to other client types 

(with respect to the amendments to the 

compliance rule), private funds, private 

fund investors, certain other pooled 

investment vehicles and clients advised 

by private fund advisers and their 

related persons, accountants providing 

audits under the final audit rule, and 

others to whom those affected parties 

will turn for assistance in responding to 

the rules and amendments. Private fund 

investors are generally institutional 

investors (including, for example, 

retirement plans, trusts, endowments, 

sovereign wealth funds, and insurance 

companies), as well as high net worth 

individuals. In addition, the parties 

affected by these rules could include 

private fund portfolio investments, such 

as portfolio companies. 

The relationships between the 

affected parties are governed in part by 

current rules under the Advisers Act, as 

discussed in Section V.B.3. In addition, 

relationships between funds and 

investors generally depend on fund 

governance.1085 Private funds typically 

lack fully independent governance 

mechanisms, such as an independent 

board of directors, that would help 

monitor and govern private fund adviser 

conduct and check possible 

overreaching. Although some private 

funds may have LPACs or boards of 

directors, these types of bodies may not 

have sufficient independence, authority, 

or accountability to oversee and consent 

to these conflicts or other harmful 

practices as they may not have sufficient 

access, information, or authority to 

perform a broad oversight role, and they 

do not have a fiduciary obligation to 

private fund investors.1086 As a result, 

to the extent the adviser has a potential 

conflict of interest, these bodies may not 

be positioned to negotiate for full and 

fair disclosure, or may not be positioned 

to provide informed consent to the 

adviser’s potential conflicts, or may not 

be positioned to negotiate with the 

adviser to eliminate or reduce conflicts. 

Similarly, relationships between 

advisers, funds, and investors may rely 

on investor consent to govern fund and 

adviser behavior. For example, one 

private equity fund document template 

uses investor consent as a prerequisite 

for revising fund documents.1087 Some 

provisions may require an individual 

investor’s consent, such as the fund 

documents designating that investor an 

‘‘ERISA Partner,’’ other provisions may 

require majority investor consent, such 

as changing the fund’s closing date, and 

still further provisions may require 

consent of 75% or 90% of investors in 

interest, with interest typically 

excluding the interests of the adviser 

and its related persons, and with other 

certain limitations.1088 For example, 

modifying fund documents to change 

the fund’s investment objectives may 

require consent from 90% of investors 

in interest.1089 Hedge fund advisers may 

also rely on consent arrangements with 

respect to their hedge funds, with some 

activities requiring positive consent, 


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1090LPACs may not have the necessary 

independence, authority, or accountability to 

oversee and consent to certain conflicts or other 

harmful practices. 1091AIC Comment Letter I, Appendix 1. 

1092MFA Comment Letter I, Appendix A. 

1093See, e.g., Ropes & Gray Comment Letter. 

1094See supra section II.G; see also infra sections 

VI.C.2, VI.D.4. 

1095See, e.g., BVCA Comment Letter; MFA 

Comment Letter I; AIMA/ACC Comment Letter. 

1096See supra section II.A. 

1097See LSTA Comment Letter; SFA Comment 

Letter I; SIFMA–AMG Comment Letter I; TIAA 

Comment Letter; see also Ares Mgmt. Corp., 

Understanding Investments in Collateralized Loan 

Obligations (‘‘CLOS’’) (2020), available at https://

www.aresmgmt.com/sites/default/files/2020-02/ 

Understanding-Investments-in-Collateralized-LoanObligationsvF.pdf (last visited June 26, 2023); see 

also supra section II.A. 

1098 Id. 

1099LSTA Comment Letter. 

1100See LSTA Comment Letter; SFA Comment 

Letter I; SIFMA–AMG Comment Letter I; TIAA 

Comment Letter. 

1101See supra section II.A. 

1102LSTA Comment Letter. 

1103 Id. 

1104 Id. 

1105See supra section II.A. 

1106See SFA Comment Letter I; SFA Comment 

Letter II. 

1107Form ADV, Item 5.F.2. and Item 12.A. 

some activities requiring negative 

consent, and some activities such as 

changing an auditor only requiring 

notice to investors. 

However, the interests of one or more 

private fund investors may not represent 

the interests of, or may otherwise 

conflict with the interests of, other 

investors in the private fund due to 

business or personal relationships or 

other private fund investments, among 

other factors. To the extent investors are 

afforded governance or similar rights, 

such as LPAC representation, certain 

fund agreements permit such investors 

to exercise their rights in a manner that 

places their interests ahead of the 

private fund or the investors as a whole. 

For example, certain fund agreements 

state that, subject to applicable law, 

LPAC members owe no duties to the 

private fund or to any of the other 

investors in the private fund and are not 

obligated to act in the interests of the 

private fund or the other investors as a 

whole.1090 These limitations may hinder 

the ability for LPAC oversight, including 

LPAC consent, to achieve the same 

benefits as investor consent. 

Some commenters further stated that 

relationships between the affected 

parties are governed in part by 

reputational mechanisms and active 

monitoring directly by investors. For 

example, one commenter stated that 

preferential terms offered to certain 

investors provide flexibility for the 

adviser, but that if the adviser ‘‘abuses 

the flexibility in some way (for example, 

by providing some benefit to a preferred 

client), it imposes a reputational cost for 

the adviser and adversely affects the 

adviser’s future fundraising efforts.’’ 1091

Another commenter stated that ‘‘larger 

investors have strong incentives to 

actively monitor and communicate with 

their investment manager,’’ and that 

‘‘this type of fund governance benefits 

all investors.’’1092 As a closely related 

matter, some commenters stated that 

larger investors negotiate for liquidity 

protections or other investor-favorable 

protections that, if adopted by the 

adviser, benefit all investors in the 

fund.1093 However, no commenter made 

this argument with respect to 

preferential treatment secured by larger 

investors. That is, while larger investors’ 

monitoring and negotiations for certain 

protections may benefit all investors, 

the preferential terms secured by larger 

investors can be to the detriment of 

smaller investors with fewer resources 

to bargain with advisers.1094 Lastly, 

while commenters stated that the 

Commission should consider consent 

requirements instead of certain of the 

proposed rules,1095 commenters did not 

generally discuss the prevalence of 

consent requirements today with respect 

to the activities considered in the final 

rules. 

As discussed above, SAFs are special 

purpose vehicles or other entities that 

securitize assets by pooling and 

converting them into securities that are 

offered and sold in the capital 

markets.1096 These vehicles primarily 

issue debt, structured as notes and 

issued in different tranches to investors, 

and paid in accordance with a waterfall 

established by the fund’s initial 

indenture agreement. The residual 

profits from the fund after fees, 

expenses, and payments to debt 

tranches accrue to an equity tranche of 

the fund. Equity tranches are typically 

only a small portion of the CLO, on the 

order of 10% of initial capital raised to 

purchase the CLO loan portfolio.1097

However, the equity tranche of a CLO 

differs from typical equity interests in 

other private funds, in particular with 

respect to the composition of investors 

in the equity tranche. For example, 

based on industry data, no pension 

funds invest in the equity tranches of 

CLOs (and pension funds are only a de 

minimis portion of the most senior debt 

tranches of CLOs).1098 One commenter 

stated, consistent with industry reports, 

that the most common equity investors 

are hedge funds and structured credit 

funds.1099 Investors in the equity 

tranche also typically include the 

adviser and its related persons. 

Moreover, as commenters stated, most 

third party investors in CLOs are 

Qualified Institutional Buyers (‘‘QIBs’’), 

each of which is generally an entity that 

owns and invests on a discretionary 

basis at least $100 million in securities 

of issuers that are not affiliated with the 

entity, and are thus typically among the 

larger private fund investors.1100

Some commenters stated that the 

governance structure of CLOs and other 

SAFs differ from other types of 

funds.1101 One commenter stated, for 

example, that the structure of a CLO is 

governed by its indenture, which will 

describe the appointment and role of a 

trustee that represents the interests of 

the CLO investors, and a collateral 

administrator, both of whom are 

independent of the investment 

adviser.1102 The trustee, along with a 

similarly unrelated collateral 

administrator, will maintain custody of 

the portfolio’s assets, remit payments to 

investors, approve trades, generate 

reports for investors, and act as a 

representative of the investors in 

unusual events such as defaults or 

accelerations.1103 The CLO will also 

appoint an independent CPA to perform 

specific procedures so the user of the 

results of the agreed upon procedures 

report can make their own 

determination about whether the fund 

follows procedures that are designed to 

ensure that the CLO is properly 

allocating cash flows, meeting the 

obligations in the indenture, and 

providing accurate information to 

investors.1104 We understand that 

certain core characteristics of CLOs are 

generally shared across all SAFs: 

namely, that they are vehicles that issue 

asset-backed securities collateralized by 

an underlying pool of assets and that 

primarily issue debt.1105 One 

commenter generally specified that 

these features are common to all assetbacked securitization vehicles, and so 

based on our definition we understand 

these features to be common to all 

SAFs.1106

Based on Form ADV filing data 

between October 1, 2021, and 

September 30, 2022, 5,517 RIAs and 

5,381 ERAs reported that they are 

advisers to private funds.1107 Based on 

Form ADV data, hedge funds and 

private equity funds are the most 

frequently reported private funds among 

RIAs, followed by real estate and 

venture capital funds, as shown in 

Figures 1A and 1B. This pattern also 

holds for the number of advisers to each 

of these types of funds. In comparison 


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63304 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1108See, e.g., Andreessen Comment Letter; NVCA 

Comment Letter. In general, Figures 1A and 1B 

illustrate that advisers often advise multiple 

different types of funds, as the sum of advisers to 

each type of fund exceeds the total number of 

advisers. 

1109 Id. See also, e.g., David Horowitz, Why VC 

Firms Are Registering as Investment Advisers, 

Medium.com (Sept. 23, 2019), available at https:// 

medium.com/touchdownvc/why-vc-firms-areregistering-as-investment-advisers-ea5041bda28d 

(discussing why Andreessen Horowitz, General 

Catalyst, Foundry Group, and Touchdown 

Ventures, among other venture capitalists, have 

registered as RIAs). 

1110See Form ADV data. 

to RIAs, ERAs have lower assets under 

management and are more frequently 

advisers to venture capital (VC) funds, 

followed by advisers to private equity 

funds and hedge funds, with advisers to 

real estate funds more uncommon. 

However, as some commenters stated, 

some advisers to venture capital funds 

may also be RIAs.1108 In particular, 

some advisers to funds that hold 

themselves out as venture capital funds 

may not want to limit their capital 

allocation outside of direct equity stakes 

in private companies to 20% of their 

portfolio, and so may register to be able 

to hold a more diversified portfolio.1109

Based on Form ADV filing data between 

October 1, 2021, and September 30, 

2022, RIAs to venture capital funds who 

exceed this 20% threshold may account 

for as much as $539.1 billion in gross 

assets. 

FIGURE 1A—PRIVATE FUNDS REPORTED BY RIAS

Registered investment advisers 

Private funds Feeder funds Gross assets 

(billions) 

Advisers to 

private funds 

Any private funds ............................................................................................. 51,767 13,222 21,120.70 5,517 

Hedge funds ............................................................................................. 12,442 6,815 9,728.60 2,632 

Private equity funds .................................................................................. 22,709 3,910 6,542.10 2,106 

Real estate funds ..................................................................................... 4,717 976 1,017 605 

Venture capital funds ................................................................................ 3,056 199 539.1 368 

Securitized asset funds ............................................................................ 2,554 85 1,008.40 230 

Liquidity funds ........................................................................................... 88 9 305.5 47 

Other private funds ................................................................................... 6,201 1,218 1,980.10 1,113 

Source: Form ADV submissions filed between Oct. 1, 2021, and Sept. 30, 2022. Funds that are listed by both registered investment advisers 

and SEC-exempt reporting advisers are counted under both categories separately. Gross assets include uncalled capital commitments on Form 

ADV. 

FIGURE 1B—PRIVATE FUNDS REPORTED BY ERAS

Exempt reporting advisers 

Private funds Feeder funds Gross assets 

(billions) 

Advisers to 

private funds 

Any private funds ............................................................................................. 31,129 2,667 5,199.40 5,381 

Hedge funds ............................................................................................. 2,060 1,223 1,445.50 1,205 

Private equity funds .................................................................................. 6,325 702 1,657.50 1,457 

Real estate funds ..................................................................................... 849 180 374.1 242 

Venture capital funds ................................................................................ 20,627 351 1,206.10 1,994 

Securitized asset funds ............................................................................ 101 ¥ 56.3 20 

Liquidity funds ........................................................................................... 16 ¥ 129.3 5 

Other private funds ................................................................................... 1,151 201 330.6 350 

Source: Form ADV submissions filed between Oct. 1, 2021, and Sept. 30, 2022. Funds that are listed by both registered investment advisers 

and SEC-exempt reporting advisers are counted under both categories separately. Gross assets include uncalled capital commitments on Form 

ADV. 

Also based on Form ADV data, the 

market for private fund investing has 

grown dramatically over the past five 

years. For example, the assets under 

management of private equity funds 

reported by RIAs on Form ADV during 

this period (from Oct. 1, 2017 to Sept. 

30, 2022) grew from $2.9 trillion to $6.5 

trillion, or by 124%. The assets under 

management of hedge funds reported by 

ERAs grew from $7.1 trillion to $9.7 

trillion, or by 37%. The trends for 

private funds as a whole are given in 

Figure 2. The assets under management 

of all private funds reported by RIAs 

grew by 62% over the past five years 

from $13 trillion to over $21 trillion, 

while the number of private funds 

reported by RIAs grew by 42% from 

36.5 thousand to 51.7 thousand. The 

assets under management of all private 

funds reported by ERAs grew by 89% 

over the past five years from $2.75 

trillion to over $5.2 trillion, while the 

number of private funds reported by 

ERAs grew by 105% from 15.2 thousand 

to 31.1 thousand, as shown in Figure 

2A.1110 There has lastly been similar 

growth in the number of private fund 

advisers, as the number of RIAs advising 

at least one private fund grew from 

4,783 in 2018 to 5,517 in 2022, and the 

number of ERAs advising at least one 

private fund grew from 3,839 in 2018 to 

5,381 in 2022, as shown in Figure 2B. 


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1111See supra section VI.B; see also, e.g., AIC 

Comment Letter I, Appendix 2. 

1112See, e.g., Private Equity Investments, 

Moonfare, available at https://www.moonfare.com/ 

private-equity-investments; About Us, Yieldstreet, 

available at https://www.yieldstreet.com/about/ 

(‘‘For decades, institutions and hedge funds have 

trusted private markets to grow their portfolios. 

Yieldstreet was founded in 2015 to unlock 

alternatives for more investors than ever before.’’). 

1113See, e.g., Paul Sullivan, D.I.Y. Private Equity 

is Luring Small Investors, N.Y. Times (July 19, 

2019); How Can Smaller Investors Obtain Access to 

Private Equity Investment, The Nest, available at 

https://budgeting.thenest.com; Nathan Tipping, 

Private Equity is Finding Ways to Attract Smaller 

Investors, Risk.net (May 20, 2022), available at 

https://www.risk.net/investing/7948681/privateequity-is-finding-ways-to-attract-smaller-investors. 

Despite commenter assertions that all 

private fund investors are sophisticated 

and can ‘‘fend for themselves,’’ 1111 the 

staff have also observed a trend of rising 

interest in private fund investments by 

smaller investors, who may have 

sufficient capital to meet the regulatory 

requirements to invest in private funds 

but lack experience with the complexity 

of private funds and the practices of 

their advisers. While we do not believe 

there exists industry-wide data on the 

prevalence of investors of different 

levels of sophistication in private funds 

over time, there has been a distinct 

trend of media coverage and public 

interest in expanding private fund 

investing access. Platforms have 

emerged to facilitate individual investor 

access to private investments with small 

investment sizes.1112 News outlets have 

reported other instances of amateur 

investor groups investing in private 

equity, or other instances of smaller 

individual investors accessing private 

investments.1113 There is also evidence 

that this trend will continue into the 

future, with potential ongoing rising 


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63306 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1114SEI, Private Market Liquidity: Illogical or 

Inspired? (2021), available at https://www.seic.com/ 

sites/default/files/2022-05/SEI-IMS-Private-MarketLiquidity-WhitePaper-2021-US.pdf. 1115McKinsey & Co., US Wealth Management: A 

Growth Agenda for the Coming Decade (Feb. 16, 

2022), available at https://www.mckinsey.com/ 

industries/financial-services/our-insights/uswealth-management-a-growth-agenda-for-thecoming-decade. 1116For example, retail investors may continue 

increasing their participation in investor groups 

with pooled funds. See supra footnote 1113. 1117See, e.g., Professor Clayton Public Investors 

Article, supra footnote 12. 1118National Data, Publicplansdata.Org, available 

at https://publicplansdata.org/quick-facts/national/ 

#:%7E:text=Collectively%

2C%20these%20plans%20have%3A,members%

20and%2011.7%20million%20retirees (last visited 

May 30, 2023). 1119See, e.g., Dep’t of Labor, Info. Letter (June 3, 

2020), available at https://www.dol.gov/agencies/ 

ebsa/about-ebsa/our-activities/resource-center/ 

information-letters/06-03-2020. 1120See, e.g., Blackstone, Other Large PrivateEquity Firms Turn Attention to Vast Retail Market, 

Wall St. J. (June 7, 2022), available at https:// 

www.wsj.com/articles/blackstone-other-largeprivate-equity-firms-turn-attention-to-vast-retailmarket-11654603201 (retrieved from Factiva 

database). 

1121Advisers may also instead seek and identify 

investors through multiple potential channels. 

1122See, e.g., ILPA Comment Letter II; NY State 

Comptroller Comment Letter; see also, e.g., Pension 

Funds, supra footnote 985. 

1123See PSCA, Retirement Plan Committees, 

available at https://www.psca.org/sites/psca.org/ 

files/Research/2021/2021%20Snapshot_

Ret%20Plan%20Com_FINAL.pdf. 

1124See, e.g., Illinois Municipal Retirement Fund 

Investment Committee Charter, available at https:// 

www.imrf.org/en/investments/policies-and-charter/ 

investment-committee-charter. 

1125See California Public Employees’ Retirement 

System Asset Liability Management Policy, 

CalPERS, available at https://www.calpers.ca.gov/ 

docs/board-agendas/202009/financeadmin/item-6b01_a.pdf. 

1126See supra sections II.A, II.G.1. 

1127See, e.g., Seth Chertok & Addison D. 

Braendel, Closed-End Private Equity Funds: A 

Detailed Overview of Fund Business Terms, Part I, 

13 J. Priv. Equity 33 (Spring 2010). 

1128 Id. 

1129See, e.g., George Fenn, Nellie Liang & 

Stephen Prowse, The Private Equity Market: An 

Overview, 6 Fin. Mkts., Inst., & Instruments, at 50 

(Nov. 1997). 

1130See, e.g., William Clayton, Preferential 

Treatment and the Rise of Individualized Investing 

in Private Equity, 11 Va. L. & Bus. Rev. (2017). 

participation in private funds by smaller 

investors with less bargaining power. 

One industry white paper found 80% of 

surveyed private fund advisers and 72% 

of surveyed private fund investors said 

non-accredited individuals should be 

able to invest in private markets.1114 A 

2022 survey of private market investors 

found that young individual investors 

were expressing increased demand for 

alternative investments, and that large 

private market firms are building out 

retail distribution capabilities and 

vehicles, providing greater access to 

private markets for individual 

portfolios.1115 Even absent any changes 

in relevant law that would allow 

currently non-accredited individuals, or 

retail investors, greater access, these 

data points indicate rising interest and 

likelihood of rising future participation 

by more vulnerable investors in private 

funds.1116

Private funds and their advisers also 

play an increasingly important role in 

the lives of millions of Americans. Some 

of the largest groups of private fund 

investors include State and municipal 

pension plans, college and university 

endowments, non-profit organizations, 

and high net worth individuals.1117

According to the U.S. Census Bureau, 

public sector retirement systems play a 

role in retirement savings for 15 million 

active working members and 11.7 

million retirees.1118

Private fund advisers have also sought 

to be included in individual investors’ 

retirement plans, including their 

401(k)s,1119 and some large private 

equity firms have created new private 

funds aimed at individual investors.1120

2. Sales Practices, Compensation 

Arrangements, and Other Business 

Practices of Private Fund Advisers 

The relationship between the adviser 

and the private fund client in which the 

investor is participating begins with the 

investor conducting initial screening for 

private funds that meet the investor’s 

specified criteria, potentially with the 

assistance of investment 

consultants.1121 As noted above, many 

investors’ internal diversification 

requirements and objectives and 

underwriting standards generally leave 

them with a smaller pool of advisers 

with whom they can negotiate.1122

Many investors also face complex 

internal administrative and state 

regulatory requirements that govern 

their negotiations with advisers that 

they contact. For example, for 

retirement plans, investment 

committees who are responsible for 

determining plan strategy are often 

established by a plan sponsor, an 

investment board is formed, and the 

board acts according to an investment 

policy statement and charter. A survey 

by Plan Sponsor Council of America 

found that 95% of organizations that 

sponsor defined contribution retirement 

plans had such a committee, with 78% 

of them being established with formal 

legal documents.1123 These percentages 

are both higher for organizations with a 

large number of participants. Investment 

committees then report portfolio 

performance strategy, plans, and results 

to the plan sponsor and other key 

stakeholders.1124 This includes a 

determination of asset allocations for a 

portfolio, which an investment 

committee may make up to several years 

ahead of actual deployment of capital to 

those allocations. For example, CalPERS 

determines its asset mix on a four-year 

cycle, with the determination being 

made nearly a year before beginning its 

implementation.1125 As another 

example, advisers may also face State 

pay-to-play or anti-boycott laws.1126

Once investors identify potential 

advisers, they enter into negotiations to 

determine whether they will invest in 

one or more of the adviser’s private fund 

clients. The process during which fund 

terms may be disclosed and negotiated 

before investors commit to investing in 

a fund is known as the ‘‘closing 

process.’’ 1127 For closed-end, illiquid 

funds, such as private equity funds, 

there may be a series of closings from 

the initial closing to the final closing, 

after which new investors may generally 

not be admitted to the fund. The end of 

the fundraising period is the final 

closing date. For open-end, liquid 

funds, such as hedge funds, the closing 

process for allowing new investors to 

commit may be ongoing over the life of 

the fund. 

Because different investors may 

receive disclosures or opportunities to 

negotiate over fund terms at different 

times, private funds face a fundamental 

incentive obstacle in making successful 

closings: later investors may be able to 

ask the fund adviser what contractual 

terms were awarded to early investors, 

and armed with that information they 

may attempt to negotiate contractual 

terms at least as good as the early 

investors. This is one of several 

difficulties advisers may currently face 

in successfully closing early investors 

into a private fund, as the early investor 

has an incentive to wait for the latest 

possible opportunity to close.1128 New 

emerging advisers may also not have 

established reputations yet, and earlier 

investors may have to conduct 

supplemental due diligence on the 

adviser. Later investors can freeride on 

the due diligence, and resulting 

negotiated terms, conducted by earlier 

investors.1129

There are two leading ways that 

advisers may currently overcome these 

operational difficulties with respect to 

the closing process. First, an adviser 

may allow investors, particularly early 

investors, to have MFN status. An MFN 

investor may have, for example, subject 

to certain restrictions, the ability to 

receive substantially the same rights 

granted by the fund or the adviser in 

any side letter or similar agreement that 

are materially different from the rights 

granted to the MFN investor.1130 These 


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1131See, e.g., MFN Clause Sample Clauses, Law 

Insider, available at https://www.lawinsider.com/ 

clause/mfn-clause. 

1132See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5. Investment advisers also have 

antifraud liability with respect to prospective 

clients under section 206 of the Advisers Act, 

which, among other aspects, applies to transactions, 

practices, or courses of business which operate as 

a fraud or deceit upon prospective clients. 

1133See, e.g., SIFMA–AMG Comment Letter I; 

PIFF Comment Letter. 

1134See 2019 IA Fiduciary Duty Interpretation, 

supra footnote 5. The duty of care includes, among 

other things: (i) the duty to provide advice that is 

in the best interest of the private fund client, (ii) 

the duty to seek best execution of a private fund 

client’s transactions where the adviser has the 

responsibility to select broker-dealers to execute 

private fund client trades, and (iii) the duty to 

provide advice and monitoring over the course of 

the relationship with the private fund client. Id. 

The final rules predominantly relate to issues 

regarding the duty of loyalty and not the duty of 

care. 

1135Advisers’ dealings with private fund 

investors may also implicate the antifraud 

provisions of the Federal securities laws depending 

on the facts and circumstances. 

1136See supra section II.E. 

1137State laws generally require disclosure of 

information that would not have a material, 

negative effect on other investors, such as fee and 

expense transparency. See supra footnote 854 and 

accompanying text. 

1138See supra section II.E. 

1139 Id. 

1140Proposing Release, supra footnote 3, at 140. 

1141 Id. 

1142 Id. 

1143See, e.g., Sullivan & Cromwell Comment 

Letter; ATR Comment Letter; Comment Letter of 

James A. Overdahl, Ph.D., Partner, Delta Strategy 

Group (Apr. 25, 2022) (‘‘Overdahl Comment 

Letter’’). 

1144See, e.g., Overdahl Comment Letter. 

1145See supra section II.E.2.a). 

MFN rights can come with certain 

restrictions, such as not having the 

ability to receive any rights granted to 

an investor with a capital commitment 

in excess of the MFN investor’s 

commitment.1131 Second, an adviser 

may convince investors that the adviser 

can credibly commit to terms that will 

be more advantageous than the investor 

could receive by waiting. One possible 

path to this credibility would be for the 

adviser to establish a reputation for this 

behavior. 

Once the closing process is complete, 

investors are participants in the 

adviser’s private fund client, and the 

adviser has a fiduciary duty to the 

private fund client that is comprised of 

a duty of care and a duty of loyalty 

enforceable under the antifraud 

provision of Section 206.1132 Many 

commenters cited the existing fiduciary 

duty in their comment letters.1133 The 

duty of loyalty requires that an adviser 

not subordinate its private fund client’s 

interests to its own.1134 Private fund 

advisers are also prohibited from 

engaging in fraud more generally under 

the general antifraud provisions of the 

Federal securities laws, including 

section 10(b) of the Exchange Act (and 

17 CFR 240.10b–5 (‘‘rule 10b–5’’) 

thereunder) and section 17(a) of the 

Securities Act.1135 As discussed above, 

we believe that certain activities that we 

proposed to specifically prohibit are 

already inconsistent with an adviser’s 

existing fiduciary duty, namely charging 

fees for unperformed services and 

attempting to waive an adviser’s 

compliance with its Federal antifraud 

liability for breach of fiduciary duty to 

the private fund or with any other 

provision of the Advisers Act.1136

Private fund advisers are also subject 

to rule 206(4)–8 under the Advisers Act, 

which prohibits investment advisers to 

pooled investment vehicles, which 

include private funds, from (1) making 

any untrue statement of a material fact 

or omitting to state a material fact 

necessary to make the statements made, 

in the light of the circumstances under 

which they were made, not misleading, 

to any investor or prospective investor 

in the pooled investment vehicle; or (2) 

otherwise engaging in any act, practice, 

or course of business that is fraudulent, 

deceptive, or manipulative with respect 

to any investor or prospective investor 

in the pooled investment vehicle. 

Despite existing fiduciary duties, 

existing antifraud provisions of section 

206 and the other Federal securities 

laws, and existing rule 206(4)–8, there 

are no current particularized 

requirements that deal with many of the 

revised requirements in the final rule. 

For example, there is no current Federal 

regulation requiring a private fund 

adviser to disclose multiple different 

measures of performance to its 

investors, to refrain from borrowing 

from a private fund client without 

disclosure or investor consent, to obtain 

a fairness opinion or valuation opinion 

from an independent opinion provider 

when leading secondary transactions, or 

to disclose preferential treatment of 

certain investors to other investors.1137

In the absence of more particularized 

requirements, we have observed 

business practices of private fund 

advisers that enrich advisers without 

providing any benefit of services to the 

private fund and its underlying 

investors or that create incentives for an 

adviser to place its own interests ahead 

of the private fund’s interests. For 

example, as discussed above, some 

private fund advisers or their related 

persons have entered into arrangements 

with a fund’s portfolio investments to 

provide services which permit the 

adviser to accelerate the unpaid portion 

of fees upon the occurrence of certain 

triggering events, even though the 

adviser will never provide the 

contracted-for services.1138 These fees 

enrich advisers without providing the 

benefit of any services to the private 

fund and its underlying investors. As 

stated above, even absent a 

particularized requirement, we believe 

charging fees for unperformed services 

is inconsistent with an adviser’s 

fiduciary duty and may also violate 

antifraud provisions of the Federal 

securities laws on grounds other than an 

undisclosed breach of the adviser’s 

fiduciary duty, even if disclosed and 

even if investors consented.1139

The Proposing Release cited a trend in 

the industry where certain advisers 

charge a private fund for fees and 

expenses incurred by the adviser in 

connection with the establishment and 

ongoing operations of its advisory 

business.1140 The Proposing Release 

recognized, for example, that certain 

private fund advisers, most notably for 

hedge funds that utilize a ‘‘passthrough’’ expense model, employ an 

arrangement where the private fund 

pays for most, if not all, of the adviser’s 

expenses, and that in exchange, the 

adviser does not charge a management, 

advisory, or similar fee.1141 The adviser 

does charge an incentive or performance 

fee on net returns of the private 

fund.1142 However, commenters stated 

that the Proposing Release did not 

demonstrate any economic problems 

with pass-through expense models, and 

stated the pass-through expense models 

should not be prohibited.1143 Other 

commenters stated that pass-through 

expense models are often optimal 

outcomes of negotiations, and that passthrough expense models still provide 

incentives for advisers to minimize 

expenses.1144

However, we continue to believe that, 

to the extent advisers charge to a private 

fund certain expenses that benefit the 

adviser more than the investors, such as 

fees and expenses related to regulatory, 

compliance, and examination costs, and 

expenses related to investigations of the 

adviser or its related persons by any 

governmental or regulatory authority, 

that practice represents a potentially 

economically problematic outcome.1145

This is because, since these expenses 

may benefit the adviser more directly 

than the investors, including where the 

expense pertains to an investigation of 

the adviser or its related persons by any 

governmental or regulatory authority, 

any instance of this practice occurring 

risks representing an exercise of the 

adviser’s bargaining power in securing 


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1146 Id. 

1147See supra section VI.B. 

1148See, e.g., Weiss Comment Letter; Maskin 

Comment Letter. 

1149 Id. 

1150 Id. 

1151See supra section II.E.1.a), II.E.2.a). 

1152 Id. 

1153See supra section II.E.1.b). Form PF recently 

was revised to include new reporting requirements 

(though the effective date has not arrived) requiring 

large private equity fund advisers (i.e., those with 

at least $2 billion in regulatory assets under 

management as of the last day of the adviser’s most 

recently completed fiscal year) to report annually 

on the occurrence of general partner and limited 

partner clawbacks. Form PF Release, supra footnote 

564. 

1154See supra section II.E. 

1155See supra section II.E.1.b). 

contractual terms allowing these 

expenses.1146 Some investors may not 

anticipate the performance implications 

of these costs, or may avoid investments 

out of concern that such costs may be 

present.1147 This could lead to a 

mismatch between investor choices of 

private funds and their preferences over 

private fund terms, investment 

strategies, and investment outcomes, 

relative to what would occur in the 

absence of such unexpected or 

uncertain costs. 

Whether such arrangements distort 

adviser incentives to pay attention to 

compliance and legal matters, including 

matters related to investigations of 

potential conflicts of interest, may vary 

from adviser to adviser. This is because 

adviser-level attention to compliance 

and legal matters can depend on both 

investor and adviser risk preferences. As 

one commenter stated, in some cases, if 

advisers bear the cost of compliance, 

including costs of compliance for 

investigations by government or 

regulatory authorities, advisers may 

have incentives to recommend 

investments that are less diversified.1148

We agree with this possibility. For 

example, complex investment strategies 

may require significant registration with 

multiple regulators and reporting in 

multiple jurisdictions. The additional 

compliance work on the part of the 

adviser to execute a more complex 

investment strategy can be to the benefit 

of investors in the fund. By contrast, as 

the same commenter stated, if investors 

bear the cost, then so long as disclosures 

are made the investors can decide for 

themselves whether they are willing to 

pay extra compliance costs to achieve 

better diversification (or, in other cases, 

higher risks and thus higher potential 

returns).1149

However, we also continue to believe 

that, when investors bear the costs, 

advisers may have distorted incentives 

with respect to their treatment of 

compliance and legal matters, namely 

incentives to pay suboptimal attention 

to these matters. Advisers who pay 

suboptimal attention to compliance 

costs, for example, receive profits 

associated with their reduced 

compliance expenses, but in doing so 

generate risks that may be borne by 

investors. Thus, for some advisers, 

funds, and their investors, it may align 

economic incentives for the fund (and, 

by extension, the investors) to bear 

regulatory, compliance, and 

examination costs, and expenses related 

to investigations of the adviser or its 

related persons by any governmental or 

regulatory authority. In other cases, it 

may better align economic incentives for 

the adviser to bear these expenses, if the 

benefits from undertaking the expenses 

primarily accrue to the adviser. 

Even when investors may benefit from 

bearing these costs, full disclosure is 

necessary and investors may not be able 

to secure such disclosures today. As the 

above commenter stated, even when 

economic incentives are aligned by 

investors bearing the costs of 

compliance expenses, it is so that the 

investor can determine for themselves 

the appropriate magnitude of 

compliance expenses (subject to 

minimum required amounts of 

expenses, for example minimum 

expenses necessary for compliance with 

rule 206(4)-7).1150 This requires 

disclosure, but we believe that 

allocation of these types of fees and 

expenses to private fund clients can be 

deceptive in current market practice. 

For example, investors may be deceived 

to the extent the adviser does not 

disclose the total dollar amount of such 

fees and expenses before charging them. 

These expenses may also change over 

time in ways not expected by investors, 

requiring consistent ongoing 

disclosures. Investors may also be 

deceived if advisers describe such fees 

and expenses so generically as to 

conceal their true nature and extent.1151

As a final matter, we believe that 

these considerations vary according to 

the type of expense. For regulatory, 

compliance, and examination expenses, 

the risk of distorted adviser incentives 

when the investor bears the costs may 

be comparatively low, and with 

disclosure many investors may prefer to 

bear these costs and determine 

appropriate allocation of fund resources 

towards these expenses themselves. For 

example, investors are more likely to 

have varying preferences over whether 

the adviser hires a compliance 

consultant, the scope of legal services 

that will be provided to the fund, or 

whether the fund will conduct mock 

examinations in order to prepare for real 

examinations. 

Meanwhile, the risk of distorted 

adviser incentives may be higher in the 

case of investors bearing the costs of 

investigations by government or 

regulatory authorities. A fund in which 

the adviser, without having secured 

consent from investors, is able to pass 

on expenses associated with an 

investigation has adverse incentives to 

engage in conduct likely to trigger an 

investigation. While reputational effects 

may mitigate the effects of these adverse 

incentives, as advisers who pass on 

such expenses may be less able to attract 

investors in the future, reputational 

effects do not resolve these effects. 

Examinations may not necessarily 

implicate the adviser’s wrongdoing,1152

but investigations may carry a higher 

risk of such an implication. In 

particular, we do not believe there are 

reasonable cases where incentives are 

aligned by investors bearing the costs of 

investigations by government or 

regulatory authorities that result or have 

resulted in the governmental or 

regulatory authority, or a court of 

competent jurisdiction, sanctioning the 

adviser or its related persons for 

violating the Act or the rules 

thereunder. Our staff has also observed 

instances in which advisers have 

entered into agreements that reduce the 

amount of clawbacks by taxes paid, or 

deemed to be paid, by the adviser or its 

owners without sufficient disclosure as 

to the effects of these clawbacks,1153 and 

instances in which limited partnership 

agreements limit or eliminate liability 

for adviser misconduct.1154 While these 

agreements are negotiated between fund 

advisers and investors, as discussed 

above advisers often have discretion 

over the timing of fund payments, and 

so may have greater control over risks of 

clawbacks than anticipated by 

investors.1155 As such, reducing the 

amount of clawbacks by actual, 

potential, or hypothetical taxes can 

therefore pass an unnecessary and 

avoidable cost to investors when the 

investor has insufficient transparency 

into the effect of the taxes on the 

clawback. This cost, when not 

transparent to the investor, denies the 

investor the opportunity to understand 

the potential restoration of distributions 

or allocations to the fund that it would 

have been entitled to receive in the 

absence of an excess of performancebased compensation paid to the adviser 

or a related person. These clawback 

terms can therefore reduce the 

alignment between the fund adviser’s 

and investors’ interests when not 

properly disclosed. However, as many 


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1156See supra section II.E.1.b). 

1157See supra section II.E.2.b). 

1158 Id. 

1159Tax advances occur when the private fund 

pays or distributes amounts to the general partner 

to allow the general partner to cover tax obligations. 

1160See SBAI Comment Letter; CFA Comment 

Letter I; AIC Comment Letter I. 

1161See IAA Comment Letter II. 

1162See infra section VI.C.4. 

1163See supra section II.E.2.b). 

1164See supra section II.E.1.c). 

1165 Id. 

1166 Id. 

1167 Id. 

1168 Id. 

1169 Id. 

1170 Id. 

1171See supra section II.F. 

1172 Id. 

1173 Id. 

commenters stated, because this 

practice is widely implemented and 

negotiated, we do not believe there is a 

risk of investors being unable, today, to 

refuse to consent to this practice and 

being harmed as a result of being unable 

to consent to this practice.1156

We have also observed some cases 

where private fund advisers have 

directly or indirectly (including through 

a related person) borrowed from private 

fund clients.1157 This practice carries a 

heightened risk of investor harm 

because the adviser faces a direct 

conflict of interest: The adviser’s 

interests are on both sides of the 

borrowing transaction. This conflict of 

interest may result in the adviser 

borrowing from the fund even when it 

is harmful to the fund. For example, the 

fund client may be prevented from 

using borrowed assets to further the 

fund’s investment strategy, and so the 

fund may fail to maximize the investor’s 

returns. This risk is relatively higher for 

those investors that are not able to 

negotiate or directly discuss the terms of 

the borrowing with the adviser, and for 

those funds that do not have an 

independent board of directors or LPAC 

to review and consider such 

transactions.1158

However, as commenters stated, 

advisers may also borrow from funds in 

cases where it is beneficial to the fund 

and its investors for the adviser to do so, 

such as borrowing to facilitate tax 

advances,1159 borrowing arrangements 

outside of the fund structure,1160 and 

the activity of service providers that are 

affiliates of the adviser, especially with 

large financial institutions that play 

many roles in a private fund 

complex.1161 Therefore, whether an 

adviser borrowing from a fund is 

harmful to the fund varies not only from 

adviser to adviser and from fund to 

fund, but also varies according to each 

individual instance of the adviser 

borrowing, as the harm or benefit to the 

fund depends on the facts and 

circumstances surrounding that specific 

borrowing activity. 

As a final matter, unlike the case of 

adviser-led secondaries, it can be easier 

to reduce the risk of this conflict of 

interest distorting the terms, price, or 

interest rate of the fund’s loan to the 

adviser with disclosure and consent 

practices.1162 This is because the fund’s 

investors can, if the borrow is disclosed 

and investor consent is sought, compare 

the terms of the loan to publicly 

available commercial rates to determine 

if the terms are appropriate given 

market conditions, or may generally 

withhold consent if they perceive a 

conflict of interest. However, we do not 

understand that such disclosures and 

consent practices are always 

implemented today.1163

The staff also has observed harm to 

investors when advisers lead coinvestments, leading multiple private 

funds and other clients advised by the 

adviser or its related persons to invest 

in a portfolio investment.1164 In those 

instances, the staff observed advisers 

allocating fees and expenses among 

those clients on a non pro rata basis, 

resulting in some fund clients (and 

investors in those funds) being charged 

relatively higher fees and expenses than 

other clients.1165 This may particularly 

occur when one co-investment vehicle 

is made up of larger investors with 

specific fee and expense limits.1166

Advisers may make these decisions to 

avoid charging some portion of fees and 

expenses to funds with insufficient 

resources to bear their pro rata share of 

expenses related to a portfolio 

investment (whether due to insufficient 

reserves, the inability to call capital to 

cover such expenses, or otherwise) or 

funds in which the adviser has greater 

interests. These non pro rata allocations 

may also occur if an investor’s side 

letter has reached an expense cap, or if 

an investor’s side letter negotiates that 

the investor will not bear a particular 

type of expense. More generally, in any 

type of private fund, an adviser may 

choose to charge or allocate lower fees 

and expenses to a higher fee paying 

client to the detriment of a lower fee 

paying client. However, commenters 

stated that investors may also often 

benefit from these co-investment 

opportunities,1167 and the benefit to 

main fund investors may fairly and 

equitably lead to non-pro rata 

allocations of expenses. Commenters 

also stated that expenses may be 

generated disproportionately by one 

fund investing in a portfolio company, 

and so non-pro rata allocations that 

charge such expenses entirely to one 

fund could also be fair and 

equitable.1168 For example, this could 

occur under a bespoke structuring 

arrangement for one private fund client 

to participate in the portfolio 

investment.1169 However, our staff 

understand that investors today may not 

always receive disclosure of such nonpro rata allocations or the reasons for 

those allocations.1170

The staff also has observed harm to 

investors from disparate treatment of 

investors in a fund. For example, our 

staff has observed scenarios where an 

adviser grants certain private fund 

investors and/or investments in similar 

pools of assets with better liquidity 

terms than other investors.1171 These 

preferential liquidity terms can 

disadvantage other fund investors or 

investors in a similar pool of assets if, 

for instance, the preferred investor is 

able to exit the private fund or pool of 

assets at a more favorable time.1172

Similarly, private fund advisers, in 

some cases, disclose information about 

a private fund’s investments to certain, 

but not all, investors in a private fund, 

which can result in profits or avoidance 

of losses among those who were privy 

to the information beforehand at the 

expense of those kept in the dark.1173

Currently, many investors need to 

engage in their own research regarding 

what terms may be obtained from 

advisers, as well as whether other 

investors are likely to be obtaining 

better terms than those they are initially 

offered. 

We believe that it may be hard for 

many investors, even with full and fair 

disclosure and if investor consent is 

obtained, to understand the future 

implications of materially harmful 

contractual terms, in particular when 

certain investors are granted preferential 

liquidity terms or preferential 

information, at the time of investment 

and during the investment. Further, 

some investors may find it relatively 

difficult to negotiate agreements that 

would fully protect them from bearing 

unexpected portions of fees and 

expenses or from other decreases in the 

value of investments associated with 

these practices. For example, some 

forms of negotiation may occur through 

repeat-dealing that may not be available 

to some smaller private fund investors. 

While commenters argue that many 

investors are sophisticated, for whom 

disclosure may suffice, other smaller 

investors may be more vulnerable and 

thus still be harmed even with 

disclosure and if investor consent is 


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1174See supra sections VI.B, VI.C.1. 

1175See supra section VI.B. 

1176 Id. 

1177See supra section II.G. 

1178Advisers generally are required to update 

disclosures on Form ADV on both an annual basis, 

or when information in the brochure becomes 

materially inaccurate. Additionally, although 

advisers are not required to deliver the Form ADV 

Part 2A brochure to private fund investors, many 

private fund advisers choose to provide the 

brochure to investors as a best practice. 

1179The marketing rule’s compliance date was 

Nov. 4, 2022. As discussed above, the marketing 

rule and its specific protections generally will not 

apply in the context of a quarterly statement. See 

supra footnote 312. 

1180Commission staff publish quarterly reports of 

aggregated and anonymized data regarding private 

funds on the Commission’s website. See Form PF 

Statistics Report, supra at footnote 12. 1181Form PF Release, supra footnote 564. 

Advisers to private equity funds must file new 

quarterly reports on the occurrence of certain 

events, in particular the execution of an adviser-led 

secondary transaction. See infra sections VI.C.4, 

VI.D.6. 1182Form PF Release, supra footnote 564. 

1183 Id. 

obtained.1174 As another example, to the 

extent investors accept these terms 

because of their inability to coordinate 

their negotiations, they would still be 

unable to coordinate their negotiations 

even if consent was sought from each 

individual investor for a particular 

adviser practice.1175 Majority consent 

mechanisms, even to the extent they are 

implemented today, may have minimal 

ability to protect disadvantaged 

investors specifically in the case of 

preferred investors with sufficient 

bargaining power securing preferential 

terms over disadvantaged investors, as 

we would expect larger, preferred 

investors to outvote the disadvantaged 

investors.1176 For any investors affected 

by these issues, there may be 

mismatches between investor choices of 

private funds and preferences over 

private fund terms, investment 

strategies, and investment outcomes, 

relative to what would occur in the 

absence of such unexpected or 

uncertain costs. 

Our staff has also observed that 

investors are generally not provided 

with detailed information about broader 

types of preferential terms.1177 This lack 

of transparency prevents investors from 

understanding the scope or magnitude 

of preferential terms granted, and as a 

result, may prevent such investors from 

requesting additional information on 

these terms or other benefits that certain 

investors, including the adviser’s related 

persons or large investors, receive. In 

this case, these investors may simply be 

unaware of the types of contractual 

terms that could be negotiated, and may 

not face any limitations over their 

ability to consent to these terms or their 

ability to negotiate these terms once the 

terms are sufficiently disclosed. To the 

extent this lack of transparency affects 

investor choices of where to allocate 

their capital, it can result in mismatches 

between investor choices of private 

funds and their preferences over private 

fund terms, investment strategies, and 

investment outcomes. 

3. Private Fund Adviser Fee, Expense, 

and Performance Disclosure Practices 

Current rules under the Advisers Act 

do not require advisers to provide 

quarterly statements detailing fees and 

expenses (including fees and expenses 

paid to the adviser and its related 

persons by portfolio investments) to 

private fund clients or to fund investors. 

The custody rule does, however, 

generally require registered advisers 

whose private fund clients are not 

undergoing a financial statement audit 

to have a reasonable basis for believing 

that the qualified custodians that 

maintain private fund client assets 

provide quarterly account statements to 

the fund’s limited partners. Those 

account statements may contain some of 

this information, though in our 

experience certain fees and expenses 

typically are not presented with the 

level of detail the final quarterly 

statement rule will require. In addition, 

Form ADV Part 2A (‘‘brochure’’) 

requires certain information about a 

registered adviser’s fees and 

compensation. For example, Part 2A, 

Item 6 of Form ADV requires a 

registered adviser to disclose in its 

brochure whether the adviser accepts 

performance-based fees, whether the 

adviser manages both accounts that are 

charged a performance-based fee and 

accounts that are charged another type 

of fee, and any potential conflicts. The 

information on Form ADV is available 

to the public, including private fund 

investors, through the Commission’s 

Investment Adviser Public Disclosure 

(‘‘IAPD’’) website.1178 We understand 

that many prospective fund investors 

obtain the brochure and other Form 

ADV data through the IAPD public 

website. 

Similarly, there currently are no 

requirements under current Advisers 

Act rules for advisers to provide 

investors with a quarterly statement 

detailing private fund performance, 

although advisers are subject to the 

antifraud provisions of the federal 

securities laws and any relevant 

requirements of the marketing rule and 

private placement rules. Although our 

recently adopted marketing rule 

contains requirements that pertain to 

displaying performance information and 

providing information about specific 

investments in adviser advertisements, 

these requirements do not compel the 

adviser to provide performance 

information to all private fund clients or 

investors. Rather, the requirements 

apply when an adviser chooses to 

include performance or address specific 

investments within an 

advertisement.1179

Form PF requires certain additional 

fee, expense, and performance 

reporting, but unlike Form ADV, Form 

PF is not an investor-facing disclosure 

form. Information that private fund 

advisers report on Form PF is provided 

to regulators on a confidential basis and 

is nonpublic.1180 Form PF recently was 

revised to include new current reporting 

requirements (though the effective date 

has not arrived) requiring large hedge 

fund advisers to qualifying hedge funds 

(i.e., hedge funds with a net asset value 

of at least $500 million) to file a current 

report with the Commission when their 

funds experience certain stress events, 

several of which may affect the fund’s 

performance.1181 However, Form PF 

reporting, both in its regularly 

scheduled reporting and in its current 

reporting, often only requires reporting 

on the basis of how advisers report 

information to investors. For example, 

Form PF Section 1A, Item C, Question 

17 requires reporting of gross 

performance and performance net of 

management fees, incentive fees, and 

allocations ‘‘as reported to current and 

prospective investors (or, if calculated 

for other purposes but not reported to 

investors, as so calculated)’’ and 

requires reporting ‘‘only if such results 

are calculated for the reporting fund 

(whether for purposes of reporting to 

current or prospective investors or 

otherwise).’’ 1182 Similarly, the events in 

the current reporting framework that 

rely on performance measurements are 

based on the fund’s ‘‘reporting fund 

aggregate calculated value,’’ which only 

requires valuation of positions ‘‘with the 

most recent price or value applied to the 

position for purposes of managing the 

investment portfolio’’ and need not be 

subject to fair valuation procedures.1183

Within this framework, advisers have 

exercised discretion in responding to 

the needs of private fund investors for 

periodic statements regarding fees, 

expenses, and performance or similar 

information on their current 

investments, and we discuss this variety 

in practices throughout this section. 

Broadly, current investors often use this 

information in determining whether to 

invest in subsequent funds and 

investment opportunities with the same 

adviser, or to pursue alternative 


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1184See, e.g., Professor Clayton Public Investors 

Article, supra footnote 12. 

1185See, e.g., Reporting Template, ILPA, available 

at https://ilpa.org/reporting-template/. ILPA is a 

trade group for investors in private funds. 

1186 ILPA Comment Letter I; see also ILPA 

Comment Letter II; The Future of Private Equity 

Regulation, supra footnote 983, at 17. 

1187 Id.; ILPA Private Fund Advisers Data Packet, 

supra footnote 983. 

1188 ILPA Comment Letter II; The Future of 

Private Equity Regulation, supra footnote 983, at 

16–17; ILPA Private Fund Advisers Data Packet, 

supra footnote 983, at 23. 

1189See supra sections II.B.1, II.B.2. 

1190 Id. 

1191See supra section II.B. 

1192To the extent that a private fund’s securities 

are offered pursuant to 17 CFR 230.500 through 

230.508 (Regulation D of the Securities Act) and 

such offering is made to an investor who is not an 

‘‘accredited investor’’ as defined therein, that 

investor must be provided with disclosure 

documents that generally contain the same type of 

information required to be provided in offerings 

under Regulation A of the Securities Act, as well 

as certain financial statement information. See 17 

CFR 230.502(b). However, private funds generally 

do not offer interests in funds to non-accredited 

investors. 

investment opportunities. When fund 

advisers raise multiple funds 

sequentially, they often consider current 

investors to also be prospective 

investors in their subsequent funds, and 

so may make disclosures to motivate 

future capital commitments. The format, 

scope and reporting intervals of these 

disclosures vary across advisers and 

private funds. Some disclosures provide 

limited information while others are 

more detailed and complex. A private 

fund adviser may agree, contractually or 

otherwise, to provide disclosures to a 

fund investor, and on the details of 

these disclosures, at the time of the 

investment or subsequently. A private 

fund adviser also may provide such 

information in the absence of an 

agreement. The flexibility in these 

options has led to the development of 

diverse approaches to the disclosure of 

fees, expenses, and performance, 

resulting in informational asymmetries 

among investors in the same private 

fund.1184

The private equity investor industry 

group ILPA, observing the variation in 

reporting practices across funds, has 

suggested the use of a standardized 

template for this purpose.1185 In its 

comment letter, ILPA cited that in 2021, 

59% of private equity LPs in a survey 

reported receiving the template more 

than half the time, indicating that LPs 

must continue to use their negotiating 

resources to receive the template, and 

many private equity investors do not 

receive it at all.1186 Ongoing experience 

demonstrates that advisers do not 

provide the same transparency to all 

investors: In a more recent survey, 56% 

of private equity investor respondents 

indicated that information transparency 

requests granted to one investor are 

generally not granted to all investors, 

and 75% find that an adviser’s 

agreement to report fees and expenses 

consistent with the ILPA reporting 

template was made through the side 

letter, or informally, and not reflected in 

the fund documents presented to all 

investors.1187

Investors may, as a result, find it 

difficult to assess and compare 

alternative fund investments, which can 

make it harder to allocate capital among 

competing fund investments or among 

private funds and other potential 

investments. In one industry survey, 

55% of respondents either disagreed or 

strongly disagreed that the reporting 

provided by advisers across fees, 

expenses, and performance provides the 

needed level of transparency.1188

Limitations in required disclosures by 

advisers may therefore result in 

mismatches between investor choices of 

private funds and their preferences over 

private fund terms, investment 

strategies, and investment outcomes. 

While a variety of practices are used, 

as the market for private fund investing 

has grown, some patterns have emerged. 

We understand that most private fund 

advisers currently provide current 

investors with quarterly reporting, and 

many private fund advisers 

contractually agree to provide fee, 

expense, and performance reporting.1189

Further, advisers typically provide 

information to existing investors about 

private fund fees and expenses in 

periodic financial statements, 

schedules, and other reports under the 

terms of the fund documents.1190

However, reports that are provided to 

investors may report only aggregated 

expenses, or may not provide detailed 

information about the calculation and 

implementation of any negotiated 

rebates, credits, or offsets.1191 Investors 

may use the information that they 

receive about their fund investments to 

monitor the expenses and performance 

from those investments. Their ability to 

measure and assess the impact of fees 

and expenses on their investment 

returns depends on whether, and to 

what extent, they are able to receive 

detailed disclosures regarding those fees 

and expenses and regarding fund 

performance. Some investors currently 

do not receive such detailed disclosures, 

and this reduces their ability to monitor 

the performance of their existing fund 

investment or to compare it with other 

prospective investments. 

In other cases, adviser reliance on 

exemptions from specific regulatory 

burdens for other regulators can lead 

advisers to make certain quarterly 

disclosures. For example, while we 

believe that many advisers to hedge 

funds subject to the jurisdiction of the 

U.S. Commodity Futures Trading 

Commission (‘‘CFTC’’) rely on an 

exemption provided in CFTC Regulation 

§ 4.13 from the requirement to register 

with CFTC as a ‘‘commodity pool 

operator,’’ some may rely on other CFTC 

exemptions, exclusions or relief. 

Specifically, we believe that some 

advisers registered with the CFTC may 

operate with respect to a fund in 

reliance on CFTC Regulation § 4.7, 

which provides certain disclosure, 

recordkeeping and reporting relief and 

to the extent that the adviser does so, 

the adviser would be required to, no less 

frequently than quarterly, prepare and 

distribute to pool participants 

statements that present, among other 

things, the net asset value of the exempt 

pool and the change in net asset value 

from the end of the previous reporting 

period. 

In addition, information about 

advisers’ fees and about expenses is 

often included in advisers’ marketing 

documents, or included in the fund 

documents, yet the information may not 

be standardized or uniform. Many 

advisers to private equity funds and 

other illiquid funds provide prospective 

investors with access to a virtual data 

room for the fund, containing the fund’s 

offering documents (including 

categories of fees and expenses that may 

be charged), as well as the adviser’s 

brochure and other ancillary items, such 

as case studies.1192 These advisers meet 

the contractual and other needs of 

investors for updated information by 

updating the documents in the data 

room. Many advisers to funds that 

would be considered liquid funds under 

the rule, such as hedge funds, tend not 

to use data rooms. They instead take the 

approach of sending email or using 

other methods to convey updated 

information to investors. For instance, 

prior to closing on a prospective 

investor’s investment, some advisers 

send out preclosing email messages 

containing updated versions of these 

and other documents. Prospective 

investors at the start of the life of a fund, 

or at or before the time of their 

investment, may use this information in 

conducting due diligence, in deciding 

whether to seek to negotiate the terms 

of investment, and ultimately in 

deciding whether to invest in the 

adviser’s fund. 

The adviser’s and related persons’ 

rights to compensation, which are set 

forth in fund documents, vary across 


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1193See supra section II.B.1. 

1194See, e.g., David Snow, Private Equity: A Brief 

Overview, PEI Media (2007), available at https://

www.law.du.edu/documents/registrar/adv-assign/ 

Yoost_PrivateEquity%20Seminar_

PEI%20Media’s%20Private%20Equity%20- 

%20A%20Brief%20Overview_318.pdf. 

1195 Id. 

1196 Id. 

1197Waterfalls (especially deal-by-deal waterfalls) 

typically have clawback arrangements to ensure 

that advisers do not retain carried interest unless 

investors recoup their entire capital contributions 

on the whole fund, plus a preferred return. The 

result is that total distributions to investors and 

advisers under the two waterfalls can be equal (but 

may not always be), conditional on correct 

implementation of clawback provisions. In that 

case, the key difference in the two arrangements is 

that deal-by-deal waterfalls result in fund advisers 

potentially receiving their performance-based 

compensation faster. However, some deal-by-deal 

waterfalls may also require fund advisers to escrow 

their performance-based compensation until 

investors receive their total capital contributions to 

the fund plus their preferred return on the total 

capital contributions. These escrow policies can 

help secure funds that may need to be available in 

the event of a clawback. Id. 

1198Ludovic Phalipoou, An Inconvenient Fact: 

Private Equity Returns & The Billionaire Factory, 

Univ. of Oxford (Said Bus. Sch. Working Paper, 

June 10, 2020), available at https://ssrn.com/ 

abstract=3623820. 1199 Id.; see also SEC, Div. of Investment Mgmt: 

Analytics Office, Private Funds Statistics Report: 

Fourth Calendar Quarter 2015, at 5 (July 22, 2016), 

available at https://www.sec.gov/divisions/ 

investment/private-funds-statistics/private-fundsstatistics-2015-q4.pdf. 

1200Private equity management fees are currently 

estimated to typically be 1.76% and performancebased compensation is currently estimated to 

typically be 20.3% of private equity fund profits. 

See, e.g., Ashley DeLuce & Pete Keliuotis, How to 

Navigate Private Equity Fees and Terms, Callan’s 

Rsch. Cafe ́ (Oct. 7, 2020), available at https://

www.callan.com/uploads/2020/12/2841fa9a3ea9

dd4dddf6f4daefe1cec4/callan-institute-privateequity-fees-terms-study-webinar.pdf. Private equity 

net assets under management as of the fourth 

quarter of 2020 were approximately $4.2 trillion. 

SEC, Div. of Investment Mgmt: Analytics Office, 

Private Funds Statistics Report: Fourth Calendar 

Quarter 2020, at 5 (Aug. 4, 2021), available at 

https://www.sec.gov/divisions/investment/privatefunds-statistics/private-funds-statistics-2020-q4.pdf. 

Total fees may be estimated by multiplying 

management fee percentages by net assets under 

management, and by multiplying performancebased compensation percentages by net assets 

under management and again by an estimate of 

private equity annual returns, which may 

conservatively be assumed to be approximately 

10%. See, e.g., Michael Cembalest, Food Fight: An 

Update on Private Equity Performance vs. Public 

Equity Markets, J.P. Morgan Asset and Wealth 

Mgmt. (June 28, 2021), available at https://

privatebank.jpmorgan.com/content/dam/jpm-wmaem/global/pb/en/insights/eye-on-the-market/ 

private-equity-food-fight.pdf. 1201See Form PF Statistics Report, supra footnote 

12. 

1202For example, hedge fund management fees 

are currently estimated to typically be 1.4% per 

year and performance-based compensation is 

currently estimated to typically be 16.4% of hedge 

fund profits, approximately consistent with private 

equity fees. See, e.g., Leslie Picker, Two and Twenty 

is Long Dead: Hedge Fund Fees Fall Further Below 

Onetime Industry Standard, CNBC (June 28, 2021), 

available at https://www.cnbc.com/2021/06/28/twoand-twenty-is-long-dead-hedge-fund-fees-fallfurther-below-one-time-industry-standard.html 

(citing HRF Microstructure Hedge Fund Industry 

Report Year End 2020). Hedge funds, as of the 

fourth quarter of 2020, represented another 

approximately $4.7 trillion in net assets under 

management. See Form PF Statistics Report, supra 

footnote 12. 

1203See, e.g., Ludovic Phalippou, Christian Rauch 

& Marc Umber, Private Equity Portfolio Company 

Fees, 129 J. Fin. Econ. 3, 559–585 (2018). 

1204See supra section II.B.1. There may be certain 

economic arrangements where only certain 

investors to the fund receive credits from rebates. 

1205See, e.g., Juliane Begenau & Emil 

Siriwardane, How Do Private Equity Fees Vary 

Across Public Pensions? (Harvard Bus. Sch. 

Working Paper, Jan. 2020, Revised Feb. 2021) 

(concluding that a sample of public pension funds 

investing in a sample of private equity funds would 

have received an average of an additional $8.50 per 

$100 invested had they received the best observed 

fees in the sample); Tarun Ramadorai & Michael 

Streatfield, Money for Nothing? Understanding 

Variation in Reported Hedge Fund Fees (Paris, Dec. 

2012 Finance Meeting, EUROFIDAI–AFFI Paper, 

Mar. 28, 2011), available at https://ssrn.com/ 

abstract=1798628 (retrieved from SSRN Elsevier 

database) (finding that in a sample of hedge fund 

advisers, management fees ranging from less than 

0.5% to over 2% and finding incentive fees ranging 

from less than 5% to over 20%, with no detectible 

difference in performance by funds with different 

management fees and only modest evidence of 

higher incentive fees yielding higher returns). One 

commenter states that ‘‘[t]he Commission is 

concerned’’ about this substantial variation in fees, 

and argues that we have overlooked that there are 

economic reasons for different fees or prices 

charged to investors. See AIC Comment Letter I, 

Appendix 1. We do not believe this argument 

correctly characterizes the Proposing Release or the 

final rules. While we agree that there are economic 

reasons for different fees or prices charged, in 

particular that charging different fees may be a 

plausible substitute for other more harmful types of 

preferential treatment, we believe that this 

substantial variation in fees across funds means that 

achieving appropriate transparency is crucial for 

investors. See Proposing Release, supra footnote 3, 

at 204; see also supra section VI.B, infra sections 

VI.D.2, VI.D.4. Another commenter stated that ‘‘[t]o 

fund types and advisers and can be 

difficult to quantify at the time of the 

initial investment. For example, 

advisers of private equity funds 

generally receive a management fee 

(compensating the adviser for managing 

the affairs of the fund) and performancebased compensation (incentivizing 

advisers to maximize the fund’s 

profits).1193 Performance-based 

compensation arrangements in private 

equity funds typically require that 

investors recoup capital contributions 

plus a minimum annual return (called 

the ‘‘hurdle rate’’ or ‘‘preferred return’’), 

but these arrangements can vary 

according to the waterfall arrangement 

used, meaning that distribution 

entitlements between the adviser (or its 

related persons) and the private fund 

investors can depend on whether the 

proceeds are distributed on a wholefund (known as European-style) basis or 

a deal-by-deal (known as Americanstyle) basis.1194 In the whole-fund 

(European) case, the fund typically 

allocates all investment proceeds to the 

investors until they recoup 100% of 

their capital contributions attributable 

to both realized and unrealized 

investments plus their preferred return, 

at which point fund advisers typically 

begin to receive performance-based 

compensation.1195 In the deal-by-deal 

(American) case (or modified versions 

thereof), it is common for investment 

proceeds from each portfolio investment 

to be allocated 100% to investors until 

investors recoup their capital 

contributions attributable to that 

specific investment, any losses from 

other realized investments, and their 

applicable preferred return, and then 

fund advisers can begin to receive 

performance-based compensation from 

that investment.1196 Under the deal-bydeal waterfall, advisers can potentially 

receive performance-based 

compensation earlier in the life of the 

fund, as successful investments can 

deliver advisers performance-based 

compensation before investors have 

recouped their entire capital 

contributions to the fund.1197

Management fee compensation figures 

and performance-based compensation 

figures are not widely disclosed or 

reported publicly,1198 but the sizes of 

certain of these fees have been estimated 

in industry and academic literature. For 

example, one study estimated that from 

2006–2015, performance-based 

compensation alone for private equity 

funds averaged $23 billion per year.1199

Private fund fees increase as assets 

under management increase, and the 

private fund industry has grown since 

2015, and as a result private equity 

management fees and performancebased compensation fees may together 

currently total over $100 billion dollars 

in fees per year.1200 Private equity 

represents $4.2 trillion of the $11.5 

trillion dollars in net assets under 

management by private funds,1201 and 

so total fees across private funds may be 

over $200 billion dollars in fees per 

year.1202

In addition, advisers or their related 

persons may receive a monitoring fee for 

consulting services targeted to a specific 

asset or company in the fund 

portfolio.1203 Whether they ultimately 

retain the monitoring fee depends, in 

part, on whether the fund’s governing 

documents require the adviser to offset 

portfolio investment compensation 

against other revenue streams or 

otherwise provide a rebate to the fund 

(and so indirectly to the fund 

investors).1204 There can be substantial 

variation in the fees private fund 

advisers charge for similar services and 

performances.1205 Ultimately, the fund 


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support [their] assertion with respect to hedge 

funds, [the Commission] cites a lone study . . . . 

However, a meaningful assessment of price 

competition . . . cannot be based on unsubstantiated 

assertions and a lone study.’’ CCMR Comment 

Letter IV. We believe this mischaracterizes the 

Proposing Release. The additional statistics cited by 

this commenter speak to average alpha, average 

returns, and average risk-adjusted returns of hedge 

funds, among other average statistics. The 

Proposing Release, by contrast, discusses 

substantial variation across advisers in fees charged 

and in their performance. Additional literature 

cited in the commenter’s analysis states ‘‘‘[i]n 

contrast to the perception of a common 2/20 fee 

structure,’ there are ‘considerable cross-sectional 

and time series variations in hedge fund fees,’’’ 

which we also believe supports the Proposing 

Release’s discussion. Id., see also Proposing 

Release, supra footnote 3, at 196. 

1206See supra section II.B.1. 

1207As discussed above, certain factors are 

currently used for determining how certain types of 

private funds should report performance under U.S. 

GAAP. See supra section II.B.2. 

1208See supra section II.B.2.b). 

1209 Id. 

1210 Id. 

1211 Id. 

1212See, e.g., James F. Albertus & Matthew Denes, 

Distorting Private Equity Performance: The Rise of 

Fund Debt, Frank Hawkins Kenan Institute of 

Private Enterprise Report (June 2019), available at 

https://www.kenaninstitute.unc.edu/wp-content/ 

uploads/2019/07/DistortingPrivateEquity

Performance_07192019.pdf; Recommendations 

Regarding Private Asset Fund Subscription Lines, 

Cliffwater LLC (July 10, 2017); Subscription Lines 

of Credit and Alignment of Interest, ILPA (June 

2017), available at https://ilpa.org/wp-content/ 

uploads/2020/06/ILPA-Subscription-Lines-ofCredit-and-Alignment-of-Interests-June-2017.pdf. 

1213See, e.g., Pierre Schillinger, Reiner Braun & 

Jeroen Cornel, Distortion or Cash Flow 

Management? Understanding Credit Facilities in 

Private Equity Funds (Aug. 7, 2019), available at 

https://ssrn.com/abstract=3434112; Enhancing 

Transparency Around Subscription Lines of Credit, 

supra footnote 1001. 

1214Subscription Lines of Credit and Alignment 

of Interest, supra footnote 1212. 

1215 Id. 

1216Enhancing Transparency Around 

Subscription Lines of Credit, supra footnote 1001. 

1217See, e.g., Oliver Gottschalg & Ludovic 

Phalippou, The Truth About Private Equity 

Performance, Harvard Bus. Rev. (Dec. 2007), 

available at https://hbr.org/2007/12/the-truthabout-private-equity-performance. 

1218One commenter argues that neither IRR nor 

MOIC takes into account the timing of fund 

transactions, and provides as an example three 

funds with different timing of contributions and 

distributions but the same IRR. See XTAL Comment 

Letter. We disagree. The fact that it is possible to 

construct examples in which two funds with 

different timings of payments can have the same 

IRRs does not mean that IRR broadly fails to take 

into account the time value of money. Rather, this 

only indicates that in any such examples, the 

Continued 

(and indirectly the investors) bears the 

costs relating to the operation of the 

fund and its portfolio investments.1206

Regarding performance disclosure, 

advisers typically provide information 

about fund performance to investors 

through the account statements, 

transaction reports, and other reports. 

Some advisers, primarily private equity 

fund advisers, also disclose information 

about past performance of their funds in 

the private placement memoranda that 

they provide to prospective investors. 

Many standardized industry methods 

have emerged that private funds rely on 

to report returns and performance.1207

However, each of these standardized 

industry methods has a variety of 

benefits and drawbacks, including 

differences in the information they are 

able to capture and their susceptibility 

to manipulation by fund advisers. 

For private equity and other funds 

that would be determined to be illiquid 

under the final rules, standardized 

industry methods for measuring 

performance must contend with the 

complexity of the timing of potentially 

illiquid investments and must also 

reflect the adviser’s discretion in the 

timing of distributing proceeds to 

investors. 

One approach that has emerged for 

computing returns for private equity 

and other funds that would be 

determined to be illiquid funds is the 

internal rate of return (‘‘IRR’’).1208 As 

discussed above, an important benefit of 

IRR that drives its use is that IRR can 

reflect the timing of cash flows more 

accurately than other performance 

measures.1209 All else equal, a fund that 

delivers returns to its investors faster 

will have a higher IRR. 

However, current use of IRR to 

measure returns has a number of 

drawbacks, including an upward bias in 

the IRR that comes from a fund’s use of 

leverage, assumptions about the 

reinvestment of proceeds, and a large 

effect on measured IRR from cash flows 

that occur early in the life of the pool. 

For example, as discussed above, some 

private equity funds borrow extensively 

at the fund level.1210 This can cause 

IRRs to be biased upwards. Since IRRs 

are based in part on the length of time 

between the fund calling up investor 

capital and the fund distributing profits, 

private equity funds can delay capital 

calls by first borrowing from fund-level 

subscription facilities to finance 

investments.1211

This practice has several key 

implications for investors. First, this 

practice has been used by private equity 

funds to artificially boost reported IRRs, 

but investors must pay the interest on 

the debt used and can potentially suffer 

lower total returns.1212 Second, because 

the increases to IRR can reflect a 

manipulation of financing timing (and 

can distort total returns) rather than 

being a reflection of the adviser’s skill 

and return opportunities, or even a 

reflection of the adviser’s skill in cash 

flow management, the higher reported 

performance can distort fund 

performance rankings and distort future 

fundraising outcomes.1213 Lastly, use of 

subscription lines to boost IRRs can 

artificially boost IRRs over the fund’s 

preferred return hurdle rate, resulting in 

the adviser receiving carried interest 

compensation in a scenario where the 

adviser would not have received carried 

interest without the subscription line, 

and where the investor may not agree 

that the subscription line improved total 

returns and warranted a carried interest 

payment.1214 If the use of a subscription 

line artificially boosts the IRR and does 

not actually reflect the adviser’s 

investment skill, losses later in the 

fund’s life may be more likely, 

potentially resulting in a clawback.1215

While investors have grown aware of 

these issues, utilization of subscription 

lines has continued to grow, and 

investor industry groups continue to 

report challenges in achieving visibility 

into fund liquidity and cash 

management practices around 

subscription lines.1216 As for 

reinvestment assumptions, the IRR as a 

performance measure assumes that cash 

proceeds have been reinvested at the 

IRR over the entire investment period. 

For example, if a private equity or other 

fund determined to be illiquid reports a 

50% IRR but has exited an investment 

and made a distribution to investors 

early in its life, the IRR assumes that the 

investors were able to reinvest their 

distribution again at a 50% annual 

return for the remainder of the life of the 

fund.1217

Although IRR remains one of the 

leading standardized methods of 

reporting returns at present, these and 

other drawbacks make IRR difficult as a 

singular return measure, especially for 

investors who likely may not 

understand the limitations of the IRR 

metric, and the differences between IRR 

and total return metrics used for public 

equity or registered investment funds. 

Several other measures have emerged 

for measuring the performance of 

private equity and other funds that 

would be determined to be illiquid 

under the final rule. These measures 

compensate for some of the 

shortcomings of IRR at the cost of their 

own drawbacks. Multiple of invested 

capital (‘‘MOIC’’), used by private equity 

funds, is the sum of the net asset value 

of the investment plus all the 

distributions received divided by the 

total amount paid in. MOIC is simple to 

understand in that it is the ratio of value 

received divided by money invested, 

but has a key drawback that, unlike IRR, 

MOIC does not take into account the 

time value of money.1218


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comparable funds are offering similar performances 

to their investors, taking the time value of money 

into consideration. We continue to understand that, 

in general, IRR takes into account the time value of 

money. 

1219See supra section II.B.2.b). 

1220See, e.g., Private Capital Performance Terms, 

Preqin, available at https://www.preqin.com/ 

academy/industry-definitions/private-capitalperformance-terms-definitions. 

1221See, e.g., Robert Harris, Tim Jenkinson & 

Steven Kaplan, Private Equity Performance: What 

Do We Know?, 69 J. Fin. 1851 (2014), available at 

https://onlinelibrary.wiley.com/doi/full/10.1111/ 

jofi.12154; Steven Kaplan & Antoinette Schoar, 

Private Equity Performance: Returns, Persistence, 

and Capital Flows, 60 J. Fin. 1791 (2005), available 

https://onlinelibrary.wiley.com/doi/full/10.1111/ 

j.1540-6261.2005.00780.x. 

1222See supra section II.B.2.b). 

1223 Id. 

1224 Id. 

1225See, e.g., Ludovic Phalippou & Oliver 

Gottschalg, The Performance of Private Equity 

Funds, 22 Rev. Fin. Stud. 1747–1776 (Apr. 2009). 

1226AIC Comment Letter I; Gregory W. Brown, 

Oleg Gredil & Steven N. Kaplan, Do Private Equity 

Funds Manipulate Reported Returns? J. Fin. Econ., 

Forthcoming, Fama-Miller Working Paper (Apr. 30, 

2017) (‘‘Brown et al.’’), available at https://

ssrn.com/abstract=2271690. 

1227Brown et al., supra footnote 1226. 

1228 Id. 

1229CFA Comment Letter I; CFA Comment Letter 

II. 

1230 GIPS, Guidance Statement on Fees (Sept. 28, 

2010), available at http://www.gipsstandards.org/ 

wp-content/uploads/2021/03/fees_gs_2011.pdf. 

1231 Id. 

1232 Id. 

1233See, e.g., CFA Comment Letter I; CFA 

Comment Letter II. 

1234Marketing Release, supra footnote 127. 

1235 Id. 

Another measure closely related to 

MOIC is the TVPI, or ‘‘total value to 

paid-in capital’’ ratio.1219 When applied 

to an entire fund, MOIC and TVPI are 

similar performance metrics. However, 

both MOIC and TVPI have analogous 

measures than can be applied to just the 

realized and unrealized portions of a 

fund, and differ in their approaches to 

these portions of funds. For TVPI, the 

unrealized and realized analogues are 

RVPI (‘‘residual value to paid-in 

capital’’) and DPI (‘‘distributions to 

paid-in capital’’) ratios, and the 

denominator in both of these cases is 

the total called capital of the entire 

fund.1220 For MOIC, unrealized and 

realized MOIC have as denominators 

just the portions of the called capital 

attributable to unrealized and realized 

investments in the portfolio. RVPI and 

DPI sum to TVPI, while unrealized 

MOIC and realized MOIC must be 

combined as a weighted average to yield 

total MOIC. In the staff’s experience, in 

the TVPI framework, substantial 

misvaluations applied to unrealized 

investments, when unrealized 

investments are a small portion of the 

fund’s portfolio, may go undetected 

because in that case the denominator in 

the RVPI will be very large compared to 

the size of the misevaluation. By 

comparison, unrealized MOIC will have 

as a denominator just the called capital 

contributed to the unrealized 

investments, and so the misevaluation 

may be easier to detect. 

Another measure, Public Market 

Equivalent (‘‘PME’’), also used by 

private equity and other illiquid funds, 

is sometimes used to compare the 

performance of a fund with the 

performance of an index.1221 The 

measure is an estimate of the value of 

fund cash flows relative to the value of 

a public market index. Relative to a 

given benchmark, differences in PME 

can indicate differences in the 

performance of different private fund 

investments. However, the computation 

of the PME for a fund requires the 

availability of information about fund 

cash flows including their timing and 

magnitude. 

Regardless of the performance 

measure applied, another fundamental 

difficulty in reporting the performance 

of illiquid funds is accounting for 

differences in realized and unrealized 

gains. Illiquid funds generally pursue 

longer-term investments, and reporting 

of performance before the fund’s exit 

requires estimating the unrealized value 

of investments.1222 There are often 

multiple methods that may be used for 

valuing an unrealized illiquid 

investment. As discussed above, the 

valuations of these unrealized illiquid 

investments are typically determined by 

the adviser and, given the lack of readily 

available market values, can be 

challenging. Such methods may rely on 

unobservable models and other 

inputs.1223 Because advisers are 

typically evaluated (and, in certain 

cases, compensated) based on the value 

of these illiquid investments, unrealized 

valuations are at risk of being inflated, 

such that fund performance may be 

overstated.1224 Some academic studies 

have found broadly that private equity 

performance is overstated, driven in 

part by inflated accounting of ongoing 

investments.1225

One paper cited by commenters 

argues that even when advisers do 

manipulate their investment valuations, 

‘‘investors can see through [the 

adviser’s] manipulation on 

average.’’ 1226 Brown et al. (2013) agree 

that there is evidence of 

underperforming managers inflating 

reported returns during times when 

fundraising takes place, but they also 

find that, on average, those managers are 

less likely to raise a subsequent 

fund.1227 We disagree with the 

commenter’s assessment that this study 

indicates that investors in private funds 

are all equipped to protect their 

interests without any further regulation. 

The paper cited itself concedes that in 

its findings, unskilled investors may 

misallocate capital, and that it is only 

the more sophisticated investors who 

may prefer the status quo to a regime 

with more regulation.1228 We believe 

the commenter’s interpretation of this 

paper also ignores the costs that 

investors must currently undertake to 

‘‘see through’’ manipulation, even on 

average. 

Commenters also added to this 

discussion that there are different 

methods and norms for calculating gross 

performance and then net performance 

that is net of fees and expenses. In 

particular, the CFA Institute described 

the role of GIPS standards in providing 

definitions and methods for calculating 

gross returns and net returns.1229 The 

GIPS standards define ‘‘gross-of-fees 

returns’’ as the return on investments 

reduced only by trading expenses.1230

GIPS states that gross-of-fees returns 

demonstrates the firm’s expertise in 

managing assets without the impact of 

the firm’s or client’s skills in negotiating 

fees.1231 GIPS defines ‘‘net-of-fees 

returns’’ as gross-of-fees returns reduced 

by management fees, including 

performance-based fees and carried 

interest.1232

The CFA Institute also acknowledged 

the role of the recent marketing rule in 

defining gross and net performance.1233

The marketing rule defines gross 

performance as ‘‘the performance results 

of a portfolio (or portions of a portfolio 

that are included in extracted 

performance, if applicable) before the 

deduction of all fees and expenses that 

a client or investor has paid or would 

have paid in connection with the 

investment adviser’s investment 

advisory services to the relevant 

portfolio.’’ 1234 However, the final rule 

also offers guidance that ‘‘the final rule 

does not prescribe any particular 

calculation of gross performance . . . 

Under the final rule, advisers may use 

the type of returns appropriate for their 

strategies provided that the usage does 

not violate the rule’s general 

prohibitions.’’ 1235 Thus, gross reporting 

under GIPS standards deducts 

transaction fees, but under the 

marketing rule may or may not, 

depending on the adviser’s internal 

calculation methodologies. 


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1236 Id. 

1237See, e.g., OPERS Comment Letter; CFA 

Comment Letter II. 

1238See supra footnote 1222 and accompanying 

text. 

1239See, e.g., J Curve, Corp. Fin. Inst. (June 28, 

2023), available at https://corporatefinance

institute.com/resources/economics/j-curve/. 

1240See supra footnote 1222 and accompanying 

text; see also Proposing Release, supra footnote 3, 

at 59–60. 

1241Because these problems are exacerbated 

when the fund primarily invests in illiquid assets, 

as separate from when the investors’ interests in the 

fund are illiquid, certain funds that will be defined 

to be liquid funds under the final rules may also 

rely on IRR and MOIC performance reporting today. 

1242See, e.g., ATR Comment Letter; ICM 

Comment Letter. 

1243See, e.g., Philippe Jorion & Christopher 

Schwarz, The Fix Is In: Properly Backing Out 

Backfill Bias, 32 Soc’y Fin. Stud. 5048–5099 (Dec. 

2019); see also Nickolay Gantchev, The Costs of 

Shareholder Activism: Evidence From A Sequential 

Decision Model, 107 J. Fin. Econ. 610–631 (2013). 

One commenter stated that ‘‘[t]he Proposed Rule 

also casts doubt on the reliability of public data on 

hedge fund performance . . . implying that these 

data may [ ] overstate fund performance. The 

Proposed Rule then suggests that its proposed 

restrictions will remedy this purported lack of price 

and quality competition.’’ CCMR Comment Letter 

IV. We believe this mischaracterizes the Proposing 

Release. The discussion in the Proposing Release, 

and in this release, pertain to whether existing 

private tools are sufficient for investors seeking to 

evaluate the performance of hedge fund advisers 

and other liquid fund advisers. The paragraph cited 

by the commenter discusses that there are 

limitations to the extent to which investors may be 

able to conduct complete evaluations of the 

performance of their adviser using existing methods 

because, for example, public commercial databases 

may have biased data. We agree with the 

commenter that, for example, there is no literature 

concluding that hedge fund performance is low, 

and that public data on hedge fund performance 

indicating otherwise are not a reliable rebuttal to 

assertions of low hedge fund performance. See 

Proposing Release, supra footnote 3, at 208, 230. 

Moreover, the commenter then cites additional 

literature illustrating that some hedge fund advisers 

may understate their performance in public 

commercial databases, for example to prevent 

disclosing clues about their proprietary trading 

strategies. We believe this result means the 

literature demonstrates that there is likely variation 

in the bias of performance reporting by hedge fund 

advisers. Variation in the bias of performance 

reporting by advisers further limits the ability to 

which commercial databases today can satisfy 

investor needs when evaluating their advisers, as 

investors cannot tell the direction of bias of any 

given adviser in the data. 

The marketing rule defines net 

performance as ‘‘the performance results 

of a portfolio (or portions of a portfolio 

that are included in extracted 

performance, if applicable) after the 

deduction of all fees and expenses that 

a client or investor has paid or would 

have paid in connection with the 

investment adviser’s investment 

advisory services to the relevant 

portfolio, including, if applicable, 

advisory fees, advisory fees paid to 

underlying investment vehicles, and 

payments by the investment adviser for 

which the client or investor reimburses 

the investment adviser.’’ 1236 Thus, net 

returns under GIPS standards only 

deduct management fees, performancebased fees, and carried interest, but 

under the marketing rule all fees and 

expenses may be deducted, depending 

on the adviser’s treatment of certain fees 

and expenses, such as custodian fees for 

safekeeping funds and securities. 

For illiquid funds under the final 

rules, standard industry methods for 

reporting performance do not use 

annual returns, because annual returns 

for individual years may be 

substantially less informative for 

investors. For an investor in an illiquid 

fund who has limited or no ability to 

withdraw or redeem from a fund, we 

understand that the investor’s primary 

concern is more typically measurement 

of the total increase in the value of its 

investment over the life of the illiquid 

fund and the average cumulative return 

as measured by MOIC and IRR, rather 

than the annual returns in any given 

year. Consistent with this, many 

commenters expressed support for the 

proposal’s rules that would require 

MOIC and IRR for private equity funds 

and other illiquid funds, as compared to 

requiring annual returns.1237

Private equity funds and other illiquid 

funds also must, as discussed above,1238

more frequently measure performance of 

the fund both with respect to realized 

and unrealized investments. In addition 

to the challenges described above, the 

difficulty of valuing unrealized 

investments often contributes to what is 

deemed a ‘‘J-Curve’’ to illiquid fund 

performance, causing many 

performance metrics to report negative 

returns for investors in early years (as 

investor capital calls occur, funds 

deploy capital, and funds hold 

unrealized investments) and large 

positive returns in later years (as 

investments succeed and are exited, and 

proceeds are distributed).1239 As 

discussed above and in the Proposing 

Release, these problems are exacerbated 

by a potential lack of reliable valuation 

data prior to realization of an 

investment, in particular when the fund 

primarily invests in illiquid assets.1240

For investors in those funds, an annual 

return in the middle of the life of the 

fund therefore does not provide the 

same information as the cumulative 

impact of their investments since the 

fund’s inception, as measured by MOIC 

and IRR.1241

Other approaches tend to be used for 

evaluating the performance of hedge 

funds and other liquid funds. In 

particular, investors who are 

determining whether and when to 

withdraw from or request a redemption 

from a liquid fund typically find annual 

net total returns more informative than 

metrics such as an IRR measured since 

the fund’s inception, as annual net total 

returns allow the investor to measure 

whether the liquid fund’s performance 

is likely to continue to outperform its 

next best investment alternative. 

Consistent with this, many commenters 

disagreed with the proposed rule 

requirement of annual net total returns 

since inception, stating that more recent 

returns are more relevant.1242 Other 

methods include a fund’s ‘‘alpha’’ and 

its ‘‘Sharpe ratio.’’ A fund’s alpha is its 

excess return over a benchmark index of 

comparable risk. A fund’s Sharpe ratio 

is its excess return above the risk-free 

market rate divided by the investment’s 

standard deviation of returns. Many, but 

not all, hedge funds disclose these and 

other performance measures, including 

net returns of the fund. Many hedge 

fund-level performance metrics can be 

calculated by investors directly using 

data on the fund’s historical returns, by 

either combining with publicly 

available benchmark index data (in the 

case of alpha) or by combining with an 

estimate of the standard deviation of the 

fund’s returns (in the case of the Sharpe 

ratio). Despite these detailed methods, 

data in commercial databases on hedge 

fund performance reporting may also be 

biased, because hedge funds choose 

whether and when to make their 

performance results available to 

commercial databases.1243


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1244See supra section II.A. 

1245LSTA Comment Letter; SFA Comment Letter 

I; SFA Comment Letter II; SIFMA–AMG Comment 

Letter I; TIAA Comment Letter. 

1246 Id. 

1247 Id. 

1248 Id. 

1249See, e.g., Phalippou et al., supra footnote 

1225; Cembalest, supra footnote 1200. 

1250See supra section II.C; rule 206(4)–2(b)(4). We 

note that the staff has stated that, in order to meet 

the requirements of rule 206(4)–2(b)(4), these 

financial statements must be prepared in 

accordance with U.S. GAAP or, for certain non-U.S. 

funds and non-U.S. advisers, prepared in 

accordance with other standards, so long as they 

contain information substantially similar to 

statements prepared in accordance with U.S. GAAP, 

with material differences reconciled. See SEC, Staff 

Responses to Questions About the Custody Rule, 

available at https://www.sec.gov/divisions/ 

investment/custody_faq_030510.htm. 1251See, e.g., PCAOB, AS 2301: The Auditor’s 

Responses to the Risks of Material Misstatement, 

available at https://pcaobus.org/oversight/ 

standards/auditing-standards/details/AS2301; 

AICPA, AU–C Section 240: Consideration of Fraud 

in a Financial Statement Audit (2021), available at 

https://us.aicpa.org/content/dam/aicpa/research/ 

standards/auditattest/downloadabledocuments/auc-00240.pdf. 

1252Rule 206(4)–2(a)(4) requires that an adviser 

that is registered or required to be registered under 

Section 203 of the Act with custody of client assets 

to obtain an annual surprise examination from an 

independent public accountant. An adviser to a 

pooled investment vehicle that is subject to an 

annual financial statement audit by a PCAOBregistered independent public accountant that is 

subject to regular inspection is not, however, 

required to obtain an annual surprise examination 

if the vehicle distributes the audited financial 

statements prepared in accordance with generally 

accepted accounting principles to the pool’s 

investors within 120 days of the end of its fiscal 

year. See rule 206(4)–2(b)(4). One commenter stated 

that the Proposing Release’s analysis of audit 

frequencies did not limit analysis of current audit 

rates to PCAOB-registered and -inspected auditors. 

We agree, and also note that the Proposing Release 

did not limit its analysis to audits of financial 

statements prepared in accordance with U.S. GAAP. 

The analysis here is limited to PCAOB-registered 

and -inspected independent auditors conducting 

audits of financial statements prepared in 

accordance with U.S. GAAP, and we still find that 

approximately 90% of funds undergo such an audit. 

See AIMA/ACC Comment Letter. 

Because CLOs and other SAFs 

primarily issue debt to investors, 

typically structured as notes and issued 

in different tranches to investors, typical 

fee, expense, and performance reporting 

practices for these funds differ from 

other types of funds.1244 Typical 

reporting for SAFs is designed to 

provide relevant information to different 

debt tranches of a fund, which offer 

different defined returns based on 

different priorities of payments and 

different defined levels of risk 

associated with their notes. Because 

debt interests in a SAF are not 

structured to provide variable 

investment returns like an equity 

interest, SAF reporting metrics 

prioritize measuring the likelihood of 

the debt investor receiving its 

previously agreed-upon defined return. 

For example, commenters stated that 

CLOs typically report overcollateralization ratios, examinations of the 

average credit rating of the portfolio, the 

diversity of holdings within the 

portfolio, and the promised yield of 

portfolio assets.1245 Monthly reports of 

the portfolio holdings will also often 

include one or more credit ratings for 

each individual asset in the 

portfolio,1246 and also often include 

summaries of cash flows and mark to 

market valuations for every asset in the 

portfolio.1247 Finally, commenters 

stated that CLO managers typically earn 

three types of management fees, all of 

which are set out in the indenture and 

paid in accordance with the waterfall, 

and that a CLO’s quarterly reports 

include the calculation of the amounts 

to be distributed or paid in accordance 

with the waterfall on the payment 

date.1248

While the Commission believes that 

many advisers currently select from 

these varying standardized industry 

methods to prepare and present 

performance information, the difficulty 

in measuring and reporting returns on a 

basis comparable with respect to risk, 

coupled with the potentially high fees 

and expenses associated with these 

funds, can present investors with 

difficulty in monitoring and selecting 

their investments. Specifically, without 

disclosure of detailed performance 

measures and accounting for the impact 

of risk, debt, the varying impact of 

realized and unrealized gains, 

performances across funds can be highly 

overstated or otherwise manipulated, 

and so impossible to compare.1249

4. Fund Audits, Fairness Opinions, and 

Valuation Opinions 

Currently under the custody rule, 

private fund advisers may obtain 

financial statement audits as an 

alternative to the requirement of the rule 

that an RIA with custody of client assets 

obtain an annual surprise examination 

from an independent public 

accountant.1250 Advisers of funds that 

obtain these audits, regardless of the 

type of fund, are thus able to provide 

fund investors with reasonable 

assurances of the accuracy and 

completeness of the fund’s financial 

statements and, specifically, that the 

financial statements are free from 

material misstatements.1251

Also under the custody rule, an 

adviser’s choice for a fund to obtain an 

external financial statement audit (in 

lieu of a surprise examination) may 

depend on the benefit of the audit from 

the adviser’s perspective, including the 

benefit of any assurances that an audit 

might provide investors about the 

reliability of the financial statement. 

The adviser’s choice also may depend 

on the cost of the audit, including fees 

and expenses. 

Based on Form ADV data and as 

shown below, approximately 90% of the 

total number of hedge funds and private 

equity funds that are advised by RIAs 

currently undergo a financial statement 

audit, by a PCAOB-registered 

independent public accountant that is 

subject to regular inspection.1252 Other 

types of private funds advised by RIAs 

undergo financial statement audits with 

similarly high frequency, with the 

exception of SAFs, of which fewer than 

20% are audited according to the recent 

ADV data. 

FIGURE 3 

Fund type Total funds Unaudited 

funds 

Unaudited 

pct. 

(%) 

Audited 

pct. 

(%) 

Hedge Fund ..................................................................................................... 12,442 1,188 9.6 90.4 

Liquidity Fund .................................................................................................. 88 28 31.8 68.2

Other Private Fund .......................................................................................... 6,201 1,282 20.7 79.3 

Private Equity Fund ......................................................................................... 22,709 2,110 9.3 90.7 

Real Estate Fund ............................................................................................. 4,717 756 16 84.0 

Securitized Asset Fund .................................................................................... 2,554 2,319 90.8 9.20

Venture Capital Fund ....................................................................................... 2,558 498 16.3 83.7 


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1253See supra section VI.C.3. 

1254See 17 CFR 275; rule 206(4)–2. However, the 

proposal of a new rule to address how investment 

advisers safeguard client assets considered closing 

this discrepancy. See Safeguarding Release, supra 

footnote 467. 

1255For example, annual financial statements 

may not include both gross and net IRRs and 

MOICs, separately for realized and unrealized 

investments, and with and without the impact of 

fund-level subscription facilities. Annual financial 

statements may also vary in the level of detail 

provided for portfolio investment-level 

compensation. See, e.g., Illustrative Financial 

Statements: Private Equity Funds, KPMG (Nov. 

2020), available at https://audit.kpmg.us/articles/ 

2020/illustrative-financial-statements-2020.html; 

Illustrative Financial Statements: Hedge Funds, 

KPMG (Nov. 2020), available at https://

audit.kpmg.us/articles/2020/illustrative-financialstatements-2020.html. 

1256Based on staff analysis of Form ADV 

Schedule D, Section 7.B.(1) data filed between Oct. 

1, 2017 and Sept. 30, 2022. 

1257See, e.g., Canaras Comment Letter; TIAA 

Comment Letter; SFA Comment Letter I; SFA 

Comment Letter II; LSTA Comment Letter. 

1258See, e.g., Canaras Comment Letter; LSTA 

Comment Letter; SFA Comment Letter I; SFA 

Comment Letter II. As discussed above, one 

commenter stated that GAAP’s efforts to assign, 

through accruals, a period to a given expense or 

income may not be useful, and potentially 

confusing, for SAF investors because principal, 

interest, and expenses of administration of assets 

can only be paid from cash received. We note that 

vehicles that issue asset-backed securities are 

specifically excluded from other Commission rules 

that require issuers to provide audited GAAP 

financial statements, and we have stated that GAAP 

financial information generally does not provide 

useful information to investors in asset-backed 

securitization vehicles. See supra section II.A; see 

also SFA Comment Letter I; SFA Comment Letter 

II. 

1259 Id., see also supra sections II.C, VI.C.1. 

1260 Id. 

FIGURE 3—Continued 

Fund type Total funds Unaudited 

funds 

Unaudited 

pct. 

(%) 

Audited 

pct. 

(%) 

Unique Totals ........................................................................................... 51,767 8,181 15.8 84.2 

Source: Form ADV, Schedule D, Section 7.B.(1) filed between Oct. 1, 2021, and Sept. 30, 2022. 

These audits, while currently valuable 

to investors, do not obviate the issues 

with fee, expense, and performance 

reporting discussed above.1253 First, as 

shown in Figure 3 above, not all funds 

advised by RIAs currently undergo 

annual financial statement audits from a 

PCAOB-registered and -inspected 

auditor. Second, statements regarding 

fees, expenses, and performance tend to 

be more frequent, and thus more timely, 

than audited annual financial 

statements. Third, there currently exists 

a discrepancy in reporting requirements 

to the Commission between surprise 

examinations and audits: Problems 

identified during a surprise exam must 

currently be reported to the Commission 

under the custody rule, but problems 

identified during an audit, even if the 

audit is serving as the replacement for 

the surprise examination under the 

custody rule, do not need to be reported 

to the Commission.1254 Lastly, more 

frequent fee, expense, and performance 

disclosures can include incremental and 

more granular information that would 

be useful to investors and that would 

not typically be included in an annual 

financial statement.1255

Funds of different sizes do vary in 

their propensity to get audits, but audits 

are common for funds of all sizes. 

Figures 4A and 4B below show that for 

funds of size <$2 million, excluding 

securitized asset funds, approximately 

4800 out of approximately 6100 funds 

already get an audit from a PCAOBregistered and -inspected independent 

auditor, or approximately 76%. For 

funds of size $2 million to $10 million, 

this percentage is approximately 82%. 

This percentage generally increases as 

funds get larger, such that for funds of 

size >$500 million, approximately 6400 

out of approximately 7000 funds already 

get an audit from a PCAOB-registered 

and -inspected independent auditor, or 

approximately 91%. However, of 

course, because larger funds have more 

assets, these larger funds still represent 

a large volume of unaudited assets. 

Funds of size <$10 million have 

approximately $7.1 billion in assets not 

audited by a PCAOB registered and 

inspected independent auditor, while 

funds of size >$500 million have 

approximately $1.9 trillion in assets not 

audited by a PCAOB-registered and 

-inspected independent auditor.1256

Funds also vary by their fund type in 

their propensity to get audits. Many 

commenters stated that CLOs and other 

asset-backed securitization vehicles 

generally do not get such audits, in 

particular because audited financial 

statements prepared under U.S. GAAP 

may not be as useful for investors with 

debt interests in cash flow vehicles such 

as CLOs and other such vehicles who 

are primarily focused on the underlying 

cash flows of the fund.1257 CLOs are 

generally captured in Form ADV data 

under ‘‘securitized asset funds.’’ The 

low rates of audits for securitized asset 

funds, as seen in Figure 3 above and 

Figure 4B below, is therefore likely 

driven by the low propensity for CLO 

funds and other SAFs to get audits, 

consistent with commenters’ statements. 

Some commenters further stated that 

CLOs and other such funds are more 

likely to engage independent accounting 

firms to perform ‘‘agreed upon 

procedures’’ on quarterly reports.1258

These procedures are often related to 

the securitized asset fund’s cash flows 

and the calculations relating to a 

securitized asset fund portfolio’s 

compliance with the portfolio 

requirements and quality tests (such as 

overcollateralization, diversification, 

interest coverage, and other tests) set 

forth in the fund’s securitization 

transaction agreements.1259 The agreedupon-procedures report details the 

results of procedures performed that 

provide the user of the report with 

information regarding these complex 

cash allocations and distributions, 

whereas a financial statement audit 

focuses on potential investor harm 

regarding whether or not the financial 

statements are presented fairly in 

accordance with applicable accounting 

framework.1260

BILLING CODE 8011–01–P 


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1261 Id. We discuss the implications of these facts 

for the final mandatory audit requirement below. 

See infra section VI.D.5. 

1262LaSalle Comment Letter; PWC Comment 

Letter. 

1263CFA Comment Letter I. 

BILLING CODE 8011–01–C 

Figures 4A, 4B, and 5 also show that 

fund audits have also grown over time 

at a rate approximately consistent with 

the growth of the rest of private funds. 

Figure 5 shows that the average 

percentage of audited funds, across all 

fund sizes, has remained high at 

approximately 85% for the last five 

years. An implication of this fact is that 

the number of audits being added to the 

industry each year is not substantially 

larger than the number of outstanding 

funds not receiving audits: Figure 4B 

shows that approximately 8,100 funds 

did not get audits in 2022 from PCAOBregistered and -inspected independent 

auditors. Figure 4A shows that, 

excluding securitized asset funds, 

approximately 5,800 funds did not get 

audits in 2022 from PCAOB-registered 

and -inspected independent auditors. 

There was growth in the number of 

audits from PCAOB-registered and 

-inspected independent private fund 

auditors of approximately 2,000 in 2020, 

approximately 3,000 in 2021, and 

approximately 6,000 in 2022.1261

As a final matter, several commenters 

state that certain funds get an audit from 

a Big Four firm because of their 

investors’ demands, but none of the Big 

Four firms would meet the 

independence requirement under the 

proposed rules.1262 These funds get an 

audit from a non-independent auditor, 

often in response to client demands for 

an audit, and then undergo an 

additional surprise exam from a 

PCAOB-registered and -inspected 

independent auditor. Another 

commenter stated that some funds are 

currently unable to get an audit from a 

PCAOB-registered and -inspected 

independent auditor, because there is a 

shortage of audit firms meeting those 

criteria for many advisers.1263

FIGURE 6 

Fund type Total funds 

Funds who get an 

annual audit that is 

by a PCAOBregistered and 

-inspected auditor 

but who is not 

independent 

Get a surprise 

exam from an 

independent 

public accountant 

Funds who get an 

annual audit by an 

independent public 

accountant who is 

not PCAOBregistered and 

-inspected 

Get a surprise 

exam from an 

independent public 

accountant 

Hedge Fund ......................................... 12,442 20 14 46 2 

Liquidity Fund ....................................... 88 0 0 0 0 

Other Private Fund .............................. 6,201 175 172 16 1 

Private Equity Fund ............................. 22,709 71 70 65 10 

Real Estate Fund ................................. 4,717 23 5 11 3 

Securitized Asset Fund ........................ 2,554 0 0 8 6 

Venture Capital Fund ........................... 3,056 14 14 11 0 

Unique Totals ................................ 51,767 303 275 157 22 

Source: Form ADV Schedule D, Section 7.B.(1) and 9.C. data filed between Oct. 1, 2017, and Sept. 30, 2022. 


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1264See supra section II.C. 

1265Unlike the case of adviser borrowing, there is 

a heightened risk of this conflict of interest 

distorting the terms or price of the transaction, and 

it may be difficult for disclosure practices or 

consent practices alone to resolve these conflicts, 

because in an adviser-led secondary there may be 

limited market-driven price discovery processes 

available to investors. Even where market-driven 

price discovery processes are available, they may be 

particularly subject to manipulation in the case of 

adviser-led secondaries. For example, if a recent 

sale improperly valued an asset, an adviser could 

be incentivized to initiate a transaction with the 

same valuation, which, depending on the terms of 

the transaction, may benefit the adviser at the 

expense of the investors. Similarly, if the market 

price of shares in a publicly traded underlying asset 

is volatile and drops suddenly or is depressed for 

an extended period of time, an adviser may be 

incentivized to seek to execute an adviser-led 

secondary with respect to such asset as soon as 

possible to lock in the lower price to the detriment 

of investors. See supra sections II.D, VI.C.2. 

1266See, e.g., Rae Wee, Turnover Surges As Funds 

Rush To Exit Private Equity Stakes, Reuters (Dec. 

18, 2022), available at https://www.reuters.com/ 

business/finance/global-markets-privateequity-pix2022-12-19/ (retrieved from Factiva database). 

1267See, e.g., Madeline Shi, Investors Up 

Allocation To Secondaries As GPs Seek Alternative 

Liquidity Sources, PitchBook (Sep. 15, 2022), 

available at https://pitchbook.com/news/articles/ 

investor-secondaries-growth-alternative-liquidity. 

1268See supra section II.D. 

1269 Id. 

1270Form PF Release, supra footnote 564. 

1271See supra section VI.C.3. 

1272See, e.g., IAA Comment Letter II; Houlihan 

Comment Letter; Cravath Comment Letter. 

1273Houlihan Comment Letter. 

1274 Id. 

1275 Id. 

1276See, e.g., IAA Comment Letter II; Houlihan 

Comment Letter; Cravath Comment Letter. 

1277Cravath Comment Letter. 

1278See supra section II.D.2; see also Houlihan 

Comment Letter. 

1279See supra section II.D.1. 

1280 Id. 

1281 Id. 

Figure 6 further analyzes the funds 

from Figure 4 who do not get an audit 

by a PCAOB-registered and -inspected 

independent auditor. In particular, 

while some funds do not get audits at 

all, Figure 6 analyzes the funds that may 

get an audit, but not an audit from a 

PCAOB-registered and -inspected 

independent auditor. Figure 6 shows 

that less than one percent of all funds 

get an additional surprise exam 

alongside an audit from an auditor who 

is not independent, which indicates that 

no more than one percent of funds are 

managed by advisers who face difficulty 

in complying with existing audit 

requirements because of the 

independence standard. Figure 6 also 

shows that only a de minimis number of 

funds, namely 149 out of almost 50 

thousand, excluding securitized asset 

funds, are managed by advisers who get 

an audit from an auditor who is not 

PCAOB-registered and -inspected. 

Regarding fairness opinions, our staff 

has observed a recent rise in adviser-led 

secondary transactions where an adviser 

offers fund investors the choice between 

selling their interests in the private fund 

or converting or exchanging them for 

new interests in another vehicle advised 

by the adviser.1264 These transactions 

involve direct conflicts of interest on the 

part of the adviser in structuring and 

leading these transactions because the 

adviser is on both sides of the 

transaction. In any such transaction, the 

adviser may face an incentive to 

structure the price of the transaction to 

be particularly beneficial to one of the 

vehicles, in particular by under-valuing 

or over-valuing the asset instead of 

engaging in an arms-length transaction, 

and so investors in one fund or the other 

are likely to be harmed.1265 Advisers 

also may face an incentive to pursue 

these transactions even when it is not in 

the best interest of the fund to engage in 

the transaction at all. For example, it 

has been reported that adviser-led 

secondaries occur during times of stress 

and may be associated with an adviser 

who needs to restructure a portfolio 

investment.1266 In other instances, an 

adviser may use an adviser-led 

secondary transaction to extend an 

investment beyond the contractually 

agreed upon term of the fund that holds 

it.1267 While commenters stated that 

advisers may also pursue adviser-led 

secondaries for the benefit of 

investors,1268 and we agree, the 

advisers’ incentives to distort price or 

terms are present in each such 

transaction. Advisers also have the 

ability and discretion to distort price or 

terms in many such transactions, as 

many transactions in adviser-led 

secondaries contain level 3 or illiquid 

assets.1269

In part because of these risks of 

conflicts of interest, we understand that 

some, but not all, advisers obtain 

fairness opinions in connection with 

these transactions that typically address 

whether the price offered is fair. These 

fairness opinions are meant to provide 

investors with some third-party 

assurance as a means to help protect 

participating investors. The 

Commission’s recently adopted 

amendments to Form PF require 

advisers to private equity funds who 

must file Form PF (registered advisers 

with at least $150 million in private 

fund assets under management) to file 

on a quarterly basis on the occurrence 

of adviser-led secondary 

transactions.1270 However, as discussed 

above, Form PF is not an investor-facing 

disclosure form. Information that 

private fund advisers report on Form PF 

is provided to regulators on a 

confidential basis and is nonpublic.1271

Some commenters stated that other 

alternatives to fairness opinions are also 

commonly used tools.1272 A valuation 

opinion is a written opinion stating the 

value (either as a single amount or a 

range) of any assets being sold as part 

of an adviser-led secondary transaction. 

By contrast, a fairness opinion addresses 

the fairness from a financial point of 

view to a party paying or receiving 

consideration in a transaction.1273 One 

commenter stated that the financial 

analyses used to support a fairness 

opinion and valuation opinion are 

substantially similar.1274 Both types of 

opinions generally yield implied or 

indicative valuation ranges.1275

However, commenters stated that the 

costs of valuation opinions are typically 

lower than the costs of fairness 

opinions, all else equal.1276 We 

understand this to typically be because 

of the extra burden of a fairness opinion 

in which the opinion often speaks to 

prices paid or received, not just to the 

value of the assets in the transaction.1277

We believe, based on commenter 

arguments and typical fairness opinion 

and valuation opinion practices, that to 

the extent that the information 

asymmetry between investors and 

advisers is concentrated in the valuation 

of the assets, and not other terms of the 

deal, a valuation opinion can alleviate 

this problem as effectively as a fairness 

opinion. We believe valuation opinions 

are viable options for providing price 

transparency to an investor, and that a 

valuation opinion will still provide 

investors with a strong basis to make an 

informed decision.1278

As discussed above, adviser-led 

secondaries may differ from other 

practices such as tender offers.1279

Tender offers may include, for example, 

a transaction where the investor is not 

truly faced with the decision between 

(1) selling all or a portion of its interest 

and (2) converting or exchanging all or 

a portion of its interest.1280 Tender 

offers may also include the case where 

the investor is allowed to continue to 

receive exposure to the asset by 

retaining its interest in the same fund on 

the same terms.1281

5. Books and Records 

The books and records rule includes 

requirements for recordkeeping to 

promote, and facilitate internal and 

external monitoring of, compliance. For 

example, the books and records rule 

requires advisers registered or required 

to be registered under Section 203 of the 

Act to make and keep true, accurate and 

current certain books and records 


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1282See rule 204–2 under the Advisers Act. 

1283 Id. 

1284Rule 206(4)–7 under the Advisers Act. 

1285 Id. 

1286See supra section III; see also SBAI Comment 

Letter; IAA Comment Letter II. 

1287See supra section III; see also NSCP 

Comment Letter. 

1288Proposing Release, supra footnote 3, at 213– 

214. 

1289See supra section VI.B. The lack of 

transparency in private fund investments can also 

negatively affect investors because of the lack of 

independent governance mechanisms, which leaves 

limited ability for investors to cause funds to 

effectively oversee and give consent to adviser 

practices. See supra sections I, VI.B, VI.C.2. 

relating to their investment advisory 

businesses, including advisory business 

financial and accounting records, and 

advertising and performance 

records.1282 Advisers are required to 

maintain and preserve these records in 

an easily accessible place for a period of 

not less than five years from the end of 

the fiscal year during which the last 

entry was made on such record, the first 

two years in an appropriate office of the 

investment adviser.1283 Commenters did 

not provide further perspectives on the 

current state of books and records 

compliance practices. 

6. Documentation of Annual Review 

Under the Compliance Rule 

Under the Advisers Act compliance 

rule, advisers registered or required to 

be registered under Section 203 of the 

Act must review no less frequently than 

annually the adequacy of their 

compliance policies and procedures and 

the effectiveness of their 

implementation. Currently, there is no 

requirement to document that review in 

writing.1284 This rule applies to all 

investment advisers, not just advisers to 

private funds.1285 We understand that 

many investment advisers routinely 

make and preserve written 

documentation of the annual review of 

their compliance policies and 

procedures, even while the compliance 

rule does not require such written 

documentation. Many advisers retain 

such documentation for use in 

demonstrating compliance with the rule 

during an examination by our Division 

of Examinations. As discussed above, 

several commenters stated that written 

documentation of the annual review has 

been widely adopted as a standard 

practice by investment advisers.1286

However, based on staff experience, we 

understand that not all advisers make 

and retain such documentation of the 

annual review. One commenter also 

described that there are a variety of 

ways advisers may document the annual 

review of their policies and procedures, 

including written reports, presentations, 

and informal compilations of notes, 

among other methods.1287

D. Benefits and Costs 

1. Overview 

The final rules will (a) require 

registered investment advisers to 

provide certain disclosures in quarterly 

statements to private fund investors, (b) 

require all investment advisers, 

including those that are not registered 

with the Commission, to make certain 

disclosures of preferential terms offered 

to prospective and current investors, (c) 

with certain exceptions, prohibit all 

private fund advisers, including those 

that are not registered with the 

Commission, from providing certain 

types of preferential treatment that the 

advisers reasonably expect to have a 

material negative effect on other 

investors, (d) restrict all private fund 

advisers, including those that are not 

registered with the Commission, from 

engaging in certain activities with 

respect to the private fund or any 

investor in that private fund, with 

certain exceptions for when the adviser 

satisfies certain disclosure requirements 

and, in some cases, when the adviser 

also satisfies certain consent 

requirements, (e) require a registered 

private fund adviser to obtain an annual 

financial statement audit of a private 

fund and, in connection with an 

adviser-led secondary transaction, a 

fairness opinion or valuation opinion 

from an independent opinion provider, 

and (f) impose compliance rule 

amendments and recordkeeping 

requirements, including certain 

requirements that apply to all advisers, 

to enhance the level of regulatory and 

other external monitoring of private 

funds and other clients. 

Without Commission action, private 

funds and private fund advisers would 

have limited abilities and incentives to 

implement effective reforms such as 

those in the final rules. As discussed in 

the Proposing Release, private fund 

investments can have insufficient 

transparency in negotiations as well as 

in reporting of performance and fees/ 

expenses, and certain sales practices, 

conflicts of interest, and compensation 

schemes are either not transparent to 

investors or can be harmful and have 

significant negative effects on private 

fund returns.1288 As discussed above, 

because of the asymmetries in investor 

and adviser bargaining power, investors 

may have limited ability to negotiate for 

enhanced transparency, and even new 

rules that mandate enhanced 

transparency may not give investors the 

ability to negotiate for safer contractual 

terms with respect to certain sales 

practices, conflicts of interest, and 

compensation schemes that can 

negatively impact investors.1289

The results are costs and risks of 

investor harm in financial markets, and 

by extension costs and risks of harm to 

millions of Americans through State and 

municipal pension plans, college and 

university endowments, and non-profit 

organizations. The relationship between 

fund adviser and investor can provide 

valuable opportunities for 

diversification of investments and an 

efficient avenue for the raising of 

capital, enabling economic growth that 

would not otherwise occur. However, 

the current opacity of the market can 

prevent even sophisticated investors 

from optimally obtaining certain terms 

of agreement from fund advisers, and 

this can result in investors paying 

excess costs, bearing excess risk, 

receiving limited and less reliable 

information about investments, and 

receiving contractual terms that may 

reduce their returns relative to what 

they would obtain otherwise. The final 

rules provide a regulatory solution that 

enhances the protection of investors and 

improves the current state of many of 

these problems. Moreover, the final 

rules do so in a way that does not 

deprive fund advisers of compensation 

for their services: Insofar as the rules 

shift costs and risks back onto fund 

advisers, the rules strengthen the 

incentives of advisers to manage risk in 

the interest of fund investors and, in 

doing so, does not preclude fund 

advisers from responding by raising 

prices of services that are not prohibited 

and are transparently disclosed and, in 

some cases, where investor consent is 

obtained. 

Effects. In analyzing the effects of the 

final rules, we recognize that investors 

may benefit from access to more useful 

information about the fees, expenses, 

and performance of private funds. They 

also may benefit from more intensive 

monitoring of funds and fund advisers 

by third parties, including auditors and 

persons who prepare assessments of 

secondary transactions. Finally, 

investors may benefit from more 

specific disclosure and, in some cases, 

consent requirements involving certain 

sales practices, conflicts of interest, and 

compensation schemes that may result 

in investor harm, and a restriction of 

certain practices where they are not 

specifically disclosed or, in some cases, 

where investor consent is not obtained. 

The specific provisions of the final rules 

will benefit investors, and by extension 

costs and risks of harm to millions of 


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1290See infra section VI.E. 1291See, e.g., MFA Comment Letter II; Comment 

Letter of the Managed Funds Association (July 21, 

2023) (‘‘MFA Comment Letter III’’); AIC Comment 

Letter IV. These commenters discussed generally 

the cumulative costs of these proposed and adopted 

rules, as well as possible costs of simultaneous 

adoption; they did not identify other specific 

interactions from the rules that result in benefits or 

costs that would not be purely additive. 

1292See supra section VI.C. 

1293See infra sections VI.D.2, VI.D.6. 

1294See infra section VI.E.2. 

1295See supra section II.E. 

1296The competitive effects of these heightened 

costs are discussed below. See infra section VI.E.2. 

The effects of these compliance costs on advisers, 

including their competitive effects, are difficult to 

quantify. Some advisers may have high profit 

margins but low ability or willingness to pass on 

new costs to funds, and so may earn lower profits 

but with no further effects. Other advisers may pass 

on some or all of the new costs to funds, and by 

extension their investors, reducing fund and 

investor returns. Still other advisers may exit the 

market or forgo entry. Measuring the likelihood of 

each of these outcomes for the purposes of 

quantifying effects would require individualized 

inquiry into the conditions and characteristics of 

each adviser, or would require speculative 

assumptions that may not be reliable. 

1297For example, private equity fund agreements 

often allow the adviser to raise capital for new 

funds before the end of the fund’s life, as long as 

all, or substantially all, of the money in prior fund 

has been invested. See supra section VI.C.2. 

1298See supra section VI.B. 

Americans through State and municipal 

pension plans, college and university 

endowments, and non-profit 

organizations, through each of these 

basic effects. Further effects on 

efficiency, competition, and capital 

formation are analyzed below.1290

Some commenters stated that the 

proposed private fund adviser rules and 

other recently proposed or adopted 

rules would have interacting effects, and 

that the effects should not be analyzed 

independently.1291 The Commission 

acknowledges that the effects of any 

final rule may be impacted by recently 

adopted rules that precede it. 

Accordingly, each economic analysis in 

each adopting release considers an 

updated economic baseline that 

incorporates any new regulatory 

requirements, including compliance 

costs, at the time of each adoption, and 

considers the incremental new benefits 

and incremental new costs over those 

already resulting from the preceding 

rules. That is, as stated above, the 

economic analysis appropriately 

considers existing regulatory 

requirements, including recently 

adopted rules, as part of its economic 

baseline against which the costs and 

benefits of the final rule are 

measured.1292

In particular, the Commission’s 

analysis here considers three primary 

ways in which preceding adopted rules 

impact the baseline, meaning the state 

of the world in the absence of the final 

rules, and as such we believe the 

analysis is responsive to commenter 

concerns. First, as a general matter, the 

incremental effect of new compliance 

costs on advisers from the final rules 

can vary depending on the total amount 

of compliance costs already facing 

advisers. Whether an adviser is likely to 

respond to new compliance costs 

without exiting or without substantially 

passing on costs to investors depends on 

the adviser’s profits today above 

existing compliance costs. Recently 

adopted rules impact advisers’ profits, 

and so impact the degree to which new 

compliance costs may result in advisers 

exiting the market or in costs being 

passed on to investors. Second, as a 

related matter, if other rules have been 

adopted sufficiently recently, the state 

of the world in the absence of the final 

rules may specifically include the 

transition periods for recently adopted 

rules. Certain advisers may face 

increased costs from coming into 

compliance with multiple rules 

simultaneously. Third, to the extent 

recently adopted rules address matters 

related to those in the final rules, the 

benefits of the final rules may be 

mitigated to the extent recently adopted 

rules already offer certain investor 

protections. 

Specifically, the recent amendments 

to Form PF may result in these three 

effects. First, the recent amendments to 

Form PF result in economic costs of 

new required current reporting for 

advisers to hedge funds and new 

quarterly and annual reporting for 

advisers to private equity funds. 

Second, the incremental new costs of 

the final private fund adviser rules may 

be borne, in part, at the same time as the 

new Form PF costs, as the effective date 

of the new Form PF current reporting is 

December 11, 2023. Third, the recently 

adopted Form PF amendments result in 

required reporting related to 

performance, clawbacks, and adviserled secondaries, which may impact the 

benefits of the final quarterly statement 

rule and the final adviser-led 

secondaries rule.1293

While the Commission acknowledges 

these potential effects, we also believe 

we have mitigated the consequences of 

these overlapping costs for many 

advisers in the final rules by adopting 

a longer transition period for the private 

fund adviser rules, in particular for 

smaller advisers, as discussed further 

below.1294 We have also responded to 

commenter concerns on compliance 

costs by offering certain disclosurebased exceptions and, in some cases, 

certain consent-based exceptions rather 

than outright prohibitions.1295 Still, we 

understand that, at the margin, the 

sequencing of these rules may still 

result in heightened costs for certain 

advisers.1296 To the extent heightened 

costs occur, these heightened costs are 

analyzed together with the benefits of 

the final rules. 

More useful information for investors. 

Investors rely on information from fund 

advisers in deciding whether to 

continue an investment, how strictly to 

monitor an ongoing investment or their 

adviser’s conduct, whether to consider 

switching to an alternative, whether to 

continue investing in subsequent funds 

raised by the same adviser, and how to 

potentially negotiate terms with their 

adviser on future investments.1297 By 

requiring detailed and standardized 

disclosures across certain funds, the 

final rules will improve the usefulness 

of the information that current investors 

receive about private fund fees, 

expenses, and performance, and that 

both current and prospective investors 

receive about preferential terms granted 

to certain investors. This will enable 

them to evaluate more easily the 

performance of their private fund 

investments, net of fees and expenses, 

and to make comparisons among 

investments. 

Finally, enhanced disclosures and, in 

some cases, consent requirements will 

help investors shape the terms of their 

relationship with the adviser of the 

private fund. As discussed above, many 

investors report that they accept poor 

terms because they do not know what is 

‘‘market.’’ 1298 Many investors may 

benefit from the enhanced information 

they receive by being in a better position 

to negotiate the terms of their 

relationship with a private fund’s 

adviser. 

The rules may also improve the 

quality and accuracy of information 

received by investors through the final 

audit requirement, both by providing 

independent checks of financial 

statements, and by potentially 

improving advisers’ regular performance 

reporting, to the extent that regular 

audits improve the completeness and 

accuracy of fund adviser valuation of 

investments. The final rules will lastly 

improve the quality and accuracy of 

information received by investors 

through the rules providing for 

restrictions of certain activities unless 

those activities are specifically 

disclosed. 

Enhanced external monitoring of fund 

investments. Many investors currently 

rely on third-party monitoring of funds 

for prevention and timely detection of 

specific harms from misappropriation, 


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1299See supra section VI.C.1. 

1300 Investors will also have similar benefits in 

cases where advisers curtail the restricted activities 

by ceasing them in certain cases and pursuing 

compliance through enhanced disclosure in others. 

1301One commenter, in evaluating these potential 

costs, states that ‘‘it is impossible or too costly to 

write and enforce a contract contingent on all the 

possible outcomes of negotiations between advisers 

and all the potential coinvestors.’’ AIC Comment 

Letter I, Appendix 1. We believe this argument is 

inapt. The proposed rules were not, and did not 

purport to be, an enforced contract contingent on 

all the possible outcomes of negotiations between 

advisers and investors. Neither are the final adopted 

rules. We agree that such a contract would be too 

costly to write and enforce. As discussed above, we 

agree with commenters who stated that policy 

choices benefit from taking into consideration the 

specific market failure the policy is designed to 

address. We believe the final rules are consistent 

with this approach. See supra section VI.B. 

1302See supra section II. 

1303 Id. 

1304See supra section II.B.3. 

1305See infra section VI.E.2. 

1306See infra section VI.E.3. 

1307As discussed above, not all funds reported as 

SAFs in Form ADV will meet this definition. We 

recognize that certain private funds have, in recent 

years, made modifications to their terms and 

structure to facilitate insurance company investors’ 

compliance with regulatory capital requirements to 

which they may be subject. These funds, which are 

typically structured as rated note funds, often issue 

both equity and debt interests to the insurance 

company investors, rather than only equity 

interests. Whether such rated note funds meet the 

SAF definition depends on the facts and 

circumstances. However, based on staff experience, 

the modifications to the fund’s terms generally 

leave ‘‘debt’’ interests substantially equivalent in 

substance to equity interests, and advisers typically 

treat the debt investors substantially the same as the 

equity investors (e.g., holders of the ‘‘debt’’ interests 

have the same or substantially the same rights as 

the holders of the equity interests). We would not 

view investors that have equity-investor rights (e.g., 

no right to repayment following an event of default) 

as holding ‘‘debt’’ under the definition, even if fund 

documents refer to such persons as ‘‘debt investors’’ 

or they otherwise hold ‘‘notes.’’ Further, we do not 

believe that certain rated note funds will meet the 

second prong of the definition (i.e., a private fund 

whose primary purpose is to issue asset backed 

securities), because they generally do not issue 

asset-backed securities. See supra section II.A. This 

Continued 

theft, or other losses to investors. This 

monitoring occurs through surprise 

exams or audits under the custody rule, 

as well as through other audits of fund 

financial statements. The final rules will 

expand the scope of circumstances 

requiring third-party monitoring, and 

investors will benefit to the extent that 

such expanded monitoring increases the 

speed of detection of misappropriation, 

theft, or other losses and so results in 

more timely remediation. Audits may 

also broadly improve the completeness 

and accuracy of fund performance 

reporting, to the extent these audits 

improve fund valuations of their 

investments. Even investors who rely on 

the recommendations of consultants, 

advisers, private banks, and other 

intermediaries will benefit from the 

final rules to the extent the 

recommendations by these 

intermediaries are also improved by the 

protections of expanded third-party 

monitoring by independent public 

accountants. 

Restrictions of certain activities that 

are contrary to public interest and to the 

protection of investors, with certain 

exceptions for disclosures and, in some 

cases, where investor consent is also 

obtained. Certain practices represent 

potential conflicts of interest and 

sources of harm to funds and investors. 

As discussed above, private funds 

typically lack fully independent 

governance mechanisms more common 

to other markets that would help protect 

investors from harm in the context of 

the activities considered.1299 While 

many of these conflicts of interest and 

sources of harm may be difficult for 

investors to detect or negotiate terms 

over, we are convinced by commenters 

that disclosure of the activities 

considered in the final rule, and, in 

some cases, investor consent, can 

resolve the potential investor harm. The 

final rule will benefit investors and 

serve the public interest by restricting 

such practices to be restricted, with 

certain exceptions where the adviser 

makes certain disclosures and, in some 

cases, where the adviser also obtains the 

required investor consent. This will 

further enhance investors’ ability to 

monitor their funds through enhanced 

disclosures and, in some cases, consent 

requirements. Investors will also benefit 

from fund investments where advisers 

cease the restricted activities altogether, 

either because there is no exception 

made for disclosures or consent 

requirements (for example, as is the case 

for prohibitions on certain preferential 

treatment that advisers reasonably 

expect to have a material negative effect 

on other investors in the fund), or 

because the adviser ceases the activity 

voluntarily instead of making required 

disclosures, or in a follow-on fund 

where investors used the enhanced 

disclosure in the prior fund to negotiate 

the removal of the restricted activities in 

those future funds.1300

The direct costs of the final rules will 

include the costs of meeting the 

minimum regulatory requirements of 

the rules, including the costs of 

providing standardized disclosures, in 

some cases obtaining the required 

investor consent, and, for some advisers, 

refraining from restricted activities, and 

obtaining the required external financial 

statement audit and fairness opinions or 

valuation opinions.1301 Additional costs 

will arise from the new compliance 

requirements of the final rules. For 

example, some advisers will update 

their compliance programs in response 

to the requirement to make and keep a 

record of their annual review of the 

program’s implementation and 

effectiveness. Certain fund advisers may 

also face costs in the form of declining 

revenue, declining compensation to 

fund personnel and a potential resulting 

loss of employees, or losses of investor 

capital. Some of these costs may be 

passed on to investors in the form of 

higher fees. However, some of these 

costs, such as declining compensation 

to fund personnel, will be a transfer to 

investors depending on the fund’s 

economic arrangement with the adviser. 

Other indirect costs of the rule may 

include unintended consequences to 

investors, such as potential losses of 

preferential terms for investors currently 

receiving them (specifically in the case 

of preferential terms that would not be 

prohibited if disclosed, but where the 

adviser does not want to make the 

required disclosures), delays in fund 

closing processes associated with 

advisers making disclosures of 

preferential terms. 

Scope. There are four aspects of the 

scope that impact the benefits and costs 

of the rule. First, as discussed above, all 

of the elements of the final rule will in 

general not apply with respect to nonU.S. private funds managed by an 

offshore investment adviser, regardless 

of whether that adviser is registered.1302

Second, the quarterly statements, 

mandatory audit, and adviser-led 

secondaries rules will not apply to ERAs 

or State-registered investment 

advisers.1303 Third, certain elements of 

the rules provide for certain relief for 

advisers to funds of funds. For example, 

the quarterly statement rule requires 

advisers to private funds that are not 

funds of funds to distribute statements 

within 45 days after the first three fiscal 

quarter ends of each fiscal year (and 90 

days after the end of each fiscal year), 

but advisers to funds of funds are 

allowed 75 days after the first three 

quarter ends of each fiscal year (and 120 

days after fiscal year end).1304 Investors 

in funds outside the scope of the rule 

may benefit from general procompetitive effects of the rule,1305 to the 

extent private funds outside the scope of 

the rule revise their terms to compete 

with funds inside the scope of the rules, 

and there may be risks to capital 

formation from the contours of the 

scope impacting adviser incentives,1306

but investors in such funds will not 

otherwise be impacted. Lastly, the final 

rules will not apply to advisers with 

respect to their SAFs, such as CLOs.1307


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means that SAFs for the purposes of this definition 

are likely even more disproportionately CLOs than 

is indicated by the statistics in section VI.C.1. 1308See supra section IV. 1309 Id. 

1310 Id. 

1311See supra section II.B. 

1312See supra section II.B.4. 

1313See supra section VI.C.3. 

1314Some commenters criticized this approach to 

the costs and benefits discussion. These 

commenters state that the analysis is deficient, not 

appropriate, and sparse, among other criticisms. 

See, e.g., AIC Comment Letter I, Appendix 1; 

AIMA/ACC Comment Letter. We continue to 

believe that the economic analysis is mindful of the 

costs imposed by, and the benefits obtained from, 

the final rules, and have considered, in addition to 

the protection of investors, whether the action 

would promote efficiency, competition, and capital 

formation. The following analysis considers, in 

detail, the potential economic effects that may 

result from this final rulemaking, including the 

benefits and costs to market participants as well as 

the broader implications of the final rules for 

efficiency, competition, and capital formation. One 

commenter was broadly supportive of the depth 

and scope of the economic analysis offered in the 

Proposing Release. See Better Markets Comment 

Letter. 

1315See supra section II.B.1.b). 

1316See supra section II.B.1.b). 

1317See supra section II.B.1. 

1318 Id. 

1319 Id. 

1320 Id. 

1321See supra section VI.C.3. 

Legacy Status. Commenters requested 

legacy status for various portions of the 

rule.1308 We are providing for legacy 

status under the prohibitions aspect of 

the preferential treatment rule, which 

prohibits advisers from providing 

certain preferential redemption rights 

and information about portfolio 

holdings, and for the aspects of the 

restricted activities rule that require 

investor consent.1309 The legacy status 

provisions apply to governing 

agreements, as specified above, that 

were entered into prior to the 

compliance date if the rule would 

require the parties to amend such an 

agreement.1310 Outside of these 

exceptions, the benefits and costs of the 

rule will accrue across all private funds 

and advisers. This application of legacy 

status mean that benefits and costs of 

the prohibition may not accrue with 

respect to private funds and advisers 

whose agreements were entered into 

prior to the compliance date. In the case 

of advisers to evergreen private funds, 

where the fund agreements have no 

defined end of life of the fund, such 

preferential terms with legacy status 

may persevere long after the compliance 

date. However, those advisers will now 

need to compete with advisers that are 

subject to the final rules with respect to 

their newer funds. To the extent that 

investors prefer private funds and 

advisers who do not rely on such 

practices, then to compete to attract 

those investors, even some private funds 

with legacy status may revise their 

practices over time. 

Below we discuss these benefits and 

costs in more detail and in the context 

of the specific elements of the final rule. 

2. Quarterly Statements 

The final rules will require a 

registered investment adviser to prepare 

a quarterly statement for any private 

fund that it advises, directly or 

indirectly, that has at least two full 

fiscal quarters of operating results, and 

distribute the quarterly statement to the 

private fund’s investors within 45 days 

after each fiscal quarter end after the 

first three fiscal quarter ends of each 

fiscal year (and 90 days after the end of 

each fiscal year), unless such a quarterly 

statement is prepared and distributed by 

another person.1311 The rule provides 

that, to the extent doing so would 

provide more meaningful information to 

the private fund’s investors and would 

not be misleading, the adviser must 

consolidate the quarterly statement 

reporting to cover, as defined above, 

similar pools of assets.1312

We discuss the costs and benefits of 

these requirements below. It is generally 

difficult to quantify these economic 

effects with meaningful precision, for a 

number of reasons. For example, there 

is a lack of quantitative data on the 

extent to which advisers currently 

provide information that will be 

required to be provided under the final 

rule to investors. Even if these data 

existed, it would be difficult to quantify 

how receiving such information from 

advisers may change investor behavior. 

In addition, the benefit from the 

requirement to provide the mandated 

performance disclosures will depend on 

the extent to which investors already 

receive the mandated information in a 

clear, concise, and comparable manner. 

As discussed above, however, we 

believe that the format and scope of 

these disclosures vary across advisers 

and private funds, with some 

disclosures providing limited 

information while others are more 

detailed and complex.1313 As a result, 

parts of the discussion below are 

qualitative in nature.1314

Quarterly Statement—Fee and Expense 

Disclosure 

The final rule will require an 

investment adviser that is registered or 

required to be registered and that 

provides investment advice to a private 

fund to provide each of the private fund 

investors with a quarterly statement 

containing certain information regarding 

fees and expenses, including fees and 

expenses paid by underlying portfolio 

investments to the adviser or its related 

persons. The quarterly statement will 

include a table detailing all adviser 

compensation to advisers and related 

persons, fund expenses, and the amount 

of offsets or rebates carried forward to 

reduce future payments or allocations to 

the adviser or its related persons.1315

Further, the quarterly statement will 

include a table detailing portfolio 

investment compensation.1316 The 

quarterly statement rule will require 

each quarterly statement to be 

distributed within 45 days after each the 

first, second, and third fiscal quarter 

ends and 90 days after the final fiscal 

quarter end.1317 Statements must 

include clear and prominent, plain 

English disclosures regarding the 

manner in which all expenses, 

payments, allocations, rebates, waivers, 

and offsets are calculated, and include 

cross-references to the sections of the 

private fund’s organizational and 

offering documents that set forth the 

applicable calculation methodology.1318

If the private fund is a fund of funds, 

then a quarterly statement must be 

distributed within 75 days after the first, 

second, and third fiscal quarter ends 

and 120 days after the final fiscal 

quarter end.1319 1320

Benefits 

The effect of this requirement to 

provide a standardized minimum 

amount of information in an easily 

understandable format will be to lower 

the cost to investors of monitoring fund 

fees and expenses, lower the cost to 

investors of monitoring any conflicting 

arrangements, improve the ability of 

investors to negotiate terms related to 

the governance of the fund, and improve 

the ability of investors to evaluate the 

value of services provided by the 

adviser and other service providers to 

the fund. The lack of legacy status for 

this rule provision means that these 

benefits will accrue across all private 

funds and advisers. 

We continue to believe that the final 

rules will achieve the benefits as stated 

in the Proposing Release. For example, 

investors could more easily compare 

actual investment returns to the 

projections they received prior to 

investing. As discussed above, any 

waterfall arrangements governing fund 

adviser compensation may be complex 

and opaque.1321 As a result, investor 

returns from a fund may be affected by 

whether investors are able to follow, 

and verify, payments that the fund is 

making to investors and to the adviser 

in the form of performance-based 


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1322 Id. 

1323See supra section II.B.1. 

1324See supra sections II.B, VI.C.3. In particular, 

commenters stated that the proposed disclosure 

requirements were appropriate for investors to all 

types of private funds. See, e.g., CFA Comment 

Letter II. 

1325See supra section VI.C.3; see also CCMR 

Comment Letter IV. 

1326 Id. 

1327 Id. See also Proposing Release, supra footnote 

3, at 218. 

1328See, e.g., NYC Bar Comment Letter II; AIMA/ 

ACC Comment Letter; Dechert Comment Letter; AIC 

Comment Letter I; ICM Comment Letter; Schulte 

Comment Letter. 

1329AIC Comment Letter I, Appendix 1. 

1330See, e.g., InvestX Comment Letter; NEA and 

AFT Comment Letter; United For Respect Comment 

Letter I; Public Citizen Comment Letter; Better 

Markets Comment Letter. 

1331See, e.g., Segal Marco Comment Letter; 

Seattle Retirement System Comment Letter; 

Morningstar Comment Letter; CFA Comment Letter 

II. 

1332Morningstar Comment Letter; CFA Comment 

Letter II. 

1333See supra section VI.C.3. 

1334See supra section VI.C.3; see also ILPA 

Comment Letter II; The Future of Private Equity 

Regulation, supra footnote 983, at 17. 

compensation, as these payments are 

often only made after investors have 

recouped the applicable amount of 

capital contributions and received any 

applicable preferred returns from the 

fund. This information may also help 

investors evaluate whether they are 

entitled to the benefit of a clawback. For 

example, for deal-by-deal waterfalls, 

where advisers may be more likely to be 

subject to a clawback,1322 even 

sophisticated investors have reported 

difficulty in measuring and evaluating 

compensation made to fund advisers 

and determining if adviser fees comply 

with the fund’s governing 

agreements.1323 Any such investors 

would benefit to the extent that the 

required disclosures under the final 

rules address these difficulties. Fee and 

compensation arrangements for other 

types of private funds also vary in their 

approach and complexity, and investors 

in all types of private funds will 

therefore benefit from the 

standardization under the final 

rules.1324

With respect to hedge funds, as 

discussed above, one commenter 

criticized the Proposing Release’s 

statement that there can be substantial 

variation in the fees private fund 

advisers charge for similar services and 

performances.1325 We believe this 

mischaracterizes the potential benefits 

of the proposal and of the final rules. 

First, the additional statistics cited by 

this commenter speak to average alpha, 

average returns, and average riskadjusted returns of hedge funds, among 

other average statistics.1326 The 

Proposing Release, by contrast, 

discusses substantial variation across 

advisers in fees charged and in their 

performance. Additional literature cited 

in the commenter’s analysis states ‘‘ ‘[i]n 

contrast to the perception of a common 

2/20 fee structure,’ there are 

‘considerable cross-sectional and time 

series variations in hedge fund fees,’ ’’ 

which we also believe supports the 

Proposing Release’s discussion.1327

Investors may also find it easier to 

compare alternative funds to other 

investments. As a result, some investors 

may reallocate their capital among 

competing fund investments and, in 

doing so, achieve a better match 

between their choice of private fund and 

their preferences over private fund 

terms, investment strategies, and 

investment outcomes. For example, 

investors may discover differences in 

the cost of compensating advisers across 

funds that lead them to move their 

assets into funds (if able to do so) with 

less costly advisers or other service 

providers. Investors may also have an 

improved ability to negotiate expenses 

and other arrangements in any 

subsequent private funds raised by the 

same adviser. Investors may therefore 

face lower overall costs of investing in 

private funds as a benefit of the 

standardization. In addition, an investor 

may more easily detect errors by reading 

the adviser’s disclosure of any offsets or 

rebates carried forward to subsequent 

periods that would reduce future 

adviser compensation. This information 

will make it easier for investors to 

understand whether they are entitled to 

additional reductions in future periods. 

Because the rule requires disclosures 

at both the private-fund level and the 

portfolio level, investors can more easily 

evaluate the aggregate fees and expenses 

of the fund, including the impact of 

individual portfolio investments. The 

private fund level information will 

allow investors to more easily evaluate 

their fund fees and expenses relative to 

the fund governing documents, evaluate 

the performance of the fund investment 

net of fees and expenses, and evaluate 

whether they want to pursue further 

investments with the same adviser or 

explore other potential investments. The 

portfolio investment level information 

will allow investors to evaluate the fees 

and costs of the fund more easily in 

relation to the adviser’s compensation 

and ownership of the portfolio 

investments of the fund. For example, 

investors will be able to evaluate more 

easily whether any portfolio 

investments are providing 

compensation that could entitle 

investors to a rebate or offset of the fees 

they owe to the fund adviser. This 

information will also allow investors to 

compare the adviser’s compensation 

from the fund’s portfolio investments 

relative to the performance of the fund 

and relative to the performance of other 

investments available to the investor. To 

the extent that this heightened 

transparency encourages advisers to 

make more substantial disclosures to 

prospective investors, investors may 

also be able to obtain more detailed fee 

and expense and performance data for 

other prospective fund investments. As 

a result of these required disclosures, 

investor choices over private funds may 

more closely match investor preferences 

over private fund terms, investment 

strategies, and investment outcomes. 

The magnitude of the effect depends 

on the extent to which investors do not 

currently have access to the information 

that will be reported in the quarterly 

statement in an easily understandable 

format and will use the information 

once provided. Several commenters 

argue that advisers are already 

providing investors with sufficient 

disclosures on all items described in the 

required quarterly statements, or that 

investors rarely ask for more 

information than is provided by current 

practices.1328 One commenter stated 

that the increasing demand for private 

equity advisory services suggests that 

investors are satisfied with the level of 

disclosure provided to them.1329

However, many other commenters 

broadly supported these categories of 

benefits, both from the required 

quarterly statements in general and from 

the final rule’s overall enhancement of 

disclosures.1330 Other commenters 

specifically supported the general 

enhancement of fee and expense 

disclosure.1331 Two commenters 

supported enhanced disclosure of 

adviser compensation.1332

Moreover, as discussed above, 

industry literature provides a 

countervailing view to these industry 

commenters, at least for private equity 

investors.1333 In 2021, 59% of private 

equity LPs in a survey reported 

receiving ILPA’s reporting template 

more than half the time, indicating that 

LPs must continue to use their 

negotiating resources to receive the 

template, and many investors do not 

receive reporting consistent with the 

template.1334 In a more recent survey, 

56% of private equity investor 

respondents indicated that information 

transparency requests granted to one 

investor are generally not granted to all 

investors, and 75% find that an 

adviser’s agreement to report fees and 

expenses consistent with the ILPA 


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1335See supra section VI.C.3; see also ILPA 

Comment Letter II; The Future of Private Equity 

Regulation, supra footnote 983; ILPA Private Fund 

Advisers Data Packet, supra footnote 983. 

1336See supra section II.A. 

1337See supra sections II.A, VI.C.3. 

1338 Id. 

1339 Id. 

1340See supra section II.B.1. 

1341See, e.g., StepStone, Uncovering the Costs 

and Benefits of Private Equity (Apr. 2016), available 

at https://www.stepstonegroup.com/wp-content/ 

uploads/2021/07/StepStone_Uncovering_the_

Costs_and_Benefits_of_PE.pdf. 

1342Form PF Release, supra footnote 564. 

1343 Id. 

1344 Id. 

1345See supra section VI.C.3. 

1346See supra section VI.C.3. 

1347See supra section VI.C.3. 

1348AIMA/ACC Comment Letter. 

1349See supra footnotes 217–222 (with 

accompanying text). 

reporting template was made through 

the side letter, or informally, and not 

reflected in the fund documents 

presented to all investors.1335

Because we have not applied the rules 

to advisers with respect to their CLOs 

and other SAFs,1336 no benefits will 

accrue to investors in those funds. 

However, we understand from 

commenters and from staff 

understanding that these forgone 

benefits associated with fee and expense 

reporting, relative to the proposal, are 

minimal, based on existing practices for 

fee and expense reporting associated 

with CLOs and other SAFs, and based 

on the fee, expense, and performance 

reporting needs of CLO investors and 

other SAF investors.1337 This is because 

debt interests in a SAF are not 

structured to provide variable 

investment returns like an equity 

interests, and so SAF reporting metrics 

that are of value to SAF investors 

should prioritize measuring the 

likelihood of the debt investor receiving 

its previously agreed-upon defined 

return.1338 While this means that the 

reporting metrics required by the final 

rules could be of value to investors in 

the equity tranche of a CLO or other 

SAF, equity tranches are typically only 

a small portion of the CLO, on the order 

of 10%, and a portion of the holders of 

the equity tranche of CLOs and other 

SAFs consists of the adviser and its 

related persons, further reducing the 

forgone benefits from not applying the 

rules to advisers in those cases.1339

Benefits of the required disclosures 

may also be slightly reduced for 

investors in funds of funds, because (1) 

investors in funds of funds will 

generally receive the information in a 

less timely manner as compared to other 

types of funds, and because (2) certain 

fund of funds advisers may lack 

information or may not be given 

information in respect of underlying 

entities, and depending on a private 

fund’s underlying investment structure, 

a fund of funds adviser may have to rely 

on good faith belief to determine which 

entity or entities constitute a portfolio 

investment under the rule.1340 However, 

investors in funds of funds will benefit 

from their fund managers receiving 

quarterly statements from the 

underlying fund advisers, allowing the 

fund of fund manager to better monitor 

and negotiate with unaffiliated advisers 

to underlying funds. 

Lastly, while many advisers not 

required to send quarterly statements 

choose to do so anyway, existing 

quarterly statements are not 

standardized across advisers and may 

vary in their level of detail. For 

example, we understand that many 

private equity fund governing 

agreements are broad in their 

characterization of the types of expenses 

that may be charged to portfolio 

investments and that investors receive 

reports of fund expenses that are 

aggregated to a level that makes it 

difficult for investors to verify that the 

individual charges to the fund are 

justified.1341

As a result of this variation across 

advisers in quarterly statement 

practices, the final rules will have two 

key interactions with Form PF reporting 

that affect the benefits of the final rules. 

First, Form PF requires information 

pertaining to fees and expenses (namely 

gross performance and then net 

performance after management fees, 

incentive fees, and allocations). The 

Commission may rely on data in Form 

PF to pursue potential outreach, 

examinations, or investigations, in 

response to any potential harm to 

investors associated with fees and 

expenses being charged to investors.1342

Therefore, any investor protection 

benefits of the final rules may be 

mitigated to the extent that Form PF is 

already a sufficient tool for investor 

protection purposes on matters related 

to fees and expenses.1343 However, we 

do not believe the benefits will be 

meaningfully mitigated for two reasons. 

First, the information Form PF collects 

on fees and expenses is limited to 

performance net of management fees 

and performance fees, which may be 

compared to gross performance to infer 

the value of those fees.1344 Second, 

Form PF is not an investor-facing 

disclosure form. Information that 

private fund advisers report on Form PF 

is provided to regulators on a 

confidential basis and is nonpublic.1345

The benefits from the final rules accrue 

substantially from investors receiving 

enhanced and standardized information. 

Second, the final rules may enhance 

the benefits from Form PF reporting, 

because Form PF reporting often only 

requires reporting on the basis of how 

advisers report information to 

investors.1346 Standardizing practices of 

disclosures of fee and expense reporting 

may improve data collected by Form PF, 

including data collected by the recently 

adopted Form PF current reporting 

regime (after the new current reporting 

regime’s effective date of 180 days after 

publication in the Federal Register), 

improving Form PF’s systemic risk 

assessment and investor protection 

benefits. 

As discussed above, we believe that 

some investors in hedge funds whose 

advisers are operating in reliance on the 

exemption set forth in CFTC Regulation 

§4.7 may currently receive quarterly 

statements that present, among other 

things, the net asset value of the exempt 

pool and the change in net asset value 

from the end of the previous reporting 

period.1347 While this could have the 

effect of mitigating some of the benefits 

of the rule if this information is already 

provided, and one commenter suggested 

excluding investors in private funds for 

which the adviser is a registered 

commodity pool operator or is relying 

on the exemption under CFTC 

Regulation §4.7,1348 we do not believe 

that reports provided to investors 

pursuant to CFTC Regulation § 4.7 

require all of the information as 

required under the final rule. 

The magnitude of the effect also 

depends on how investors will use the 

fee and expense information in the 

quarterly statement. In addition, reports 

of fund expenses often do not include 

data about payments at the level of 

portfolio investments, or about how 

offsets are calculated, allocated and 

applied. Lack of disclosure has been at 

issue in enforcement actions against 

fund managers.1349

Costs 

The cost of the changes in fee and 

expense disclosure will include the cost 

of compliance by the adviser. For 

advisers that currently maintain the 

records needed to generate the required 

information, the cost of complying with 

this new disclosure requirement will be 

limited to the costs of compiling, 

preparing, and distributing the 

information for use by investors and the 

cost of distributing the information to 

investors. We expect these costs will 

generally be ongoing costs. For advisers 

who already both maintain the records 

needed to generate the required 


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1350See supra section VI.C.3. 

1351See supra section II.B.3. 

1352See supra section II.A. 

1353See supra section II.B.1.b). 

1354One commenter quantified all of the costs of 

the rule over a 20-year horizon, assuming constant 

costs over time but applying a discount rate to costs 

in the future. See LSTA Comment Letter, Exhibit C. 

However, we believe forecasts of costs over such a 

horizon face substantial difficulties in reliably 

taking into account changes in technology over 

time, changes in market practices, changes in asset 

allocations between private funds and other asset 

allocations, or changes in the regulatory landscape. 

Doing so requires sophisticated econometric 

modeling, with many assumptions beyond the use 

of a discount rate, and long-horizon forecasting 

often cannot be done reliably. See, e.g., Kenichiro 

McAlinn & Mike West, Dynamic Bayesian 

Predictive Synthesis in Time Series Forecasting, 210 

J. Econometrics 155–169 (May 2019) (‘‘However, 

forecasting over longer horizons is typically more 

difficult than over shorter horizons, and models 

calibrated on the short-term basis can often be quite 

poor in the longer-term.’’). As such, we do not 

incorporate forecasts of total costs over long 

horizons in our quantification of costs here or for 

other categories of costs. 

1355There do not exist reliable data for 

quantifying what percentage of private fund 

advisers today engage in this activity or the other 

restricted activities. For the purposes of quantifying 

costs, including aggregate costs, we have applied 

the estimated costs per adviser to all advisers in the 

scope of the rule, as detailed in section VII. 

1356See, e.g., Alumni Ventures Comment Letter; 

Segal Marco Comment Letter; Roubaix Comment 

Letter; ATR Comment Letter; AIC Comment Letter 

I. 

1357Alumni Ventures Comment Letter; ATR 

Comment Letter. 

1358AIC Comment Letter I; SBAI Comment Letter. 

We discuss the impact of the final rules on smaller 

or emerging advisers more generally below. See 

infra section VI.E. 

1359See, e.g., PIFF Comment Letter; NYC 

Comptroller Comment Letter. 

1360See supra section II.B.1. 

1361See AIMA/ACC Comment Letter. 

1362See supra section VI.B. 

1363See supra section II.B.1.b). 

information and make the required 

disclosures, the costs will be even more 

limited. We anticipate this may be the 

case for many private fund advisers, as 

we believe many private fund advisers 

already maintain and disclose similar 

information to what is required by the 

rule.1350

Costs of delivery may be mitigated by 

the fact that the final rule generally 

allows for distribution of statements via 

a data room, if the adviser notifies 

investors when the quarterly statements 

are uploaded to the data room within 

the applicable time period under the 

rule and ensures that investors have 

access to the quarterly statement 

therein.1351 Because certain of the rules 

will not apply to SAF advisers, there 

will be no costs for SAF advisers or 

their investors.1352

Other costs may include advisers 

needing to make determinations about 

what must be included on their fee and 

expense quarterly statements. In 

particular, even though portfolio 

investments of certain private funds 

may not pay or allocate portfolio 

investment compensation to an adviser 

or its related persons, advisers to those 

funds may still have costs associated 

with reviewing payments and 

allocations made by their portfolio 

investments to determine whether they 

must provide the required portfolio 

investment compensation disclosures 

under the final rule.1353

Advisers will also incur costs 

associated with determining and 

verifying that the required disclosures 

comply with the format requirements 

under the final rule, including demands 

on personnel time required to verify that 

disclosures are made in plain English 

regarding the manner in which 

calculations are made and to verify that 

disclosures include cross-references to 

the sections of the private fund’s 

organizational and offering documents. 

This also includes demands on 

personnel time to verify that the 

information required to be provided in 

tabular format is distributed with the 

correct presentation. Advisers may also 

choose to undertake additional costs of 

ensuring that all information in the 

quarterly statements is drafted 

consistently with the information in 

fund offering documents, to avoid 

inconsistent interpretations across fund 

documents and resulting confusion for 

investors. Many of these costs we would 

expect would be borne more heavily in 

the initial compliance phases of the rule 

and would wane on an ongoing 

basis.1354 The lack of legacy status for 

this rule provision means that these 

costs will be borne across all private 

fund advisers and potentially passed 

through to the funds they advise.1355

Some commenters emphasized the 

potential costs of the required quarterly 

statements, and that these costs would 

be likely to be borne by the fund and 

thus investors instead of by advisers.1356

Comments also stated that the reporting 

requirement would be excessively 

burdensome where the fund has a 

bespoke expense arrangement.1357 Other 

commenters stated that the quarterly 

statement requirements would be overly 

burdensome for smaller or emerging 

advisers.1358

Some commenters lastly expressed 

concerns over unintended consequences 

from the rule from changes in adviser 

behavior in response to the rule. For 

example, some commenters stated that, 

with a required framework in place 

governing fund expense reporting, 

investors would face difficulties in 

negotiating for any reporting not 

specified in the final rules.1359 While at 

the margin this may occur, we believe 

the final rules and this release 

appropriately leave investors and 

advisers free to negotiate any fee and 

expense reporting terms not specified in 

the final rules (though any additional 

reporting must still comply with other 

regulations, such as the final marketing 

rule when applicable).1360 Similarly, 

one commenter stated that disclosing 

sub-adviser fees separately could 

disincentivize sub-advisers from 

offering discounted or reduced fees to 

private funds.1361 As discussed above, 

we believe the final rules are designed 

to mitigate burden where possible and 

continue to facilitate competition and 

facilitate flexible negotiations between 

private fund parties.1362

Some of these costs of compliance 

could be reduced by the rule provision 

providing that, to the extent doing so 

would provide more meaningful 

information and not be misleading, 

advisers must consolidate the quarterly 

statement reporting to cover similar 

pools of assets, avoiding duplicative 

costs across multiple statements. 

However, in other cases the rule 

provision requiring consolidation may 

further increase the costs of compliance 

with the rules, not decrease the costs of 

compliance. For example, in the case 

where a private fund adviser is 

preparing quarterly statements for 

investors in a feeder fund and is 

consolidating statements between a 

master fund and its feeder funds, the 

consolidation may require the adviser to 

calculate the feeder fund’s proportionate 

interest in the master fund on a 

consolidated basis. The additional costs 

of these calculations of proportionate 

interest in the master fund, to the extent 

the adviser does not already undertake 

this practice, may offset any reduced 

costs the adviser receives from not being 

required to undertake duplicative costs 

across multiple statements. Commenters 

did not offer any opinion as to which of 

these two scenarios is generally more 

likely to be the case. 

Advisers to funds of funds may face 

certain additional costs associated with 

needing to determine whether an entity 

paying itself, or a related person, is a 

portfolio investment of the fund of 

funds under the final rule.1363 We 

understand there are means available to 

funds of funds to mitigate these costs, 

such as being able to ask any such payor 

whether certain underlying funds hold 

an investment in the payor, or 

requesting a list of investments from 

underlying funds to determine whether 

any of those underlying portfolio 

investments have a business 

relationship with the adviser or its 


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1364 Id. 

1365 Id. 

1366We have adjusted the estimates from the 

proposal to reflect that the five private fund rules 

will not apply to SAF advisers regarding SAFs they 

advise. See infra section VII.B. As explained in that 

section, this estimated annual cost is the sum of the 

estimated recurring cost of the proposed rule in 

addition to the estimated initial cost annualized 

over the first three years. One commenter broadly 

criticized the hours estimates underlying these cost 

estimates as unsupported, arbitrary, and possibly 

underestimated, further stating that none of the 

calculations rely on survey data or wage and hour 

studies. See AIC Comment Letter I, Appendix 1. We 

disagree. These cost estimates are based on industry 

survey data on wages, and we have stated the 

assumptions underlying the number of hours. See 

infra section VII.B. To reflect commenter concerns 

that quantified costs of the proposal were 

potentially understated, and recognizing certain 

changes from the proposal, we are revising the 

estimates upwards as reflected here and in section 

VII.B. For example, to address the commenter’s 

contention that we underestimated the burdens 

generally, and recognizing the changes from the 

proposal, we are revising the internal initial burden 

for the preparation of the quarterly statement 

estimate upwards to 12 hours. We believe this is 

appropriate because advisers will likely need to 

develop, or work with service providers to develop, 

new systems to collect and prepare the statements. 

1367See supra section II.B.2.a). 

1368See supra section II.B.2.b). 

1369 Id. 

1370 Id. 

1371See supra section II.B.2.c). 

1372 Id; see also Brown et al., supra footnote 1226. 

related persons.1364 However, at the 

margin, there may be such increased 

costs, in particular in the case where 

certain fund of funds advisers may lack 

information or may not be given 

information in respect of underlying 

entities.1365

There are other aspects of the rule that 

will impose costs. In particular, some 

advisers may choose to update their 

systems and internal processes and 

procedures for tracking fee and expense 

information to better respond to this 

disclosure requirement. The costs of 

those improvements would be an 

indirect cost of the rule, to the extent 

they would not occur otherwise, and 

they are likely to be higher initially than 

they would be on an ongoing basis. 

Preparation and distribution of 

Quarterly Statements. As discussed 

below, for purposes of the PRA, we 

anticipate that the compliance costs 

associated with preparation and 

distribution of quarterly statements 

(including the preparation and 

distribution of fee and expense 

disclosure, as well as the performance 

disclosure discussed below) will 

include an aggregate annual internal 

cost of $339,493,120 and an aggregate 

annual external cost of $148,229,760, or 

a total cost of $487,722,880 

annually.1366 For costs associated with 

potential upgrades to fee tracking and 

expense information systems, funds are 

likely to vary in the intensity of their 

upgrades, because for example some 

advisers may not pursue any system 

upgrades at all, and moreover the costs 

may be pursued or amortized over 

different periods of time. Advisers are 

similarly likely to vary in their choices 

of whether to invest in increasing the 

quality of their services. For both of 

these categories of costs, the data do not 

exist to estimate how funds or investors 

may respond to the reporting 

requirements, and so the costs may not 

be practically quantified. 

Under the final rule, these compliance 

costs may be borne by advisers and, 

where permissible, could be imposed on 

funds and therefore indirectly passed on 

to investors. For example, under current 

practice, advisers to private funds 

generally charge disclosure and 

reporting costs to the funds, so that 

those costs are ultimately paid by the 

fund investors. Also, currently, to the 

extent advisers use service providers to 

assist with preparing statements (e.g., 

fund administrators), those costs often 

are borne by the fund (and thus 

indirectly investors). We expect similar 

arrangements may be made going 

forward to comply with the final rule, 

with disclosure where required. 

Advisers could alternatively attempt to 

introduce substitute charges (for 

example, increased management fees) in 

order to cover the costs of compliance 

with the rule, and their ability to do so 

may depend on the willingness of 

investors to incur those substitute 

charges. 

Further, to the extent that the 

additional standardization and 

comparability of the information in the 

required disclosures makes it more 

difficult to charge fees higher than those 

charged for similar adviser services or 

otherwise to continue current levels and 

structures of fees and expenses, the final 

rules may reduce revenues for some 

advisers and their related persons. 

These advisers may respond by 

reducing their fees or by differentiating 

their services from those provided by 

other advisers, including by, for 

example, increasing the quality of their 

services in a manner that could attract 

additional capital to funds they advise. 

To the extent these reduced revenues 

result in reduced compensation for 

some advisers and their related persons, 

those entities may become less 

competitive as employers. However, this 

cost may be mitigated to the extent that 

some advisers attract new capital under 

the final rules, and so those advisers 

and their related persons may become 

more competitive as employers. 

Quarterly Statement—Performance 

Disclosure 

Advisers will also be required to 

include standardized fund performance 

information in each quarterly statement 

provided to fund investors. Specifically, 

the final rules will require an adviser to 

a fund considered a liquid fund under 

the final rule to disclose the fund’s 

annual net total returns for each fiscal 

year for the prior year, prior five-year 

period, and prior 10-year period or since 

inception (whichever is shorter) and the 

cumulative result for the year as of the 

most recent quarter.1367 For illiquid 

funds, the final rule will require an 

adviser to show the internal rate of 

return (IRR) and multiple of invested 

capital (MOIC) (each, on a gross and net 

basis), the gross IRR and the gross MOIC 

for the unrealized and realized portions 

of the portfolio (each shown separately), 

and a statement of contributions and 

distributions.1368 Performance 

reporting, save for the statement of 

contributions and distributions, must be 

computed with and without the effect of 

any fund level subscription 

facilities.1369 The statement of 

contributions and distributions must 

provide certain cash flow information 

for each fund.1370 Further, advisers 

must include clear and prominent plain 

English disclosure of the criteria used 

and assumptions made in calculating 

the performance.1371

Benefits 

As a result of these performance 

disclosures, some investors will find it 

easier to obtain and use information 

about the performance of their private 

fund investments. They may, for 

example, find it easier to monitor the 

performance of their investments and 

compare the performance of the private 

funds in their portfolios to each other 

and to other investments.1372 In 

addition, they may use the information 

as a basis for updating their choices 

between different private funds or 

between private fund and other 

investments. In doing so, they may 

achieve a better alignment between their 

investment choices and preferences. 

Cash flow information will be provided 

in a form that allows investors to 

compare the performance of the fund (or 

a fund investment) with the 

performance of other investments, such 

as by computing PME or other metrics. 

The lack of legacy status for this rule 

provision means that these benefits will 

accrue across all private funds and 

advisers. 

We understand that some investors 

receive the required performance 

information under the baseline, 

independently of the final rule. For 


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1373See, e.g., NYC Bar Comment Letter II; AIMA/ 

ACC Comment Letter; Dechert Comment Letter; AIC 

Comment Letter I. 

1374 ICM Comment Letter. 

1375See, e.g., Schulte Comment Letter; PIFF 

Comment Letter. 

1376See supra sections II.AII.B, VI.C.3. 

1377 Id. 

1378 Id. 

1379See, e.g., LSTA Comment Letter; SFA 

Comment Letter II; TIAA Comment Letter. 

1380See supra sections II.A, VI.C.3. 

1381 Id. 1382See, e.g., LSTA Comment Letter; SFA 

Comment Letter II; TIAA Comment Letter. 1383See supra sections II.A, VI.C.3. 1384 Id. 1385See, e.g., CII Comment Letter; NEA and AFT 

Comment Letter; OPERS Comment Letter. 

1386Form PF Release, supra footnote 564. 

1387See supra section VI.C.3. 

1388Form PF Release, supra footnote 564. 

1389See supra section VI.C.3. 

1390See supra section VI.C.3. 

example, some investors receive 

performance disclosures from advisers 

on a tailored basis. As noted above, 

many commenters stated, generally, that 

advisers are already providing investors 

with sufficient disclosures on all items 

described in the required quarterly 

statements.1373 Another adviser 

commented that it finds investors rarely 

express that they want more information 

regarding historical performance of a 

fund.1374 Other commenters stated that 

the existence of a variety of market 

practices reflects differing desires by 

investors, and that standardization 

would not yield any benefits, given 

varying investor preferences.1375

Because the rules will not apply to 

advisers with respect to SAFs that they 

advise, investors in SAFs will not 

benefit under the final rules.1376 There 

may be forgone benefits because, for 

example, junior tranches of debt in 

SAFs carry higher risks that 

deteriorating performance of the SAF as 

measured by IRR and MOIC could 

impact their cash flows, and thus 

investors in junior tranches could have 

benefited from reporting of IRR and 

MOIC metrics as would have been 

required by the proposal.1377 While 

equity tranches are typically only a 

small portion of the CLO, on the order 

of 10%, and a portion of the equity 

tranche of CLOs and other SAFs 

consists of the adviser and its related 

persons, there are still allocations of the 

equity tranche to certain outside 

investors, and those investors could 

have benefited under the final rules as 

well.1378 The Commission staff are not 

aware of any data, and we did not 

receive any comment letters, that could 

measure SAF investor sensitivity to IRR 

and MOIC metrics, but to the extent 

investors are sensitive to such metrics, 

SAF investor benefits under the final 

rules have been reduced relative to the 

proposal by the loss of required 

reporting of those metrics. 

However, we believe these forgone 

benefits are likely to be minimal, 

consistent with statements by 

commenters.1379 Because investors in 

SAFs primarily hold debt interests in 

the fund, by definition,1380 their 

primary performance concern is in 

evaluating the likelihood of full 

payment of the cash flows they are 

owed under the indenture 

corresponding to their agreed-upon 

defined return.1381 This view is 

supported by industry comment 

letters.1382 Because the final rules 

require reporting of performance metrics 

that pertain to the fund itself, those 

performance metrics may be of little or 

no informative use to debt investors 

receiving fixed payments along a 

waterfall structure. For example, a fund 

with a high IRR or MOIC that then 

experiences a reduction in its IRR or 

MOIC may not experience a reduction 

in its likelihood of repaying debt 

investors, and debt investors may not be 

able to determine if or when a reduction 

in IRR or MOIC results in a likelihood 

of their debt interests becoming 

impaired. 

The performance reporting terms that 

CLOs and other SAFs typically 

currently rely on, by contrast, focus on 

tests of fund performance designed to 

measure the likelihood of successful 

payment of cash flows owed under an 

indenture, such as overcollateralization 

tests and interest coverage tests (i.e., 

information relating to the quality, 

composition, characteristics and 

servicing of the fund’s portfolio 

assets).1383 As a final matter, because 

CLO industry standard independent 

collateral administrator reports typically 

provide all relevant cash flows, and 

provide for estimated market values of 

every loan in the portfolio, investors in 

CLOs who would value information 

from IRR and MOIC could, in principle, 

estimate their own values from these 

metrics.1384 Therefore, these forgone 

benefits relative to the proposal may be 

minimal. 

Other commenters supported the 

proposed economic benefits of the 

enhanced and standardized 

performance disclosures.1385 For 

example, to the extent that investors 

share the complete, comparable data 

with consultants or other intermediaries 

they work with (as is often current 

practice to the extent permitted under 

confidentiality provisions), this may 

allow such intermediaries to provide 

broader views across the private funds 

market or segments of the market. This 

may facilitate better decision making 

and capital allocation more broadly. 

Similar to fee and expense reporting, 

variation across advisers in reporting 

practices means that the final rules will 

have two key interactions with Form PF 

reporting that affect the benefits of the 

final rules. First, because Form PF 

already collects performance 

information, the Commission may rely 

on data in Form PF to pursue potential 

outreach, examinations, or 

investigations, in response to any 

potential harm to investors associated 

with fund performance.1386 Therefore, 

any investor protection benefits of the 

final rules may be mitigated to the 

extent that Form PF is already a 

sufficient tool for investor protection 

purposes regarding issues related to 

fund performance.1387 This may also be 

the case for investors in funds advised 

by large hedge fund advisers, whose 

advisers will be subject to the new 

current reporting regime (after the new 

current reporting regime’s effective date 

of 180 days after publication in the 

Federal Register).1388 However, as with 

fee and expense reporting, we do not 

believe the benefits will be substantially 

mitigated, because Form PF is not an 

investor-facing disclosure form. 

Information that private fund advisers 

report on Form PF is provided to 

regulators on a confidential basis and is 

nonpublic.1389 The benefits from the 

final rules accrue substantially from 

investors receiving enhanced and 

standardized information. 

Second, the final rules may enhance 

the benefits from Form PF reporting, 

because Form PF reporting often only 

requires reporting on the basis of how 

advisers report information to 

investors.1390 Standardizing practices of 

disclosures of performance reporting 

may improve data collected by Form PF, 

including data collected by the recently 

adopted Form PF current reporting 

regime (after the new current reporting 

regime’s effective date of 180 days after 

publication in the Federal Register), 

improving Form PF’s systemic risk 

assessment and investor protection 

benefits. 

The required presentation of 

performance information and the 

resulting economic benefits will vary 

based on whether the fund is 

determined to be a liquid fund or an 

illiquid fund. For example, for private 

equity and other illiquid funds, 

investors will benefit from receiving 

multiple pieces of performance 

information, because the shortcomings 

discussed above that are associated with 

each method of measuring performance 


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63332 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1391See supra section VI.C.3. 1392AIC Comment Letter I, Appendix 1. 1393 Id. 1394See supra section VI.C.3. 1395Proposing Release, supra footnote 3, at 205– 

206; see also supra section VI.C.3. 1396See supra section VI.C.3; see also, e.g., 

Schillinger et al., supra footnote 1213; Enhancing 

Transparency Around Subscription Lines of Credit, 

supra footnote 1001. 1397See supra section VI.C.3; see also 

Subscription Lines of Credit and Alignment of 

Interest, supra footnote 1211. 

1398See supra sections VI.B, VI.C.3; see also 

Enhancing Transparency Around Subscription 

Lines of Credit, supra footnote 1001. 

1399See supra section II.B.2.b). 

1400AIC Comment Letter I, Appendix 1. 

1401One commenter stated that in certain cases, 

the calculation of performance without the impact 

of subscription facilities could be challenging, 

particularly for historical periods. The commenter 

stated that advisers may not have identified the 

reasons for each capital call from investors, and 

may need to make assumptions about which 

historical capital calls would have been impacted. 

To the extent these assumptions by advisers are not 

accurate, the benefits of the information to investors 

will be reduced (and, as discussed below, the 

resulting complexity of the calculation may result 

in increased costs to advisers, which may be passed 

on to the fund and investors). See CFA Comment 

Letter I. 

1402CFA Comment Letter I. 

1403See supra section VI.C.3. 1404 Id. 1405As a key related benefit that may accrue as 

a result of standardization, the required 

performance reporting under the final rules may 

mitigate potential biases associated with hedge 

funds choosing whether and when to report returns, 

as discussed above. Id. As discussed above, one 

commenter stated that ‘‘[t]he Proposed Rule also 

casts doubt on the reliability of public data on 

hedge fund performance . . . implying that these 

data may [ ] overstate fund performance. The 

Proposed Rule then suggests that its proposed 

restrictions will remedy this purported lack of price 

and quality competition.’’ See supra section VI.C.3; 

see also CCMR Comment Letter IV. As discussed 

above, we believe this mischaracterizes the 

Proposing Release. See Proposing Release, supra 

footnote 3, at 208, 230. Moreover, also as discussed 

above, additional literature illustrating variation in 

the bias of performance reporting by advisers. See 

supra section VI.C.3. We believe this further limits 

the ability to which commercial databases today 

can satisfy investor needs when evaluating their 

advisers, as investors cannot tell the direction of 

bias of any given adviser in the data. The literature 

cited by the commenter therefore further increases 

the likelihood of the benefits of the final rules, by 

mitigating these potential biases, instead of 

reducing the likelihood of the final rules generating 

the intended benefits. Id. 

make it difficult for investors to evaluate 

fund performance from any singular 

piece of performance information alone, 

such as IRR or MOIC.1391 This will 

improve investors’ ability to interpret 

performance reporting, and assess the 

relationship between the fees paid in 

connection with an investment and the 

return on that investment as they 

monitor their investment and consider 

potential future investments. 

One commenter questioned the 

benefits of mandatory reporting of 

performance without the impact of 

subscription facilities, stating that 

reporting of performance without the 

impact of subscription facilities ‘‘does 

not provide a better view of ‘actual’ 

performance.’’ 1392 The commenter also 

states that ‘‘the Commission is mistaken 

that the levered performance obscures 

‘actual’ performance.’’ 1393 We disagree 

with the argument underlying these 

statements. As discussed above, there is 

a documented literature on the use of 

subscription facilities to distort the 

results of performance reporting.1394 We 

do not believe, and have not stated, that 

borrowing necessarily, or always, 

distorts actual performance: The 

Proposing Release stated, and we 

continue to believe, that subscription 

facilities can be and have been used to 

artificially boost reported IRRs, but 

because investors must pay the interest 

on the debt used, subscription facilities 

can potentially lower total returns for 

investors.1395 We have further stated 

that subscription facilities can distort 

fund performance rankings and distort 

future fundraising outcomes,1396 and we 

further understand from literature by 

investor groups that subscription 

facilities can artificially boost IRRs over 

the fund’s preferred return hurdle rate, 

resulting in the adviser receiving carried 

interest compensation in a scenario 

where the adviser would not have 

received carried interest without the 

subscription line, and where the 

investor may not agree that the 

subscription line improved total returns 

and warranted a carried interest 

payment or where such early carried 

interest can create clawback 

complications later in the life of the 

fund.1397

We believe, therefore, that reporting 

of performance without the impact of 

subscription facilities does provide the 

investor with a better understanding of 

the value delivered by the adviser, 

absent any possible distortionary effect 

of the subscription facility, and 

enhances the standardization of 

disclosures about private funds.1398 We 

also believe that performance without 

the impact of a subscription facilities 

does not tell the investor the actual 

dollar value of returns delivered. This 

motivates the final rule, in which 

reporting both with and without the 

impact of subscription facilities is 

required.1399

This commenter also stated that ‘‘the 

Commission is mistaken that excluding 

the impact of subscription facilities 

would necessarily increase net 

returns.’’ 1400 We have not stated that we 

believe there is any mathematical, 

necessary relationship between the 

impact of subscription facilities and net 

returns. We stated in the Proposing 

Release, and continue to believe, that 

subscription facilities can be and 

sometimes are used to manipulate 

reporting of returns, but not that they 

necessarily do in all cases. We believe 

subscription lines often deliver value to 

investors. However, we also continue to 

believe that there are cases when 

investors may not fully understand the 

impacts of subscription facilities on 

performance, and may not understand 

that a performance measure that 

depends on the timing of capital calls 

(such as IRR) has been distorted by use 

of a subscription facility.1401

One commenter questioned the 

benefits of disclosure of MOIC for 

unrealized and realized portions of a 

portfolio, and questioned if the 

proposed framework was intended to be 

analogous to TVPI/RVPI/DPI.1402 As 

discussed above, there are key 

distinctions between unrealized and 

realized MOIC as separate from RVPI/ 

DPI.1403 We believe these distinctions 

result in key benefits from the 

disclosure of unrealized and realized 

MOIC. In the staff’s experience, in the 

TVPI framework, substantial 

misvaluations applied to unrealized 

investments, when unrealized 

investments are a small portion of the 

fund’s portfolio, may go undetected 

because in that case the denominator in 

the RVPI will be very large compared to 

the size of the misvaluation. By 

comparison, unrealized MOIC will have 

as a denominator just the called capital 

contributed to the unrealized 

investments, and so the misvaluation 

may be easier to detect.1404

For hedge funds, the primary benefit 

is the mandating of regular reporting of 

returns by advisers, standardizing the 

information provided by advisers across 

investors and over time.1405 This will 

improve investors’ ability to interpret 

performance reporting, and assess the 

relationship between the fees paid in 

connection with an investment and the 

return on that investment as they 

monitor their investment and consider 

potential future investments. The 

benefits from the final requirements are, 

however, potentially more substantial 

for illiquid funds, as the breadth of the 

performance information that will be 

required under the final rule for the 

private equity and other illiquid funds 

is designed to address the shortcomings 

of individual performance metrics. 

For both types of funds, because the 

factors used to distinguish between 

liquid and illiquid funds rely on a 

narrow set of key distinguishing features 

that are included in the set of factors for 

determining how certain types of 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63333 

1406See supra section VI.C.3. 

1407 Id. As discussed above, because these 

problems are exacerbated when the fund primarily 

invests in illiquid assets, as separate from when the 

investors’ interests in the fund are illiquid, there 

may be certain liquid funds under the final rules 

for whom IRR and MOIC performance would be 

more beneficial to investors but the advisers to 

those funds will not be required under the rules to 

report IRR and MOIC. Id. However, advisers to such 

funds may already provide IRR and MOIC in their 

performance reporting, and moreover under the 

final rules investors may be more able to negotiate 

for such enhanced performance reporting. See 

supra footnotes 201, 228, and 1360 and 

accompanying discussion. 

1408 Id. 

1409See supra section VI.C.3. 

1410See supra section II.A. 

1411The quantification of the direct costs 

associated with completing performance 

disclosures is included in the analysis of costs 

associated with fee and expense disclosures above. 

1412There do not exist reliable data for 

quantifying what percentage of private fund 

advisers today engage in this activity or the other 

restricted activities. For the purposes of quantifying 

costs, including aggregate costs, we have applied 

the estimated costs per adviser to all advisers in the 

scope of the rule, as detailed in section VII. 

1413See supra sections II.B.2.a), II.B.2.b). For 

example, one commenter stated that in certain 

cases, the calculation of performance without the 

impact of subscription facilities could be 

challenging, particularly for historical periods. The 

commenter stated that advisers may not have 

identified the reasons for each capital call from 

investors, and may need to make assumptions about 

which historical capital calls would have been 

impacted. To the extent these assumptions by 

advisers result in difficult and costly calculations, 

these complications may result in further costs to 

advisers, which may be passed on to the fund and 

investors (and, as discussed above, benefits may be 

reduced). See CFA Comment Letter I. 

1414AIC Comment Letter I; AIC Comment Letter 

II; CFA Comment Letter II; Ropes & Gray Comment 

Letter. 

private funds should report performance 

under U.S. GAAP, market participants 

may be more likely to understand the 

presentation of performance. Investors 

will also benefit because the types of 

performance information required for 

each of liquid and illiquid funds are 

tailored to the circumstances facing 

investors in those funds. For illiquid 

fund investors who have limited or no 

ability to withdraw or redeem from a 

fund, annual returns in the middle of 

the life of the fund do not provide the 

same information as the cumulative or 

average performance of their 

investments since the fund’s inception, 

as is measured by the MOIC and 

IRR.1406 Illiquid funds also typically 

experience what is deemed a ‘‘J-Curve’’ 

to their performance, making negative 

returns for investors in early years (as 

investor capital calls occur) and large 

positive returns in later years (as 

investments succeed and are exited, and 

proceeds are distributed), and annual 

returns for those individual years are 

therefore typically less informative for 

investors.1407 By contrast, investors who 

are determining whether and when to 

withdraw from or request a redemption 

from a liquid fund will find annual net 

total returns over the past (at minimum) 

10 years more informative than an IRR 

or MOIC measured since the fund’s 

inception.1408

Costs 

The cost of the required performance 

disclosure by fund advisers will vary 

according to the existing practices of the 

adviser and the complexity of the 

required disclosure. For advisers who 

already (under their current practice) 

incur the costs of generating the 

necessary performance data, presenting 

and distributing it in a format suitable 

for disclosure to investors, and checking 

the disclosure for accuracy and 

completeness, the cost will likely be 

small. In particular, for those advisers, 

the cost of the performance disclosure 

may be limited to the cost of 

reformatting the performance 

information for inclusion in the 

mandated quarterly report. For example, 

because most advisers with fund-level 

subscription facilities are already 

reporting performance with the impact 

of such facilities, we do not anticipate 

that this requirement will entail 

substantial additional burdens for most 

advisers. For advisers who already both 

maintain the records needed to generate 

the required information and make the 

required disclosures, the costs will be 

even more limited. We anticipate this 

may be the case for many private fund 

advisers, as we believe many private 

fund advisers already maintain and 

disclose similar information to what is 

required by the rule.1409 For example, 

given that the rule will not apply to 

advisers with respect to SAFs that they 

advise, there will be no costs for 

advisers in the case of SAFs.1410

However, we understand that some 

advisers may face costs of changing 

their performance tracking or reporting 

practices under the current rule. Some 

of these costs will be direct costs of the 

rule requirements. Costs of updating an 

adviser’s internal controls or internal 

compliance system to verify the 

accuracy and completeness of the 

reported performance information will 

be indirect costs of the rule. We expect 

the bulk of the costs associated with 

complying with this aspect of the final 

rules will likely be most substantial 

initially rather than on an ongoing 

basis.1411 The lack of legacy status for 

this rule provision means that these 

costs will be borne across all private 

funds and advisers.1412

Some of these costs of compliance 

may again be affected by the rule 

provision providing that, to the extent 

doing so would provide more 

meaningful information and not be 

misleading, advisers must consolidate 

the quarterly statement reporting to 

cover similar pools of assets. These 

costs of compliance will be reduced to 

the extent that advisers are able to avoid 

duplicative costs across multiple 

statements, but will be increased to the 

extent that advisers must undertake 

costs associated with calculating feeder 

fund proportionate interests in a master 

fund, to the extent advisers do not 

already do so. Commenters did not offer 

any opinion as to which of these two 

scenarios is generally more likely to be 

the case. 

The required presentation of 

performance, and the resulting costs, 

will vary based on whether the fund is 

categorized as liquid or illiquid. In 

particular, for liquid funds, the cost is 

mitigated by the limited nature of the 

required disclosure, while the more 

detailed required disclosures for illiquid 

funds may require greater cost (yielding, 

as just discussed, greater benefit).1413

For both categories of funds, because the 

set of factors we used to distinguish 

between liquid and illiquid funds is 

included in the current set of factors for 

determining how certain types of 

private funds should report performance 

under U.S. GAAP, market participants 

may be more familiar with these 

methods of presenting information, 

which may mitigate costs. 

Under the final rule, these compliance 

costs may be borne by advisers and, 

where permissible, could be imposed on 

funds and therefore indirectly passed on 

to investors. For example, under current 

practice, advisers to private funds 

generally charge disclosure and 

reporting costs to the funds, so that 

those costs are ultimately paid by the 

fund investors. Similarly, to the extent 

advisers currently use service providers 

to assist with performance reporting 

(e.g., administrators), those costs are 

often borne by the fund (and thus 

investors). We expect similar 

arrangements may be made going 

forward to comply with the final rule, 

with disclosure where required. 

Advisers may alternatively attempt to 

introduce substitute charges (for 

example, increased management fees) to 

cover the costs of compliance with the 

rule, but their ability to do so may 

depend on the willingness of investors 

to incur those substitute charges. Some 

commenters stated that they believed 

these costs could be substantial, and 

that they would be more than likely to 

be borne by investors, not advisers.1414


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1415AIC Comment Letter I. 

1416See, e.g., AIC Comment Letter I; Schulte 

Comment Letter; NYC Bar Comment Letter II. 

1417See supra section II.B.1. 

1418See supra section VI.B. 

1419See supra section II.E. 

1420See supra sections II.E, II.F. 

1421We are not adopting the remaining two 

prohibitions (fees for unperformed services and 

indemnification) and have instead stated our views 

on the application of existing law. See supra section 

II.E. 

1422See supra section II.E. 

1423Because the rule will not apply to advisers 

with respect to CLOs and other SAFs, there will be 

no benefits or costs for investors and advisers 

associated with those funds. See supra section II.A. 

1424See supra section II.E.1.a), II.E.2.a). 

1425Proposing Release, supra footnote 3, at 234. 

1426 Id. 

1427Fund adviser fees can allow the adviser to 

obtain leverage, and thereby gain disproportionately 

from successes, encouraging advisers to take on 

additional risk. See, e.g., Alon Brav, Wei Jiang & 

Rongchen Li, Governance by Persuasion: Hedge 

Fund Activism and Market-Based Shareholder 

Influence, Euro. Corp. Governance Inst. Fin., 

Working Paper No. 797/2021 (Dec. 10, 2021), 

available at https://ssrn.com/abstract=3955116. 

Another commenter also stated that it 

believed this would likely be the case 

with respect to required reporting of 

performance without the impact of 

subscription facilities.1415

Some commenters lastly expressed 

concerns that the rule posits a one-sizefits-all solution to performance 

reporting, and that with a required 

framework in place governing 

performance reporting, investors would 

face difficulties in negotiating for any 

reporting not specified in the final 

rules.1416 While at the margin this may 

occur, we believe the final rules and this 

release appropriately leave investors 

and advisers free to negotiate any 

performance reporting terms not 

specified in the final rules (though that 

additional reporting must still comply 

with other regulations, such as the final 

marketing rule).1417 As discussed above, 

we believe the final rules were designed 

to mitigate burden where possible and 

continue to facilitate competition and 

facilitate flexible negotiations between 

private fund parties.1418

Further, to the extent that the 

additional standardization and 

comparability of the information in the 

required disclosures make it easier for 

investors to compare and evaluate 

performance, the rule may prompt some 

investors to search for and seek higher 

performing investment opportunities. 

This could reduce the ability for 

advisers of low-performing funds to 

attract additional capital. 

3. Restricted Activities 

The final rules restrict a private fund 

adviser from engaging in five types of 

activities with respect to the private 

fund or any investor in that private 

fund, with certain exceptions for where 

the adviser makes required disclosures 

and, in some cases, also obtains 

required investor consent.1419 These 

activities are:1420

(i) Charging fees or expenses associated 

with an examination or investigation of the 

adviser or its related persons; 

(ii) Charging regulatory or compliance 

expenses or fees of the adviser or its related 

persons; 

(iii) Reducing the amount of any adviser 

clawback by the amount of certain taxes; 

(iv) Charging fees and expenses related to 

a portfolio investment on a non-pro rata 

basis; 

(v) Borrowing money, securities, or other 

fund assets, or receiving an extension of 

credit, from a private fund client.1421

The non-pro rata restriction will be 

subject to an exception if the allocation 

approach is fair and equitable as well as 

a before-the-fact disclosure-based 

exception while the certain fees and 

expenses restrictions and the post-tax 

clawback restriction will be subject to 

after-the-fact disclosure-based 

exceptions only. The borrowing 

restriction and the investigation 

restriction will be subject to consentbased exceptions, which will require an 

adviser to receive advance consent from 

at least a majority in interest of a fund’s 

investors that are not related persons of 

the adviser in order to engage in these 

activities. However, the exception to the 

investigation restriction will not apply if 

the investigation results or has resulted 

in in the governmental or regulatory 

authority, or a court of competent 

jurisdiction, sanctioning the adviser or 

its related persons for violating the Act 

or the rules thereunder.1422

These restrictions will apply to 

activities of the private fund advisers 

even if they are performed indirectly, 

for example, by an adviser’s related 

persons, recognizing that the potential 

for harm to the fund and its investors 

arises independently of whether the 

adviser engages in the activity directly 

or indirectly. 

We discuss the costs and benefits of 

each of the final rules below.1423 The 

Commission notes, however, that 

several factors make the quantification 

of many of these economic effects of the 

final amendments and rules difficult. 

For example, there is a lack of data on 

the extent to which advisers engage in 

certain of the activities that will be 

restricted under the final rules, as well 

as their significance to the businesses of 

such advisers. It is, therefore, difficult to 

quantify how costly it will be to comply 

with the restrictions. Similarly, it is 

difficult to quantify the benefits of these 

restrictions, because there is a lack of 

data regarding how and to what extent 

the changed business practices of 

advisers will affect investors, and how 

advisers may change their behavior in 

response to these rules. As a result, 

parts of the discussion below are 

qualitative in nature. 

Fees for Exams, Regulatory/Compliance 

Expenses, or Investigations 

The final rules will restrict a private 

fund adviser from charging the fund for 

fees or expenses associated with an 

examination or investigation of the 

adviser or its related persons by any 

governmental or regulatory authority or 

for the regulatory and compliance fees 

and expenses of the adviser or its 

related persons.1424 While our policy 

choices for these types of restricted 

activities vary between disclosure, 

consent, and prohibition, the effects 

remain substantially similar, and so we 

discuss them in tandem. 

We stated in the Proposing Release 

that we believed that these charges, 

even when disclosed, may create 

adverse incentives for advisers to 

allocate expenses to the fund at a cost 

to the investor, and as such they 

represent a possible source of investor 

harm.1425 For example, when these 

charges are in connection with an 

investigation of an adviser, it may not be 

in the fund’s best interest to bear the 

cost of the investigation.1426 We further 

stated that these fees may also, even 

when disclosed, incentivize advisers to 

engage in excessive risk-taking, as the 

adviser will no longer bear the cost of 

any ensuing government or regulatory 

examinations or investigations.1427 We 

discussed that by restricting this 

activity, investors would benefit from 

the reduced risk of having to incur costs 

associated with the adviser’s adverse 

incentives, such as allocating 

inappropriate expenses to the fund. We 

discussed that investors would also be 

able to search across fund advisers 

knowing that these charges would not 

be assessed on any fund, which may 

lead to a better match between investor 

choices of private funds and their 

preferences over private fund terms, 

investment strategies, and investment 

outcomes. 

Some commenters agreed with these 

benefits, stating that advisers should not 

be charging examination, investigation, 

regulatory and compliance fees and 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63335 

1428See, e.g., AFREF Comment Letter I; OPERS 

Comment Letter; NY State Comptroller Comment 

Letter. 1429See, e.g., Comment Letter of CSC Global 

Financial Markets (Apr. 25, 2022); NYC Bar 

Comment Letter II; ASA Comment Letter; Schulte 

Comment Letter; AIMA/ACC Comment Letter; SBAI 

Comment Letter. 

1430See, e.g., Weiss Comment Letter; Maskin 

Comment Letter. 

1431 Id. 

1432See supra section VI.B. 

1433See supra section VI.C.2. 1434See supra section II.E. 

1435See supra section IV. For the avoidance of 

doubt, we have specified that the legacy status 

provision does not permit advisers to charge for fees 

and expenses related to an investigation that results 

or has resulted in a court or governmental authority 

imposing a sanction for a violation of the Act or the 

rules promulgated thereunder. See supra footnote 

951. 

1436 Id. 

1437See infra footnote 1458 and accompanying 

text. 

1438See supra section VI.B. 

expenses to the fund.1428 Many 

commenters, however, disagreed, stating 

that a prohibition would have negative 

consequences and disagreeing that 

prohibitions would generate 

benefits.1429 For example, one 

commenter in particular stated that, 

because compliance costs increase with 

diversification of an adviser’s portfolio, 

requiring advisers to bear costs of 

compliance would therefore discourage 

portfolio diversification.1430 The 

commenter further stated that, if 

investors bear those costs, they can 

decide for themselves whether they are 

willing to pay extra compliance costs to 

achieve better diversification.1431

We recognize commenters’ concerns, 

and as stated above we believe that our 

policy choice has benefited from taking 

into consideration the market problem 

that the policy is designed to 

address.1432 Under the final rules, 

investors will benefit both in the case 

where (1) the activity in question 

continues but with enhanced disclosure 

and, in some cases, with enhanced 

consent practices, and (2) the adviser 

ceases the activity. These benefits will 

be mitigated to the extent advisers today 

already do not pass through these types 

of expenses to funds, or already do so 

subject to what will be required 

disclosures and after obtaining what 

will be required consent. As discussed 

above, reputational effects for advisers 

who pass through these expenses may 

already discipline the prevalence of 

these activities, as an adviser who 

passes through these expenses without 

disclosure or, in some cases, without 

consent, may have difficulties attracting 

investors after having done so.1433

These considerations may mitigate 

benefits of the final rules, but they will 

also reduce the costs. 

As discussed above, we believe 

whether such arrangements risk 

distorting adviser incentives to pay 

attention to compliance and legal 

matters, including matters related to 

investigations of potential conflicts of 

interest, may vary from adviser to 

adviser and may vary according to the 

type of expense. For regulatory, 

compliance, and examination expenses, 

the risk may be comparatively low, and 

requiring investor consent or 

prohibiting the activity altogether may 

not be necessary. However, even when 

investors bear these costs, it is necessary 

for them to at minimum receive 

disclosures of these costs. By contrast, 

in the case of investors bearing the costs 

of investigations by government or 

regulatory authorities, the risk of 

distorted adviser incentives may be 

higher, motivating further protections 

from additional consent requirements. 

Lastly, we do not believe there are 

reasonable cases where incentives are 

appropriately aligned by investors 

bearing the costs of investigations by 

government or regulatory authorities 

that results in the governmental or 

regulatory authority, or a court of 

competent jurisdiction, sanctioning the 

adviser or its related persons for 

violating the Act or otherwise finding 

that the adviser or its related persons 

violated the Act. Thus, in response to 

commenters, the final rules provide an 

exception to the restriction on 

regulatory, compliance, and 

examination expenses where the adviser 

makes certain disclosures, and an 

exception to the restriction on 

investigation expenses where the 

adviser obtains investor consent, but 

with the investigation expense 

exception not applying if the 

investigation results in a sanctioning or 

a finding as described above.1434

We continue to believe that the passthrough of these types of expenses can 

be associated with risks of adverse 

incentives for the adviser, such as 

allocating inappropriate expenses to the 

fund, or risks of incentives for the 

adviser to engage in excessive risktaking. Under the final rules, investors 

will benefit from greater transparency 

into the risks that they will have to 

incur costs associated with these 

problems. Investors will be able to 

search across fund advisers knowing 

more clearly whether these charges will 

be assessed on a fund, which may lead 

to a better match between investor 

choices of private funds and their 

preferences over private fund terms, 

investment strategies, and investment 

outcomes. 

Investors will also benefit in cases 

where the adviser no longer charges the 

private fund clients for the restricted 

expenses, in particular with respect to 

costs of investigations that result in a 

sanctioning or a finding as described in 

the final rules. For the types of fees and 

expenses with a disclosure exception 

and, in some cases, a consent exception, 

investors may also benefit in cases 

where the adviser either opts to not 

make the required disclosure or obtain 

the required consent that would 

facilitate an exception, or may also 

occur in cases where the investors, 

having received disclosure of these 

expenses or when consent is sought, are 

able to negotiate for the adviser to bear 

the expense. We are providing legacy 

status for the aspects of the restricted 

activities rule that require investor 

consent, which include restricting an 

adviser from charging for certain 

investigation fees and expenses.1435

This legacy status will mitigate the 

benefits to current funds that engage in 

pass-through of investigation expenses 

and the investors, but will also reduce 

costs for those advisers. We are also not 

applying legacy status to the aspects of 

the restricted activities rule with 

disclosure-based exceptions because 

transparency into these practices is 

important and will not harm investors 

in the private fund.1436 That means that 

these benefits will accrue across all 

private funds and advisers who 

currently engage in pass-through of 

these expenses. 

As discussed further below, we 

believe most advisers will pursue 

compliance via the required disclosures 

and, in some cases, by obtaining the 

required consent, where they are 

able.1437 The disclosures and, in some 

cases, consent requirements may 

enhance investor negotiating positions 

because, as discussed above, many 

investors report that they accept poor 

terms because they do not know what is 

‘‘market.’’ 1438 Consistent with the 

Proposing Release, we believe investors 

in these cases will benefit from 

resolving any adverse incentives for the 

adviser created by passing-through the 

expenses at issue and any incentives for 

the adviser to engage in excessive risktaking, which may lead to a better match 

between investor choices of private 

funds and their preferences over private 

fund terms, investment strategies, and 

investment outcomes. Investors will 

also benefit from their improved ability 

to determine the appropriate amount of 

fund attention directed towards 

regulatory and compliance matters. 

In these cases, the magnitude of the 

benefit will to some extent depend on 

whether advisers can introduce 


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1439See supra footnote 1153. 

1440See supra section II.E.1.b). 

1441See supra footnote 1153. 

1442Form PF Release, supra footnote 564. 

1443See supra sections II.E.1.b), VI.C.2. 

1444See infra section VI.E.2. 

1445See supra section VI.C.2. 

1446See supra section IV. 

1447 Id. 

1448See infra section VII.D. IARD data indicate 

that registered investment advisers to private funds 

typically advise more private funds as compared to 

the full universe of investment advisers. 1449 Id. 

1450 Id. 

1451See supra section II.E. 

substitute charges (for example, 

increased management fees), and the 

willingness of investors to incur those 

substitute charges, for the purpose of 

making up any revenue that would be 

lost to the adviser from the restriction. 

However, any such substitute charges 

will be more transparent to the investor 

and will not create the same adverse 

incentives as the restricted charges, and 

so investors would likely ultimately still 

benefit. 

Because Form PF’s recently adopted 

new reporting requirements for private 

equity fund advisers will already collect 

annual information on the occurrence of 

general partner and limited partner 

clawbacks from large private equity 

advisers,1439 any investor protection 

benefits of the final rules may be 

mitigated to the extent that Form PF is 

already a sufficient tool for investor 

protection purposes.1440 However, we 

do not believe the benefits will be 

meaningfully mitigated, because Form 

PF is not an investor-facing disclosure 

form. Information that private fund 

advisers report on Form PF is provided 

to regulators on a confidential basis and 

is nonpublic, and by contrast the 

advisers who come into compliance 

with the restricted activities rule via the 

required disclosures will need to make 

those disclosures to investors. 

Moreover, the recently adopted Form PF 

reporting requirements are only 

applicable to large private equity 

advisers as defined by Form PF, which 

are those with at least $2 billion in 

regulatory assets under management as 

of the last day of the adviser’s most 

recently completed fiscal year,1441 while 

the restricted activities rule will apply 

to all private fund advisers. While large 

private equity advisers cover 

approximately 73 percent of the private 

equity industry,1442 and clawbacks are 

more common for private equity funds 

and other illiquid funds,1443 there will 

still be benefits from consistently 

applying the restricted activities rule to 

all private fund advisers. 

The restriction will impose direct 

costs on advisers from the need to 

update their charging and contracting 

practices to bring them into compliance 

with the new requirements, in particular 

by making certain new disclosures and, 

in some cases, obtaining the new 

required investor consent. As discussed 

further below, in the context of the 

rule’s impact on competition, 

commenters generally stated that they 

believed the direct costs of the rule 

would be high, given the compliance 

requirements involved.1444

Under the final rules, advisers will 

face costs both in the case where (1) the 

activity in question continues but with 

costs for enhanced disclosure, and (2) 

the adviser ceases the activity, with 

costs related to restructuring fund 

documents, higher expenses, or new or 

additional fees. For the restriction on 

passing through of expenses related to 

investigations by government or 

regulatory authorities that result or have 

resulted in the governmental or 

regulatory authority, or a court of 

competent jurisdiction, sanctioning the 

adviser or its related persons for 

violating the Act or the rules 

thereunder, advisers and funds will 

have no exception from the rule 

regardless of disclosures made or 

consent obtained. Similar to benefits, 

the costs will be reduced to the extent 

advisers today already do not pass 

through these types of expenses to 

funds, or already do so subject to what 

will be required disclosures and after 

obtaining what will be required consent, 

for example as a result of reputational 

effects.1445 Also similar to benefits, the 

legacy status for the aspects of the 

restricted activities rule that require 

investor consent, which restrict an 

adviser from charging for certain 

investigation fees and expenses, will 

reduce the costs of the final rules for 

advisers with respect to those rules.1446

We are not applying legacy status to the 

disclosure-based portions of the 

restricted activities rules, or to the 

prohibition on fees and expenses related 

to an investigation that results or has 

resulted in a court or governmental 

authority imposing a sanction for a 

violation of the Act or the rules 

promulgated thereunder,1447 which 

means that the costs of those rules will 

be borne across all private funds and 

advisers who currently engage in passthrough of these expenses. In the case 

where advisers comply with the final 

rule by making the required disclosures 

and, in some cases, by obtaining the 

required consent, costs are quantified by 

examination of the analysis in section 

VII. As discussed below, based on IARD 

data, as of December 31, 2022, there 

were 12,234 investment advisers 

(including both registered and 

unregistered advisers, but excluding 

advisers managing solely SAFs) 

providing advice to private funds, and 

we estimate that these advisers would, 

on average, each provide advice to 8 

private funds (excluding SAFs).1448 We 

estimate that each of these advisers 

would require internal time costs from 

compliance attorneys, accounting 

managers, and assistant general 

counsels, yielding total internal time 

costs per adviser of $29,344 across all 

restricted activities. We believe 75% of 

these advisers would also face total 

external costs of $25,424 across all 

restricted activities. This means that 

aggregate internal time costs across 

these advisers would total $358,994,496 

across all of the restricted activities.1449

We estimate that these advisers would 

also face aggregate external costs of 

$233,290,624 across all advisers, for a 

total aggregate cost of $592,285,120.1450

We assume that this time is inclusive 

of time needed for advisers to make the 

determination that the requisite 

disclosure and, in some cases, consent 

is the appropriate path to compliance 

for that adviser. These costs also include 

the costs of making the requisite 

distributions of required disclosures to 

investors. For many private fund 

advisers, these costs will be limited by 

the timeline provided in the final rule 

for the requisite disclosures, requiring 

distribution within 45 days after the end 

of the fiscal quarter in which the 

relevant activity occurs, or 90 days after 

the end of the fiscal year for the fourth 

quarterly report, allowing many advisers 

that are subject to the quarterly 

statement rule to include these 

disclosures in their quarterly 

reports.1451 However, certain fund 

advisers, such as advisers to funds of 

funds, may not make quarterly reports 

within a 45 day time frame, and those 

advisers may face additional costs 

associated with distribution of the 

required disclosures. 

However, advisers may instead face 

direct costs associated with the need to 

update their charging and contracting 

practices to bring them into compliance 

with the new requirements in the case 

where advisers cease the restricted 

expense pass-through instead of making 

the required disclosures or instead of 

obtaining the required investor consent. 

These costs will be separate from PRA 

costs, which are limited to the costs 

associated with coming into compliance 

with the rules on restricted activities 

through making the required disclosures 

and, in some cases, obtaining the 

required investor consent. 


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1452Proposing Release, supra footnote 3, at 233– 

234. 

1453See, e.g., Overdahl Comment Letter; LSTA 

Comment Letter, Exhibit C. 

1454See infra section VII. One commenter stated 

that these wage rates may be underestimated. See 

AIC Comment Letter I, Appendix 1. But one 

commenter stated that these wage rates are 

conservatively high, and that commenter’s 

quantification of total costs used lower wage rates 

from the Bureau of Labor Statistics. See LSTA 

Comment Letter, Exhibit C. 

1455This yields a total of 360 hours of personnel 

time for each of the restricted activities. We believe 

this is a reasonably large minimum estimate, as it 

applies for each restricted activity in question. For 

certain of these categories of professionals, these 

hours may be imposed on two professionals of each, 

who would face one-time costs of 12 hours each. 

For some, such as the Chief Compliance Officer, 

these hours would come/originate from one staff 

member, who may require 24 hours of time 

associated with each restricted activity. 

1456The proportion of initial costs that will 

persist as ongoing costs is difficult to quantify and 

may vary from adviser to adviser, and also varies 

across different types of funds. To the extent the 

proportion of initial costs that persist as ongoing 

costs is higher than one third, the ongoing costs 

would be proportionally higher than what is 

reflected here. 

1457Based on staff experience, as advisers grow in 

size, efficiencies of scale may emerge that limit the 

upper range of compliance costs. For example, an 

adviser in a large complex may have many contracts 

to revise, but these contracts may be substantially 

similar across funds. 

1458See infra section VII.D. 1459See infra footnote 1533. 1460However, any such costs of alternative 

charges would be mitigated by the adviser needing 

to negotiate and disclose such charges, for example 

in quarterly statements of fees and expenses. See 

supra section II.B.1. 

1461See, e.g., Eli Hoffmann, Welcome To Hedge 

Funds’ Stunning Pass-Through Fees, Seeking Alpha 

(Jan. 24, 2017), available at https://

seekingalpha.com/article/4038915-welcome-tohedge-funds-stunning-pass-through-fees. 

As discussed in the Proposing 

Release, several factors make the 

quantification of these costs difficult, 

such as a lack of data on the extent to 

which advisers engage in the passthrough of expenses that will be 

restricted under the final rules.1452

However, some commenters criticized 

the Commission for acknowledging 

these direct costs but failing to quantify 

them.1453 In light of this, the 

Commission has further considered the 

requirement and additional work that 

would be required by various parties to 

comply. To that end, the Commission 

has estimated ranges of costs for 

compliance, depending on the amount 

of time each adviser will need to spend 

to comply. Some advisers may pass 

these direct costs on to their funds and 

thus investors, and other advisers may 

absorb these costs and bear the costs 

themselves. 

Advisers are likely to vary in the 

complexity of their contracts and 

expense arrangements, because for 

example some advisers may not charge 

any expenses to a fund at all beyond 

management fees and carried interest. 

At minimum, we estimate that the 

additional work will require time from 

accounting managers ($337/hour), 

compliance managers ($360/hour), a 

chief compliance officer ($618/hour), 

attorneys ($484/hour), assistant general 

counsels ($543/hour), junior business 

analysts ($204/hour), financial reporting 

managers ($339), senior business 

analysts ($320/hour), paralegals ($253/ 

hour), senior operations managers 

($425/hour), operations specialists 

($159/hour), compliance clerks ($82/ 

hour), and general clerks ($73/hour).1454

Certain advisers may need to hire 

additional personnel to meet these 

demands. We also include time needed 

for advisers to make the determination 

that ceasing the restricted activity 

instead of making a disclosure and, in 

some cases, obtaining consent is the 

appropriate path to compliance for that 

adviser, which we estimate will require 

time from senior portfolio managers 

($383/hour) and senior management of 

the adviser ($4,770/hour). 

To estimate monetized costs to 

advisers, we multiply the hourly rates 

above by estimated hours per 

professional. Based on staff experience, 

we estimate that on average, advisers 

will require at minimum 24 hours of 

time from each of the personnel 

identified above as an initial burden for 

each of the restricted activities.1455 For 

example, at minimum, each adviser may 

require time from these personnel to at 

least evaluate whether any revisions to 

their contracts are warranted at all. 

Multiplying these minimum hours by 

the above hourly wages yields a 

minimum initial cost of $224,368.92 per 

adviser. These costs are likely to be 

higher initially than they are ongoing. 

Based on staff experience, we estimate 

minimum ongoing costs will likely be 

one third of the initial costs, or 

$74,789.64 per year.1456

However, many of these potential 

direct costs of updates may be higher for 

certain advisers. Larger advisers, with 

more complex contracts and expense 

arrangements that are more complex to 

update, may have greater costs. Advisers 

may also vary in which investors 

consent to pass-through of investigation 

expenses. These variations across 

advisers could impact how many hours 

are needed from personnel. While the 

factors that may increase these costs are 

difficult to fully quantify, we anticipate 

that very few advisers would face a 

burden that exceeds 10 times the 

minimum estimate.1457 Multiplying 

minimum initial cost estimates by 10 

yields a maximum initial cost of 

$2,243,689.20 per adviser. These costs 

are likely to be higher initially than they 

are ongoing. We estimate maximum 

ongoing costs will likely be one third of 

the initial costs, or $747,896.40 per year. 

The aggregate costs to the industry 

will depend on the proportion of 

advisers who pursue compliance via the 

required disclosures and via the 

required consent and the proportion of 

advisers who pursue compliance by 

forgoing the restricted activities. We 

believe that, in general, the substantial 

majority of advisers will pursue 

compliance with the final rule via 

disclosures and via consent as opposed 

to by ceasing the required activities.1458

We therefore believe that the aggregate 

compliance costs to the industry 

associated with this component of the 

final rule will likely be consistent with 

the aggregate costs to the industry as 

reflected in the PRA analysis. This is 

supported by the fact that the costs we 

estimate to each adviser of complying 

with the final rules by ceasing the 

restricted activity (in particular, 

potentially as high as $2,243,689.20 in 

initial costs) is much higher than the 

PRA cost per adviser across all 

restricted activities ($54,768). However, 

to the extent that more than a de 

minimis number of advisers pursue 

compliance through ceasing the 

restricted activity instead of via 

disclosures and via consent, aggregate 

costs may be higher.1459

Similar to the benefits, advisers may 

also incur costs related to this 

restriction in connection with not being 

able to charge private fund clients for 

the restricted expenses, in cases where 

the adviser opts to not make the 

required disclosure or, in some cases, 

obtain the required consent that would 

facilitate an exception. This may also 

occur in cases where the investors, 

having received disclosure of these 

expenses or when consent is sought, are 

able to negotiate for the adviser to bear 

the expense, for example by 

withholding consent. In addition, in 

these cases, advisers may incur indirect 

costs related to adapting their business 

models to identify and substitute nonrestricted sources of revenue. For 

example, advisers may identify, 

negotiate, and implement methods of 

replacing the lost charges from the 

restricted practice with other charges to 

the fund, and so investors may bear 

such additional costs.1460

Further, as discussed above, we 

understand that certain private fund 

advisers, most notably advisers to hedge 

funds and other liquid funds,1461 utilize 

a pass-through expense model where 

the private fund pays for most, if not all, 


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63338 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1462See, e.g., MFA Comment Letter I, Appendix 

A; Overdahl Comment Letter. 

1463However, any such costs of alternative 

charges would be mitigated by the adviser needing 

to negotiate and disclose such charges, for example 

in quarterly statements of fees and expenses. See 

supra section II.B.1. 

1464See supra sections II.E.1.a), II.E.2.a). 

1465 Id. 

1466 Id. 

1467See supra section II.E.1.a). 

1468See, e.g., Overdahl Comment Letter; AIC 

Comment Letter I, Appendix 1. 

1469AIC Comment Letter I, Appendix 1. 

1470To the extent that these substitute funds that 

do not need to be restructured under the rule have 

higher expenses than funds whose structures are 

impacted, but the compliance costs of the rule 

cause impacted funds to become the higher expense 

funds, than investors may still face higher expenses 

and reduced returns. For example, some 

commenters state that pass-through funds are lower 

expense funds than other types of private funds, 

and so to the extent higher compliance costs create 

higher expenses for pass-through funds, investors 

may face higher expenses and lower returns 

regardless of their ability to rotate to other fund 

types. See, e.g., Overdahl Comment Letter; Sullivan 

& Cromwell Comment Letter. 

1471See supra section VI.B. 

of the adviser’s expenses in lieu of being 

charged a management fee. Commenters 

expressed substantial concerns with the 

notion that pass-through expense 

models, or portions of these models, 

would be prohibited or restricted by the 

rule, stating that pass-through expense 

models can be in the best interest of 

investors, and can in fact enhance fee 

and expense transparency.1462

The final rules substantially address 

these commenters’ concerns, in that 

pass-through expense models would not 

have most aspects of their business 

model expressly prohibited by the final 

rules (except for the pass-through of 

expenses associated with investigations 

that result or have resulted in 

sanctioning the adviser for violating the 

Act or the rules thereunder as described 

in the final rules), as advisers to those 

fund models can comply with the 

restrictions in the rules via the required 

disclosures. The final rules will, 

however, likely impact certain aspects 

of pass-through expense models or other 

similar models in which advisers charge 

investors expenses associated with 

certain of the adviser’s cost of being an 

investment adviser, because these 

business models may in general need to 

pursue the necessary disclosures to have 

an exception from the restriction, or 

otherwise undertake substantial costs to 

restructure their fund’s business model 

to generate other sources of revenue, 

such as a new management fee,1463 and 

will in general need to pay without 

passing through fees or expenses 

associated with a violation of the 

Act.1464 For example, an adviser may 

have investors who have consented to 

investigation expenses, and for an 

ongoing investigation the adviser may 

be passing through those investigation 

expenses, but upon the occurrence of a 

finding that the adviser violated the Act 

the adviser will need to identify funding 

to reimburse the fund for previously 

passed-through expenses. In that case, 

advisers who are not already equipped 

to pay such expenses will need to 

identify other assets (e.g., balance sheet 

capital), sources of revenue (e.g., a new 

management fee or increased 

performance-based compensation), or 

access to capital (e.g., loans) to pay any 

such fees or expenses.1465

There are two factors that mitigate 

these impacts for advisers to passthrough funds and their investors. First, 

as the Commission may already require 

advisers to pass-through funds to pay 

penalties associated with a violation the 

Act, we anticipate that this rule will not 

cause a significant disruption from 

current practice for advisers to passthrough funds.1466 Second, more 

generally, we believe pass-through 

funds already provide ongoing, regular 

disclosure of the other fees and 

expenses that are being passed through 

to investors and these investors have 

consented to the pass-through of these 

expenses, and thus are most likely 

already well-positioned to come into 

compliance with the final rule through 

the necessary disclosures and consent 

requirements.1467

To the extent advisers to pass-through 

expense funds pursue such 

restructuring, the expenses that will no 

longer be passed through to the fund 

will require the adviser to negotiate a 

new fixed management fee to 

compensate for the new costs. In 

addition, any such fund restructurings 

that are undertaken will likely impose 

costs that will be borne by advisers. The 

costs may also be borne partially or 

entirely by the private funds, to the 

extent permissible or to the extent 

advisers are able to compensate for their 

costs with substitute charges (for 

example, increased management fees). 

To the extent that existing pass-through 

structures are more efficient than the 

resulting structures that may emerge, as 

some commenters have stated, that may 

represent an additional cost of the 

rule.1468 As a related cost, fund advisers 

unable to fully compensate for formerly 

passed-through costs with new fees may 

reduce their costs, possibly with 

inefficiently low investment in 

compliance, and reduced investments in 

compliance may result in additional 

expenses for the fund or adviser in the 

future or reductions to activities 

designed to protect investors.1469

In addition, investors may incur costs 

from this restriction that take the form 

of lower returns from some fund 

investments, depending on the extent to 

which the restriction limits the adviser’s 

efficiency or effectiveness in providing 

the services that generate returns from 

those investments. For example, in the 

case of pass-through expense models, 

fund advisers who would have to bear 

new costs of providing certain services 

under the restriction may reduce or 

eliminate those services to reduce costs, 

which may be to the detriment of the 

fund’s performance or lead to an 

increase of compliance risk. The 

restriction in the final rules may also 

represent an incentive for advisers to 

take fewer risks, to reduce risks of 

examinations or investigations 

occurring in the first place, which may 

lower investor returns. 

Moreover, to the extent that 

restructuring a pass-through expense 

model of a hedge fund under the final 

rule diverts the hedge fund adviser’s 

resources away from the hedge fund’s 

investment strategy, this could lead to a 

lower return to investors in hedge 

funds. The cost of lower returns would 

be mitigated to the extent that certain 

investors can distinguish and identify 

those funds that require restructuring as 

to how they collect revenue from 

investors and use this information to 

search for and identify substitute funds 

that have expense models that do not 

need to be restructured under the rule 

and that do not present the investor 

with reduced returns as a result of the 

rule.1470 While some investors may face 

difficulty today in determining whether 

their next investment should be with 

the same or a different adviser,1471 they 

may have an improved ability to do so 

as a result of the enhanced transparency 

under the final rules. Investors would 

also need to evaluate whether these 

substitute funds would be likely to 

present them with better performance 

than their current funds. Any such 

search costs would be a cost of the rule. 

As a result, the cost to investors may 

include a combination of the cost of 

lower returns and the cost of seeking to 

avoid or mitigate such reductions in 

returns. 

Reducing Adviser Clawbacks for Taxes 

The final rule will restrict certain uses 

of fund resources by the private fund 

adviser by restricting advisers from 

reducing the amount of their clawback 

obligation by actual, potential, or 

hypothetical taxes applicable to the 

adviser, its related persons, or their 

respective owners or interest holders, 

unless the adviser distributes a written 


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1472See supra section II.E.1.b). 

1473See supra section VI.B. 

1474Because commenters generally emphasized 

that clawbacks have developed through robust 

negotiations between advisers and their private 

fund clients, investors may generally be more likely 

to benefit from the enhanced information that they 

will receive under the final rule, instead of from 

advisers voluntarily forgoing the reduction of 

clawbacks for taxes. 

1475See, e.g., AFL–CIO Comment Letter; 

Albourne Comment Letter; Better Markets Comment 

Letter; Convergence Comment Letter; NASAA 

Comment Letter; NYC Comptroller Comment Letter; 

OPERS Comment Letter. 

1476See supra sections II.E.1.b), VI.C.2. 

1477See supra section VI.C.3; see also, e.g., AIC 

Comment Letter I, Appendix I; Ropes & Gray 

Comment Letter. 

1478See supra section VI.B. 

1479Under the proposal, the Commission stated 

that some advisers may be unable to recoup the cost 

of the tax payments made in connection with the 

excess distributions and allocations affected by the 

proposal, and therefore would face greater costs 

when clawbacks do occur under the prohibition. 

Proposing Release, supra footnote 3, at 22. We 

believe we have removed that potential cost, as we 

expect any such advisers who would have been 

unable to recoup the cost of the tax payment under 

the proposal will instead under the final rule make 

the required disclosures. 

1480See infra section VI.E.2. 

1481See supra sections II.E.1.b), VI.C.2. 

1482However, there do not exist reliable data for 

quantifying what percentage of private fund 

advisers today engage in this activity or the other 

restricted activities. For the purposes of quantifying 

costs, including aggregate costs, we have applied 

the estimated costs per adviser to all advisers in the 

scope of the rule, consistent with the approach 

taken in the PRA analysis. See supra section VII. 

notice to the investors of such private 

fund client that sets forth the aggregate 

dollar amounts of the adviser clawback 

before and after any reduction for 

actual, potential, or hypothetical taxes 

within 45 days after the end of the fiscal 

quarter in which the adviser clawback 

occurs.1472

Investors in funds with advisers who 

would have otherwise reduced 

clawbacks for taxes, but under the rule 

will make no such reduction, will 

benefit from this rule from increases to 

clawbacks (and thus investor returns) by 

actual, potential, or hypothetical tax 

rates. Investors in funds with advisers 

who will continue to reduce clawbacks 

for taxes but will make the required 

disclosure will benefit from their 

enhanced ability to monitor the adviser 

and prevent the adviser from putting its 

interests ahead of the funds’ interests. 

Current investors in a fund who receive 

these disclosures, and who are 

contemplating investing in a follow-on 

fund with the same adviser, may also 

benefit from these disclosures through 

an enhanced ability to negotiate terms of 

the follow-on fund, for example by 

negotiating that the adviser to the 

follow-on fund will not reduce 

clawbacks for taxes in the follow-on 

fund. The disclosures may enhance 

investor negotiating positions because, 

as discussed above, many investors 

report that they accept poor terms 

because they do not know what is 

‘‘market.’’ 1473 Such investors will 

benefit from effectively increased 

clawbacks in their follow-on funds.1474

Many commenters agreed that investors 

could benefit from restricting the 

practice of reducing clawbacks for 

taxes.1475 The lack of legacy status for 

this rule provision means that these 

benefits will accrue across all private 

funds and advisers who currently 

engage in clawbacks. Because clawbacks 

are more common for private equity 

funds and other illiquid funds,1476 these 

benefits will generally be more 

applicable to advisers and investors in 

those funds. 

Commenters who opposed a 

prohibition generally did not specify 

any objection to the purported benefits 

of the rule, and instead emphasized the 

indirect costs of the rule. Specifically, 

many commenters stated that the 

indirect costs of the rule, as proposed, 

would have been very high. As 

discussed above, commenters stated that 

indirect costs and unintended 

consequences could have included the 

reduction of advisers that choose to 

offer clawback mechanisms in their 

private funds, the restructurings of 

current performance-based 

compensation arrangements into 

arrangements that would be less 

favorable for investors, offsetting 

changes to other economic terms 

applicable to investors (e.g., higher 

management fees), the distortion of 

timely portfolio management decisions 

to avoid potential clawback liabilities, 

and disproportionate burdens on 

smaller investment advisers that may be 

more reliant on the receipt of 

performance-based compensation on a 

deal-by-deal basis to remunerate their 

employees and fund their 

operations.1477 We believe that the final 

rule substantially mitigates the risks of 

these unintended consequences and 

costs by allowing for advisers to still 

reduce clawbacks for taxes, in the event 

they make the required disclosures. As 

stated above, we also believe that our 

policy choice has benefited from taking 

into consideration the market problem 

that the policy is designed to address, 

and believe that the final rule with an 

exception for certain disclosures 

accomplishes this.1478

This restriction will still impose 

direct costs on advisers of either (i) 

updating their charging and contracting 

practices to bring them into compliance 

with the new requirements, or (ii) 

making the relevant disclosures. 

Advisers may also attempt to mitigate 

the greater costs of clawbacks under the 

restriction, including the costs of 

disclosures, by introducing some new 

fee, charge, or other contractual 

provision that would make up for the 

lost tax reduction on the clawback, and 

they will then incur costs of updating 

their contracting practices to introduce 

these new provisions.1479 As discussed 

further below, in the context of the 

rule’s impact on competition, 

commenters generally stated that they 

believed the direct costs of the rule 

would be high, given the compliance 

requirements involved.1480 The lack of 

legacy status for this rule provision 

means that these costs will be borne 

across all private funds and advisers 

who currently engage in clawbacks. 

Because clawbacks are more common 

for private equity funds and other 

illiquid funds,1481 these costs will 

generally be more applicable to advisers 

and investors in those funds.1482

Advisers who forgo reducing 

clawbacks for taxes because of the final 

rule, either voluntarily or in a follow-on 

fund where investors used the enhanced 

disclosure in the prior fund to negotiate 

such terms, may attempt to mitigate 

their increased costs associated with 

clawbacks by reducing the risk of a 

clawback occurring. For example, 

certain advisers may adopt new 

waterfall arrangements designed to 

delay carried interest payments until 

later in the life of a fund, to limit the 

possibility of a clawback or reduce the 

possible sizes of clawbacks. In this case, 

investors will benefit from earlier 

distributions of proceeds from the fund 

and reduced costs associated with 

monitoring their potential need for a 

clawback. However, some fund advisers 

are able to attract investors even though 

their fund terms do not provide for full 

or partial clawbacks. To the extent such 

advisers were able to update their 

business practices, for example by 

providing for an advance on tax 

payments with no option for a 

clawback, this will reduce the benefits 

of the rule, as investors would continue 

to receive the reduced clawback 

amounts and bear portions of the 

adviser’s tax burden. In either case, 

advisers will also bear additional costs 

from the final rule of updating their 

business practices. 

Advisers could, therefore, incur 

transitory costs related to adapting their 

business models to identify and 

substitute non-restricted sources of 

revenue. These direct costs may be 

particularly high in the short term to the 


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63340 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1483See supra footnote 1450 and accompanying 

text. 

1484See supra section II.E. 

1485Proposing Release, supra footnote 3, at 233– 

234. 

1486See, e.g., Overdahl Comment Letter; LSTA 

Comment Letter, Exhibit C. 

1487See infra section VII. 

1488As discussed above, this yields a total of 360 

hours of personnel time for each of the restricted 

activities. See supra footnote 1455. 

1489As discussed above, to the extent the 

proportion of initial costs that persist as ongoing 

costs is higher than one third, the ongoing costs will 

be proportionally higher than what is reflected here. 

See supra footnote 1456. 1490As discussed above, based on staff 

experience, as advisers grow in size, efficiencies of 

scale may emerge that limit the upper range of 

compliance costs. See supra footnote 1457. 

1491See infra section VII.D. 

1492See infra footnote 1533. 

extent that advisers renegotiate, 

restructure, and/or revise certain 

existing deals or existing economic 

arrangements in response to this 

restriction. 

In the case where advisers comply 

with the final rule by making the 

required disclosures, costs are 

quantified by examination of the 

analysis in section VII, which have been 

tallied along with all other disclosure 

costs of the restricted activities above 

and include time needed for advisers to 

make the determination that the 

requisite disclosure is the appropriate 

path to compliance for that adviser.1483

These costs also include the costs of 

making the requisite distributions to 

investors. For many private fund 

advisers, these costs will be limited by 

the timeline providing in the final rule, 

requiring distribution within 45 days 

after the end of the fiscal quarter in 

which the relevant activity occurs, or 90 

days after the end of the fiscal year for 

the fourth quarterly report, allowing 

many advisers that are subject to the 

quarterly statement rule to include these 

disclosures in their quarterly 

reports.1484 However, certain fund 

advisers, such as advisers to funds of 

funds, may not make quarterly reports 

within a 45 day time frame, and those 

advisers may face additional costs 

associated with distribution of the 

required disclosures. 

However, advisers may instead face 

direct costs associated with the need to 

update their charging and contracting 

practices to bring them into compliance 

with the new restriction, in particular in 

the case where advisers cease the 

restricted clawbacks instead of making 

the required disclosures. These costs 

will be separate from PRA costs, which 

are limited to the costs associated with 

coming into compliance with the rules 

on restricted activities through making 

the required disclosures, and include 

time needed for advisers to make the 

determination that the ceasing the 

restricted activity is the appropriate 

path to compliance for that adviser. 

As discussed in the Proposing 

Release, several factors make the 

quantification of these costs difficult, 

such as a lack of data on the extent to 

which advisers engage in the reduction 

clawbacks for taxes that will restricted 

under the final rules.1485 However, 

some commenters criticized the 

Commission for acknowledging these 

direct costs but failing to quantify 

them.1486 In light of this, the 

Commission has further considered the 

requirement and additional work that 

would be required by various parties to 

comply. To that end, the Commission 

has estimated ranges of costs for 

compliance, depending on the amount 

of time each adviser will need to spend 

to comply. Some advisers may pass 

these direct costs on to their funds and 

thus investors, and other advisers may 

absorb these costs and bear the costs 

themselves. 

Advisers are likely to vary in the 

complexity of their contracts and 

clawback arrangements, because for 

example some advisers may already 

refrain from reducing clawbacks for 

taxes. At minimum, we estimate that the 

additional work will require time from 

accounting managers ($337/hour), 

compliance managers ($360/hour), a 

chief compliance officer ($618/hour), 

attorneys ($484/hour), assistant general 

counsel ($543/hour), junior business 

analysts ($204/hour), financial reporting 

managers ($339), senior business 

analysts ($320/hour), paralegals ($253/ 

hour), senior operations managers 

($425/hour), operations specialists 

($159/hour), compliance clerks ($82/ 

hour), and general clerks ($73/hour).1487

Certain advisers may need to hire 

additional personnel to meet these 

demands. We also include time needed 

for advisers to make the determination 

that ceasing the restricted activity 

instead of making a disclosure is the 

appropriate path to compliance for that 

adviser, which we estimate will require 

time from senior portfolio managers 

($383/hour) and senior management of 

the adviser ($4,770/hour). 

To estimate monetized costs to 

advisers, we multiply the hourly rates 

above by estimated hours per 

professional. Based on staff experience, 

we estimate that on average, advisers 

will require at minimum 24 hours of 

time from each of the personnel 

identified above as an initial burden.1488

For example, at minimum, each adviser 

may require time from these personnel 

to at least evaluate whether any 

revisions to their contracts are 

warranted at all. Multiplying these 

minimum hours by the above hourly 

wages yields a minimum initial cost of 

$224,368.92 per adviser. These costs are 

likely to be higher initially than they are 

ongoing. We estimate minimum ongoing 

costs will likely be one third of the 

initial costs, or $74,789.64 per year.1489

However, many of these potential 

direct costs of updates may be higher for 

certain advisers. Larger advisers, with 

more complex contracts and expense 

arrangements that are more complex to 

update, may have greater costs. While 

the factors that may increase these costs 

are difficult to fully quantify, we 

anticipate that very few advisers would 

face a burden that exceeds 10 times the 

minimum estimate.1490 Multiplying 

minimum initial cost estimates by 10 

yields a maximum initial cost of 

$2,243,689.20 per adviser. These costs 

are likely to be higher initially than they 

are ongoing. We estimate maximum 

ongoing costs will likely be one third of 

the initial costs, or $747,896.40 per year. 

The aggregate costs to the industry 

will depend on the proportion of 

advisers who pursue compliance via the 

required disclosures and the proportion 

of advisers who pursue compliance by 

forgoing the restricted activity. We 

believe that, in general, almost all 

advisers will pursue compliance with 

the final rule via disclosures as opposed 

to by ceasing the restricted activity.1491

We therefore believe that the aggregate 

costs to the industry associated with 

this component of the final rule will 

likely be consistent with the aggregate 

costs to the industry as reflected in the 

PRA analysis. This is supported by the 

fact that the costs we estimate to each 

adviser of complying with the final 

rules by ceasing the restricted activity 

(in particular, potentially as high as 

$2,243,689.20 in initial costs) is much 

higher than the PRA cost per adviser 

across all restricted activities ($54,768). 

However, to the extent that more than 

a de minimis number of advisers pursue 

compliance through ceasing the 

restricted activity instead of via 

disclosures, aggregate costs may be 

higher.1492

Certain Non-Pro Rata Fee and Expense 

Allocations 

The final rule will restrict a private 

fund adviser from charging certain fees 

and expenses related to a portfolio 

investment (or potential portfolio 

investment) on a non-pro rata basis 

when multiple private funds and other 

clients advised by the adviser or its 


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1493See supra section II.E.1.b). 

1494Proposing Release, supra footnote 3, at 240. 

1495 Id. See also infra section VI.D.4 (discussing 

opportunism in the context of certain preferential 

treatment). 

1496See, e.g., NY State Comptroller Comment 

Letter; AFL–CIO Comment Letter; ILPA Comment 

Letter I; ICCR Comment Letter; IAA Comment Letter 

II. 

1497See, e.g., SBAI Comment Letter; IAA 

Comment Letter II; Ropes & Gray Comment Letter. 

1498See supra section VI.B. 1499See supra section VI.B. 

1500See supra sections II.E.1.c), VI.C.2. 

1501See supra footnote 1450 and accompanying 

text. 

related persons have invested (or 

propose to invest) in the same portfolio 

investment unless the adviser satisfies a 

requirement that the allocation be fair 

and equitable and a requirement to, 

before charging or allocating such fees 

or expenses to a private fund client, 

distribute to each investor of the private 

fund a written notice of the non-pro rata 

charge or allocation and a description of 

how the allocation approach is fair and 

equitable under the circumstances.1493

The Proposing Release stated that 

these non-pro rata fee and expense 

allocations tend to adversely affect some 

investors who are placed at a 

disadvantage to other investors.1494 We 

associated these practices and 

disadvantages with a tendency towards 

opportunistic hold-up of investors by 

advisers, involving exploitation of an 

informational or bargaining 

advantage.1495 The disadvantaged 

investors currently pay greater than 

their pro rata shares of fees and 

expenses. The disparity may arise from 

differences in the bargaining power of 

different investors. For example, a fund 

adviser may have an incentive to assign 

lower than pro rata shares of fees and 

expenses to larger investors that bring 

repeat business to the adviser and 

correspondingly lower pro rata shares to 

the smaller investors paying greater than 

pro rata shares. 

We continue to believe that this may 

generally be the case. Several 

commenters supported the proposed 

provision, agreeing that it may protect 

investors.1496 However, many 

commenters argue that there are also 

many fair and equitable reasons for 

different investors to bear different 

portions of fees and expenses.1497 As 

stated above, we believe that our policy 

choice has benefited from taking into 

consideration the market problem that 

the policy is designed to address, and 

believe that this is accomplished by the 

final rule with an exception for advisers 

who make certain advance 

disclosures.1498 This is because under 

the final rule, investors will have an 

enhanced ability to monitor their funds’ 

advisers for inappropriate opportunistic 

apportioning of fees and expenses, but 

advisers will still be able to apportion 

fees on a non-pro rata basis when it is 

fair and equitable to do so, as long as the 

required disclosures are made. Current 

investors in a fund who receive these 

disclosures, and who are contemplating 

investing in a follow-on fund with the 

same adviser, may also benefit from 

these disclosures through an enhanced 

ability to negotiate terms of the followon fund, for example by negotiating that 

the follow-on fund will not engage in 

any non-pro rata fee and expense 

allocations. The disclosures may 

enhance investor negotiating positions 

because, as discussed above, many 

investors report that they accept poor 

terms because they do not know what is 

‘‘market.’’ 1499

Investors in funds with advisers who 

forgo non-pro rata fee and expense 

allocations because of the final rule, 

either voluntarily or in a follow-on fund 

where investors used the enhanced 

disclosure in the prior fund to negotiate 

such terms, may either benefit or face 

costs from the resulting revised 

apportionment of expenses. This will 

depend on whether their share of 

expenses is decreased or increased 

under the rule. Investing clients in these 

portfolio investments paying greater 

than pro rata shares of such fees and 

expenses will benefit as a result of 

lowered fees and expenses. However, to 

the extent that a client was previously 

able to obtain fee and expense 

allocations at rates less than a pro rata 

apportionment, the client could incur 

higher fee and expense costs in the 

future. 

The enhanced disclosures will also 

benefit investors directly. Investors may 

not be aware of the extent to which fees 

and expenses are charged on a non-prorata basis. Even if an adviser discloses 

upfront that non-pro rata fee and 

expense allocations may occur 

throughout the life of the fund, the 

complexity of fee and expense 

arrangements may mean that these 

arrangements are hard to follow. Even 

larger or more sophisticated investors, 

with greater bargaining power, may be 

aware that they risk non-pro-rata fees, 

but nonetheless be harmed by the 

uncertainty from complex fee 

arrangements, and so even larger 

investors may benefit from this 

enhanced transparency. 

The lack of legacy status for this rule 

provision means that these benefits will 

accrue across all private funds and 

advisers who currently engage in non 

pro-rata allocations of fees and 

expenses. Because such allocations are 

more common for private equity funds 

and other illiquid funds,1500 these 

benefits will generally be more 

applicable to advisers and investors in 

those funds. 

The final rule will impose direct costs 

on advisers who must either update 

their charging and contracting practices 

to bring them into compliance with the 

new requirements or provide the 

required disclosures. These compliance 

costs may be particularly high in the 

short term to the extent that advisers 

renegotiate, restructure, and/or revise 

certain existing deals or existing 

economic arrangements in response to 

this restriction. Advisers who forgo nonpro rata fee and expense allocations 

because of the final rule, either 

voluntarily or in a follow-on fund where 

investors used the enhanced disclosure 

in the prior fund to negotiate such 

terms, may face additional costs in the 

form of lower expenses and fees, to the 

extent that less flexible pro-rata fee and 

expense allocations result in lower 

average fees and expenses to the adviser 

or are more costly to administer and 

monitor. These effects may impact the 

use of co-investment vehicles: To the 

extent that advisers, in response to the 

final rule, increase the fees passed on to 

co-investment vehicles that absent the 

rule would have borne less than their 

pro-rata share of fees, the rule may 

reduce the attractiveness of coinvestment vehicles to investors. This 

may reduce the liquidity available for 

certain illiquid funds that currently rely 

on co-investment vehicles for raising 

money for specific portfolio 

investments. 

In the case where advisers comply 

with the final rule by making the 

required disclosures, costs are 

quantified by examination of the 

analysis in section VII, which have been 

tallied along with all other disclosure 

costs of the restricted activities above 

and include time needed for advisers to 

make the determination that the 

requisite disclosure is the appropriate 

path to compliance for that adviser.1501

These costs also include the costs of 

making the requisite distributions to 

investors. For many private fund 

advisers, these costs will be limited by 

the timeline provided in the final rule, 

requiring distribution within 45 days 

after the end of the fiscal quarter in 

which the relevant activity occurs, or 90 

days after the end of the fiscal year for 

the fourth quarterly report, allowing 

many advisers that are subject to the 

quarterly statement rule to include these 

disclosures in their quarterly 


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1502See supra section II.E. 

1503Proposing Release, supra footnote 3, at 233– 

234. 

1504See, e.g., Overdahl Comment Letter; LSTA 

Comment Letter, Exhibit C. 

1505See infra section VII. 

1506As discussed above, this yields a total of 360 

hours of personnel time for each of the restricted 

activities. See supra footnote 1455. 

1507As discussed above, to the extent the 

proportion of initial costs that persist as ongoing 

costs is higher than one third, the ongoing costs 

would be proportionally higher than what is 

reflected here. See supra footnote 1456. 

1508As discussed above, based on staff 

experience, as advisers grow in size, efficiencies of 

scale may emerge that limit the upper range of 

compliance costs. See supra footnote 1457. 

1509See infra section VII.D. 

1510See infra footnote 1533. 

1511See supra sections II.E.1.c), VI.C.2. 

1512However, there do not exist reliable data for 

quantifying precisely what percentage of private 

fund advisers today engage in this activity or the 

other restricted activities. For the purposes of 

quantifying costs, including aggregate costs, we 

have applied the estimated costs per adviser to all 

advisers in the scope of the rule, consistent with the 

approach taken in the PRA analysis. See supra 

section VII. 

1513See supra section II.E.2.b). 

1514 Id. 

1515Proposing Release, supra footnote 3, at 241. 

reports.1502 However, certain fund 

advisers, such as advisers to funds of 

funds, may not make quarterly reports 

within a 45 day time frame, and those 

advisers may face additional costs 

associated with distribution of the 

required disclosures. 

However, advisers may instead face 

direct costs associated with the need to 

update their charging and contracting 

practices to bring them into compliance 

with the new requirements, in particular 

in the case where advisers cease nonpro rata allocations of fees and expenses 

instead of making the required 

disclosures. As discussed in the 

Proposing Release, several factors make 

the quantification of these costs 

difficult, such as a lack of data on the 

extent to which advisers engage in nonpro rata allocations of fees and 

expenses.1503 However, some 

commenters criticized the Commission 

for acknowledging these direct costs but 

failing to quantify them.1504 In light of 

this, the Commission has further 

considered the requirement and 

additional work that would be required 

by various parties to comply. To that 

end, the Commission has estimated 

ranges of costs for compliance, 

depending on the amount of time each 

adviser will need to spend to comply. 

Some advisers may pass these direct 

costs on to their funds and thus 

investors, and other advisers may absorb 

these costs and bear the costs 

themselves. 

Advisers are likely to vary in the 

complexity of their contracts and fee 

and expense allocation arrangements, 

because for example some advisers may 

already refrain from ever implementing 

non-pro rata allocations of fees and 

expenses. At minimum, we estimate 

that the additional work will require 

time from accounting managers ($337/ 

hour), compliance managers ($360/ 

hour), a chief compliance officer ($618/ 

hour), attorneys ($484/hour), assistant 

general counsel ($543/hour), junior 

business analysts ($204/hour), financial 

reporting managers ($339), senior 

business analysts ($320/hour), 

paralegals ($253/hour), senior 

operations managers ($425/hour), 

operations specialists ($159/hour), 

compliance clerks ($82/hour), and 

general clerks ($73/hour).1505 Certain 

advisers may need to hire additional 

personnel to meet these demands. We 

also include time needed for advisers to 

make the determination that ceasing the 

restricted activity instead of making a 

disclosure is the appropriate path to 

compliance for that adviser, which we 

estimate will require time from senior 

portfolio managers ($383/hour) and 

senior management of the adviser 

($4,770/hour). 

To estimate monetized costs to 

advisers, we multiply the hourly rates 

above by estimated hours per 

professional. Based on staff experience, 

we estimate that on average, advisers 

will require at minimum 24 hours of 

time from each of the personnel 

identified above as an initial burden.1506

For example, at minimum, each adviser 

may require time from these personnel 

to at least evaluate whether any 

revisions to their contracts are 

warranted at all. Multiplying these 

minimum hours by the above hourly 

wages yields a minimum initial cost of 

$224,368.92 per adviser. These costs are 

likely to be higher initially than they are 

ongoing. Based on staff experience, we 

estimate minimum ongoing costs will 

likely be one third of the initial costs, 

or $74,789.64 per year.1507

However, many of these potential 

direct costs of updates may be higher for 

certain advisers. Larger advisers, with 

more complex contracts and expense 

arrangements that are more complex to 

update, may have greater costs. While 

the factors that may increase these costs 

are difficult to fully quantify, we 

anticipate that very few advisers would 

face a burden that exceeds 10 times the 

minimum estimate.1508 Multiplying 

minimum initial cost estimates by 10 

yields a maximum initial cost of 

$2,243,689.20 per adviser. These costs 

are likely to be higher initially than they 

are ongoing. We estimate maximum 

ongoing costs will likely be one third of 

the initial costs, or $747,896.40 per year. 

The aggregate costs to the industry 

will depend on the proportion of 

advisers who pursue compliance via the 

required disclosures and the proportion 

of advisers who pursue compliance by 

forgoing the restricted activity. We 

believe that, in general, almost all 

advisers will pursue compliance with 

the final rule via disclosures as opposed 

to by ceasing the restricted activity.1509

We therefore believe that the aggregate 

costs to the industry associated with 

this component of the final rule will 

likely be consistent with the aggregate 

costs to the industry as reflected in the 

PRA analysis. This is supported by the 

fact that the costs we estimate to each 

adviser of complying with the final 

rules by ceasing the restricted activity 

(in particular, potentially as high as 

$2,243,689.20 in initial costs) is much 

higher than the PRA cost per adviser 

across all restricted activities ($54,768). 

However, to the extent that more than 

a de minimis number of advisers pursue 

compliance through ceasing the 

restricted activity instead of via 

disclosures, aggregate costs may be 

higher.1510

The lack of legacy status for this rule 

provision means that these costs will be 

borne across all private funds and 

advisers who currently engage in non 

pro-rata allocations of fees and 

expenses. Because such allocations are 

more common for private equity funds 

and other illiquid funds,1511 these costs 

will generally be more applicable to 

advisers and investors in those 

funds.1512

Borrowing 

The final rule restricts an adviser, 

directly or indirectly, from borrowing 

money, securities, or other fund assets, 

or receiving a loan or an extension of 

credit, from a private fund client, unless 

it satisfies certain disclosure 

requirements and consent 

requirements.1513

In the Proposing Release we stated 

that in cases where, as the Commission 

has observed, fund assets were used to 

address personal financial issues of one 

of the adviser’s principals, used to pay 

for the advisory firm’s expenses, or used 

in association with any other harmful 

conflict of interest, 1514 then a 

prohibition would increase the amount 

of fund resources available to further the 

fund’s investment strategy.1515 We 

stated further that investors would 

benefit from any resulting increased 

payout and that investors would benefit 

from the elimination or reduction of any 

need to engage in costly research or 


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1516 Id. 1517 Id. 

1518See, e.g., OPERS Comment Letter; AFL–CIO 

Comment Letter; Convergence Comment Letter. 

1519SIFMA–AMG Comment Letter I; NYC Bar 

Comment Letter II; IAA Comment Letter II. 

1520NYC Bar Comment Letter II. 

1521See supra section VI.B. 

1522See supra section IV. 

1523There do not exist reliable data for 

quantifying what percentage of private fund 

advisers today engage in this activity or the other 

restricted activities. For the purposes of quantifying 

costs, including aggregate costs, we have applied 

the estimated costs per adviser to all advisers in the 

scope of the rule, consistent with the approach 

taken in the PRA analysis. See supra section VII. 

1524See supra section II.E.2.b). 

1525See supra section VI.C.2. 

1526See supra footnote 1450 and accompanying 

text. 

1527Proposing Release, supra footnote 3, at 233– 

234. 

1528Overdahl Comment Letter. 

negotiations with the adviser to prevent 

the uses of fund resources by the adviser 

that would be prohibited.1516 We lastly 

stated that a prohibition would 

potentially potential benefit investors by 

reducing moral hazard: if an adviser 

borrows from a private fund client and 

does not pay back the loan, it is the 

investors who bear the cost, providing 

the adviser with incentives to engage in 

potentially excessive borrowing.1517

Some commenters agreed that a 

prohibition would generate benefits,1518

but other commenters opposed the 

proposal,1519 and one stated that 

benefits from such a prohibition would 

be de minimis because advisers and 

their related persons rarely borrow from 

fund clients.1520 Because we have 

revised the final rule to allow for an 

exception should the adviser satisfy 

certain disclosure requirements and 

consent requirements, we believe the 

final rule will primarily generate 

benefits by allowing investors to more 

easily monitor instances where the 

adviser does borrow from the fund. 

Investors will benefit from the reduced 

cost of monitoring adviser borrowing 

activity, and from reduced risk of harm 

from the potential conflicts of interest or 

other harms we have identified above. 

Further benefits may accrue to investors 

in the case of advisers who would have 

otherwise borrowed from the fund forgo 

doing so, either voluntarily to avoid the 

cost of disclosure and the cost of 

consent requirements or in a follow-on 

fund where investors used the enhanced 

disclosure and consent requirements in 

the prior fund to negotiate such terms. 

The disclosures and consent 

requirements may enhance investor 

negotiating positions because, as 

discussed above, many investors report 

that they accept poor terms because they 

do not know what is ‘‘market.’’ 1521

These additional benefits include 

increased fund resources available to 

further the fund’s investment strategy, 

increased payouts, the elimination or 

reduction of any need to engage in 

costly research or negotiations with the 

adviser to prevent the uses of fund 

resources, and reducing moral hazard. 

We are providing legacy status for the 

restriction on adviser borrowing, as the 

restriction requires investor consent.1522

This legacy status will mitigate the 

benefits to current funds and investors 

who borrow from their funds, but will 

also reduce costs for those advisers.1523

However, as discussed above we 

understand this practice is generally 

rare.1524

Similar to the restricted activities rule 

for certain fees and expenses, we believe 

that the risks to investors where 

advisers borrow against the fund 

motivate greater investor protections 

than is provided for in the case of the 

final rule restricting certain fees and 

expenses and clawbacks (and, similarly, 

the other types of preferential terms that 

must be disclosed but are not 

prohibited). Because the adviser 

borrowing from the fund is at a greater 

risk of being explicitly in the adviser’s 

interest at the expense of the fund’s 

interest, investors will benefit from the 

adviser being required to satisfy the 

necessary consent requirements. 

Moreover, because the adviser 

borrowing from the fund is less 

associated with the adviser benefiting 

certain advantaged investors at the 

expense of disadvantaged investors, the 

benefits are preserved by only requiring 

at least a majority in interest of investors 

that are not related persons of the 

adviser. As a final matter, as discussed 

above there is a reduced risk of this 

conflict of interest distorting the terms, 

price, or interest rate of the fund’s loan 

to the adviser, because the fund’s 

investors can, if the borrow is disclosed 

and investor consent is sought, compare 

the terms of the loan to publicly 

available commercial rates to determine 

if the terms are appropriate given 

market conditions.1525 As such the 

benefits are preserved without a need 

for a stricter policy choice than consent 

requirements. 

Advisers who currently borrow from 

their funds will experience costs as a 

result of this rule from updating their 

practices to bring them into compliance 

with the new requirements, in particular 

by making the required new disclosures 

and by obtaining new consent. Advisers 

who cease borrowing from their funds, 

either voluntarily to avoid the cost of 

disclosure or in a follow-on fund where 

investors used the enhanced disclosure 

in the prior fund to negotiate such 

terms, may also face direct compliance 

costs associated with updating their 

business practices and fund documents 

to remove the ability of the adviser to 

borrow from the fund. 

In the case where advisers comply 

with the final rule by making the 

required disclosures and by obtaining 

the required investor consent, costs are 

quantified by examination of the 

analysis in section VII, which have been 

tallied along with all other disclosure 

costs of the restricted activities above 

and include time needed for advisers to 

make the determination that the 

requisite disclosure is the appropriate 

path to compliance for that adviser.1526

However, advisers may instead face 

direct costs associated with the need to 

update their borrowing practices to 

bring them into compliance with the 

new requirements, in particular in the 

case where advisers cease borrowing 

from their funds instead of making the 

required disclosures and obtaining the 

required consent. As discussed in the 

Proposing Release, several factors make 

the quantification of these costs 

difficult, such as a lack of data on the 

extent to which advisers borrow from 

their funds today.1527 However, one 

commenter criticized the Commission 

for acknowledging these direct costs but 

failing to quantify them.1528 In light of 

this, the Commission has further 

considered the requirement and 

additional work that would be required 

by various parties to comply. To that 

end, the Commission has estimated 

ranges of costs for compliance, 

depending on the amount of time each 

adviser will need to spend to comply. 

Some advisers may pass these direct 

costs on to their funds and thus 

investors, and other advisers may absorb 

these costs and bear the costs 

themselves. 

Advisers are likely to vary in the 

complexity of their contracts and 

borrowing practices, because for 

example some advisers may already 

refrain from ever borrowing from their 

funds. At minimum, we estimate that 

the additional work will require time 

from accounting managers ($337/hour), 

compliance managers ($360/hour), a 

chief compliance officer ($618/hour), 

attorneys ($484/hour), assistant general 

counsel ($543/hour), junior business 

analysts ($204/hour), financial reporting 

managers ($339), senior business 

analysts ($320/hour), paralegals ($253/ 

hour), senior operations managers 

($425/hour), operations specialists 

($159/hour), compliance clerks ($82/ 


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63344 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1529See infra section VII. 

1530As discussed above, this yields a total of 360 

hours of personnel time for each of the restricted 

activities. See supra footnote 1455. 

1531As discussed above, to the extent the 

proportion of initial costs that persist as ongoing 

costs is higher than one third, the ongoing costs 

would be proportionally higher than what is 

reflected here. See supra footnote 1456. 

1532See infra section VII.D. 

1533We assume all 612 would be drawn from the 

pool of advisers who would have faced external 

PRA costs had they pursued compliance via the 

required disclosures and the required consent. Then 

612 advisers will face ongoing costs of 

4*($747,896.40). The PRA assumes that 75% of 

advisers will face internal costs only, and not 

require any external burden, yielding 9,176 advisers 

facing ongoing costs of $29,344. The PRA assumes 

25% of advisers will face a further $25,424 in 

external costs, yielding 2,447 advisers facing 

ongoing costs of $54,768. See infra section VII.D. 

1534See supra section II.E.2.b); see also SBAI 

Comment Letter; CFA Comment Letter I; AIC 

Comment Letter I; SIFMA–AMG Comment Letter I. 

1535However, to the extent that a borrowing 

under the final rule also involves a purchase under 

section 206(3) of the Advisers Act, the requirements 

of that section will continue to apply to the adviser. 

The final rules may therefore result in additional 

direct costs as a result of requirements from both 

section 206(3) of the Advisers Act and the final 

restricted activities rule. See supra section II.E.2.b); 

SIFMA–AMG Comment Letter I. 

1536See supra section II.F. 

1537 Id. 

1538 Id. 

1539 Id. Because the rule will not apply to advisers 

with respect to CLOs and other SAFs they advise, 

there will be no benefits or costs for investors and 

advisers associated with those funds. However, 

unlike investors in other private funds, the 

noteholders are similarly situated with all of the 

other noteholders in the same tranche and they 

cannot redeem or ‘‘cash in’’ their note ahead of 

other noteholders in the same tranche. As a result, 

in our experience, this structure has generally 

deterred investors from requesting, and SAF 

advisers from granting, preferential treatment, 

especially preferential treatment that would have a 

material, negative effect on other investors, such as 

early redemption rights. We therefore understand 

hour), and general clerks ($73/hour).1529

Certain advisers may need to hire 

additional personnel to meet these 

demands. We also include time needed 

for advisers to make the determination 

that ceasing the restricted activity 

instead of making a disclosure and 

obtaining consent is the appropriate 

path to compliance for that adviser, 

which we estimate will require time 

from senior portfolio managers ($383/ 

hour) and senior management of the 

adviser ($4,770/hour). 

To estimate monetized costs to 

advisers, we multiply the hourly rates 

above by estimated hours per 

professional. Based on staff experience, 

we estimate that on average, advisers 

will require at minimum 24 hours of 

time from each of the personnel 

identified above as an initial burden.1530

For example, at minimum, each adviser 

may require time from these personnel 

to at least evaluate whether any 

revisions to their contracts are 

warranted at all. Multiplying these 

minimum hours by the above hourly 

wages yields a minimum initial cost of 

$224,368.92 per adviser. These costs are 

likely to be higher initially than they are 

ongoing. We estimate minimum ongoing 

costs will likely be one third of the 

initial costs, or $74,789.64 per year.1531

However, many of these potential 

direct costs of updates may be higher for 

certain advisers. Larger advisers, with 

more complex contracts and borrowing 

arrangements that are more complex to 

update, may have greater costs. Advisers 

may also vary in which investors 

consent to advisers’ borrowing 

activities. While the factors that may 

increase these costs are difficult to fully 

quantify, we anticipate that very few 

advisers would face a burden that 

exceeds 10 times the minimum 

estimate. Multiplying minimum initial 

cost estimates by 10 wages yields a 

maximum initial cost of $2,243,689.20 

per adviser. These costs are likely to be 

higher initially than they are ongoing. 

We estimate maximum ongoing costs 

will likely be one third of the initial 

costs, or $747,896.40 per year. 

The aggregate costs to the industry 

will depend on the proportion of 

advisers who pursue compliance via the 

required disclosures and the required 

consent and the proportion of advisers 

who pursue compliance by forgoing the 

restricted activities. We believe that, in 

general, almost all advisers will pursue 

compliance with the final rule via 

disclosures and consent as opposed to 

by ceasing the required activities.1532

We therefore believe that the aggregate 

costs to the industry associated with 

this component of the final rule will 

likely be consistent with the aggregate 

costs to the industry as reflected in the 

PRA analysis. This is supported by the 

fact that the costs we estimate to each 

adviser of complying with the final 

rules by ceasing the restricted activity 

(in particular, potentially as high as 

$2,243,689.20 in initial costs) is much 

higher than the PRA cost per adviser 

across all restricted activities ($54,768). 

However, to the extent that more than 

a de minimis number of advisers pursue 

compliance through ceasing the 

restricted activity instead of via 

disclosures and consent, aggregate costs 

may be higher. For example, suppose 

five percent of private fund advisers 

(excluding advisers to solely securitized 

asset funds, or 612 advisers, pursue 

compliance through ceasing the 

restricted activities. Then maximum 

aggregate ongoing annual costs will in 

that case be $2,234,128,277.2 as 

compared to aggregate PRA costs for 

restricted activities of $592,285,120.1533

Other commenters who discussed the 

costs of the proposed rule primarily 

stated that the costs of the rule would 

be indirect, in that the proposed rule 

would have prohibited activity that 

could benefit investors, such as tax 

advances, borrowing arrangements 

outside of the fund structure, an adviser 

purchasing securities from a client 

under section 206(3) of the Advisers 

Act, and the activity of large financial 

institutions that play many roles in a 

private fund complex.1534 We believe 

the final rule substantially eliminates 

these indirect costs by providing for an 

exception for certain disclosures and 

consent, as advisers are still permitted 

to conduct activities that could benefit 

investors so long as the required 

disclosures are made and the required 

investor consent is obtained.1535

However, to the extent advisers forgo 

these activities because of the costs of 

disclosure, that will be an indirect cost 

of the rule. Advisers who cease 

borrowing from their funds may also 

face costs related to any marginal 

increases in the cost of capital incurred 

from new sources of borrowing, as 

compared to what was being charged by 

the fund. 

4. Preferential Treatment 

Prohibition of Certain Preferential 

Terms 

The final rules will, as proposed, 

prohibit a private fund adviser from 

providing certain preferential terms to 

some investors that the adviser 

reasonably expects to have a material 

negative effect on other investors in the 

private fund or in a similar pool of 

assets,1536 but in response to 

commenters contains three 

modifications. First, we are modifying 

the proposed term ‘‘substantially similar 

pool of assets’’ as used throughout the 

preferential treatment rule and changing 

it to ‘‘similar pool of assets.’’1537

Second, the rule will allow two 

exceptions from the prohibition of 

preferential redemption terms: one for 

redemptions that are required by 

applicable law and another if the 

adviser offers the same redemption 

ability to all existing and future 

investors in the same private fund or 

any similar pool of assets.1538 Lastly, the 

rule will also allow an exception from 

the prohibition on preferential 

information where the adviser offers the 

information to all other existing 

investors in the private fund and any 

similar pool of assets at the same time 

or substantially the same time.1539


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the forgone benefits from this limitation in scope to 

be minimal. See supra section II.A. 

1540See supra section II.F. 

1541See supra section II.G.2. 

1542See Selective Disclosure and Insider Trading, 

Securities Act Release, supra footnote 842. 

1543 Id. 

1544 Id. See also infra section VI.E. 

1545See supra section II.G. See also, e.g., NY State 

Comptroller Comment Letter; Top Tier Comment 

Letter. We emphasize, however, that this potential 

for harm does not require the investor to have 

preferential redemption rights also. Preferential 

information combined with any redemption rights 

at all may result in harm to other investors. 

1546 Id. 

1547See supra sections II.G, II.F. 

1548For a similar scenario, see, e.g., In the Matter 

of Alliance Capital Mgmt., L.P., Investment 

Advisers Act Release No. 2205 (Dec. 18, 2003) 

(settled order) (alleging Alliance Capital violated, 

among other things, Advisers Act rule against 

misuse of material non-public information by 

providing market timer with real-time non-public 

mutual fund portfolio information, enabling the 

timer to profit from synthetic short positions). 

Benefits may accrue from these 

prohibitions in two situations. First, we 

associate these practices with a 

tendency towards opportunistic hold-up 

of investors by advisers or the investors 

receiving the preferential treatment, 

involving the exploitation of an 

informational or bargaining advantage 

by the adviser or advantaged 

investor.1540 The prohibitions may 

benefit the non-preferred investors in 

situations where advisers lack the 

ability to commit to avoid the 

opportunistic behavior after entering 

into the agreement (or relationship) with 

the investor. For example, similar to the 

case regarding non-pro rata fee and 

expense allocations, an adviser with 

repeat business from a large investor 

with early redemption rights and 

smaller investors with no early 

redemption rights may have adverse 

incentives to take on extra risk, as the 

adviser’s preferred investor could 

exercise its early redemption rights to 

avoid the bulk of losses in the event an 

investment begins to fail. The adviser 

would then continue to receive repeat 

business with the investors with 

preferential terms, to the detriment of 

the investors with no preferential terms. 

Investors who do receive preferential 

terms may also receive information over 

the course of a fund’s life that the 

investors can use to their own gain but 

to the detriment of the fund and, by 

extension, the other investors. With 

respect to preferential redemption 

rights, if a fund was heavily invested in 

a particular sector and an investor with 

early redemption rights learned the 

sector was expected to suffer 

deterioration, that investor has a firstmover advantage and could submit a 

redemption request, securing its funds 

early but forcing the fund to sell assets 

in a declining market, harming the other 

investors in three possible ways. First, 

if the fund sells a portion of a profitable 

or valuable asset to satisfy the 

redemption, the remaining investors’ 

interests in that valuable asset is 

diluted. Second, if the fund is forced to 

sell a portion of an illiquid asset in a 

declining market, the forced sale could 

further depress the value of the asset, 

reducing the remaining investors’ 

interests in the asset. Third, the 

remaining investors may have an 

impaired ability to successfully redeem 

their own interests after the first mover’s 

redemption. In these situations, the 

prohibitions would provide a solution 

to the hold-up problem that is not 

currently available. The rule will benefit 

the disadvantaged investors by 

prohibiting such a situation, and so the 

disadvantaged investors would be less 

susceptible to hold-up and experience 

either less dilution on their fund 

investments or potentially greater 

valuations on certain illiquid assets, and 

potentially enhanced abilities to redeem 

without impairment from the preferred 

investors’ first-mover advantage, as 

benefits of the final rule. 

With respect to preferential 

information rights, we believe a similar 

situation could occur. If a fund were 

heavily invested in a particular sector 

and an investor with any redemption 

rights at all received preferential 

information that the sector was expected 

to suffer deterioration, that investor 

could submit a redemption request, 

securing its funds early but forcing the 

fund to sell assets in a declining market, 

again harming the other investors 

similar to the above scenarios. In these 

situations, the prohibitions would 

provide a solution to the hold-up 

problem that is not currently available. 

The Commission has recognized these 

potential problems in past 

rulemakings.1541 Specifically, the 

Commission has recognized that when 

selective disclosure leads to trading by 

the recipients of the disclosure the 

practice bears a close resemblance to 

ordinary insider trading.1542 The 

economic effects of the two practices are 

essentially the same; in both cases, a 

few persons gain an informational 

edge—and use that edge to profit at the 

expense of the uninformed—from 

superior access to corporate insiders, 

not through skill or diligence.1543 Thus, 

investors in many instances equate the 

practice of selective disclosure with 

insider trading. The Commission has 

also stated that the effect of selective 

disclosure is that individual investors 

lose confidence in the integrity of the 

markets because they perceive that 

certain market participants have an 

unfair advantage.1544

As discussed above, commenters 

argued that the use of preferential 

information to exercise redemption is an 

important element of determining 

whether providing information would 

have a material, negative effect on other 

investors and thus whether an adviser 

triggers the preferential information 

prohibition.1545 We would generally not 

view preferential information rights 

provided to one or more investors in a 

closed-end/illiquid private fund as 

having a material, negative effect on 

other investors.1546 However, there may 

be cases where preferential information 

may be reasonably expected to have a 

material, negative effect on other 

investors in the fund even when the 

preferred investor does not have the 

ability to redeem its interest in the fund, 

and so whether preferential information 

violates the final rule requires a facts 

and circumstances analyses.1547 For 

example, a private fund may invest in 

an asset with certain trading 

restrictions, and then later receive 

notice that the investment is performing 

poorly. If the private fund gives that 

information to a preferred investor 

before others, the preferred investor 

could front-run other investors in taking 

a (possibly synthetic) short position 

against the asset, driving its price down 

and causing losses to other investors in 

the fund. An adviser could also operate 

multiple funds with overlapping 

investments but offer redemption rights 

only for one fund containing its 

preferred investors. An adviser granting 

preferential information to certain 

investors in its less liquid fund, which 

those preferred investors could use to 

redeem their interests in the more liquid 

fund, could harm the investors in the 

less liquid fund even though the 

preferred investors do not have 

redemption rights in the less liquid 

fund.1548

Second, in situations where investors 

face uncertainty as to whether the 

adviser engages in the prohibited 

practice, the benefit from the 

prohibition would be to eliminate the 

costs to investors of avoiding entering 

into agreements with advisers that 

engage in the practice and the costs to 

investors from inadvertently entering 

into such agreements. 

Specifically, in this second case, the 

prohibited preferential terms would 

harm investors in private funds and 

cause investors to incur extra costs of 

researching fund investments to avoid 

fund investments in which the 

prospective fund adviser engages in 


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63346 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1549See, e.g., SBAI Comment Letter; MFA 

Comment Letter I. 

1550See, e.g., ICCR Comment Letter; United for 

Respect Comment Letter I; Segal Marco Comment 

Letter. 

1551See supra section II.F; see also infra section 

VI.D.4. 

1552See supra section II.F; see also section 208(d) 

of the Advisers Act. 

1553 Id. 

1554See supra section VI.C.1. 

1555Commenters also state that smaller emerging 

advisers may close their funds in response to the 

final rules and their resulting restricted ability to 

offer certain preferential terms to anchor investors. 

We discuss these effects of the final rules on 

competition below. See infra section VI.E; see also, 

e.g., Carta Comment Letter; Meketa Comment Letter; 

Lockstep Ventures Comment Letter; NY State 

Comptroller Comment Letter; Weiss Comment 

Letter; AIC Comment Letter I; AIC Comment Letter 

I, Appendix 2; MFA Comment Letter II. 

1556See supra section IV. 

these practices (or costs of otherwise 

avoiding or mitigating the harm to those 

disadvantaged investors from the 

practice). The benefit of the prohibition 

to investors will be to eliminate such 

costs. It will prohibit disparities in 

treatment of different investors in 

similar pools of assets in the case where 

the disparity is due to the adviser 

placing their own interests ahead of the 

client’s interests or due to behavior that 

may be deceptive. Investors will benefit 

from the costs savings of no longer 

needing to evaluate whether the adviser 

engages in such practices. Investors and 

advisers also may benefit from reduced 

cost of negotiating the terms of a fund 

investment. Investors who would have 

otherwise been harmed by the 

prohibited practices will benefit from 

the elimination of such harms through 

their prohibition. While many 

commenters from adviser groups and 

from large investors disputed these 

benefits,1549 other commenters 

supported the view of these benefits.1550

These benefits, in particular the 

benefits from the prohibition on 

preferential redemption rights, may be 

mitigated by the two new exceptions to 

the rule allowed for in the final rule. 

Specifically, investors in private funds 

where other investors receive 

preferential redemption rights required 

by applicable law will not benefit from 

any prohibition. However, those 

investors will still benefit from 

enhanced disclosures of those 

preferential terms.1551 We generally do 

not believe that benefits will be 

mitigated by the exception allowing for 

preferential redemption rights or 

preferential information granted to other 

investors so long as those rights and 

information are offered to all existing 

and future investors, because an adviser 

is prohibited from doing indirectly what 

it cannot do directly and an adviser 

must offer investors options with 

reasonably the same incentives.1552 For 

example, an adviser could not avail 

itself of the exception by offering Class 

A (quarterly redemption, 1.5% 

management fee, 20% performance fee) 

and Class B (annual redemption, 1% 

management fee, 15% performance fee) 

while requiring Class B investors to also 

invest in another fund managed by the 

adviser.1553 While we do not believe 

any such menus of share classes offered 

to all investors will generally result in 

the types of harm we have considered 

above, at the margin there may be cases 

in which investors do not realize the 

implications of the share classes being 

offered to them, and select differential 

redemption rights that lead to eventual 

harm. These cases, to the extent they 

occur, would reduce the benefits of the 

final rules. 

The benefits of the prohibition on 

preferential redemption rights may 

generally be lessened for investors in 

funds managed by ERAs relying on the 

venture capital exemption, because such 

venture capital funds must prohibit 

investor redemptions except in 

extraordinary circumstances to qualify 

for the registration exemption.1554

However, there may still be meaningful 

benefits from this prohibition for those 

investors to the extent that 

‘‘extraordinary circumstances’’ are 

exactly the circumstances where 

preferential redemptions for certain 

investors are most likely to have a 

material, negative effect on other 

investors in the fund. 

The cost of the prohibitions will 

depend on the extent to which investors 

would otherwise obtain such 

preferential terms in their agreements 

with advisers and the conditions under 

which they make use of the preferential 

treatment. Investors who would have 

obtained and made use of the 

preferential terms will incur a cost of 

losing the prohibited redemption and 

information rights. This will include 

any investors who might benefit from 

the ability to redeem based on 

negotiated exceptions to the private 

fund’s stated redemption terms, in 

addition to the investors who might 

benefit from the hold-up problems 

discussed above. 

Commenters also expressed concerns 

that both investors and advisers may 

face costs in the case of smaller funds 

who rely on offering preferential 

treatment to anchor or seed investors, 

including preferential redemption terms 

that will be prohibited under the final 

rules that prohibit preferential terms to 

some investors that the adviser 

reasonably expects to have a material 

negative effect on other investors in the 

private fund or in a similar pool of 

assets.1555 However, because advisers 

are only prevented from offering anchor 

investors preferential redemption rights 

and preferential information that the 

adviser reasonably expects will have a 

material negative effect on other 

investors these potential harms to 

competition will be mitigated to the 

extent that smaller, emerging advisers 

do not need to be able to offer anchor 

investors preferential rights that the 

adviser reasonably expects to have a 

material negative effect on other 

investors to effectively compete, and to 

the extent that smaller emerging 

advisers are able to compete effectively 

by offering anchor investors other types 

of preferential terms that will not 

materially negatively affect other 

investors. However, some smaller or 

emerging advisers may find it more 

difficult to compete without offering 

preferential redemption rights or 

preferential information that will now 

be prohibited. 

To the extent advisers respond to the 

prohibitions on certain preferential 

redemption rights and preferential 

information by developing new 

preferential terms and disclosing them 

to all investors, there may be new 

potential harms to investors who do not 

receive these new preferential terms. 

For example, advisers may offer greater 

fee breaks to anchor or seed investors 

instead of the prohibited terms and may 

accordingly charge higher fees to nonpreferred investors. 

In addition, advisers will incur direct 

costs of updating their processes for 

entering into agreements with investors, 

to accommodate what terms could be 

effectively offered to all investors once 

the option of preferential terms to 

certain investors has been removed. 

These direct costs may be particularly 

high in the short term to the extent that 

advisers renegotiate, restructure and/or 

revise certain existing deals or existing 

economic arrangements in response to 

this prohibition. However, because such 

deals will have legacy status under the 

rule and will therefore not require a 

restructuring under the rules,1556 we 

expect that these renegotiations or 

restructurings will typically only occur 

to the extent that they represent a net 

positive benefit to investors who 

successfully renegotiate new terms by 

threatening to move their investments to 

new funds that do not offer any 

investors the prohibited preferential 

redemption rights or prohibited 

preferential information. 


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1557See supra section II.F. The burden associated 

with the preparation, provision, and distribution of 

written notices for advisers who comply with the 

rule by (i) offering the same preferential redemption 

terms to all existing and future investors and (ii) 

offering the same preferential information to all 

other investors, in each case, in accordance with the 

exceptions to the prohibitions aspect of the final 

rule, is included in the PRA analysis. See infra 

section VII. 

1558Proposing Release, supra footnote 3, at 233– 

234. 

1559AIC Comment Letter I, Appendix 2. 

1560See infra section VII. 

1561As discussed above, to the extent the 

proportion of initial costs that persist as ongoing 

costs is higher than one third, the ongoing costs 

would be proportionally higher than what is 

reflected here. See supra footnote 1456. 

1562See supra footnote 1556 and accompanying 

text. 

1563As discussed above, based on staff 

experience, as advisers grow in size, efficiencies of 

scale may emerge that limit the upper range of 

compliance costs. See supra footnote 1457. 

1564See, e.g., MFA Comment Letter I; Haynes & 

Boone Comment Letter; Dechert Comment Letter; 

RFG Comment Letter II; AIMA/ACC Comment 

Letter; AIC Comment Letter I, Appendix 1; Segal 

Marco Comment Letter. 

1565See AIC Comment Letter I; Segal Marco 

Comment Letter. 

1566See, e.g., ILPA Comment Letter I; RFG 

Comment Letter II; AIMA/ACC Comment Letter; 

Schulte Comment Letter; SFA Comment Letter II. 

1567See supra section II.F. 

The costs of the prohibition on 

preferential redemption rights are 

mitigated by the two exceptions adopted 

in the final rule: for redemption rights 

that are required by applicable law and 

redemption rights where the adviser 

offers the same redemption ability to all 

existing and future investors, there will 

be limited new compliance costs, and 

the investors who currently benefit from 

such terms will continue to do so, in a 

change from the proposal’s costs.1557

As discussed in the Proposing 

Release, several factors make the 

quantification of these costs difficult, 

such as a lack of data on the extent to 

which advisers currently offer 

preferential terms that will be 

prohibited under the final rule.1558

However, one commenter criticized the 

Commission for failing to quantify these 

costs.1559 In light of this, the 

Commission has further considered the 

requirement and additional work that 

would be required by various parties to 

comply. To that end, the Commission 

has estimated ranges of costs for 

compliance, depending on the amount 

of time each adviser will need to spend 

to comply. 

We estimate a range of costs because 

advisers are likely to vary in the 

complexity of their contractual 

arrangements, because for example 

some advisers may not offer any 

preferential terms today that will be 

prohibited. At minimum, we estimate 

that the additional work will require 

time from accounting managers ($337/ 

hour), compliance managers ($360/ 

hour), a chief compliance officer ($618/ 

hour), attorneys ($484/hour), assistant 

general counsel ($543/hour), junior 

business analysts ($204/hour), financial 

reporting managers ($339), senior 

business analysts ($320/hour), 

paralegals ($253/hour), senior 

operations managers ($425/hour), 

operations specialists ($159/hour), 

compliance clerks ($82/hour), and 

general clerks ($73/hour).1560 Certain 

advisers may need to hire additional 

personnel to meet these demands. Given 

the impact of preferential treatment 

decisions on fund capital and business 

outcomes, we also include time needed 

from senior portfolio managers ($383/ 

hour) and senior management of the 

adviser ($4,770/hour). 

To estimate monetized costs to 

advisers, we multiply the hourly rates 

above by estimated hours per 

professional. To estimate the minimum 

number of hours required, we consider 

the minimum amount of burden that 

may result from the prohibitions on 

certain preferential redemption rights 

and certain preferential information. We 

expect most advisers will also only face 

direct costs of updating their contracts 

for new funds, and therefore the 

minimum costs in the estimated range 

do not include direct costs for 

renegotiating or restructuring contracts 

for existing funds. Each adviser will also 

require a minimum amount of time from 

these personnel to at least evaluate 

whether any revisions to their contracts 

are warranted at all. Based on staff 

experience, we estimate that on average, 

advisers will require at minimum 72 

hours of time from each of the personnel 

identified above as an initial burden. 

Multiplying these minimum hours by 

the above hourly wages yields a 

minimum initial cost of $673,106.76 per 

adviser. These costs are likely to be 

higher initially than they are ongoing. 

We estimate minimum ongoing costs 

will likely be one third of the initial 

costs, or $224,368.92 per year.1561

However, many of these potential 

direct costs of updates may be higher for 

certain advisers. Larger advisers, with 

more complex contractual arrangements 

that are more complex to update, may 

have greater costs. Some advisers may 

also need to restructure or renegotiate 

contracts for existing funds, in response 

to pressure from investors resulting 

from the final rules, despite the legacy 

status.1562 While the factors that may 

increase these costs are difficult to fully 

quantify, we anticipate that very few 

advisers would face a burden that 

exceeds 10 times the minimum 

estimate.1563 Multiplying minimum 

initial cost estimates by 10 yields a 

maximum initial cost of $6,731,067.60 

per adviser. These costs are likely to be 

higher initially than they are ongoing. 

Based on staff experience, we estimate 

maximum ongoing costs will likely be 

one third of the initial costs, or 

$2,243,689.20 per year. 

In addition to compliance costs, some 

commenters stated that the prohibition 

on preferential information may have an 

unintended chilling effect on ordinary 

investor communications and will 

impede the co-investment process.1564

To the extent there are ordinary 

communications that are valued by 

investors that would have occurred 

absent this rule, and those 

communications do not occur under the 

rule, the loss of those valued 

communications represents a cost of the 

rule. This may include advisers 

interpreting the rule as prohibiting 

selective disclosure of portfolio 

information to investors in coinvestment vehicles.1565 Similarly, 

certain commenters expressed concerns 

at ambiguity around the meaning of 

‘‘material, negative effect.’’ 1566 When 

industry participants view terms such as 

these as ambiguous, this increases the 

risk identified by commenters of some 

advisers evaluating their meaning 

broadly and providing less information 

to investors. 

Certain elements of the prohibition 

may result in these types of costs. For 

example, the application of the 

prohibition to all forms of 

communication, both formal and 

informal, may drive certain advisers to 

conservatively evaluate what 

information can be provided on a 

preferential basis.1567 However, we also 

believe that the scope of the prohibition 

is reasonably precisely defined, such 

that the risk of advisers conservatively 

evaluating the prohibition and denying 

ordinary investor communications may 

be low. The prohibition only applies in 

a narrow set of circumstances: when the 

adviser reasonably expects that 

providing information would have a 

material, negative effect on other 

investors in the private fund or similar 

pool of assets. We believe advisers will 

in general be able to form reasonable 

expectations around what types of 

information are likely to have a 

material, negative effect on other 

investors, for example by examining the 

effect of delivering comparable 

information to investors in the past, 

either in their own prior funds, other 


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1568 Id. 

1569 Id. 

1570See supra section II.F; see also final rule 

211(h)(2)–3(b). 

1571See supra section II.F. Because the rule will 

not apply to advisers with respect to SAFs, there 

will be no benefits or costs for investors and 

advisers associated with those funds. See supra 

footnote 1539. 

1572 Id. 

1573See supra section VI.B. 

1574See, e.g., Healthy Markets Comment Letter I; 

Trine Comment Letter; AFREF Comment Letter I; 

NEBF Comment Letter; NASAA Comment Letter; 

Segal Marco Comment Letter; Pathway Comment 

Letter. 

1575RFG Comment Letter II. 

1576See supra section VI.C.2. 

1577We have also adjusted these estimates to 

reflect that the final rule will not apply to SAF 

advisers with respect to SAFs they advise. See infra 

section VII.F. As explained in that section, this 

estimated annual cost is the sum of the estimated 

recurring cost of the proposed rule in addition to 

the estimated initial cost annualized over the first 

three years. As discussed above, one commenter 

criticized the quantification methods underlying 

these estimates, and we have explained why we do 

not agree with that criticism. See supra footnote 

1366. Nevertheless, to reflect the commenter’s 

concerns, and recognizing certain changes from the 

proposal, we are revising the estimates upwards as 

reflected here and in section VII.B. 

1578While commenters’ concerns were primarily 

focused on fund closing processes, hedge funds and 

funds in public press, or other funds in 

Commission enforcement actions.1568

Moreover, once advisers begin 

disclosing what forms of preferential 

treatment they provide pursuant to the 

final preferential treatment rule, the 

reactions of other investors may give 

advisers a clearer, more comprehensive 

picture of when material, negative 

effects may result.1569

Any preferential information that 

does not meet the specified reasonable 

expectation of a material, negative effect 

criteria would only be subject to the 

disclosure portions of this rule.1570 We 

believe this also mitigates the risk of any 

unintended chilling of communication. 

Because fund agreements entered into 

before the compliance date will have 

legacy status, benefits to investors will 

generally not accrue for current funds 

unless they are able to negotiate revised 

terms to their existing contracts, but 

benefits to investors in future funds will 

benefit from advisers ceasing prohibited 

preferential treatment activity. This will 

also generally be the case for costs of the 

final rules prohibiting a private fund 

adviser from providing certain 

preferential terms to some investors that 

the adviser reasonably expects to have 

a material negative effect on other 

investors in the private fund or in a 

similar pool of assets. However, 

investors in liquid funds who have the 

ability to redeem may do so in response 

to the final rules, if they do not 

currently receive preferential terms, to 

reallocate their investments into new 

private funds that are subject to the 

rules and do not offer preferential terms 

reasonably expected to have a material, 

negative effect on other investors. Those 

investors may be able to benefit from the 

final rules, and advisers 

correspondingly may face costs 

associated with reduced compensation 

from losing the assets of those investors. 

Prohibition of Other Preferential 

Treatment Without Disclosure 

The final rule also will prohibit other 

preferential terms unless the adviser 

provides certain written disclosures to 

prospective and current investors, and 

these disclosures must contain 

information regarding all preferential 

treatment the adviser provides to other 

investors in the same fund.1571 In 

response to commenters, we are also 

adopting the prohibition of other 

preferential treatment without 

disclosure in a modified form. We are 

limiting the advance written notice 

requirement to prospective investors to 

only apply to material economic terms, 

but we are still requiring advisers to 

provide to current investors 

comprehensive disclosure of all 

preferential treatment. The timing of 

when that disclosure is provided will 

depend on whether the fund is a liquid 

or illiquid fund. We are also adopting 

the annual written disclosure 

requirement as proposed.1572

This rule will reduce the risk of harm 

that some investors face from expected 

favoritism toward other investors, and 

help investors understand the scope of 

preferential terms granted to other 

investors, which could help investors 

shape the terms of their relationship 

with the adviser of the private fund. 

Because these disclosures would need 

to be provided to prospective investors 

prior to their investments and to current 

investors annually, these disclosures 

would help investors shape the terms of 

their relationship with the adviser of the 

private fund. This may lead the investor 

to request additional information on 

other benefits to be obtained, such as coinvestment rights, and would allow an 

investor to understand better certain 

potential conflicts of interest and the 

risk of potential harms or other 

disadvantages. 

Some commenters who supported the 

rule in general offered perspectives 

consistent with these benefits. In 

particular, as discussed above, many 

investors report that they accept poor 

legal terms in LPAs largely because they 

do not think that they have sufficient 

information on ‘‘what’s market’’ to be 

included in LPA terms.1573 Other 

commenters more specifically stated 

that with better transparency into 

preferential treatment, investors would 

be able to better protect themselves from 

risks to their investments.1574 Another 

commenter stated that the proposed rule 

would generally assist investors in the 

negotiation process.1575

Disclosures of such preferential 

treatment would impose direct costs on 

advisers to update their contracting and 

disclosure practices to bring them into 

compliance with the new requirements, 

including by incurring costs for legal 

services. These direct costs may be 

particularly high in the short term to the 

extent that advisers renegotiate, 

restructure and/or revise certain existing 

deals or existing economic arrangements 

in response to this prohibition. 

However, these costs may also be 

reduced by an adviser’s choice between 

not providing the preferential terms and 

continuing to provide the preferential 

terms with the required disclosures, as 

the costs to some advisers from not 

providing the preferential terms to 

investors may be lower than the costs 

from the disclosure. Both the costs and 

the benefits may be mitigated to the 

extent that advisers already make the 

required disclosures, for example in 

response to any relevant State laws.1576

As discussed below, for purposes of 

the PRA, we anticipate that the total 

costs of making the required disclosures 

pursuant to the rule prohibiting 

preferential treatment without 

disclosure will impose an aggregate 

annual internal cost of $364,386,264.48 

and an aggregate annual external cost of 

$41,475,520 for a total cost of 

$405,861,784.48 annually.1577 To the 

extent that advisers are not prohibited 

from categorizing all or a portion of 

these costs as expenses to be borne by 

the fund, then these costs may be borne 

indirectly by investors to the fund 

instead of advisers. We believe these 

costs are mitigated in part by the 

limiting of the final rules to only those 

terms that a prospective investor would 

find most important and that would 

significantly impact its bargaining 

position (i.e., material economic terms, 

including but not limited to the cost of 

investing, liquidity rights, investorspecific fee breaks, and co-investment 

rights). 

However, private fund advisers, in 

addition to having to undertake direct 

compliance costs associated with their 

disclosures, may ultimately face direct 

costs as described by commenters 

associated with revising their business 

practices, policies, and procedures to 

ensure successful fund closings that are 

in compliance with the final rules.1578


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other liquid funds that raise capital on an ongoing 

basis may face related additional costs associated 

with investors delaying investing in the fund in 

order to learn more about what terms are being 

received by other investors. However, for those 

funds, any incentive for investors to delay 

committing their capital will be at least partially 

offset by the fact that they will not earn the returns 

of the fund for the duration of their delay. 

1579Proposing Release, supra footnote 3, at 233– 

234. 

1580AIC Comment Letter I, Appendix 2; LSTA 

Comment Letter, Exhibit C. 

1581See infra section VII. 

1582As discussed above, to the extent the 

proportion of initial costs that persist as ongoing 

costs is higher than one third, the ongoing costs 

would be proportionally higher than what is 

reflected here. See supra footnote 1456. 

1583As discussed above, based on staff 

experience, as advisers grow in size, efficiencies of 

scale may emerge that limit the upper range of 

compliance costs. See supra footnote 1457. 

1584Proposing Release, supra footnote 3, at 249. 

1585See, e.g., AIMA/ACC Comment Letter; OPERS 

Comment Letter. 

1586See, e.g., AIC Comment Letter I. 

1587MFA Comment Letter I; PIFF Comment 

Letter; Chamber of Commerce Comment Letter; 

AIMA/ACC Comment Letter; Correlation Ventures 

Comment Letter; SIFMA–AMG Comment Letter I; 

ATR Comment Letter. 

1588See supra section VI.C.2. 

As discussed in the Proposing Release, 

several factors make the quantification 

of costs difficult, such as a lack of data 

on the extent to which advisers 

currently offer preferential terms that 

will be prohibited under the final rule 

unless the adviser makes certain 

disclosures.1579 However, some 

commenters criticized the Commission 

for failing to quantify these costs.1580 In 

light of this, and in light of commenter 

concerns on other direct costs to 

advisers associated with having to 

revise their business practices above 

and beyond making disclosures, the 

Commission has further considered the 

requirement and additional work that 

would be required by various parties to 

comply. To that end, the Commission 

has estimated ranges of costs for 

compliance, depending on the amount 

of time each adviser will need to spend 

to comply. 

Advisers are likely to vary in the 

complexity of their contractual 

arrangements, because for example 

some advisers may not offer any 

preferential terms today that will be 

prohibited. At minimum, we estimate 

that the additional work will require 

time from accounting managers ($337/ 

hour), compliance managers ($360/ 

hour), a chief compliance officer ($618/ 

hour), attorneys ($484/hour), assistant 

general counsel ($543/hour), junior 

business analysts ($204/hour), financial 

reporting managers ($339), senior 

business analysts ($320/hour), 

paralegals ($253/hour), senior 

operations managers ($425/hour), 

operations specialists ($159/hour), 

compliance clerks ($82/hour), and 

general clerks ($73/hour).1581 Certain 

advisers may need to hire additional 

personnel to meet these demands. Given 

the impact of preferential treatment 

decisions on fund capital and business 

outcomes, we also include time needed 

from senior portfolio managers ($383/ 

hour) and senior management of the 

adviser ($4,770/hour). 

To estimate monetized costs to 

advisers, we multiply the hourly rates 

above by estimated hours per 

professional. Based on staff experience, 

we estimate that on average, advisers 

will require at minimum 36 hours of 

time from each of the personnel 

identified above as an initial burden. 

For example, at minimum, each adviser 

may require time from these personnel 

to at least evaluate whether any 

revisions to their contracts are 

warranted at all. Multiplying these 

minimum hours by the above hourly 

wages yields a minimum initial cost of 

$336,553.38 per adviser. These costs are 

likely to be higher initially than they are 

ongoing. Based on staff experience, we 

estimate minimum ongoing costs will 

likely be one fifth of the initial costs, or 

$112,184.46 per year.1582

However, many of these potential 

direct costs of updates may be higher for 

certain advisers. Larger advisers, with 

more complex contracts and preferential 

treatment arrangements that are more 

complex to update, may have greater 

costs. While the factors that may 

increase these costs are difficult to fully 

quantify, we anticipate that very few 

advisers would face a burden that 

exceeds 10 times the minimum 

estimate.1583 Multiplying minimum 

initial cost estimates by 10 yields a 

maximum initial cost of $3,365,533.80 

per adviser. These costs are likely to be 

higher initially than they are ongoing. 

Based on staff experience, we estimate 

maximum ongoing costs will likely be 

one third of the initial costs, or 

$1,121,844.60 per year. 

We believe the direct costs of the final 

rule will be equal to the sum of the PRA 

direct costs and non-PRA direct costs, as 

we believe the preferential treatment 

rule will in general require advisers to 

both undertake additional disclosures of 

preferential treatment offered to 

investors as well as revise their business 

practices, policies, and procedures. We 

do not believe that, in general, any 

advisers will come into compliance 

with the final rule by, for example, 

forgoing offering preferential treatment 

altogether, thereby avoiding all 

disclosures-based PRA costs. 

In addition to these direct compliance 

costs, at the proposing stage, we stated 

that to the extent that these disclosures 

could discourage advisers from 

providing certain preferential terms in 

the interest of avoiding future 

negotiations with other investors on 

similar terms, this prohibition could 

ultimately decrease the likelihood that 

some investors are granted preferential 

terms.1584 Commenters generally agreed, 

stating that these disclosures would 

discourage advisers from providing 

certain preferential terms in the interest 

of avoiding future negotiations with 

other investors on similar terms, or out 

of a conservative evaluation of their 

obligations under the rule and a 

resulting fear of non-compliance.1585 As 

a result, some investors may find it 

harder to secure such terms. 

Some commenters also stated that the 

prohibition on preferential treatment 

without disclosure would impede fund 

closing processes. Specifically, 

commenters stated that the 

Commission’s proposal would 

disadvantage investors that participate 

in earlier closings, as the investors in 

later closings would have access to an 

even larger set of disclosed agreements. 

This dynamic would provide investors 

with an incentive to wait—it encourages 

investors to try to be the last investor to 

sign up for a fund—making fundraising 

even more difficult and time 

consuming.1586 Some commenters 

stated that because of the dynamic 

nature of negotiations leading up to a 

closing (i.e., advisers simultaneously 

negotiate with multiple investors), it 

would be impractical for an adviser to 

provide advance written notice to a 

prospective investor because doing so 

would result in a repeated cycle of 

disclosure, discussion, and potential 

renegotiation.1587

While commenters may be correct 

that, at the margin, there may be certain 

increased difficulties associated with 

the fund closing process under the new 

rule, we believe there are two key 

factors mitigating any concern that the 

final rule will create any meaningful 

fund closing problems. 

First, as discussed in the economic 

baseline, there already exists today an 

incentive for investors to wait for their 

latest possible opportunity to close, 

freeriding on the due diligence and 

resulting negotiated terms conducted by 

earlier investors,1588 and therefore have 

already developed two tools for 

overcoming this problem, and will 

continue to have those tools available to 

them, namely (i) offering earlier 

investors MFN provisions to convince 

them to commit to the fund early, and 


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63350 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1589 Id. 

1590See supra section II.C. 

1591 Id. 

1592 Id. 

1593See supra section VI.C.4. 1594 Id. 1595See supra section VI.C.4. 1596See supra section II.C. 1597See supra section II.A. 1598See supra section VI.C.4. Approximately 10% 

of SAFs do get audits, from PCAOB-registered and 

-inspected independent auditors, of U.S. GAAP 

financial statements. Id. Advisers to these funds 

would not be prohibited from continuing to cause 

the fund to undergo such an audit of U.S. GAAP 

financial statements under the final rules. 

1599 Id. 

1600 Id. 

(ii) an ability to cultivate a reputation 

that early investors will receive 

beneficial terms (such as reduced fees) 

that will not be granted to later 

investors.1589 We believe both of these 

tools will continue to facilitate efficient 

fund closings under the final rule just as 

they do today. 

Second, at least some portion of any 

increased difficulty in securing fund 

closings is likely to be because many 

advisers, having disclosed greater terms 

to prospective investors, now must 

compete more intensely to secure 

capital from those investors. In these 

cases, the increased operational 

difficulties for advisers are at least 

partially offset by the benefits of greater 

competition to investors. 

The lack of legacy status for this rule 

provision means that these benefits will 

accrue across all private funds and 

advisers. This will also be the case for 

costs of the rule. 

5. Mandatory Private Fund Adviser 

Audits 

The final audit rule will require an 

investment adviser that is registered or 

required to be registered to cause each 

private fund that it advises, directly or 

indirectly, to undergo audits in 

accordance with the audit provision 

under the custody rule.1590 These audits 

will need to be performed by an 

independent public accountant that 

meets certain standards of 

independence and is registered with 

and subject to regular inspection by the 

PCAOB, and the statements will need to 

be prepared in accordance with 

generally accepted accounting 

principles as currently required under 

the custody rule.1591 In a change from 

the proposal, the rule will not require 

that auditors notify the Commission in 

any circumstances.1592 The lack of 

legacy status for this rule provisions 

mean that the benefits and costs will 

apply across all investors in private 

funds and their advisers, not just new 

issuances. 

We discuss the costs and benefits of 

this rule below. Several factors, 

however, make the quantification of 

many of the economic effects of the final 

amendments and rules difficult. For 

example, there is a lack of quantitative 

data on the extent to which auditors 

may raise their prices in response to 

new demand for audits. It would also be 

difficult to quantify how advisers may 

pass on any additional costs for audits 

in response to the final rule. As a result, 

parts of the discussion below are 

qualitative in nature. 

Benefits 

We recognize that many advisers 

already provide audited fund financial 

statements to fund investors in 

connection with the adviser’s 

alternative compliance with the custody 

rule.1593 However, to the extent that an 

adviser does not currently have its 

private fund client undergo a financial 

statement audit, investors would receive 

more reliable information from private 

fund advisers as a result of the final 

audit rule. The benefits to investors will 

therefore vary across fund sizes, as 

smaller and larger funds have different 

propensities to already pursue 

audits.1594 However, of course, because 

larger funds have more assets, these 

larger funds still represent a large 

volume of unaudited assets. Funds of 

size 10 million have approximately $7.1 

billion in assets not audited by a 

PCAOB-registered and -inspected 

independent auditor, while funds of 

size >$500 million have approximately 

$1.9 trillion in assets not audited by a 

PCAOB-registered and -inspected 

independent auditor.1595

Because advisers to funds that an 

adviser does not control and that are 

neither controlled by nor under 

common control with the adviser (e.g., 

where an unaffiliated sub-adviser 

provides services to the fund) have only 

a requirement to take all reasonable 

steps to cause their fund to undergo an 

audit that meets these elements,1596

investors in those funds may not benefit 

from the final rules as frequently, to the 

extent that those funds’ advisers’ 

reasonable steps fail to cause their funds 

to undergo an audit. Similarly, the final 

mandatory audit rule will not require 

advisers to obtain audits of SAFs, 

investors in SAFs will not benefit from 

the final rules.1597 However, 

commenters have stated that in the case 

of CLOs and other SAFs, there would be 

minimal benefit to investors from an 

audit, consistent with the fact that very 

few advisers to CLOs and other SAFs 

cause their funds to undergo an audit 

today compared to audit rates for other 

types of private funds.1598 For example, 

one commenter stated that GAAP’s 

efforts to assign, through accruals, a 

period to a given expense or income 

may not be useful, and potentially 

confusing, for SAF investors because 

principal, interest, and expenses of 

administration of assets can only be 

paid from cash received.1599

We further understand that agreedupon procedures are a more common 

practice for these funds, and such 

procedures often relate to the 

securitized asset fund’s cash flows and 

the calculations relating to a securitized 

asset fund portfolio’s compliance with 

the portfolio requirements and quality 

tests (such as overcollateralization, 

diversification, interest coverage, and 

other tests) set forth in the fund’s 

securitization transaction 

agreements.1600 To the extent advisers 

to CLOs and other SAFs continue to 

undertake existing agreed-upon 

procedures practices, the forgone 

benefits from not applying the final 

rules to advisers with respect to their 

SAFs may be mitigated. However, audits 

provide stronger protections to investors 

than agreed-upon procedures, and so to 

the extent audits would benefit 

investors to SAFs, then there will still 

be forgone benefits from not applying 

the final rules to advisers with respect 

to their SAFs. 

The audit requirement will provide an 

important check on the adviser’s 

valuation of private fund assets, which 

often has an impact on the calculation 

of the adviser’s fees. It may thereby limit 

some opportunities for advisers to 

materially over-value investments. 

Audits provide substantial benefits to 

private funds and their investors 

because audits also test other assertions 

associated with the investment portfolio 

that are not captured by surprise 

examinations, which only test the 

existence of assets: e.g., audits test all 

relevant assertions such as 

completeness, and rights and 

obligations. Audits may also provide a 

check against adviser 

misrepresentations of performance, fees, 

and other information about the fund, 

for example by detecting irregularities 

or errors, as well as an investment 

adviser’s loss, misappropriation, or 

misuse of client investments. Enhanced 

and standardized regular auditing may 

therefore broadly improve the 

completeness and accuracy of fund 

performance reporting, to the extent 

these audits improve fund valuations of 

their investments. Investors who are not 

currently provided with audited fund 

financial statements that meet the 

requirements of the final rule may, as a 


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1601See, e.g., In the Matter of Chatham Asset 

Mgmt., Investment Advisers Act Release No. 6270 

(Apr. 3, 2023). 

1602See supra section VI.C.4. 

1603See, e.g., Daniel Aobdia, The Impact of the 

PCAOB Individual Engagement Inspection 

Process—Preliminary Evidence, 93 Acc. Rev. 53–80 

(2018) (concluding that ‘‘engagement-specific 

PCAOB inspections influence non-inspected 

engagements, with spillover effects detected at both 

partner and office levels’’ and that ‘‘the information 

communicated by the PCAOB to audit firms is 

applicable to non-inspected engagements’’); Daniel 

Aobdia, The Economic Consequences of Audit 

Firms’ Quality Control System Deficiencies, 66 

Mgmt. Sci. (July 2020) (concluding that ‘‘common 

issues identified in PCAOB inspections of 

individual engagements can be generalized to the 

entire firm, despite the PCAOB claiming that its 

engagement selection process targets higher-risk 

clients’’ and that ‘‘[PCAOB quality control] 

remediation also appears to positively influence 

audit quality’’). See also Safeguarding Release, 

supra footnote 467. 

1604 Id. 

1605See supra section II.C. 

1606See supra section VI.C.4. Recently, the SEC 

has proposed to amend and redesignate the custody 

rule. See supra VI.C.4; see also Safeguarding 

Release, supra footnote 467. Advisers that currently 

obtain surprise exams will likely cease doing so, to 

the extent they are duplicative of the mandatory 

audits, which may result in a reduction of any 

reporting to the Commission under the custody 

rule. 

1607NYC Bar Comment Letter II; BVCA Comment 

Letter; Invest Europe Comment Letter. 

1608NASAA Comment Letter; RFG Comment 

Letter II. 

1609NASAA Comment Letter. 

1610Utke and Mason Comment Letter. 

1611 Id.; Jennifer J. Gaver, Paul Mason & Steven 

Utke, Financial Reporting Choices of Private Funds 

and Their Implications for Capital Formation (May 

4, 2020), available at https://ssrn.com/ 

abstract=3092331. 

1612See supra section VI.B. 

1613 Id. 

1614Utke and Mason Comment Letter. 

1615See supra section VI.C.3; see also AIC 

Comment Letter I, Appendix 1; Brown et al., supra 

footnote 1226. 

1616 Id. 

result, have additional beneficial 

information regarding their investments 

and, in turn, the fees being paid to 

advisers. 

However, audits do not perfectly 

prevent all forms of investor harm, and 

investor benefits can be mitigated to the 

extent that checks on valuation, even 

independent checks, are influenced by 

adviser behavior in a way that is not 

possible for audits to detect. For 

example, an adviser trading an illiquid 

asset between different funds owned by 

the adviser or the adviser’s related 

entities may bias data reported by 

independent pricing services, to the 

extent that the asset’s illiquidity causes 

the pricing service to overly weight the 

adviser’s own transactions in publishing 

an independent estimate of the asset’s 

price.1601 These types of pricing 

distortions can be difficult for audits to 

detect and may therefore mitigate 

benefits of the final mandatory audit 

rule. To the extent investors overassume the degree of protection offered 

by audits, and reduce their own 

monitoring or due diligence of adviser 

conduct, this may be a negative effect of 

the final audit rule. 

As discussed above, currently not all 

financial statement audits of private 

funds are necessarily conducted by a 

PCAOB-registered independent public 

accountant that is subject to regular 

inspection.1602 The requirement that the 

independent public accountant 

performing the audit be registered with, 

and subject to regular inspection by, the 

PCAOB, is likely to improve the audit 

and financial reporting quality of 

private funds.1603 Higher quality audits 

generally have a greater likelihood of 

detecting material misstatements due to 

fraud or error, and we further believe 

that investors will benefit more from the 

higher quality of audits conducted by an 

independent public accountant 

registered with, and subject to regular 

inspection by, the PCAOB.1604 The 

requirement to distribute the audited 

financial statements to current investors 

annually within 120 days of the private 

fund’s fiscal year-end and promptly 

upon liquidation will allow investors to 

evaluate the audited financial 

information in a timely manner. 

In a change from the proposal, 

investors will not receive potential 

benefits from any enhanced regulatory 

oversight that would have accrued as a 

result of the proposed requirement for 

the adviser to engage the auditor to 

notify the Commission under some 

conditions.1605 While problems 

identified during a surprise examination 

must currently be reported to the 

Commission under the custody rule, 

problems identified during an audit, 

even if the audit is serving as the 

replacement for the surprise 

examination under the custody rule, 

will continue to not need to be reported 

to the Commission.1606 Some 

commenters questioned the benefits of 

the notification provision,1607 but other 

commenters supported the proposal,1608

with one stating that the issuance of a 

modified opinion or the auditor’s 

termination may be ‘‘serious red flags 

that warrant early notice to 

regulators.’’ 1609

One commenter argued that audits do 

not provide benefits to private fund 

investors.1610 That commenter cited two 

studies related to private equity and 

venture capital funds and argued that 

these studies show that there is only 

limited evidence that audits provide 

capital market benefits to funds and that 

audits do not improve fund’s NAV 

estimates. We disagree with this 

commenter and continue to agree with 

the consensus view, established by the 

academic literature cited in the above 

discussion, that audits provide 

meaningful benefits to fund investors. 

Moreover, a key focus on one study is 

estimating the impact of an audit on an 

adviser’s ability to raise new funds.1611

We do not believe that advisers to 

unaudited funds and advisers to audited 

funds having similar probabilities of 

raising new funds is necessarily in 

contrast to the value of audits. For 

example, oftentimes advisers raise new 

funds before exiting investments of 

prior funds. Fund exits require an actual 

transaction price which may differ from 

the adviser’s fair value estimate. Part of 

the benefit of an audit is that asset 

valuation discrepancies may be more 

likely to be detected prior to an exit 

when the fund is audited, and therefore 

prior to when an adviser begins to raise 

a new fund. This author’s results also do 

not engage with the market failures and 

economic rationale described above, 

such as investors having worse outside 

options to a given negotiation than the 

adviser, the investor’s operational 

difficulties associated with switching 

advisers, or not having sufficient insight 

into market terms.1612 Many investors 

may continue to invest with an adviser 

whose funds are unaudited because of 

their difficulties in identifying a new 

adviser who meets the investor’s 

complex internal administrative and 

regulatory requirements.1613 The studies 

cited lastly do not include hedge funds, 

real estate funds, liquidity funds, or any 

other category of private fund whose 

adviser will be subject to the rule.1614

As discussed above, another 

commenter cites an academic study as 

stating that investors can ‘‘see through’’ 

any potential valuation manipulation 

that would be uncovered by an 

audit.1615 We do not believe this 

literature undermines the potential 

benefits of a mandatory audit. First, also 

as discussed above, the paper cited itself 

concedes that in its findings, unskilled 

investors may misallocate capital, and 

that it is only the more sophisticated 

investors who may prefer the status quo 

to a regime with more regulation.1616

We believe the commenter’s 

interpretation of this paper also ignores 

the costs that investors must currently 

undertake to ‘‘see through’’ 

manipulation, even on average. 

Other commenters who questioned 

the benefits of a mandatory audit rule 

agreed that audits provide benefits but 

characterized the rule as unnecessary 

given current market practices around 

audits. For example, one commenter 


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1617See supra section VI.C.4. 

1618PIFF Comment Letter. 

1619BVCA Comment Letter; Invest Europe 

Comment Letter. 

1620See supra section VI.B. 

1621 Id. 

1622 Id. See also, e.g., AIMA/ACC Comment 

Letter. 

1623See supra sections II.C, VI.D.5. 

1624See supra section II.C. 

1625See supra section VI.C.4. 

1626The final audit rule’s requirement to 

distribute audited financial statements within 120 

days of the private fund’s fiscal year-end and 

promptly upon liquidation may change the relevant 

compliance costs relative to the proposal, which 

required prompt distribution in all cases. The 120- 

day requirement may impose lower compliance 

costs relative to the proposal by providing more 

time for audits relative to the proposal, but a 

specific deadline requirement may also impose 

higher compliance costs relative to the flexible 

deadline approach of the proposal. The custody 

rule’s requirement to distribute audited financial 

statements promptly upon liquidation generally 

aligns with the private fund audit requirements. See 

supra section II.C. 

1627See infra section VII.C. IARD data indicate 

that registered investment advisers to private funds 

typically advise more private funds as compared to 

the full universe of investment advisers. 

1628 Id. The audit fee for an individual fund may 

be higher or lower than this estimate, with 

individual fund audit fees varying according to 

fund characteristics, such as the jurisdiction of the 

assets, complexity of the holdings, the firm 

providing the services, and economies of scales. 

1629 Id. 

1630 Id. As discussed above, one commenter 

criticized the quantification methods underlying 

these estimates, and we have explained why we do 

not agree with that criticism. See supra footnote 

1366. Nevertheless, to reflect the commenter’s 

concerns, and recognizing certain changes from the 

proposal, we are revising the estimates upwards as 

reflected here and in section VII.B. 

1631See supra section II.A. 

1632See supra section VI.C.4, Figure 4A. These 

costs may be overstated because some advisers are 

only required to take all reasonable steps to cause 

the fund to undergo an audit, instead of being 

required to obtain an audit. See supra sections 

II.C.7, VI.C.4. 

stated that the majority of funds today 

currently undergo an audit that meet the 

requirements of the final rule, consistent 

with the analysis above,1617 and stated 

that this reflects the fact that current 

rules and market dynamics ‘‘work’’ and 

that ‘‘there is no market problem to be 

solved by the proposed rule.’’ 1618 Other 

commenters described the rule as 

duplicative.1619 We disagree with 

commenters that there is no market 

problem to be solved by the rule. We 

again point to the market failures as 

characterized above.1620 In particular, as 

discussed above, we believe that certain 

targeted further reforms, such as 

mandatory audits, are necessitated by 

several additional sources of 

asymmetric bargaining power, because 

we believe those imbalances are not 

fully resolved by enhanced disclosure 

and would not be resolved by consent 

requirements.1621

As discussed above, some 

commenters criticized the proposed rule 

for eliminating the surprise examination 

option under the custody rule without 

evidence that surprise examinations 

have not adequately protected private 

fund investors.1622 However, we believe 

that, because surprise examinations 

only verify the existence of pooled 

investment vehicle investments, a 

surprise examination may not discover 

any misappropriation or misvaluation 

until the assets are gone. Surprise 

examinations more generally do not 

provide other benefits that the final 

mandatory audit rule will provide such 

as checks on valuation, completeness 

and accuracy of financial statements, 

disclosures such as those regarding 

related-party transactions, and 

others.1623 If, in lieu of an audit, a 

private fund undergoes a surprise 

examination, an investor may not 

receive this additional important 

information. 

The benefits from mandatory audits 

are particularly relevant for illiquid 

investments. Illiquid assets currently are 

where we believe it is most feasible for 

financial information to have material 

misstatements of investment values and 

where there is broadly a higher risk of 

investor harm from potential conflicts of 

interest or fraud. This is because 

currently, as discussed above, advisers 

may use a high level of discretion and 

subjectivity in valuing a private fund’s 

illiquid investments, and the adviser 

further may have incentives to bias the 

fair value estimates of the investment 

upwards to generate larger fees.1624

Because both liquid funds and illiquid 

funds may have illiquid investments, 

investors in both types of funds will 

benefit, though the benefits may be 

larger for investors in illiquid funds (as 

such funds may have more illiquid 

investments than liquid funds). 

Costs 

As discussed above, we recognize that 

many advisers already provide audited 

financial statements to fund investors in 

connection with the adviser’s 

alternative compliance with the custody 

rule.1625 To the extent that an adviser 

does not currently have its private fund 

client undergo the required financial 

statement audit, there will be direct 

costs of obtaining the auditor, providing 

the auditor with resources needed to 

conduct the audit, the audit fees, and 

distributing the audit results to current 

investors.1626 Under current practice, 

the costs of undergoing a financial 

statement audit are often paid by the 

fund, and therefore, ultimately, by the 

fund investors, though in some cases the 

costs may be partially or fully paid by 

the adviser. We expect similar 

arrangements may be made going 

forward to comply with the final rule, 

with disclosure where required: in some 

instances, the fund will bear the audit 

expense, in others the adviser will bear 

it, and there also may be arrangements 

in which both the adviser and fund will 

share the expense. Advisers could 

alternatively attempt to introduce 

substitute charges (for example, 

increased management fees) to cover the 

costs of compliance with the rule, but 

their ability to do so may depend on the 

willingness of investors to incur those 

substitute charges. 

As discussed below, based on IARD 

data, as of December 31, 2022, there 

were 5,248 registered advisers providing 

advice to private funds, excluding 

advisers managing solely SAFs, and we 

estimate that these advisers would, on 

average, each provide advice to 10 

private funds, excluding SAFs.1627 We 

further estimate that the audit fee for the 

required private fund audit will be 

$75,000 per fund on average, an 

estimate that has been revised upward 

from the Proposing Release in response 

to commenters.1628 For purposes of the 

PRA, the estimated total auditing fees 

for all advisers to private funds will 

therefore be approximately 

$3,936,000,000 annually.1629 We further 

anticipate that the audit requirement 

will impose on all advisers to private 

funds a cost of approximately 

$12,214,720 for internal time,1630

yielding total costs of $3,948,214,720. 

Because the final mandatory audit rule 

will not require advisers to obtain audits 

of CLOs or other SAFs, no costs will be 

borne by advisers or investors in the 

case of their CLOs or other SAFs.1631

However, some advisers to funds 

would obtain the required financial 

statement audits even in the absence of 

the final rule. The cost of the final audit 

requirement will therefore depend on 

the extent to which advisers currently 

obtain audits and, if so, whether the 

auditors are registered with the PCAOB 

and independent. We therefore believe 

that the costs incurred will approximate 

12% of these amounts, because across 

all types of advisers to private funds 

besides securitized asset funds, 

approximately 88% of funds are 

currently audited in connection with 

the fund adviser’s alternative 

compliance under the custody rule.1632

This yields actual economic costs of 

$473,785,766.40. 

Moreover, even estimated costs of 

$474 million may be overstated, because 

we have not deducted costs of surprise 

exams from advisers who do not get an 


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1633 In 2009, the Commission staff estimated fees 

associated with surprise exams and found that costs 

of surprise exams vary substantially across advisers, 

ranging as high as $125,000 annually, but that most 

advisers would face costs for surprise exams of 

between $10,000 and $20,000. See Custody Rule 

2009 Adopting Release. However, we do not have 

reliable data on how those costs may have changed 

over time, including whether these costs have 

increased since 2009, or possibly decreased in the 

event that surprise examinations have gotten more 

efficient. We also do not have reliable data on how 

costs for surprise examinations for advisers of 

private funds may differ from the costs of surprise 

examinations for other investment advisers. 

Separately, the Commission staff recently estimated 

costs associated with advisers who would be 

subject to newly proposed surprise examination 

requirements. That analysis relied on the high end 

of the range of surprise examination costs, assuming 

costs of $162,000 annually. The Safeguarding 

Release also cited a 2013 Government 

Accountability Office (GAO) study, which 

examined 12 average-sized registered advisers, 

found that the cost of surprise examinations ranged 

from $3,500 to $31,000. The GAO noted that the 

costs of surprise examinations vary widely across 

advisers and are typically based on the amount of 

hours required to conduct the examinations, which 

is a function of a number of factors including the 

number of client accounts under custody. See 

Safeguarding Release, supra footnote 467. Given 

these wide ranges of potential surprise examination 

costs, to be reasonable, we have not deducted cost 

savings from forgone surprise examination costs 

from our estimates of the quantified costs associated 

with the final audit rule in this release. 

1634Proposing Release, supra footnote 3, at 280– 

285. 

1635 Id. 

1636See, e.g., AIC Comment Letter I; AIMA/ACC 

Comment Letter; CFA Comment Letter I; SBAI 

Comment Letter, LaSalle Comment Letter. 

1637See supra section VI.C.4. 

1638See supra section II.A. 

audit today. Those advisers who are 

currently getting surprise exams instead 

of an audit will forgo the cost of the 

surprise exam once they are required to 

get an audit. However, we do not have 

reliable data on the typical cost of a 

surprise exam, and so we cannot 

quantify these potential cost savings. 

We also understand surprise exams to 

be substantially less expensive than 

audits, and so we do not believe we 

arrive at cost estimates that are 

excessively high by not deducting costs 

of surprise exams.1633

For funds that had received an audit 

by an auditor that is not registered with 

the PCAOB, the costs of audits will also 

be offset by a reduction in costs from no 

longer obtaining their previous audit, 

although we anticipate that the cost of 

the required audit will likely be greater 

because a PCAOB-registered and 

-inspected auditor who is independent 

may cost more than an auditor that is 

not subject to the same requirements. 

We requested comment on data that 

may facilitate quantification of these 

offsets,1634 but no commenter offered 

any such data. 

We also understand that the PCAOB 

registration and inspection requirement 

may limit the pool of auditors that are 

eligible to perform these services which 

could, in turn, increase costs, as a result 

of the potential for these auditors to 

charge higher prices for their services. 

The increase in demand for these 

services, however, may be limited in 

light of the high percentage of funds 

already being audited by such 

auditors.1635 Several commenters 

emphasized these costs, stating that the 

proposed rule would substantially 

increase audit prices, for example 

because there may be an insufficient 

number of suitable auditors 

available.1636

We are not convinced that there may 

be an insufficient number of suitable 

auditors available. As shown in Figures 

4 and 5 above, Form ADV shows growth 

in the number of audits by PCAOBregistered and -inspected independent 

private fund auditors of approximately 

2,000 in 2020, approximately 3,000 in 

2021, and approximately 6,000 in 

2022.1637 In 2022, there were only 

approximately 8,000 private funds that 

did not already undergo an audit from 

a PCAOB-registered and -inspected 

independent auditor. Moreover, the 

limitation of the final rules to not apply 

to advisers with respect to SAFs further 

alleviates commenters’ concerns.1638

Given that the rules will not apply to 

advisers with respect to SAFs, the final 

mandatory audit rule will only add 

approximately 5800 mandatory audits. 

These estimates are presented for 

comparison purposes in Figure 7. 


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1639 Id. 

1640 Id. See also, e.g., LaSalle Comment Letter; 

PWC Comment Letter. 1641 Id. 1642 Id. Based on staff review of Form ADV data, 

these funds range across all fund sizes and are not 

disproportionately larger or disproportionately 

smaller funds. 

1643See supra section II.C. 

1644See supra sections II.C, VI.C.4. 

1645See supra section II.C. 

1646See, e.g., Exemptions Adopting Release, 

supra footnote 9. 

1647See supra VI.C.4. 

In other words, the audit industry has 

already organically, of its own accord, 

added a number of audits to its 

workload in the past year commensurate 

with the workload that will be added by 

the final rule. Moreover, the number of 

audits that will be added by the final 

rule is of the same order of magnitude 

as the number of audits added 

organically by the industry in each of 

the last several years. We believe this 

indicates that the audit industry is 

equipped to expand to meet the demand 

for additional audits without substantial 

additional costs, and so we do not 

believe that supply constraints on 

auditors because of the final rule will 

substantially increase the costs of 

private fund audits. This pattern and 

conclusion holds by type of private fund 

and by fund size.1639 However, 

approximately 1,500 of these newly 

mandatory audits would be on funds of 

size $2 million and under. To the extent 

that limited supply of auditors does 

increase the cost of the rule, for example 

by resulting in increased prices of 

audits, these costs may be particularly 

borne by advisers and investors to these 

smaller funds. 

Several commenters further specify 

that the concern over a lack of a 

sufficient number of suitable auditors 

will particularly apply to funds that rely 

on Big Four auditing firms for various 

non-audit services. Several commenters 

state that certain funds get an audit from 

a Big Four firm because of their 

investors’ demands, but none of the Big 

Four firms meet the independence 

requirements associated with the 

current custody rule for the fund.1640 As 

discussed above, less than one percent 

of all funds get an additional surprise 

exam in addition to an audit, which 

indicates that no more than one percent 

of funds are managed by advisers who 

may face difficulty in getting an audit by 

an independent firm.1641 Figure 6 above 

also further shows that only a de 

minimis number of funds, namely 149 

out of almost 50 thousand, excluding 

securitized asset funds, are managed by 

advisers who may face difficulty in 

securing a PCAOB-registered and 

-inspected auditor.1642

Because the case of funds that the 

adviser does not control and are neither 

controlled by nor under common 

control with the adviser (e.g., where an 

unaffiliated sub-adviser provides 

services to the fund) only requires the 

adviser to take all reasonable steps to 

cause the fund undergo an audit that 

meets these elements,1643 many 

investors in such funds will not bear 

any of the costs of the final rule.1644

Similarly, because the final mandatory 

audit rule will not require advisers to 

obtain audits of CLOs and other SAFs, 

advisers to those funds will not face any 

costs under the rules with respect to 

those funds.1645 Lastly, as noted above, 

we do not apply substantive provisions 

of the Advisers Act and its rules, 

including the mandatory audit 

requirement, with respect to non-U.S. 

clients (including private funds) of an 

SEC registered offshore investment 

adviser.1646 We believe that this 

clarification will reduce many of the 

concerns expressed by commenters 

regarding the difficulty for non-U.S. 

private fund advisers finding an auditor 

in certain jurisdictions. 

The proposed Commission 

notification requirement is not present 

in the final rule, and thus does not 

represent a new cost.1647 While one 


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1648NYC Bar Comment Letter II. 

1649See, e.g., IAA Comment Letter II; NYC Bar 

Comment Letter II; AIC Comment Letter I. 

1650See supra footnote 1640 and accompanying 

text. 

1651See supra section II.C.8. 

1652 Id. 

1653 Id. 

1654See supra section VI.D.5. 

1655See supra sections II.D.2, VI.C.4; see also 

Houlihan Comment Letter. 

1656Houlihan Comment Letter. 

1657See supra sections II.D.2, VI.C.4 

1658See supra sections II.D.2, VI.C.4 

1659 Id. 

1660See supra section II.D.1. 

1661 Id. 

commenter questioned the benefits of 

this notification requirement, 

commenters did not address the costs of 

this notification requirement in their 

comments.1648

Because the final rule aligns the 

private fund mandatory audit 

requirement with the custody rule audit 

requirement, advisers under the final 

rule will also face lower costs than 

under the proposal by avoiding any 

confusion associated with differences in 

the requirements of the two rules. 

Several commenters stated that 

differences between the two rules could 

create a risk of confusion.1649

The indirect costs of the audit 

requirement will depend on the quality 

of the financial statements of the funds 

newly subject to audits. These costs may 

be relatively higher for the funds with 

lower quality financial statements (i.e., 

the funds with the greatest benefit from 

the audit requirement). The indirect 

costs from the independent audit 

requirement may include costs of 

changing the fund’s internal financial 

reporting practices, such as 

improvements to internal controls over 

financial reporting, to avoid potential 

harm to investors from a misstatement. 

Further, because the requirement to 

have the auditor registered with, and 

subject to the regular inspection by, the 

PCAOB may limit the pool of 

accountants that are eligible to perform 

these services,1650 the resulting 

competition for these services might 

generally lead to an increase in their 

costs, as an effect of the final rule. 

Commenters did not address these types 

of indirect costs in their comments. 

6. Adviser-Led Secondaries 

In addition, the final adviser-led 

secondaries rule will require advisers to 

obtain fairness opinions or valuation 

opinions from an independent opinion 

provider in connection with certain 

adviser-led secondary transactions with 

respect to a private fund. In connection 

with this opinion, the final rule also 

requires a summary of any material 

business relationships the adviser or 

any of its related persons has, or has had 

within the past two years, with the 

independent opinion provider. The final 

adviser-led secondaries rule differs from 

the proposal in that it allows a fund to 

obtain either a fairness opinion or a 

valuation opinion in connection with 

certain adviser-led secondary 

transactions instead of requiring a 

fairness opinion and specifies a timeline 

for the delivery of this opinion to 

investors.1651

This requirement will not apply to 

advisers that are not required to register 

as investment advisers with the 

Commission, such as State-registered 

advisers and exempt reporting advisers. 

This requirement will also not apply 

where the transaction is a tender offer 

instead of an adviser-led secondary 

transaction as defined in the rule, and 

so neither the benefits nor the costs will 

apply in the case of tender offers.1652

This will be the case if an investor is not 

faced with the decision between (1) 

selling all or a portion of its interest and 

(2) converting or exchanging all or a 

portion of its interest.1653 Generally, if 

an investor is allowed to retain its 

interest in the same fund with respect 

to the asset subject to the transaction on 

the same terms (i.e., the investor is not 

required to either sell or convert/ 

exchange), as many tender offers permit 

investors to do, then the transaction will 

not qualify as an adviser-led secondary 

transaction. We discuss the costs and 

benefits of this rule provisions below. 

Several factors, however, make the 

quantification of many of the economic 

effects of the final amendments and 

rules difficult. For example, there is a 

lack of quantitative data on the extent to 

which adviser-led secondaries with 

neither fairness opinions nor valuation 

opinions differ in fairness of price from 

adviser-led secondaries with either 

fairness opinions or valuation opinions 

attached. It would also be difficult to 

quantify how investors and advisers 

may change their preferences over 

secondary transactions once fairness 

opinions are required to be provided. As 

a result, parts of the discussion below 

are qualitative in nature. 

Benefits 

The final rule’s requirement that an 

adviser distribute a fairness opinion or 

valuation opinion and summary of 

material business relationships with the 

opinion provider in connection with 

certain adviser-led secondary 

transactions may provide benefits to 

investors in the specific context of 

adviser-led secondary transactions 

similar to the effects of the mandatory 

audit rule.1654 This requirement will 

provide an important check against an 

adviser’s conflicts of interest in 

structuring and leading these 

transactions. Investors will have 

decreased risk of experiencing harm 

from mis-valuation of secondary-led 

transactions. Further, anticipating a 

lower risk of harm from mis-valuation 

when participating in such transactions, 

investors may be more likely to 

participate. The result may be a closer 

alignment between investor choices and 

investor preferences over private fund 

terms, investment strategies, and 

investment outcomes. These benefits 

will, however, be reduced to the extent 

that advisers are already obtaining 

fairness opinions or valuation opinions 

as a matter of best practice. 

While the final rule, in a change from 

the proposal, will also allow for the use 

of a valuation opinion instead of a 

fairness opinion, we understand that a 

valuation opinion will still provide 

investors with a strong basis to make an 

informed decision.1655 A valuation 

opinion is a written opinion stating the 

value (either as a single amount or a 

range) of any assets being sold as part 

of an adviser-led secondary 

transaction.1656 By contrast, a fairness 

opinion addresses the fairness from a 

financial point of view to a party paying 

or receiving consideration in a 

transaction.1657 One commenter stated 

that the financial analyses used to 

support a fairness opinion and valuation 

opinion are substantially similar.1658

Both types of opinions generally yield 

implied or indicative valuation 

ranges.1659

Because the final rule differs from the 

proposal in that tender offers will not be 

captured by the definition in the rule 

when the investor is not faced with the 

decision between (1) selling all or a 

portion of its interest and (2) converting 

or exchanging all or a portion of its 

interest, advisers may have additional 

incentives to structure transactions as 

tender offers instead of as adviser-led 

secondary transactions.1660 That is, 

advisers may have additional incentives 

to offer investors more choices than just 

a choice between selling all or a portion 

of their interests and converting or 

exchanging all or a portion of their 

interests. To the extent this occurs, 

investors may benefit from having 

greater flexibility in such transactions 

to, for example, continue to receive 

exposure to the assets that are at issue 

in the transaction by retaining its 

interest in the same fund on the same 

terms.1661


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1662See supra section II.A. 

1663See supra section II.C.8. 

1664 Id. Equity investors in SAFs may face risks 

of harm from mis-valuations and may therefore 

have forgone benefits from not applying the rules 

to advisers with respect to SAFs. However, equity 

investors in SAFs are typically only a small portion 

of the fund, include the adviser and its related 

persons themselves as well as advisers to other 

large private funds, and do not typically include 

pension funds. See supra sections VI.C.1, VI.C.2. 

These factors mitigate the risks of any harm to the 

equity tranche, and so mitigate the forgone benefits 

from not applying the rules to advisers with respect 

to those funds. 

1665See, e.g., ILPA Comment Letter I; CFA 

Comment Letter I; Morningstar Comment Letter. 

1666See, e.g., PIFF Comment Letter; AIC 

Comment Letter II; Ropes & Gray Comment Letter. 

1667 Id. 

1668 Id. 

1669See supra section VI.C.4. 

1670 Id. 

1671See supra section II.C.8. 

1672See supra section VI.C.4. 

1673See supra section VI.C.3. 

1674See infra section VII.D. 

1675 Id. One commenter’s calculation of aggregate 

costs associated with the adviser-led secondaries 

rule yields substantially higher aggregate costs, but 

per-fund costs comparable to those reflected here. 

The commenter’s aggregate cost result is driven by 

the commenter assuming that the adviser-led 

secondaries rule’s costs would be borne over 4,533 

fairness opinions instead of 504, as was assumed by 

the Proposing Release. See LSTA Comment Letter, 

Exhibit C. This assumption would require that 

approximately 90% of registered advisers undertake 

an adviser-led secondary each year, as Form ADV 

Because the final rule specifies that 

the adviser-led secondaries rule will not 

apply to advisers in the case of 

SAFs,1662 there will be no accrual of 

benefits to investors associated with 

transactions such as CLO reissuances.1663 However, we believe 

these forgone benefits are negligible, in 

particular because SAF re-issuances 

typically specify that outstanding debt 

tranches are fully repaid at par. The 

investor benefits from the adviser-led 

secondaries rule primarily accrue from 

the check provided to investors against 

an adviser’s potential conflict of interest 

that could provide an incentive for an 

adviser to mis-value assets when the 

answer is on both sides of a transaction. 

Because investors are fully paid at par, 

there is no risk of harm from the adviser 

mis-valuing the assets.1664

Some commenters agreed with the 

stated benefits of the final rule as 

outlined in the Proposing Release, and 

generally supported it.1665 Other 

commenters were skeptical of the stated 

benefits of acquiring a fairness opinion 

for all adviser-led secondary 

transactions as would have been 

required by the proposal.1666 While 

acknowledging that fairness opinions 

can be a useful tool in mitigating 

information asymmetries between the 

adviser and their investors, these 

commenters stated that funds often will 

not seek such an opinion because it 

would provide little benefit to investors 

and would come at a high cost.1667 The 

commenters argued further that in cases 

where funds did not obtain a fairness 

opinion, other practices were in place to 

guarantee investor protection consistent 

with the adviser’s fiduciary duty, such 

as a competitive bidding process or 

recent arms-length transaction.1668 We 

recognize that there will be transactions 

for which a fairness opinion or 

valuation opinion will provide less 

benefit to investors because of the 

existence of these other mechanisms for 

independent price valuation that may 

already be in place. 

However, we continue to believe that 

this requirement will, in many cases, 

provide the above benefits to investors. 

Moreover, it is the staff’s understanding 

that adviser-led secondaries also occur 

during times of stress, and may be 

associated with an adviser who needs to 

restructure a portfolio investment.1669 In 

other instances, an adviser may use an 

adviser-led secondary transaction to 

extend an investment beyond the 

contractually agreed upon term of the 

fund that holds it.1670 These may be 

particularly risky cases for investors as 

the risk of a conflict of interest may be 

high, and so fairness opinions or 

valuation opinions may provide 

particularly high benefits in those cases. 

Lastly, we also believe that ensuring 

that such opinions are delivered to 

investors in a time frame that would 

allow them to use that information in 

their decision-making process will 

increase the benefit of this rule to 

investors. 

Similar to the final mandatory audit 

rule, the benefits from mandatory 

fairness opinions/valuation opinions are 

particularly relevant for illiquid 

investments. Illiquid assets currently are 

where we believe it is most feasible for 

adviser-led secondary transactions to 

occur at unfair prices, and where there 

is broadly a higher risk of investor harm 

from potential conflicts of interest or 

fraud and where there is the greatest 

risk of asymmetry of information 

between investors and the adviser. This 

is because currently, as discussed above, 

advisers may use a high level of 

discretion and subjectivity in valuing a 

private fund’s illiquid investments, and 

the adviser further may have incentives 

to bias the fair value estimates of the 

investment to generate a more favorable 

price in the secondary transaction.1671

Because both liquid funds and illiquid 

funds may have illiquid investments, 

investors in both types of funds will 

benefit, though the benefits may be 

larger for investors in illiquid funds (as 

such funds may have more illiquid 

investments than liquid funds and are 

more likely to have adviser-led 

secondary transactions). 

Because Form PF’s recently adopted 

new quarterly reporting requirements 

for private equity fund advisers will 

already collect quarterly information on 

the occurrence of adviser-led 

secondaries (after the effective date of 

the Form PF final amendments, albeit 

with a definition of ‘‘adviser-led 

secondary’’ that is not identical to the 

definition used for the adviser-led 

secondaries rule), any investor 

protection benefits of the final rules may 

be mitigated to the extent that Form PF 

is already a sufficient tool for investor 

protection purposes.1672 However we do 

not believe the benefits will be 

substantially mitigated, because Form 

PF is not an investor-facing disclosure 

form. Information that private fund 

advisers report on Form PF is provided 

to regulators on a confidential basis and 

is nonpublic.1673 The benefits from the 

final rules accrue substantially from 

fairness opinions and valuation 

opinions decreasing risks of investors 

experiencing harm from mis-valuation 

of secondary-led transactions. To the 

extent that advisers’ incentives to 

independently pursue fairness opinions 

and valuation opinions are increased by 

Form PF’s requirement (after the 

effective date of the new amendments) 

to report adviser-led secondaries to the 

Commission, that change in incentives 

from Form PF’s amendments will 

reduce both the benefits and costs of the 

final rules (since the final result is, 

regardless, the adviser being 

incentivized to pursue a fairness 

opinion or valuation opinion, no matter 

which rule was the predominating 

factor in the adviser’s decision). 

Costs 

Costs would also be incurred related 

to obtaining the required fairness 

opinion or valuation opinion and 

material business relationship summary 

in the case of an adviser-led secondary 

transaction. For purposes of the PRA, 

we estimate that 10% of advisers 

providing advice to private funds 

conduct an adviser-led secondary 

transaction each year and that the funds 

would pay external costs of $100,565 for 

each fairness opinion or valuation 

opinion and material business 

relationship summary.1674 Because only 

approximately 10% of advisers conduct 

an adviser-led secondary transaction 

each year, the estimated total fees for all 

funds per year would therefore be 

approximately $52,796,625.1675 Further, 


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data indicate there are currently approximately 

5,000 registered advisers to private funds. See supra 

VI.C.1. We do not believe this is a reasonable 

assumption and have continued to assume 

approximately 10% of advisers conduct an adviserled secondary transaction each year. 

1676 Id. As discussed above, one commenter 

criticized the quantification methods underlying 

these estimates, and we have explained why we do 

not agree with that criticism. See supra footnote 

1366. Nevertheless, to reflect commenters’ 

concerns, and recognizing certain changes from the 

proposal, we are revising the estimates upwards as 

reflected here and in section VII.B. 

1677See supra section II.C.8. 

1678See supra section II.A. 

1679See supra section II.C.8. 

1680See supra section II.D.1. 

1681MFA Comment Letter I; MFA Comment 

Letter I, Appendix A; Ropes & Gray Comment 

Letter. 

1682AIC Comment Letter I. 

1683PIFF Comment Letter. 

1684AIC Comment Letter I, Appendix 1. 

1685MFA Comment Letter I; MFA Comment 

Letter I, Appendix A; AIC Comment Letter I. 

1686See, e.g., CFA Comment Letter I; IAA 

Comment Letter II; Convergence Comment Letter; 

NRS Comment Letter. 

1687SIFMA–AMG Comment Letter I. 

1688 Id. 

as discussed in section VII.E below, we 

anticipate that the fairness opinion or 

valuation opinion and material business 

relationship summary requirements 

would impose a cost of approximately 

$2,800,507.50 for internal time 

annually.1676 These costs will be borne 

primarily, though not exclusively, by 

closed-end illiquid funds,1677 as these 

are the funds that most frequently have 

the adviser-led secondaries considered 

by the rule. Because the final adviserled secondaries rule will not apply to 

advisers with respect to SAFs,1678 there 

will be no accrual of costs to advisers 

associated with transactions such as 

CLO re-issuances.1679

To the extent that certain hedge fund 

or other open-end private fund 

transactions are captured by the rule, 

these funds and their investors would 

also face comparable fees and costs. The 

costs associated with obtaining fairness 

opinions or valuation opinions could 

dissuade some private fund advisers 

from leading these transactions, which 

could decrease liquidity opportunities 

for some private fund advisers and their 

investors. Under current practice, some 

investors bear the expense associated 

with obtaining a fairness opinion or 

valuation opinion if there is one. We 

expect similar arrangements may be 

made going forward to comply with the 

final rule, with disclosure where 

required. Advisers could alternatively 

attempt to introduce substitute charges 

(for example, increased management 

fees) to cover the costs of compliance 

with the rule, but their ability to do so 

may depend on the willingness of 

investors to incur those substitute 

charges. We do not believe that 

specifying a timeline for delivery of the 

opinion will significantly change the 

cost of compliance. 

Conversely, to the extent that advisers 

restructure their transactions as tender 

offers to avoid being captured by the 

definition of adviser-led secondary, 

private fund advisers and their investors 

may be able to mitigate the costs of the 

final rule.1680

Some commenters highlighted the 

costs associated with obtaining a 

fairness opinion.1681 These commenters 

also cited indirect consequences as a 

result of the high costs of fairness 

opinions. One commenter suggested 

that the time required to obtain and 

distribute a fairness opinion could 

create ‘‘unnecessary delay, which can 

put transaction completion at risk.’’ 1682

Another stated that for some 

transactions, a fairness opinion may not 

be available, which would effectively 

bar the transaction even if the benefits 

of the transaction to investors were 

large.1683 Another noted that opinion 

providers may need to create or update 

a database of business relationships, and 

that this cost may ultimately be borne at 

least partially by investors.1684

However, many of these commenters 

stated that a valuation opinion would be 

less costly in most circumstances.1685

We believe that these commenters’ 

concerns on costs are substantially 

mitigated by the option in the final rule 

for a valuation opinion instead of a 

fairness opinion, but at the margin these 

types of indirect consequences may still 

occur. 

7. Written Documentation of All 

Advisers’ Annual Review of Compliance 

Programs 

Amendments to rule 206(4)–7 under 

the Advisers Act will require all 

advisers, not just those to private funds, 

to document the annual review of their 

compliance policies and procedures in 

writing. These requirements will apply 

to advisers with respect to their SAFs, 

and so the benefits and costs below will 

apply even in the case of SAFs. We 

discuss the costs and benefits of this 

amendment below. Several factors, 

however, make the quantification of 

many of the economic effects of the final 

amendments and rules difficult. As a 

result, parts of the discussion below are 

qualitative in nature. 

Benefits 

The rule amendment requiring all 

SEC-registered advisers to document the 

annual review of their compliance 

policies and procedures in writing will 

allow our staff to better determine 

whether an adviser has complied with 

the review requirement of the 

compliance rule, and will facilitate 

remediation of non-compliance. 

Because our staff’s determination of 

whether the adviser has complied with 

the compliance rule will become more 

effective, the rule amendment may 

reduce the risk of non-compliance, as 

well as any risk to investors associated 

with non-compliance. Several 

commenters agreed with these 

benefits.1686

The commenters who disagreed with 

the rule amendment generally 

emphasized the costs of the change, 

instead of questioning the benefits, as 

discussed further below in this section. 

However, one commenter stated that the 

amendment would be unnecessarily 

burdensome and duplicative for asset 

managers that have multiple registered 

investment advisers operating under a 

common compliance program1687 The 

commenter stated that, under the 

proposed amendment, RIAs in an 

advisory complex would be producing 

multiple duplicative reports with little 

variation, and where one or more of 

those advisers are advisers to RICs, the 

report would largely be overlapping 

with and duplicative of the 38a–1 

compliance program written report.1688

While the benefits of the produced 

reports may diminish with each 

marginal report produced with little 

variation, the costs will likely also 

decrease. We also do not believe that the 

marginal benefits of each report will be 

de minimis: For RIAs in an advisory 

complex with many advisers, producing 

each report may help advisers assess 

whether they have considered any 

compliance matters that arose during 

the previous year, changes in business 

activities, or changes to the Advisers 

Act or other rules and regulations that 

may impact that particular adviser. Even 

if, in certain cases, consideration of 

such issues produces a similar report to 

a previous one, there may be broader 

benefits across the industry from 

standardizing the practice of advisers 

making such assessments throughout 

their entire advisory complex. Another 

commenter compared the rule to Rule 

38a–1 of the Investment Company Act, 

and stated such a written 

documentation requirement is only 

relevant for funds with retail investors. 

While we do not have the necessary 

data to determine whether the benefits 

of such requirements, or similar 

requirements, are higher for retail 

investors or other types of fund 

investors we continue to believe the 


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1689See infra section VII.G. 1690NYC Bar Comment Letter II. 1691Curtis Comment Letter; SBAI Comment 

Letter. 

1 In connection with the written report required 

under rule 38a–1, the Compliance Rule Adopting 

Release stated that ‘‘[a]ll reports required by our 

rules are meant to be made available to the 

Commission and the Commission staff and, thus, 

they are not subject to the attorney-client privilege, 

the work-product doctrine, or other similar 

protections.’’ See supra footnote 905. 

1692There do not exist reliable data for 

quantifying what percentage of private fund 

advisers today engage in this activity or the other 

restricted activities. For the purposes of quantifying 

costs, including aggregate costs, we have applied 

the estimated costs per adviser to all advisers in the 

scope of the rule, as detailed in section VII. 

1693See supra section II.B.5. 

1694See supra section II.C.8. 

1695See supra section II.D.5. 

1696See supra section II.G.6. 

1697See supra section II.E. 

1698See, e.g., AIMA/ACC Comment Letter; ATR 

Comment Letter. 

1699ATR Comment Letter. 

1700AIMA/ACC Comment Letter. 

1701Curtis Comment Letter. 

1702SBAI Comment Letter. 

1703We have adjusted these estimates to reflect 

that the final quarterly statement, audit, adviser-led 

secondaries, restricted activities, and preferential 

treatment rules will not apply to SAF advisers with 

respect to SAFs they advise as well. See infra 

section VII.H. As discussed above, one commenter 

criticized the quantification methods underlying 

these estimates, and we have explained why we do 

not agree with that criticism. See supra footnote 

1366. Nevertheless, to reflect the commenter’s 

concerns, and recognizing certain changes from the 

proposal, we are revising the estimates upwards as 

reflected here and in section VII.B. 

1704See supra section II.A. 

1705See supra sections VI.D.1, VI.D.3. See also, 

e.g., Consumer Federation of America Comment 

Letter. 

above benefits will broadly accrue for 

investors to both types of funds. 

The benefits from documentation of 

compliance programs will be relevant 

for all investors, as the rule applies to 

all advisers that are registered or 

required to register, not just private fund 

advisers. In addition, the lack of legacy 

status for this rule amendment mean 

that these benefits will accrue across all 

registered advisers. 

Costs 

Lastly, the required documentation of 

the annual review of the adviser’s 

compliance program has direct costs 

that include the cost of legal services 

associated with the preparation of such 

documentation. As discussed below, for 

purposes of the PRA, we anticipate that 

the requirement for all SEC-registered 

advisers to document the annual review 

of their compliance policies and 

procedures in writing would, for all 

advisers, impose cost of approximately 

$40,890,982 for internal time, and 

approximately $3,525,579 for external 

costs.1689 One commenter agreed that 

the rule would entail direct costs.1690

Other commenters stated there would be 

indirect costs of the rule, such as chilled 

communications between an adviser 

and compliance consultants or outside 

counsel and less tailored compliance 

reviews.1691 The lack of legacy status for 

this rule amendment mean that these 

costs will be borne across all SECregistered advisers.1692

8. Recordkeeping 

Finally, the amendment to the 

Advisers Act recordkeeping rule will 

require advisers who are registered or 

required to be registered to retain books 

and records related to the quarterly 

statement rule,1693 to retain books and 

records related to the mandatory adviser 

audit rule,1694 to support their 

compliance with the adviser-led 

secondaries rule,1695 to support their 

compliance with the preferential 

treatment disclosure rule,1696 and to 

support their compliance with the 

restricted activities rule.1697 The benefit 

to investors will be to enable an 

examiner to verify more easily that a 

fund is in compliance with these rules 

and to facilitate the more timely 

detection and remediation of noncompliance. These requirements will 

also help facilitate the Commission’s 

enforcement and examination 

capabilities. Also beneficial to investors, 

advisers may react to the enhanced 

ability of third parties to detect and 

impose sanctions against noncompliance due to the recordkeeping 

requirements by taking more care to 

comply with the substance of the rule. 

The lack of legacy status for this rule 

provision means that these benefits will 

accrue across all private funds and 

advisers. 

These requirements will impose costs 

on advisers related to maintaining these 

records. Several commenters stated that 

the recordkeeping requirements would 

be burdensome.1698 In addition to the 

compliance burden, commenters stated 

that the recordkeeping requirements 

posed a risk of having proprietary data 

exposed to hackers,1699 or that requiring 

the adviser to retain records regarding 

prospective investors that do not 

ultimately invest in the fund may 

conflict with other legal obligations 

applicable to the adviser, resulting in 

additional legal costs.1700 With respect 

to the written documentation of the 

adviser’s annual reviews of its 

compliance programs, commenters 

stated that the requirement to disclose 

the review of the compliance program 

may have a chilling effect on outside 

compliance consultants’ willingness to 

prepare compliance reviews for private 

fund advisers,1701 or may cause 

compliance reviews to be less tailored to 

the adviser’s specific risks.1702

While the final rules may result in 

some of these effects, we do not have a 

basis for quantifying the cost of these 

effects, and no basis was provided by 

the commenters. As discussed below, 

for purposes of the PRA, we anticipate 

that the additional recordkeeping 

obligations would impose, for all 

advisers, an annual cost of 

approximately $22,430,631.25.1703 The 

lack of legacy status for this rule 

provision means that these costs will be 

borne across all private funds and 

advisers. Because the final rules with 

new recordkeeping components will not 

apply to advisers with respect to CLOs 

and other SAFs, they will not face any 

new recordkeeping requirements in the 

case of their CLOs and SAFs, and so 

there will be no benefits or costs for 

investors and advisers associated with 

those funds from the final 

recordkeeping rules.1704

E. Effects on Efficiency, Competition, 

and Capital Formation 

1. Efficiency 

The final rules will likely enhance 

economic efficiency by enabling 

investors more easily to identify funds 

that align with their preferences over 

private fund terms, investment 

strategies, and investment outcomes, 

and also by causing fund advisers to 

align their actions more closely with the 

interests of investors through the 

elimination of prohibited practices. 

First, the final rules may increase the 

usefulness of the information that 

investors receive from private fund 

advisers regarding the fees, expenses, 

and performance of the fund, and 

regarding the preferential treatment of 

certain investors of the fund through the 

more detailed and standardized 

disclosures as well as consent 

requirements discussed above.1705

These enhanced disclosures and 

consent requirements will provide more 

information to investors regarding the 

ability and potential fit of investment 

advisers, which may improve the 

quality of the matches that investors 

make with private funds and investment 

advisers in terms of fit with investor 

preferences over private fund terms, 

investment strategies, and investment 

outcomes. The enhanced disclosures 

may also reduce search costs, as 

investors may be better able to evaluate 

the funds of an investment adviser 

based on the information to be disclosed 

at the time of the investment and in the 

quarterly statement. 


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1706See supra section II.F. 

1707See supra section VI.C.3. 1708See supra sections VI.D.7, VI.D.8. 

1709A policy in which advisers are incentivized 

only to pursue fund structures that align with their 

individual desires (e.g., their comparative 

advantage, or the needs of their investors), is 

described in economics as ‘‘incentive compatible.’’ 

The risk to efficiency from distorting adviser 

incentives may be viewed as a risk of reducing the 

incentive compatibility of the final rules. See, e.g., 

Andreu Mas-Colell, et al., Chapter 13, 

Microeconomic Theory (Oxford Univ. Press, 1995), 

for a discussion of incentive compatibility. 

1710See supra sections II.A, VI.C.2, VI.C.3. 

Regarding preferential treatment, the 

final rules further align fund adviser 

actions and investor interests by 

prohibiting certain preferential 

treatment practices altogether (instead 

of only requiring disclosure or consent), 

specifically prohibiting preferential 

terms regarding liquidity or 

transparency that have a material, 

negative impact on investors in the fund 

or a similar pool of assets.1706

Prohibiting these activities, and 

prohibiting remaining preferential 

treatment activities unless certain 

disclosures are provided, may eliminate 

some of the complexity and uncertainty 

that investors face about the outcomes 

of their investment choices, further 

reducing costs investors must undertake 

to find appropriate matches between 

their choice of private fund and their 

preferences over private fund terms, 

investment strategies, and investment 

outcomes. 

While many of the final disclosure 

and consent requirements involve 

making disclosures to and, in some 

cases, obtaining consent from only 

current investors, and not prospective 

investors, the rule’s requirements may 

enhance efficiency through the 

tendency of some fund advisers to rely 

on investors in current funds to be 

prospective investors in their future 

funds. For example, when fund advisers 

raise multiple funds sequentially, 

current investors can base their 

decisions on whether to invest in 

subsequent funds based on the 

disclosures of the prior funds.1707 As 

such, improved disclosures and consent 

requirements can improve the efficiency 

of investments without directly 

requiring disclosures to all prospective 

investors. Investors may therefore face a 

lower overall cost of searching for, and 

choosing among, alternative private 

fund investments. 

Lastly, the rules prohibit certain 

activities that represent possible 

conflicting arrangements between 

investors and fund advisers, with 

certain exceptions where certain 

disclosures regarding those activities are 

made and, in some cases, where the 

required investor consent is also 

obtained. To the extent that investors 

currently bear costs of searching for 

fund advisers who do not engage in 

these arrangements, or bear costs 

associated with monitoring fund adviser 

conduct to avoid harm, then prohibiting 

these activities may lower investors’ 

overall costs of searching for, 

monitoring, and choosing among 

alternative private fund investments. 

This may particularly be the case for 

smaller investors who are currently 

more frequently harmed by the activities 

being considered. The same effect may 

occur in the case of the final rules’ 

requirements for advisers to obtain 

audits of fund financial statements. To 

the extent that investors currently bear 

costs of searching for fund advisers who 

do have their funds undergo audits, or 

bear costs associated with monitoring 

fund adviser conduct to avoid harm 

when the adviser does not have the fund 

undergo an audit, the final mandatory 

audit rule will enhance investor 

protection and thereby improve the 

efficiency of the investment adviser 

search process. 

The above pro-efficiency effects may 

also be strengthened by the reduced 

risks of non-compliance and increased 

efficiency of the Commission’s 

enforcement and examination of noncompliance resulting from the final 

amendments to the compliance rule for 

a written documentation requirement 

and the amendments to the books and 

records rule.1708

There may be losses of efficiency from 

the rules prohibiting various activities, 

and from any changes in fund practices 

in response to the rules, to the extent 

that investors currently benefit from 

those activities or incur costs from those 

changes. For example, investors who 

currently receive preferential terms that 

will be prohibited under the final rules 

may have only invested with their 

current adviser because they were able 

to secure preferential terms. With those 

preferential terms removed, those 

investors may choose to reevaluate the 

match between their choice of adviser 

and their overall preferences over 

private fund terms, investment strategy, 

and investment outcomes. Depending 

on the results of this reevaluation, those 

investors may choose to incur costs of 

searching for new fund advisers or 

alternative investments. 

Other risks to efficiency may arise 

from the scope of the final rules, for 

example the private fund adviser rules 

not applying to advisers with respect to 

their CLOs and other SAFs. Because 

advisers to SAFs will face no costs 

under the private fund adviser rules 

with respect to their SAFs, more 

advisers may choose to structure their 

funds as an SAF so as to avoid the costs 

of the rules. To the extent this choice by 

advisers only occurs because advisers 

are incentivized to reduce their 

compliance costs, but those advisers 

would have greater skill or comparative 

advantage in advising other types of 

private funds, the effect the final rules 

have on adviser choice of fund structure 

may reduce efficiency.1709 Similarly, 

advisers restructuring their funds to 

meet the definition of SAF may be 

viewed as a potentially costly form of 

regulatory arbitrage. We believe these 

effects will be mitigated by (1) the 

definition of SAFs that includes the 

fund primarily issuing debt, which is a 

structure we believe advisers who 

normally issue equity will not want to 

use just to lower their compliance costs 

and avoid the restrictions and 

prohibitions in the private fund adviser 

rules, and (2) the fact that any advisers 

considering restructuring their funds to 

be SAFs will need to be confident that 

they are able to compete existing SAFs 

to attract SAF investors. However, at the 

margin, these risks of reduced efficiency 

may occur. 

The limited scope regarding SAF 

advisers may also result in a rule with 

lower efficiency gains relative to a rule 

with no such limitation. This is because 

the efficiency gains from the rule 

accrue, in part, from the enhanced 

comparability and transparency across 

private funds, and comparability effects 

are strongest when a rule is applied 

across all types of funds. The limitation 

may make SAFs less comparable to 

other types of funds, which may yield 

lower efficiency benefits when investors 

search across fund types for an adviser. 

However, we believe that the distinct 

features that we understand CLOs and 

other SAFs already have today likely 

result in investors already viewing CLOs 

and other SAFs as distinct types of 

investments and not comparable to an 

equity interest in other funds.1710 To the 

extent that few, or no, investors would 

compare SAFs and other types of 

private funds on the basis of the 

required reporting elements of the 

private fund adviser rules, then the loss 

of any efficiency benefits from reduced 

comparability is minimal. Moreover, 

many advisers to SAFs, in particular 

advisers to CLOs, typically provide 

extensive reporting and transparency 

already, such as regular reporting of 

every asset in the fund’s portfolio and 

their current market valuation. This 

furthers the likelihood that the loss of 

efficiency gains from forgoing the final 


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63360 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1711See supra section VI.C.3. 

1712See supra section VI.C.3. 

1713See, e.g., AIMA/ACC Comment Letter; AIC 

Comment Letter I, Appendix 1; AIC Comment Letter 

I, Appendix 2; PIFF Comment Letter. 

1714See, e.g., AIC Comment Letter I, Appendix 1. 

1715AIC Comment Letter I, Appendix 2. 

1716See, e.g., AIC Comment Letter I, Appendix 2. 

1717See supra sections VI.C.3, VI.D.2; see also, 

e.g., Schillinger et al., supra footnote 1213; 

Enhancing Transparency Around Subscription 

Lines of Credit, supra footnote 1001. 

1718See supra section VI.D.1. 

1719See supra sections VI.B, VI.D.1. 

1720See supra section VI.C.3. 

1721See supra sections VI.D.7, VI.D.8. 

1722AIMA/ACC Comment Letter. 

1723Comment Letter of the California Alternative 

Investments Association, Connecticut Hedge Fund 

Association, New York Alternative Investment 

Roundtable Inc., Palm Beach Hedge Fund 

Association, and Southeastern Alternative Funds 

Association (Apr. 25, 2022) (‘‘CAIA Comment 

Letter’’). 

rules’ transparency benefits with respect 

to advisers to SAFs will be minimal.1711

There may also be a risk of the 

transparency benefits of the rule getting 

reduced by advisers restructuring their 

funds to be SAFs to meet the exclusion 

under the final rules. Any adviser 

restructuring their fund into a SAF to 

reduce their compliance costs or avoid 

the restrictions and prohibitions in the 

private fund adviser rules would result 

in a fund less comparable to other types 

of private funds. However, these risks 

are also likely to be mitigated by the fact 

that any such adviser would need to 

compete with the existing CLO and 

broader SAF landscape. In particular, 

any such adviser seeking to attract 

investors to a new SAF would likely 

need to arrange for or issue independent 

collateral administrator reports that, like 

existing CLOs and other SAFs, detail all 

cash flows associated with the assets in 

their fund portfolio and list all market 

values of the assets in their fund 

portfolio.1712 An adviser who 

restructures a fund into a SAF but meets 

the same typical transparency practices 

as existing CLOs and other SAFs would 

not result in any substantial loss of 

transparency benefits associated with 

the final rule. 

Many commenters emphasized the 

risks to potential losses of efficiency and 

questioned the possible benefits to 

efficiency.1713 Some commenters 

emphasized particular provisions of the 

rule as bearing substantial risks to 

efficiency, such as the proposed 

prohibition on pass-through of certain 

fees and expenses.1714 Other 

commenters raised broad concerns that 

the entire regime would reduce 

efficiency by restricting the ability of 

market participants to freely negotiate 

contractual terms among 

themselves.1715 Other commenters 

stated broadly that the Proposing 

Release economic analysis had failed to 

consider important ways in which the 

proposed rules may affect efficiency.1716

We believe many of commenters’ 

concerns are mitigated by the revisions 

to the final rules as compared to the 

proposed rules, such as the provision of 

certain exceptions for many of the 

proposed activities where certain 

disclosures are made and, in some 

cases, where the required investor 

consent is also obtained. However, at 

the margin there may still be risks of 

reduced efficiency. 

2. Competition 

The final rules may also affect 

competition in the market for private 

fund investing. 

First, to the extent that the enhanced 

transparency of certain fees, expenses, 

and performance of private funds under 

the final rules may reduce the cost to 

some investors of comparing private 

fund investments, then current investors 

evaluating whether to continue 

investing in subsequent funds with their 

current adviser may be more likely to 

reject future funds raised by their 

current adviser in favor of the terms of 

competing funds offered by competing 

advisers, including new funds that 

advisers may offer as alternatives that 

they would not have offered absent the 

increased transparency, or competing 

advisers whom the investor would not 

have considered absent the increased 

transparency, including newer or 

smaller advisers. For example, we 

understand that subscription facilities 

can distort fund performance rankings 

and distort future fundraising 

outcomes,1717 and so the enhanced 

disclosures around the impact of 

subscription facilities on performance 

may change how investors compare 

prospective funds in the future. To the 

extent that this heightened transparency 

encourages advisers to make more 

substantial disclosures to prospective 

investors, investors may also be able to 

obtain more detailed fee and expense 

and performance data for other 

prospective fund investments, 

strengthening the effect of the rules on 

competition.1718 Advisers may therefore 

update the terms that they offer to 

investors, or investors may shift their 

assets to different funds. 

Second, because enhanced 

transparency of preferential treatment 

will be provided to both current and 

prospective investors, there may be 

reduced search costs to all investors 

seeking to compare funds on the basis 

of which investors receive preferential 

treatment. For example, some advisers 

may lose investors from their future 

funds if those investors only 

participated in that adviser’s prior funds 

because of the preferential terms they 

received. We anticipate that investors 

withdrawing from a fund because of a 

loss of preferential treatment would 

redeploy their capital elsewhere, and so 

new advisers would have a new pool of 

investment capital to pursue. 

These pro-competitive effects of the 

rule will directly benefit private funds 

with advisers within the scope of the 

final rules and investors in those 

funds.1719 Investors in funds whose 

advisers are outside the scope of the 

final rules, and those funds’ advisers, 

may also benefit, to the extent private 

fund advisers outside the scope of the 

rule revise their terms to compete with 

private fund advisers inside the scope of 

the rules. As discussed above, private 

fund adviser fees may currently total in 

the hundreds of billions of dollars per 

year.1720 These two sources of enhanced 

competition from additional 

transparency may lead to lower fees or 

may direct investor assets to different 

funds, fund advisers, or other 

investments. 

The above pro-competitive effects 

may also be strengthened by the 

reduced risks of non-compliance and 

increased efficiency of the 

Commission’s enforcement and 

examination of non-compliance 

resulting from the final amendments to 

the compliance rule for a written 

documentation requirement and the 

amendments to the books and records 

rule.1721

However, certain commenters 

expressed concerns that there may be 

negative effects on competition as well. 

Commenters stated that various 

individual components of the rule could 

reduce competition, such as the 

prohibition on reducing clawbacks for 

taxes (by delaying performance-based 

compensation that may increase 

employee turnover)1722 and the adviserled secondary rule to the extent that 

advisers forgo conducting adviser-led 

secondaries instead of undertaking the 

cost of a fairness opinion.1723 We 

believe that many of these commenters’ 

concerns have been mitigated by the 

revisions to the final rules relative to the 

proposal, such as the exceptions for 

reducing clawbacks for taxes when 

certain disclosures are made and the 

allowance for a valuation opinion 

instead of a fairness opinion for adviserled secondaries. 

Some commenters also stated 

restrictions on preferential treatment 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63361 

1724Ropes & Gray Comment Letter. 

1725See, e.g., Carta Comment Letter; Meketa 

Comment Letter; Lockstep Ventures Comment 

Letter; NY State Comptroller Comment Letter. 

1726 Id. 

1727See, e.g., AIC Comment Letter I, Appendix 2; 

PIFF Comment Letter. 

1728See supra section IV. 

1729See supra section II.G. 

1730See, e.g., Weiss Comment Letter; AIC 

Comment Letter I; AIC Comment Letter I, Appendix 

1; AIC Comment Letter I, Appendix 2; MFA 

Comment Letter II. Some commenters cite to the 

2023 Consolidated Appropriations Act, citing, e.g., 

‘‘an important provision urging the SEC to redo its 

economic analysis of the Private Fund Adviser 

proposal to ‘ensure the analysis adequately 

considers the disparate impact on emerging 

minority and women-owned asset management 

firms, minority and women-owned businesses, and 

historically underinvested communities.’ ’’ See, e.g., 

Comment Letter of Steven Horsford (May 3, 2023); 

CCMR Comment Letter IV. See also, e.g., supra 

footnotes 1358, 1477, 1555 and accompanying text, 

and section VI.D.5. 

1731See supra section VI.D.5. 

1732See supra sections VI.C.4, VI.D.5. Figure 4 

illustrates that approximately 4,800 out of almost 

6,400 funds of size between $0 and $2 million 

already undergo an audit that will be required by 

the final rule, leaving approximately 25% of funds 

of that size that will have to undergo an audit as 

a result of final rule. 

1733See supra section II.C. 

1734See infra section VI.E.3. 

1735See supra section VI.B; see also, e.g., AIC 

Comment Letter I, Appendix 1; AIC Comment Letter 

I, Appendix 2; NAIC Comment Letter. 

1736See, e.g., Knight Foundation, Knight Diversity 

of Asset Managers Research Series: Industry (Dec. 

7, 2021), available at https://knightfoundation.org/ 

reports/knight-diversity-of-asset-managers-researchseries-industry/. 

1737 Id. 

1738 Johan Cassel, Josh Lerner & Emmanuel 

Yimfor, Racial Diversity in Private Capital 

Fundraising (Sept. 18, 2022), available at https://

ssrn.com/abstract=4222385. 

1739See supra section VI.D.1. 

1740See, e.g., MFA Comment Letter II; MFA 

Comment Letter III; AIC Comment Letter IV. 

may reduce co-investment activity,1724

or may hinder smaller advisers’ abilities 

to secure initial seed or anchor 

investors.1725 Commenters argued that 

smaller, emerging advisers often need to 

provide anchor investors significant 

preferential rights.1726 Other 

commenters stated broadly that the 

Proposing Release economic analysis 

had failed to consider important ways in 

which the proposed rules may affect 

competition.1727

We believe that the concerns with 

respect to preferential treatment for 

smaller advisers will be mitigated in 

part by the fact that smaller advisers are 

only prevented from offering anchor 

investors preferential redemption rights 

and preferential information that the 

advisers reasonably expects to have a 

material negative effect on other 

investors. Therefore, these potential 

harms to competition will be mitigated 

to the extent that smaller, emerging 

advisers do not need to be able to offer 

anchor investors preferential rights that 

have a material negative effect on other 

investors to effectively compete, and to 

the extent that smaller emerging 

advisers are able to compete effectively 

by offering anchor investors other types 

of preferential terms. We have also 

provided certain legacy status, namely 

regarding contractual agreements that 

govern a private fund and that were 

entered into prior to the compliance 

date if the rule would require the parties 

to amend such an agreement, for all 

advisers under the prohibitions aspect 

of the preferential treatment rule and all 

aspects of the restricted activities rule 

requiring investor consent.1728 We have 

lastly included several exceptions from 

the final rules on preferential treatment, 

such as an exception from the 

prohibition on providing certain 

preferential redemption terms when 

those terms are offered to all 

investors.1729 At the margin, however, 

some advisers, particularly smaller or 

emerging advisers, may find it more 

difficult to compete without offering 

preferential redemption rights or 

preferential information that will now 

be prohibited. 

Commenters also stated more 

generally that increased compliance 

costs on advisers may reduce 

competition by causing advisers to close 

their funds and reducing the choices 

investors have among competing 

advisers and funds.1730 To the extent 

heightened compliance costs cause 

certain advisers to exit, or forgo entry, 

competition may be reduced. This may 

particularly occur through the 

compliance costs associated with 

mandatory audits, as those costs are 

likely to fall disproportionately and 

have a disproportionate impact on funds 

managed by smaller advisers, and funds 

advised by smaller advisers facing new 

increased compliance costs may be 

among those most likely to exit the 

market in response to the final rules.1731

As discussed above, approximately 25% 

of funds with less than $2 million in 

assets under management that are 

advised by RIAs and will have to 

undergo an audit as a result of the final 

rule.1732

However, the effects on the smallest 

advisers will be mitigated where those 

advisers do not meet the minimum 

assets under management required to 

register with the SEC.1733 Some 

registered advisers may therefore have 

the option of reducing their assets under 

management to forgo registration, 

thereby avoiding the costs of the final 

rule that only apply to registered 

advisers, such as the mandatory audit 

rule. While advisers responding in this 

way may negatively affect capital 

formation,1734 the option for advisers to 

respond to the rule in this way may 

mitigate negative competitive effects, as 

advisers reducing their size to forgo 

registration will still leave them as a 

partial potential competitive alternative 

to larger advisers (albeit a less effective 

competitive alternative than they 

represented as registered advisers). 

As discussed above, some 

commenters also expressed concerns 

that the loss of smaller advisers would 

result in reduced diversity of 

investment advisers, based on an 

assertion that most women- and 

minority-owned advisers are smaller 

and associated with first time funds.1735

These commenters’ concerns are 

consistent with industry literature, 

which finds that, for example, while 

7.2% of U.S. private equity firms are 

women-owned, those firms manage only 

1.6% of U.S. private equity assets, 

indicating that women-owned private 

equity firms are disproportionately 

smaller entities.1736 Similar patterns 

hold for minority-owned firms and for 

other types of private funds.1737 To the 

extent compliance costs or other effects 

of the rules cause certain smaller 

advisers to exit, the rules may result in 

reduced diversity of investment 

advisers. The potential reduced 

diversity of investment advisers may 

also have downstream effects on 

entrepreneurial diversity, as minorityowned venture capital and buyout funds 

are three-to-four times more likely to 

fund minority entrepreneurs in their 

portfolio companies.1738 However, 

because these effects are strongest for 

venture capital, these effects may be 

mitigated wherever an adviser’s funds 

are sufficiently concentrated in venture 

capital that they may forgo SEC 

registration and thus forgo many of the 

costs of the final rules. 

As stated above, some commenters 

stated that the proposed private fund 

adviser rules and other recently 

proposed or adopted rules would have 

interacting effects, and that the effects 

should not be analyzed 

independently.1739 These commenters 

stated in particular that the combined 

costs of multiple ongoing rulemakings 

would harm investors by making it costprohibitive for many advisers to stay in 

business or for new advisers to start a 

business, and that this effect would 

further harm competition by creating 

new barriers to entry.1740 As stated 

above, Commission acknowledges that 

the effects of any final rule may be 

impacted by recently adopted rules that 


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1741See supra section VI.D.1. 

1742 Id. 

1743See supra section IV. 

1744See supra footnote 1728 and accompanying 

text. 

1745See supra section IV. 

1746See supra section II.E. 

1747To the extent that smaller or newer advisers 

benefit from these pro-competitive effects, because 

smaller or newer advisers are disproportionately 

women-owned and minority-owned, these benefits 

will therefore disproportionately accrue to womenand minority-owned advisers. See supra footnote 

1736 and accompanying text. 

1748See, e.g., AIMA/ACC Comment Letter; Thin 

Line Comment Letter; ICM Comment Letter; Ropes 

& Gray Comment Letter; SBAI Comment Letter; AIC 

Comment Letter I; AIC Comment Letter I, Appendix 

2; CAIA Comment Letter; NYPPEX Comment Letter. 

1749See, e.g., Thin Line Capital Comment Letter; 

ICM Comment Letter; Ropes & Gray Comment 

Letter; SBAI Comment Letter. 

1750Utke and Mason Comment Letter; 

Convergence Comment Letter; Comment Letter of 

True Venture (June 14, 2022); Andreessen Comment 

Letter. 

1751See, e.g., AIC Comment Letter I, Appendix 2; 

NYPPEX Comment Letter. 

1752Proposing Release, supra footnote 3, at 265– 

266. 

1753See supra section II. 

1754 Id. 

precede it.1741 With respect to 

competitive effects, the Commission 

acknowledges that there are incremental 

effects of new compliance costs on 

advisers that may vary depending on the 

total amount of compliance costs 

already facing advisers and 

acknowledges costs from overlapping 

transition periods for recently adopted 

rules and the final private fund adviser 

rules.1742 In particular, the Commission 

acknowledges these sources of 

heightened costs from the recent 

adoption of amendments to Form PF. 

To the extent advisers respond to 

these costs by exiting the market, or by 

forgoing entry, competition may be 

negatively affected. In particular, 

competition may be negatively affected 

because smaller advisers may be more 

likely than larger advisers to respond to 

new compliance costs by exiting or by 

forgoing entry. To the extent smaller or 

newer advisers attempt to respond to 

new compliance costs by passing them 

on to their funds, this may hinder their 

ability to compete, as larger advisers 

may be more able to lower their own 

profit margins instead of passing some 

or all of their new costs on to funds and 

investors. 

We have also responded to 

commenter concerns by providing for a 

longer transition period for smaller 

advisers. The costs of having multiple 

ongoing rulemakings primarily accrue 

during transition periods, when advisers 

may have to revise processes, 

procedures, or fund documents with 

multiple new rulemakings in mind. In 

consideration of those costs, we are 

providing that advisers with less than 

$1.5 billion in assets under management 

will have 18 months to comply with the 

adviser-led secondaries, preferential 

treatment, and restricted activities rules, 

compared to the 12 months for larger 

advisers.1743 Since smaller advisers are 

those most likely to either exit the 

market (or fail to enter) in response to 

high compliance costs, we believe 

staggered transition periods that reduce 

the costs of coming into compliance for 

advisers reduce the risks of multiple 

concurrent rulemakings negatively 

impacting competition. In particular, 

since the effective date for the new 

Form PF current reporting is December 

11, 2023, the 18-month compliance 

period means smaller advisers will have 

over a year after the effective date of 

Form PF current reporting to come into 

compliance with the final private fund 

adviser rules. The legacy status 

discussed above,1744 namely regarding 

contractual agreements that govern a 

private fund and that were entered into 

prior to the compliance date if the rule 

would require the parties to amend such 

an agreement, for all advisers under the 

prohibitions aspect of the preferential 

treatment rule and all aspects of the 

restricted activities rule requiring 

investor consent,1745 is also responsive 

to commenter concerns on compliance 

costs. We have lastly responded to 

commenter concerns on compliance 

costs by offering certain disclosurebased exceptions and, in some cases, 

certain consent-based exceptions rather 

than outright prohibitions.1746

To the extent these effects occur, 

competition may be reduced, but these 

potential negative effects on 

competition must be evaluated in light 

of (1) the other pro-competitive aspects 

of the final rules, in particular the procompetitive effects from enhancing 

transparency, which are likely to help 

smaller advisers effectively compete and 

may therefore benefit those advisers,1747

and (2) the other benefits of the final 

rules. 

3. Capital Formation 

Commenters emphasized the risks 

that the rules may reduce capital 

formation through several different 

types of arguments. Several commenters 

made general statements that the high 

compliance costs of the rule may 

negatively affect capital formation.1748

Many of these commenters further 

specified that the harms to smaller 

advisers would reduce capital 

formation.1749 Some commenters stated 

that particular aspects of the rule risk 

reduced capital formation, such as the 

mandatory audit rule, the charging of 

regulatory/compliance expenses rule, 

and the prohibition on limitation of 

liability rule.1750 Other commenters 

stated broadly that the Proposing 

Release economic analysis had failed to 

consider important ways in which the 

proposed rules may affect capital 

formation.1751

While we believe we have resolved 

certain of these concerns in the final 

rules, in particular by revising the 

restricted activities in the final rules 

relative to the proposal, the final rules 

still carry a risk that capital formation 

may be negatively affected. The 

Proposing Release stated that there may 

be reduced capital formation associated 

with the final rules to prohibit various 

activities, to the extent that investors 

currently benefit from those 

activities.1752 For example, investors 

who currently receive preferential terms 

that will be prohibited under the final 

rue may withdraw their capital from 

their existing fund advisers. Those 

investors may have less total capital to 

deploy after bearing costs of searching 

for new investment opportunities, or 

they may redeploy their capital away 

from private funds more broadly and 

into investments with less effective 

capital formation. 

In further response to commenter 

concerns, we have also reexamined the 

risks of reduced capital formation in 

two ways related to the scope of the 

final rule. In particular, we have 

examined in two ways how the adviser 

incentives induced by the boundaries of 

the scope of the rules may carry 

unintended consequences of changes to 

adviser behavior that could risk 

reducing capital formation. 

First, as discussed above, all of the 

elements of the final rule will in general 

not apply with respect to non-U.S. 

private funds managed by an offshore 

investment adviser, regardless of 

whether that adviser is registered.1753

This aspect of the scope of the rule may 

increase incentives for advisers to move 

offshore and to limit their activity to 

non-U.S. private funds. Doing so may 

reduce U.S. capital formation, to the 

extent it is more difficult for certain 

domestic investors, especially more 

vulnerable investors, to deploy capital 

to such funds. 

Second, the quarterly statements, 

mandatory audit, and adviser-led 

secondaries rules will not apply to 

ERAs.1754 This aspect of the scope of the 

rule may increase incentives for 

advisers to limit their activity in such a 

way that allows them to forgo 

registration. In particular, advisers may 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63363 

1755Rather, the figure demonstrates an 

approximately continuous downward trend in the 

proportion of advisers as size increases. 

1756See supra section VI.C.1. 

1757See supra section II.B.3. 

1758These and other pro-capital formation effects 

of the rule may also be strengthened by the reduced 

Continued 

seek to keep their total RAUM under 

$150 million or may devote more of 

their capital to venture fund activity. 

As part of our analysis in response to 

commenter concerns on risks of reduced 

capital formation, we have investigated 

the potential likelihood of advisers 

responding to differences in RIA and 

ERA requirements under the final rules 

by examining how advisers respond to 

differences in RIA and ERA 

requirements today. In particular, if 

there is evidence today that certain 

private fund advisers respond to 

different requirements for RIAs and 

ERAs by avoiding crossing the threshold 

of $150 million in private fund assets, 

we may expect that the increasing 

differential for RIAs and ERAs under the 

final rules will, at the margin, impede 

capital formation by inducing advisers 

to keep their assets under $150 million. 

Figure 8 examines the joint distribution 

of assets under management by (1) RIAs 

and (2) ERAs relying on the size 

exemption for advisers with only 

private funds and less than $150 million 

in RAUM. The figure does not 

demonstrate any evidence of 

disproportionately fewer advisers just 

above the $150 million threshold 

compared to the proportion of advisers 

with less than $150 million in 

assets.1755 This may indicate that it is 

unlikely that some advisers who would 

otherwise have had assets between $150 

million and $200 million will instead 

seek to stay under the $150 million 

threshold. However, because the rule 

will strengthen the difference in 

compliance requirements for RIAs and 

ERAs, the final rule may strengthen this 

incentive for advisers to keep assets 

under $150 million, which may 

negatively affect capital formation. Any 

such impact of this mechanism may also 

be limited by the fact that there are 

differences in RIA and ERA 

requirements only for the quarterly 

statements, mandatory audit, and 

adviser-led secondaries rules, because 

the restricted activities rules and 

preferential treatment rules apply to 

both RIAs and ERAs. 

In addition, as discussed above, some 

advisers to venture capital funds have 

recently registered as RIAs to be able to 

have their portfolio allocations outside 

of direct equity stakes in private 

companies exceed 20%.1756 These types 

of advisers may in the future limit their 

portfolio allocations outside of direct 

equity stakes in private companies to 

forgo registration. Again, the impact of 

this differential in RIA and ERA 

requirements may be limited, as it is 

only driven by the quarterly statements, 

mandatory audit, and adviser-led 

secondaries rules, because the restricted 

activities rules and preferential 

treatment rules apply to both RIAs and 

ERAs. 

Lastly, certain elements of the rules 

provide for certain relief to funds of 

funds. For example, the quarterly 

statement rule requires advisers to 

private funds that are not funds of funds 

to distribute statements within 45 days 

after the first three fiscal quarter ends of 

each fiscal year (and 90 days after the 

end of each fiscal year), but advisers to 

funds of funds are allowed 75 days after 

the first three quarter ends of each fiscal 

year (and 120 days after fiscal year 

end).1757

However, we also continue to believe 

the final rules will facilitate capital 

formation by causing advisers to manage 

private fund clients more efficiently, by 

restricting or prohibiting activities that 

may currently deter investors from 

private fund investing because they 

represent possible conflicting 

arrangements, and by enabling investors 

to choose more efficiently among funds 

and fund advisers.1758


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63364 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

risks of non-compliance and increased efficiency of 

the Commission’s enforcement and examination of 

non-compliance resulting from the final 

amendments to the compliance rule for a written 

documentation requirement and the amendments to 

the books and records rule. See supra sections 

VI.D.7, VI.D.8. 

1759See supra section VI.E.2. 

1760See supra sections VI.D.2, VI.D.3, VI.D.4, 

VI.D.5. 

1761See supra section VI.D.4. 

1762See supra section VI.B; see also Stephen G. 

Dimmock & William Christopher Gerken, 

Regulatory Oversight and Return Misreporting by 

Hedge Funds (May 7, 2015), available at https://

ssrn.com/abstract=2260058. 

1763Citadel Comment Letter; AIMA/ACC 

Comment Letter; AIC Comment Letter I, Appendix 

2. One commenter cites three broad alternatives and 

criticizes the Proposing Release for not considering 

them: A ‘‘Null Alternative,’’ a ‘‘CLO Exemption 

Alternative,’’ and a ‘‘Qualified Investor 

Alternative.’’1 LSTA Comment Letter, Exhibit C. 

We disagree with the commenter that the Proposing 

Release did not consider the Null Alternative, as the 

Commission’s economic analysis compares costs 

and benefits relative to the economic baseline, and 

the economic baseline captures a Null Alternative. 

See supra sections VI.C, VI.D. We also disagree with 

the commenter that a Qualified Investor Alternative 

would be a reasonable alternative to consider, as 

not applying the rule to advisers with respect to 

funds that can only be accessed by certain investors 

would have substantial negative consequences such 

as incentivizing advisers to restrict access to their 

funds. Moreover, the final rules are designed to 

protect even sophisticated investors. We have 

considered the commenter’s CLO Exemption 

Alternative, and are not applying the five private 

fund rules to SAF advisers with respect to SAFs 

they advise. See supra section II. 

This may reduce the cost of 

intermediation between investors and 

portfolio investments. To the extent this 

occurs, this may lead to enhanced 

capital formation in the real economy, 

as portfolio companies will have greater 

access to the supply of financing from 

private fund investors. This may 

contribute to greater capital formation 

through greater investment into those 

portfolio companies. 

The final rules may also enhance 

capital formation through their 

competitive effects by inducing new 

fund advisers to enter private fund 

markets.1759 To the extent that existing 

fund advisers reduce their fees to 

compete more effectively with new 

entrants, or to the extent that existing 

pools of capital are redirected to new 

fund advisers, or fund advisers who 

have reduced fees to compete, and the 

advisers receiving redirected capital 

generate enhanced returns for their 

investors (for example, advisers who 

generate larger returns, less correlated 

returns across different investment 

strategies, or returns with more 

favorable risk profiles), the competitive 

effects of the final rules may provide 

new opportunities for capital allocation 

and potentially spur new investments. 

Similarly, the final rules may enhance 

capital formation by inducing new 

investors to enter private fund markets. 

Restricting activities that represent 

conflicting arrangements, requiring 

mandatory audits and mandatory 

fairness or valuation opinions for 

adviser-led secondaries, and heightened 

transparency around fee/expense/ 

performance information may increase 

investor confidence in the safety of their 

investments.1760 To the extent investor 

confidence is heightened, especially for 

smaller or more vulnerable investors, 

those investors may increase their 

willingness to invest their capital. With 

respect to the final rules on prohibitions 

for certain preferential information, the 

Commission has recognized these 

effects in prior rulemakings. As 

discussed above, specifically, the 

Commission has stated that investors in 

many instances equate the practice of 

selective disclosure with insider 

trading, and that the inevitable effect of 

selective disclosure is that individual 

investors lose confidence in the 

integrity of the markets because they 

perceive that certain market participants 

have an unfair advantage.1761 More 

generally, as discussed above, one 

academic study found that the passing 

of regulation requiring advisers to hedge 

funds to register with the SEC reduced 

hedge fund misreporting of results to 

investors, hedge fund misreporting 

increased on the overturn of that 

legislation, and that the passing of the 

Dodd-Frank Act (which removed an 

exemption from registration on which 

advisers to hedge funds and other 

private funds had relied), resulted in 

higher inflows of capital to hedge funds, 

indicating that hedge fund investors 

view regulatory oversight as protecting 

their interests and that regulatory 

oversight increases investor confidence 

and willingness to invest in hedge 

funds.1762

Similarly, and in addition to lower 

costs of intermediation between 

investors and portfolio investments, the 

final rules may directly lower the costs 

charged by fund advisers to investors by 

improving transparency over fees and 

expenses. The final rules may also 

enhance overall investor returns (for 

example, as above, larger returns, less 

correlated returns across different 

investment strategies, or returns with 

more favorable risk profiles) by 

improving transparency over 

performance information, restricting or 

prohibiting conflicting arrangements, 

and requiring external financial 

statement audits and fairness opinions. 

To the extent these increased investor 

funds from lower expenses and 

enhanced returns are redeployed to new 

investments, there may be further 

benefits to capital formation. 

F. Alternatives Considered 

Several commenters stated their view 

that the Commission had not considered 

sufficient alternatives in its 

proposal.1763 We believe we have 

considered many potential alternatives 

to the final rules. Several of the 

alternatives considered at proposal, or 

recommended by commenters, have 

been implemented as part of the final 

rules. We have further considered below 

several alternatives identified by 

commenters. 

1. Alternatives to the Requirement for 

Private Fund Advisers To Obtain an 

Annual Audit 

First, the Commission could have 

broadened the application of this rule 

to, for example, apply to all advisers to 

private funds, rather than to only 

advisers to private funds that are 

registered or required to be registered. 

Extending the application of the final 

audit rule to all advisers and in the 

context of these pooled investment 

vehicles would increase the benefits of 

helping investors receive more reliable 

information from private fund advisers 

subject to the rule. Investors would, as 

a result, have greater assurance in both 

the valuation of fund assets and, 

because these valuations often serve as 

the basis for the calculation of the 

adviser’s fees, the fees charged by 

advisers. However, an extension of the 

rule to apply to all advisers would likely 

impose the costs of obtaining audits on 

smaller funds advised by unregistered 

advisers. For these types of funds, the 

cost of obtaining such an audit may be 

large compared to the value of fund 

assets and fees and the related value to 

investors of the required audit, and so 

this alternative could inhibit entry of 

new funds, potentially constraining the 

growth of the private fund market. 

Second, instead of broadening the 

audit rule, we considered narrowing the 

rule by providing further full or partial 

exemptions. For example, we could 

have exempted advisers from obtaining 

audits for smaller funds or we could 

exempt an adviser from compliance 

with the rule where an adviser receives 

little or no compensation for its services 

or receives no compensation based on 

the value of the fund’s assets. We could 

also have exempted advisers to hedge 

funds and other liquid funds or funds of 

funds. Further, we could have provided 

an exemption to advisers from obtaining 

audits for private funds below a certain 

asset threshold, for funds that have only 

related person investors, or for funds 


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1764See, e.g., PIFF Comment Letter; ILPA 

Comment Letter I; Ropes & Gray Comment Letter. 

1765AIC Comment Letter I, Appendix 2. 

1766See supra section VI.D.5. 

1767See Healthy Markets Comment Letter I. 

1768See supra section II.C.7. 

1769See supra section II.C, VI.D.5. 

1770See supra section II.C. 

1771See supra sections VI.D.2, VI.E. 

1772For liquid funds, disclosure of performance 

information for each portfolio investment may be of 

comparatively lower incremental benefit to 

investors, because such funds typically have a 

much larger number of investments. However, 

investors may have preferences among different 

liquid funds that depend on more fund outcomes 

than their total return on their aggregate capital 

contributions. For example, investors could have a 

preference for fund advisers whose portfolio 

investments have returns that are not correlated 

with each other (meaning portfolio investments 

with returns that are not disproportionately likely 

to be similar in magnitude or disproportionately 

likely to be similar in whether they are positive or 

negative). A portfolio with correlated returns across 

investments may, for example, represent lower 

diversification and greater risk than a portfolio with 

uncorrelated returns across investments. For 

investors with such preferences, this alternative 

could provide similar additional benefits. 

1773See supra section VI.C.3; see, e.g., Harris et 

al., supra footnote 1221; Schoar et al., supra 

footnote 1221. 

that are below a minimum asset value 

or have a limited number of investors. 

Several commenters provided 

arguments for such exemptions.1764

Another commenter argued more 

generally that the entirety of the private 

fund rulemaking should narrowly focus 

on private funds with more vulnerable 

or smaller investors, implicitly arguing 

for a narrowing of all components of the 

rule, including the audit rule.1765

These exemptions could also have 

been applied in tandem, for example by 

exempting only advisers to hedge funds 

and other liquid funds below a certain 

asset threshold. For each of these 

categories, we considered partial instead 

of full exemptions, for example by 

requiring an audit only every two (or 

more) years instead of not requiring any 

annual audits at all. Further, the 

benefits of the rule may not be 

substantial for funds below a minimum 

asset value, where the cost of obtaining 

such an audit would be relatively large 

compared to the value of fund assets 

and fees that the rule is intended to 

provide a check on. 

We believe, however, that this 

narrower alternative with the above 

exemptions to the final audit rule would 

likely not provide the same investor 

protection benefits. Many of the investor 

protection benefits discussed above are 

specifically associated with the general 

applicability of the audit rule.1766 One 

commenter stated that the time and 

expense of an audit should be 

commensurate with the scale of the 

fund, removing the rationale for 

exempting smaller advisers.1767 We also 

believe that new rules with exemptions 

for certain types of funds and advisers, 

in general, distort incentives faced by 

advisers when determining their desired 

business model. Exemptions for hedge 

funds or funds of funds would, at the 

margin, induce certain advisers 

contemplating launching a private 

equity fund to instead launch a hedge 

fund or fund of funds, and we factor in 

such distortions of incentives into 

considerations of exemptions for final 

rules. 

Moreover, we have already recognized 

that some advisers may not have 

requisite control over a private fund 

client to cause its financial statements to 

undergo an audit in a manner that 

satisfies the mandatory private fund 

adviser audit rule.1768 Those advisers 

will be required under the final rule to 

take all reasonable steps to cause their 

private fund clients to undergo an audit. 

As a final matter, the rule already is 

only applicable to RIAs and does not 

apply to ERAs, including those ERAs 

with less than $150 million in assets 

under management in the U.S.1769

As a last alternative, instead of 

requiring an audit as described in the 

audit rule, we considered requiring that 

advisers provide other means of 

checking the adviser’s valuation of 

private fund assets. For example, we 

considered requiring that an adviser 

subject to the audit rule provide 

information to substantiate the adviser’s 

evaluation to its LPAC or, if the fund 

has no LPAC, then to all, or only 

significant investors in the fund. We 

believe that such methods for checking 

an adviser’s methods of valuation would 

be substantially less expensive to 

obtain, which could reduce the cost 

burdens associated with an audit. 

However, we believe that these 

alternatives would likely not 

accomplish the same investor protection 

benefits as the audit rule as adopted. As 

an immediate matter, limiting the 

requirement in this way would 

undermine the broader goal of the rule 

to protect investors against 

misappropriation of fund assets and 

providing an important check on the 

adviser’s valuation of private fund 

assets. We believe, more generally, that 

these checks would not provide the 

same level of assurance over valuation 

and, by extension, fees, to fund 

investors as an audit. As discussed 

above, we have historically relied on 

financial statement audits to verify the 

existence of pooled investment vehicle 

investments.1770 Commenters did not 

address these alternatives, either by 

expressing support for them or 

criticizing them, and generally focused 

their suggestions on either (1) 

abandoning the audit rule entirely, or 

(2) narrowing it by providing 

exemptions. 

2. Alternatives to the Requirement To 

Distribute a Quarterly Statement to 

Investors Disclosing Certain Information 

Regarding Costs and Performance 

The Commission also considered 

requiring additional and more granular 

information to be provided in the 

quarterly statements that registered 

investment advisers will be required to 

provide to investors in private funds. 

For example, we could have required 

that these statements include investorlevel capital account information, which 

would provide each investor with 

means of monitoring capital account 

levels at regular intervals throughout the 

year. Because this more specific 

information would show exactly how 

fees, expenses, and performance have 

affected the investor, it could, 

effectively, further reduce the cost to an 

investor of monitoring the value of the 

services the adviser provides to the 

investor. We believe, however, that 

requiring capital account information 

for each investor would substantially 

increase costs for funds associated with 

the preparation of these quarterly 

statements. We do not believe that the 

policy goals of the rule would be 

achieved by further increasing the costs 

of the rule, including potential harms to 

competition and capital formation.1771

We could also, for example, have 

required disclosure of performance 

information for each portfolio 

investment. For illiquid funds in 

particular, we could have required 

advisers to report the IRR for portfolio 

investments, assuming no leverage, as 

well as the cash flows for each portfolio 

investment.1772 Given the cash flows, 

end investors could compute other 

performance metrics, such as PME, for 

themselves. In addition, this 

information would give investors means 

of checking the more general 

performance information provided in a 

quarterly statement, and would, further, 

allow investors to track and evaluate the 

portfolio investments chosen by an 

adviser over time. Cash flow disclosures 

for each portfolio investment would 

enable an investor to construct measures 

of performance that address the MOIC’s 

inability to capture the timing of cash 

flows, avoid the IRR’s assumptions on 

reinvestment rates of early cash flow 

distributions, and avoid the IRR’s 

sensitivity to cash flows early in the life 

of the pool.1773 Investors would also be 


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1774See supra section II.B.1.b). 

1775See supra section VI.D.2. 

1776See supra sections II.B.2, VI.D.2. 

1777 Id. 

1778 Id. 

1779See supra section VI.D.2. 

1780Convergence Comment Letter. 

1781See, e.g., AFSCME Comment Letter; 

Comment Letter of National Employment Law 

Project (Apr. 25, 2022). 

1782See supra section II.B.2. 

1783For example, the compensation model for 

hedge funds can provide fund advisers with 

embedded leverage, encouraging greater risk-taking. 

See, e.g., Brav, et al., supra footnote 1427. 

able to compare performance of 

individual portfolio investments against 

the compensation and other data that 

advisers would be required to disclose 

for each portfolio investment.1774

While we believe that advisers would 

have cash flow data for each portfolio 

investment available in connection with 

the preparation of the standardized fund 

performance information required to be 

reported pursuant to the quarterly 

statement rule, calculating performance 

information for each portfolio 

investment could add significant 

operational burdens and costs. Because 

these costs would vary based on the 

number of portfolio investments held by 

a private fund, such a rule would distort 

adviser incentives by incentivizing them 

to take on fewer portfolio investments. 

The operational burden and cost would 

also depend on whether the alternative 

rule required both gross and net 

performance information for each 

portfolio investment, which would 

determine whether the information 

reflected the impact of fund-level fees 

and expenses on the performance of 

each portfolio investment. Requiring 

both gross and net performance 

information for each portfolio 

investment would be of greater use to 

investors, but would come at a higher 

operational burden and cost, as 

providing net performance information 

would require more complex 

calculations to allocate fund fees and 

expenses across portfolio investments. 

Lastly, to the extent that advisers were 

required to disclose cash flows for each 

portfolio investment with and without 

the impact of fund-level subscription 

facilities, this calculation may be more 

burdensome than the single calculation 

required to make the required fund-level 

performance information disclosures 

with and without the impact of fundlevel subscription facilities. 

As a final granular addition to 

performance disclosures, the 

Commission could have required the 

reporting of a wider variety of 

performance metrics for hedge funds 

and other liquid funds, similar to the 

detailed disclosure requirements for 

illiquid funds. These could have 

included requirements for liquid funds 

to report estimates of fund-level alphas, 

betas, Sharpe ratios, or other 

performance metrics. We believe that for 

investors in liquid funds, absolute 

returns are of highest priority, and 

furthermore investors may calculate 

many of these additional performance 

metrics themselves by combining fund 

annual total returns with publicly 

available data. Commenter concerns 

also indicate that further standardized 

required reporting would continue to 

raise costs,1775 but may only provide 

diminishing marginal benefit. Therefore, 

we believe these additional reporting 

requirements would impose additional 

costs with comparatively little benefit. 

As discussed above, one commenter 

suggested requiring DPI and RVPI 

instead of MOIC for realized and 

unrealized investments.1776 As an initial 

matter, since the final rules require 

calculation of unrealized and realized 

IRR,1777 we do not believe that DPI and 

RVPI calculations will be any less 

incrementally costly than unrealized 

and realized MOIC, because unrealized 

and realized MOIC uses the same 

denominators as unrealized and realized 

IRR. Moreover, we have discussed above 

that these metrics may be potentially 

less effective at highlighting overly 

optimistic valuations of unrealized 

investments. This is because the 

denominator of RVPI includes all paidin capital, not just capital contributed in 

respect of unrealized investments, and 

so the comparatively large denominator 

in RVPI may dwarf the effect of 

overvaluations of unrealized 

investments, while unrealized MOIC 

may highlight those overvaluations.1778

Further, the Commission also 

considered requiring less information be 

provided to investors in these quarterly 

statements. For example, instead of 

requiring the disclosure of 

comprehensive fee and expense 

information, we could have required 

that advisers disclose only a subset of 

these, including investments fees and 

expenses paid by a portfolio company to 

the adviser. These fees in particular may 

currently present the biggest burden on 

investors to track, and requiring the 

disclosure of only these fees could 

reduce some costs associated with the 

effort of compiling, on a quarterly basis, 

information regarding management fees 

more generally. While we believe some 

commenters would support such an 

alternative, based on the lower cost,1779

we believe if we did not require 

comprehensive information, investors 

would not derive the same utility in 

monitoring fund performance. 

We also considered requiring that 

comprehensive information regarding 

fees and performance be reported on 

Form ADV, instead of being disclosed to 

investors individually. Reporting 

publicly on Form ADV would continue 

to allow investors to monitor 

performance, while also allowing public 

review of important information about 

an adviser. One commenter suggested 

that advisers should be required to 

report information about borrowing 

from the fund on Form ADV and Form 

PF,1780 and certain other commenters 

generally supported requiring advisers 

to make data collected under the rule 

publicly available.1781 Disclosure to the 

Commission, either on Form ADV or 

Form PF, would provide the 

Commission with information that 

would enable the Commission to assess 

whether there are risks to investors, 

including risks of misappropriation 

from a fund. However, because the 

information required under the rule is 

tailored to what we believe would serve 

existing investors in a fund, we believe 

that direct delivery to investors would 

better reduce monitoring costs for 

investors. Further, as discussed above, 

prospective investors have separate 

protections, including against 

misleading, deceptive, and confusing 

information in advertisements as set 

forth in the recently adopted marketing 

rule.1782

Instead of requiring disclosure of 

comprehensive fee and expense 

information to investors, we considered 

prohibiting certain fee and expense 

practices. For example, we could have 

prohibited charging fees at the fund 

level in excess of a certain maximum 

amount that we could determine to be 

what investors could reasonably 

anticipate being charged by an adviser. 

This could, effectively, protect investors 

from unanticipated charges, and reduce 

monitoring costs to investors. Further, 

we could have prohibited certain 

compensation arrangements, such as the 

‘‘2 and 20’’ model or compensation from 

portfolio investments, to the extent the 

adviser also receives management fees 

from the fund. Prohibition of the ‘‘2 and 

20’’ model might cause advisers to 

consider and adopt more efficient 

models for private fund investing in 

which the adviser gets a smaller fee and 

the investor gets a larger share of the 

gross fund returns, and in which 

investors are generally better off.1783 We 

also considered restricting management 

fee practices, for example by imposing 

limitations on sizes of management fees, 

or requiring management fees to be 

based on invested capital or net asset 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63367 

1784See supra section VI.B, VI.D.1; see also, e.g., 

AIC Comment Letter I, Appendix 1. 

1785See supra section VI.B; see also, e.g., Clayton 

Comment Letter II. 1786See supra sections II.B.3, II.C.3. 

1787See, e.g., Y. Cong, J. Hao & L. Zou, The 

Impact of XBRL Reporting on Market Efficiency, 28 

J. Info. Sys. 181 (2014) (finding support for the 

hypothesis that ‘‘XBRL reporting facilitates the 

generation and infusion of idiosyncratic 

information into the market and thus improves 

market efficiency’’); Y. Huang, J.T. Parwada, Y.G. 

Shan & J. Yang, Insider Profitability and Public 

Information: Evidence From the XBRL Mandate, 

Working Paper (2019) (finding XBRL adoption 

levels the informational playing field between 

insiders and non-insiders). 

1788See supra section II.C.6. 

1789See, e.g., Updated Disclosure Requirements 

and Summary Prospectus for Variable Annuity and 

Variable Life Insurance Contracts, Investment 

Company Act Release No. 33814 (Mar. 11, 2020) [85 

FR 25964, at 26041 (June 10, 2020)] (stating that an 

Inline XBRL requirement for certain variable 

contract prospectus disclosures, which are publicly 

available, would include informational benefits 

stemming from use of the Inline XBRL data by 

parties other than investors, including financial 

analysts, data aggregators, and Commission staff). 

While the required disclosures in the final rules 

would not be provided to the public or the 

Commission, such benefits would not accrue from 

an Inline XBRL requirement for the required 

disclosures. 

value rather than on committed capital. 

However, the benefits of prohibiting 

certain fee and expense practices 

outright would need to be balanced 

against the costs associated with 

limiting an adviser and investor’s 

flexibility in designing fee and expense 

arrangements tailored to their 

preferences. There are benefits to 

flexible negotiations between advisers 

and investors, and that the final rule 

should not endeavor to create a rigid 

private fund contract that governs all 

possible outcomes of an investment.1784

We also believe that our policy choice 

has benefited from taking into 

consideration the market problem that 

the policy is designed to address.1785

We believe that such further 

prohibitions would too severely restrict 

the flexibility of negotiations between 

advisers and investors, and also that 

such prohibitions would not be tailored 

to the market problems that this final 

rule is designed to address. 

Similarly, instead of requiring 

disclosure of comprehensive 

performance information to investors, 

we considered prohibiting certain 

performance disclosure practices. For 

example, instead of requiring disclosure 

of performance with and without the 

effect of fund-level subscription 

facilities, we considered prohibiting 

advisers from presenting performance 

with the effect of such facilities unless 

they also presented performance 

without the effect of such facilities. 

Similarly, we considered prohibiting 

advisers from presenting combined 

performance information for multiple 

funds, such as a main fund and a coinvestment fund that pays lower or no 

fees. Commenters did not generally 

either support or criticize this 

alternative. However, while we believe 

that the required disclosures present the 

correct standardized, detailed 

information for investors to be able to 

evaluate performance, we do not believe 

there are harms from advisers electing to 

disclose additional information, and we 

again believe investors and advisers 

should have the flexibility to negotiate 

for that additional information if they 

believe it would be valuable. As such, 

we think the benefits of prohibiting any 

performance disclosure practices would 

likely be negligible, while there could 

be substantial costs to investors who 

value the information that would be 

prohibited under this alternative. 

Finally, the Commission considered 

broadening the application of this rule 

to, for example, apply to all advisers to 

private funds, rather than to only 

private fund advisers that are registered 

or required to be registered. Extending 

the application of the final rule to all 

advisers would increase the benefits of 

helping investors receive more detailed 

and standardized information regarding 

fees, expenses, and performance. 

Investors would, as a result, have better 

information with which to evaluate the 

services of these advisers. However, the 

extension of the final rule to apply to all 

advisers would likely impose the costs 

of compiling, preparing, and 

distributing quarterly statements on 

smaller funds advised by unregistered 

advisers. For these types of funds and 

advisers, these quarterly statement costs 

may be large compared to the value of 

fund assets and fees and the related 

value to investors of the required audit, 

and thus extending the rule to those 

advisers would further increase the 

costs of the rule, potentially increasing 

any potential harms to competition or 

capital formation. 

3. Alternative to the Required Manner of 

Preparing and Distributing Quarterly 

Statements and Audited Financial 

Statements 

The final rules will require private 

fund advisers to ‘‘distribute’’ quarterly 

statements and audited annual financial 

statements to investors in the private 

fund, and this requirement could be 

satisfied through either paper or 

electronic means.1786 The Commission 

considered requiring private fund 

advisers to prepare and distribute the 

required disclosures electronically using 

a structured data language, such as the 

Inline eXtensible Business Reporting 

Language (‘‘Inline XBRL’’). 

An Inline XBRL requirement for the 

disclosures could benefit private fund 

investors with access to XBRL analysis 

software by enabling them to more 

efficiently access, compile, and analyze 

the disclosures in quarterly statements 

and audited annual financial 

statements, facilitating calculations and 

comparisons of the disclosed 

information across different time 

periods or across different portfolio 

investments within the same time 

period. For any such private fund 

investors who receive disclosures from 

multiple private funds, an Inline XBRL 

requirement could also facilitate 

comparisons of the disclosed 

information across those funds. 

An Inline XBRL requirement for the 

final disclosures would diverge from the 

Commission’s other Inline XBRL 

requirements, which apply to 

disclosures that are made available to 

the public and the Commission, thus 

allowing for the realization of 

informational benefits (such as 

increased market efficiency and 

decreased information asymmetry) 

through the processing of Inline XBRL 

disclosures by information 

intermediaries such as analysts and 

researchers.1787 Under the final rules, 

the required disclosures will not be 

provided to the public or the 

Commission for processing and 

analysis.1788 Thus, the magnitude of 

benefit resulting from an Inline XBRL 

alternative for the disclosure 

requirements in the final rule may be 

lower than for other rules with Inline 

XBRL requirements.1789

Compared to the final rule, an Inline 

XBRL requirement would result in 

additional compliance costs for private 

funds and advisers, as a result of the 

requirement to select, apply, and review 

the appropriate XBRL U.S. GAAP 

taxonomy element tags for the required 

disclosures (or pay a third-party service 

provider to do so on their behalf). In 

addition, private fund advisers may not 

have prior experience with preparing 

Inline XBRL documents, as neither 

Form PF nor Form ADV is filed using 

Inline XBRL. Thus, under this 

alternative, private funds may incur the 

initial Inline XBRL implementation 

costs that are often associated with 

being subject to an Inline XBRL 

requirement for the first time (including, 

as applicable, the cost of training inhouse staff to prepare filings in Inline 

XBRL and the cost to license Inline 

XBRL filing preparation software from 

vendors). Accordingly, the magnitude of 

compliance costs resulting from an 


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1790See supra section II.E. 

1791 Id. 

1792See supra sections VI.C.2, VI.D.3. 

1793See supra sections VI.C.2, II.E.1.b). 

1794See supra section VI.C.2. 

1795See supra section II.E. 

1796See supra sections II.E.1.b), VI.D.3. 

1797See supra section II.E.1.b). 

1798See supra section II.E.2.b). 

Inline XBRL requirement under this 

final rule may be higher than for other 

rules with Inline XBRL requirements. 

4. Alternatives to the Restrictions From 

Engaging in Certain Sales Practices, 

Conflicts of Interest, and Compensation 

Schemes 

The Commission also considered 

restricting other activities, in addition to 

those currently restricted in the final 

rule. For example, we could have 

restricted advisers from charging private 

funds for expenses generally understood 

to be adviser expenses, such as those 

incurred in connection with the 

maintenance and operation of the 

adviser’s business. To the extent that the 

performance of these activities is 

outsourced to a consultant, for example, 

and the fund is charged for that service, 

advisers may be effectively shifting 

expenses that would be generally 

recognized as adviser expenses to 

instead be fund expenses. The 

restriction of such charges and the 

enhancement of disclosures or consent 

practices around those costs could 

reduce investor monitoring costs. We 

believe, however, that identifying the 

types of charges associated with 

activities that should never be charged 

to the fund would likely be difficult. As 

a result, any such restriction could risk 

effectively limiting an adviser’s ability 

to outsource certain activities that could 

be better performed by a consultant, 

because under the restriction the adviser 

would not be able to pass those costs on 

to the fund. 

Further, the Commission considered 

providing an exemption for funds 

utilizing a pass-through expense model 

from the restriction on charging fees or 

expenses associated with certain 

examinations, investigations, and 

regulatory and compliance fees and 

expenses. This would allow advisers to 

avoid the costs associated with 

restructuring any arrangements not 

compliant with the restriction, 

including the costs associated with 

having to make enhanced disclosures of 

those expenses.1790 We believe, 

however, that any exemption would 

need to be carefully balanced against the 

risk that it would continue to subject the 

fund to an adviser’s incentive to shift its 

fees and expenses to the fund to reduce 

its costs without disclosure to investors. 

The Commission also considered 

requiring consent for all of the restricted 

activities instead of just investigation 

expenses and borrowing.1791 However, 

we believe there are economic reasons 

for each of the other restricted activities 

to not pursue these additional 

requirements. As discussed above, we 

believe whether expense pass-through 

arrangements risk distorting adviser 

incentives to pay attention to 

compliance and legal matters may vary 

from adviser to adviser and may vary 

according to the type of expense.1792 For 

regulatory, compliance, and 

examination expenses, the risk may be 

comparatively low, and requiring 

investor consent or prohibiting the 

activity altogether may not be necessary. 

With respect to clawbacks, as many 

commenters stated, because this 

practice is widely implemented and 

negotiated, we do not believe there is a 

risk of investors being unable, today, to 

refuse to consent to this practice and 

being harmed as a result of being unable 

to consent to this practice.1793 With 

respect to non-pro rata allocations of 

expenses, commenters stated that 

investors may also often benefit from 

these co-investment opportunities, or 

that expenses may be generated 

disproportionately by one fund 

investing in a portfolio company.1794

Because these valid reasons for non-pro 

rata allocations of expenses may occur, 

a further restriction on non-pro rata 

allocations of expenses may have 

substantial unintended negative effects 

in terms of limiting these valid 

occurrences of non-pro rata allocations, 

even when a non-pro rata allocation 

would be fair and equitable. For 

example, in the case of an expense 

generated disproportionately by one 

fund in a portfolio company, that fund 

could refuse to consent to being charged 

greater than a pro rata share of expenses 

when it could be charged a pro rata 

share of expenses. In that instance, the 

consent requirement could result in 

other funds in the portfolio investment 

being overcharged. 

We lastly considered prohibiting all of 

the activities outright instead of 

providing for certain exceptions for 

when advisers make certain disclosures 

and, in some cases, also obtain the 

required investor consent. However, as 

discussed above, we are convinced by 

commenters that our concerns with 

certain of these activities will be 

substantially alleviated, so long as 

advisers satisfy the disclosure 

requirements and, in some cases, 

consent requirements provided for in 

the final rules.1795 We are also 

convinced by commenters that outright 

prohibitions would involve substantial 

indirect costs via unintended 

consequences of the rules. For example, 

we are convinced that an outright 

prohibition of reducing adviser 

clawbacks for taxes carries a risk of 

advisers forgoing offering adviser 

clawbacks altogether, including in 

circumstances that benefit investors.1796

We are similarly convinced by 

comments that the restricted activities 

can provide bona fide benefits for 

investors that would be lost under an 

outright prohibition. For example, we 

are convinced that non-pro rata 

allocations of fees and expenses in 

certain cases can still be fair and 

equitable, if disclosed and if consent is 

obtained,1797 and that many advisers 

borrow from funds to finance activities 

that are to the benefit of investors.1798

5. Alternatives to the Requirement That 

an Adviser To Obtain a Fairness 

Opinion or Valuation Opinion in 

Connection With Certain Adviser-Led 

Secondary Transactions 

The Commission also considered 

changing the scope of the requirement 

for advisers to obtain a fairness opinion 

or valuation opinion in connection with 

adviser-led secondary transactions. 

For example, we considered 

broadening the application of this rule 

to, for example, apply to all advisers, 

including advisers that are not required 

to register as investment advisers with 

the Commission, such as Stateregistered advisers and exempt 

reporting advisers. Under that 

alternative, investors would receive the 

assurance of the fairness of more 

adviser-led secondary transactions. An 

extension of the final rule to apply to all 

advisers would, however, likely impose 

the costs of obtaining fairness opinions 

or valuation opinions on smaller funds 

advised by unregistered advisers, and 

for these types of funds, the cost of 

obtaining such opinions would likely be 

relatively large compared to the value of 

fund assets and fees that the rule is 

intended to provide a check on. This 

could discourage those advisers from 

undertaking these transactions. This 

could ultimately reduce liquidity 

opportunities for fund investors. 

We also considered consent 

requirements for the rule, where instead 

of requiring advisers to obtain a fairness 

opinion or valuation opinion, advisers 

would have been required to obtain 

investor consent prior to implementing 

an adviser-led secondary transaction. 

We considered this alternative because 

the market friction in these transactions 

bears certain similarities to the case 


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1799See supra section VI.C.4. 

1800 Id. 

1801 Id. 

1802See, e.g., Cravath Comment Letter; Carta 

Comment Letter; ILPA Comment Letter I; IAA 

Comment Letter II; AIC Comment Letter I. 

1803Moreover, the costs to liquid fund advisers 

are more likely to be limited, as many secondary 

transactions by liquid funds are not adviser-led 

(meaning that many such transactions do not 

involve investors converting or exchanging their 

interests for new interests in another vehicle 

advised by the adviser or any of its related persons) 

and so would not necessitate a fairness opinion. 

1804See, e.g., RFG Comment Letter II; OPERS 

Comment Letter. 

1805See supra section II.F. 

1806See, e.g., AIC Comment Letter I; NY State 

Comptroller Comment Letter; Lockstep Ventures 

Comment Letter. One commenter also expressed 

concerns that the limited prohibitions on 

preferential treatment in the final rules may already 

impede co-investment activity, and these concerns 

would be exacerbated by this alternative. See AIC 

Comment Letter I, Appendix 1. 

when advisers borrow from funds, 

where we are requiring consent: in both 

cases, the conflict of interest arises 

because the adviser is on both sides of 

a transaction.1799

However, as discussed in the baseline, 

unlike the case of adviser borrowing, 

there is a heightened risk of this conflict 

of interest distorting the terms or price 

of the transaction, and it may be 

difficult for disclosure practices or 

consent practices alone to resolve these 

conflicts.1800 This is because in an 

adviser-led secondary there may be 

limited market-driven price discovery 

processes available to investors. For 

example, we considered the case where, 

if a recent sale improperly valued an 

asset, an adviser could be incentivized 

to initiate a transaction with the same 

valuation, which, depending on the 

terms of the transaction, may benefit the 

adviser at the expense of the investors. 

Because of cases like this, and the other 

cases we have discussed above, we do 

not consider consent requirements to be 

a necessary policy choice given the 

market failure at issue.1801

We also considered providing 

exemptions from the rule. An 

exemption could be provided where the 

adviser undertakes a competitive sale 

process for the assets being sold or for 

certain advisers to hedge funds or other 

liquid funds for whom the concerns 

regarding pricing of illiquid assets may 

be less relevant. Several commenters 

requested such exemptions.1802 These 

exemptions would reduce the costs on 

advisers associated with obtaining the 

fairness opinion or valuation opinion, 

which could ultimately reduce costs for 

investors. However, while this 

alternative would reduce costs, we 

believe that any such exemptions could 

reduce the benefits of the final rule 

associated with providing greater 

assurance to investors of the fairness of 

the transaction. We believe that, even 

under circumstances where the adviser 

has conducted a competitive sales 

process, the effective check on this 

process provided by the fairness 

opinion or valuation opinion would 

benefit investors. Further, even for 

advisers to hedge funds or other liquid 

funds who are advising funds with 

predominantly highly liquid securities, 

we believe that a fairness opinion or 

valuation opinion would be beneficial 

to investors because the conflicts of 

interest inherent in structuring and 

leading a transaction may, despite the 

nature of the assets in the fund, harm 

investors.1803

Some commenters suggested that we 

expand the final rule to offer additional 

protections to investors, such as 

requiring advisers to use reasonable 

efforts to allow investors to remain 

invested on their original terms without 

carry crystallization.1804 While we agree 

such an alternative could offer 

additional protection benefits to 

investors, those additional protections 

would continue to increase the costs of 

the final rule by further requiring 

advisers to revise their business 

practices, renegotiate contracts, and 

undertake additional costly changes to 

their operations. We believe those costs 

would not be warranted by the potential 

benefits. 

6. Alternatives to the Prohibition From 

Providing Certain Preferential Terms 

and Requirement To Disclose All 

Preferential Treatment 

Instead of requiring that private fund 

advisers provide investors and 

prospective investors with written 

disclosures regarding all preferential 

treatment the adviser or its related 

persons provided to other investors in 

the same fund, the Commission 

considered prohibiting all such terms. 

This could provide investors in private 

funds with increased confidence that 

the adviser’s negotiations with other 

investors would not affect their 

investment in the private fund. We 

preliminarily believe, however, that an 

outright prohibition of all preferential 

terms may not provide significant 

additional benefits beyond prohibitions 

on providing certain preferential terms 

regarding redemption or information 

about portfolio holdings or exposures 

that would have a material negative 

effect on other investors. As discussed 

above, we believe that certain types of 

preferential terms raise relatively few 

concerns, if disclosed.1805 Further, an 

outright prohibition of all preferential 

terms may limit the adviser’s ability to 

respond to an individual investor’s 

concerns during the course of attracting 

capital investments to private funds. 

Many commenters also expressed, and 

we agree, that anchor or seed investors 

may be provided with preferential terms 

for good reasons.1806

Further, we considered prohibiting all 

preferential terms regarding redemption 

or information about portfolio holdings 

or exposures, rather than just those that 

the adviser reasonably expects to have 

a material, negative effect on other 

investors in that fund or in a similar 

pool of assets. This could increase the 

investor protections associated with the 

rule, by eliminating the risk that a term 

not reasonably expected to have a 

material negative effect on investors 

could, ultimately, harm investors. We 

believe, however, that this alternative 

would likely provide more limited 

benefits and would increase costs 

associated with the rule similar to the 

above alternatives, for example by 

limiting the adviser’s ability to respond 

to an individual investor’s concerns 

during the course of attracting capital 

investments to private funds. 

In addition, for preferential terms not 

regarding redemption or information 

about portfolio holdings or exposures, 

we considered requiring advisers to 

private funds to provide disclosure only 

when the term has a material negative 

effect on other fund investors. This 

could reduce the compliance burden on 

advisers associated with the costs of 

disclosure. We believe, however, that 

limiting disclosure to only those terms 

that an adviser determines to have a 

material negative effect could reduce an 

investor’s ability to recognize the 

potential for harm from unforeseen 

favoritism toward other investors, 

relative to a requirement to disclose all 

preferential treatment. 

We lastly considered implementing 

consent requirements, both as an 

alternative to the prohibition from 

providing certain preferential terms and 

as an alternative to the requirement to 

disclose all preferential treatment. With 

respect to the prohibition, as we have 


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1807We also discussed above the example that, in 

cases where certain preferred investors with 

sufficient bargaining power to secure preferential 

terms over disadvantaged investors, majority 

consent by investor interest requirements may have 

minimal ability to protect the disadvantaged 

investors, as we would expect the larger, preferred 

investors to outvote the disadvantaged investors. 

See supra sections VI.B, VI.C.2. 

1808 Id. 

1809 44 U.S.C. 3501 et seq. 

1810See, e.g., CCMR Comment Letter II (stating 

that the Proposing Release fails to consider how the 

proposed rules would interact with certain 

structural factors inherent in the private funds 

market to produce additional costs for market 

participants); IAA Comment Letter II (stating that 

the Commission underestimated the impact of the 

proposal on investors, advisers, and private funds). 

1811See, e.g., Comment Letter of Senator Tim 

Scott and Senator Bill Hagerty (Dec. 14, 2022) 

(stating that economic analysis of the financial 

impact on the private funds market grossly 

underestimates the costs that market participants 

will incur in order to comply with the Proposal); 

SIFMA–AMG Comment Letter I. 

1812See supra section II.A (Scope) for additional 

information. The Commission is not applying all 

five private fund adviser rules to SAFs advised by 

SAF advisers. 

1813Similarly, because we are not applying 

requirements of these rules to advisers with respect 

to SAFs they advise, we do not expect that there 

will be any additional burden on smaller advisers 

for purposes of the Final Regulatory Flexibility 

Analysis. 

discussed above, the specific problems 

we have analyzed may be difficult, or 

unable, to be addressed via enhanced 

disclosures or even consent 

requirements alone. For example, 

investors facing a collective action 

problem today, in which they are unable 

to coordinate their negotiations, would 

still be unable to coordinate their 

negotiations even if consent was sought 

from each individual investor for a 

particular adviser practice.1807 With 

respect to disclosures, in this case we 

are primarily concerned with how a lack 

of transparency can prevent investors 

from understanding the scope or 

magnitude of preferential terms granted, 

and as a result, may prevent such 

investors from requesting additional 

information on these terms or other 

benefits that certain investors, receive. 

In this case, these investors may simply 

be unaware of the types of contractual 

terms that could be negotiated and may 

not face any limitations over their 

ability to properly consent to these 

terms or their ability to properly 

negotiate these terms once the terms are 

sufficiently disclosed.1808

VII. Paperwork Reduction Act 

A. Introduction 

Certain provisions of our new rules 

will result in new ‘‘collection of 

information’’ requirements within the 

meaning of the PRA.1809 The rule 

amendments will also have an impact 

on the current collection of information 

burdens of rules 206(4)–7 and 204–2 

under the Advisers Act. The title of the 

new collection of information 

requirements we are adopting are ‘‘Rule 

211(h)(1)–2 under the Advisers Act,’’ 

‘‘Rule 206(4)–10 under the Advisers 

Act,’’ ‘‘Rule 211(h)(2)–2 under the 

Advisers Act,’’ and ‘‘Rule 211(h)(2)–3 

under the Advisers Act.’’ The Office of 

Management and Budget (‘‘OMB’’) 

assigned the following control numbers 

for these new collections of information: 

Rule 206(4)–10 (OMB control number 

3235–0795); Rule 211(h)(1)–2 (OMB 

control number 3235–0796); Rule 

211(h)(2)–2 (OMB control number 

3235–0797); Rule 211(h)(2)–3 (OMB 

control number 3235–0798). The titles 

for the existing collections of 

information that we are amending are: 

(i) ‘‘Rule 206(4)–7 under the Advisers 

Act (17 CFR 275.206(4)–7)’’ (OMB 

control number 3235–0585) and (ii) 

‘‘Rule 204–2 under the Advisers Act (17 

CFR 275.204–2)’’ (OMB control number 

3235–0278). The Commission is 

submitting these collections of 

information to OMB for review and 

approval in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid OMB control 

number. 

In addition, the title of the new 

collection of information requirement 

we are proposing is ‘‘Rule 211(h)(2)–1 

under the Advisers Act.’’ In the 

Proposing Release, we did not submit a 

PRA analysis for rule 211(h)(2)–1 

because the proposed rule flatly 

prohibited certain conduct and, 

accordingly, did not contain a 

‘‘collection of information’’ requirement 

within the meaning of the PRA. 

However, final rule 211(h)(2)–1 

prohibits an adviser from engaging in 

certain activities, unless the adviser 

provides certain disclosure to investors, 

as discussed in greater detail below. In 

the Proposing Release, we solicited 

comment on whether rule 211(h)(2)–1 

should include disclosure requirements. 

In response to comments received, we 

have decided to adopt such a 

requirement. Accordingly, we are 

requesting comment on this collection 

of information requirement, and intend 

to submit these requirements to the 

OMB for review under the PRA. 

Responses to the information collection 

will not be kept confidential. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid OMB control 

number. 

We published notice soliciting 

comments on the collection of 

information requirements in the 

Proposing Release for the other rules 

and submitted the proposed collections 

of information to OMB for review and 

approval in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. We received 

general comments to our time and cost 

burdens stating that we underestimated 

the burdens.1810 We also received 

comments on aspects of the economic 

analysis that implicated estimates we 

used to calculate the collection of 

information burdens.1811 We discuss 

these comments below. We are revising 

our total burden estimates to reflect the 

final amendments, updated data, new 

methodology for certain estimates, and 

comments we received to our estimates, 

including comments received to the 

economic analysis which implicate our 

estimates. 

As discussed above, we are not 

applying certain of these rules to 

advisers regarding SAFs they advise.1812

Thus, for purposes of the PRA analysis, 

we do not believe that there will be any 

additional collection of information 

burden on advisers regarding SAFs.1813

We have adjusted the estimates from the 

proposal to reflect that the five private 

fund rules will not apply to SAF 

advisers regarding SAFs they advise. 

We discuss below the new collection 

of information burdens associated with 

final rules 211(h)(1)–2, 206(4)–10, 

211(h)(2)–1, 211(h)(2)–2, and 211(h)(2)– 

3 as well as the revised existing 

collection of information burdens 

associated with the amendments to 

rules 206(4)–7 and 204–2. Responses 

provided to the Commission in the 

context of amendments to rules 206(4)– 

7 and 204–2 will be kept confidential 

subject to the provisions of applicable 

law. Because the information collected 

pursuant to final rules 211(h)(1)–2, 

211(h)(2)–1, 211(h)(2)–2, 206(4)–10, and 

211(h)(2)–3 requires disclosures to 

existing investors and in some cases 

potential investors, these disclosures 

will not be kept confidential. 

B. Quarterly Statements 

Final rule 211(h)(1)–2 requires an 

investment adviser registered or 

required to be registered with the 

Commission to prepare a quarterly 

statement that includes certain 

standardized disclosures regarding the 

cost of investing in the private fund and 

the private fund’s performance for any 

private fund that it advises, directly or 

indirectly, that has at least two full 

fiscal quarters of operating results, and 

distribute the quarterly statement to the 


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1814See final rule 211(h)(1)–2. 

1815See final rule 211(h)(1)–2(d). 

1816Excluding advisers that provide advice solely 

to SAFs, there were 15,288 investment advisers 

registered with the Commission. 

1817See Form ADV, Part 1A, Schedule D, Section 

7.B.(1). The final rule will not apply to SAF 

advisers with respect to SAFs they advise. These 

figures do not include SAF advisers that manage 

only SAFs. 

1818See Form ADV, Part 1A, Schedule D, Section 

7.B.(1). The final rule will not apply to SAFs. These 

figures do not include SAFs. 

1819See Form ADV, Part 1A, Schedule D, Section 

7.B.(1).A., #13. 

1820See, e.g., Alumni Ventures Comment Letter; 

Segal Marco Comment Letter; Roubaix Comment 

Letter; ATR Comment Letter; AIC Comment Letter 

I. 

1821See AIC Comment Letter I, Appendix I 

(stating that the Commission’s wage rates used to 

quantify costs may be underestimated); But see 

LSTA Comment Letter, Exhibit C (stating that the 

Commission’s wage rates are conservatively high 

and the commenter used a lower wage rate 

provided by the Bureau of Labor Statistics in its 

analysis). See also supra section VI.D.2 (discussing 

the Commission’s attempts to quantify costs 

accurately). 

1822See SIFMA–AMG Comment Letter I. 

1823 Id. 

1824See CCMR Comment Letter I. 

1825 Id. 

private fund’s investors, unless such a 

quarterly statement is prepared and 

distributed by another person.1814 If the 

private fund is not a fund of funds, then 

the quarterly statement must be 

distributed within 45 days after the end 

of each of the first three fiscal quarters 

of each fiscal year and 90 days after the 

end of each fiscal year. If the private 

fund is a fund of funds, then a quarterly 

statement must be distributed within 75 

days after the first, second, and third 

fiscal quarter ends and 120 days after 

the end of the fiscal year of the private 

fund. The quarterly statement will 

provide investors with fee and expense 

disclosure for the prior quarterly period 

or, in the case of a newly formed private 

fund initial account statement, its first 

two full fiscal quarters of operating 

results. It will also provide investors 

with certain performance information 

depending on whether the fund is 

categorized as a liquid fund or an 

illiquid fund.1815

The collection of information is 

necessary to provide private fund 

investors with information about their 

private fund investments. The quarterly 

statement is designed to allow a private 

fund investor to compare standardized 

cost and performance information 

across its private fund investments. We 

believe this information will help 

inform investment decisions, including 

whether to remain invested in certain 

private funds or to invest in other 

private funds managed by the adviser or 

its related persons. More broadly, this 

disclosure will help inform investors 

about the cost and performance 

dynamics of this marketplace and 

potentially improve efficiency for future 

investments. 

Each requirement to disclose 

information, offer to provide 

information, or adopt policies and 

procedures constitutes a ‘‘collection of 

information’’ requirement under the 

PRA. This collection of information is 

found at 17 CFR 275.211(h)(1)–2 and is 

mandatory. The respondents to these 

collections of information requirements 

will be investment advisers that are 

registered or required to be registered 

with the Commission that advise one or 

more private funds. 

Based on Investment Adviser 

Registration Depository (IARD) data, as 

of December 31, 2022, there were 15,361 

investment advisers registered with the 

Commission.1816 According to this data, 

5,248 registered advisers provide advice 

to private funds.1817 We estimate that 

these advisers, on average, each provide 

advice to 10 private funds.1818 We 

further estimate that these private funds, 

on average, each have a total of 80 

investors.1819 As a result, an average 

private fund adviser has, on average, a 

total of 800 investors across all private 

funds it advises. As noted above, 

because the information collected 

pursuant to final rule 211(h)(1)–2 

requires disclosures to private fund 

investors, these disclosures will not be 

kept confidential. 

Some commenters highlighted the 

potential costs of the required quarterly 

statements.1820 One commenter 

generally criticized the hours estimates 

underlying cost estimates in the 

Proposing Release as unsupported, 

arbitrary, and possibly 

underestimated.1821 One commenter 

stated that the introduction of the new 

regulatory terms that will only be used 

for complying with the performance 

reporting requirements under the 

quarterly statement rule would likely 

lead to additional compliance burdens 

and costs for private fund advisers, and 

that adopting new terms would require 

private funds to conduct an additional 

analysis and categorization of their 

private funds, which would need to be 

reviewed and potentially reevaluated 

from time to time.1822 This commenter 

also stated that gathering information 

regarding covered portfolio investments 

would materially increase compliance 

burdens and costs to produce such 

information in adherence with the 

proposed timing and content 

requirements.1823 Another commenter 

asserted that the Proposing Release 

failed to take account of the full extent 

of the likely costs associated with its 

disclosure requirements.1824

Specifically, this commenter argued that 

there could be other costs beyond 

simply complying with the 

administrative aspects of the quarterly 

statement rule and that the Proposing 

Release fails to consider the operational 

burden imposed by the frequency and 

timing of the required reports.1825

We were persuaded by commenters 

who asserted that the proposed burdens 

underestimated the time and expense 

associated with the proposed quarterly 

statement rule. We believe that it will 

take more time than initially 

contemplated in the proposal to collect 

the applicable data, perform and review 

calculations, prepare the quarterly 

statements, and distribute them to 

investors. To address commenters’ 

concerns, and recognizing the changes 

from the proposal discussed above in 

Section II.B (Quarterly Statements), we 

are revising the estimates upwards as 

reflected in the chart below. For 

instance, to address one commenter’s 

contention that we underestimated the 

burdens generally, and recognizing the 

changes from the proposal, we are 

revising the internal initial burden for 

the preparation of the quarterly 

statement estimate upwards to 12 hours. 

We believe this is appropriate because 

advisers will likely need to develop, or 

work with service providers to develop, 

new systems to collect and prepare the 

statements. We have also adjusted these 

estimates to reflect that the final rule 

will not apply to SAF advisers with 

respect to SAFs they advise. 

We have made certain estimates of 

this data solely for this PRA analysis. 

The table below summarizes the initial 

and ongoing annual burden estimates 

associated with the final quarterly 

statement rule. 


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1826See final rule 206(4)–10. The rule also 

requires an adviser to take all reasonable steps to 

cause its private fund client to undergo an audit 

that satisfies the rule when the adviser does not 

control the private fund and is neither controlled 

by nor under common control with the fund. 

1827Excluding advisers that provide advice solely 

to SAFs, there were 15,288 investment advisers 

registered with the Commission. 

1828See Form ADV, Part 1A, Schedule D, Section 

7.B.(1). 

1829See Form ADV, Part 1A, Schedule D, Section 

7.B.(1). 1830See Form ADV, Part 1A, Schedule D, Section 

7.B.(1).A., #13. 1831See AIC Comment Letter I. 1832See, e.g., AIC Comment Letter I; AIMA/ACC 

Comment Letter; SBAI Comment Letter. 1833See, e.g., LSTA Comment Letter. 

TABLE 1—RULE 211(H)(1)–2 PRA ESTIMATES

Internal initial 

burden hours 

Internal annual burden 

hours Wage rate 1 Internal time cost Annual external cost burden 

Estimates 

Preparation of account 

statements.

12 hours ............ 14 hours 2 (See FN for 

calculation).

$436 (blended rate for 

compliance attorney 

($425), assistant general counsel ($543), 

and financial reporting 

manager ($339)).

$6,104 (Internal annual 

burden times blended 

wage rate).

$4,590 3 (See FN for calculation). 

Distribution of account 

statements to existing 

investors.

3 hours .............. 5 hours 4 (See FN for calculation).

$73 (rate for general 

clerk).

$365 (Internal annual burden times wage rate).$1,059 5 (See FN for calculation). 

Total new annual burden 

per private fund.

........................... 19 hours .......................... .......................................... $6,469 .............................. $5,649. 

Avg. number of private 

funds per adviser.

........................... 10 private funds ............... .......................................... 10 private funds ............... 10 private funds. 

Number of PF advisers .... ........................... 5,248 advisers ................. .......................................... 5,248 advisers ................. 2,624.6

Total new annual burden ........................... 997,120 hours ................. .......................................... $339,493,120 ................... $148,229,760. 

Notes: 

1The hourly wage rates in these estimates are based on (1) SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by SEC staff 

to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead; and (2) SIFMA’s Office Salaries in the Securities Industry 2013, modified by SEC staff to account for an 1,800-hour work-year and inflation, and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead. The final estimates are based on the preceding SIFMA data sets, which SEC staff have updated since the Proposing Release to account for current inflation rates. 2This includes the internal initial burden estimate annualized over a three-year period, plus 10 hours of ongoing annual burden hours and takes into account that 

there will be four statements prepared each year. The estimate of 14 hours is based on the following calculation: ((12 initial hours/3 years) + 10 hours of additional 

ongoing burden hours) = 14 hours. 3This estimated burden is based on the sum of the estimated wage rate of $565/hour, for 5 hours, ($2,825) for outside legal services and the estimated wage rate 

of $353/hour, for 5 hours, ($1,765) for outside accountant assistance, and it assumes that there will be four statements prepared each year. The Commission’s estimates of the relevant wage rates for external time costs, such as outside legal services, take into account staff experience, a variety of sources including general information websites, and adjustments for inflation. 4This includes the internal initial burden estimate annualized over a three-year period, plus 4 hours of ongoing annual burden hours that takes into account that 

there will be four statements prepared each year. The estimate of 5 hours is based on the following calculation: ((3 initial hours/3 years) + 4 hours of additional ongoing burden hours) = 5 hours. 5This estimated burden is based on the estimated wage rate of $353/hour, for 3 hours, for outside accounting services, and it assumes that there will be four statements distributed each year. See supra endnote 1 (regarding wage rates with respect to external cost estimates). 6We estimate that 50% of advisers will use outside legal and accounting services for these collections of information. This estimate takes into account that advisers 

may elect to use these outside services (along with in-house counsel), based on factors such as adviser budget and the adviser’s standard practices for using such 

outside services, as well as personnel availability and expertise. 

C. Mandatory Private Fund Adviser 

Audits 

Final rule 206(4)–10 will require 

investment advisers that are registered 

or required to be registered to cause 

each private fund they advise, directly 

or indirectly, to undergo a financial 

statement audit in accordance with the 

audit provision (and related 

requirements for delivery of audited 

financial statements) under the custody 

rule.1826 We believe that final rule 

206(4)–10 will protect the fund and its 

investors against the misappropriation 

of fund assets and that an audit 

performed by an independent public 

accountant will provide an important 

check on the adviser’s valuation of 

private fund assets, which generally 

serve as the basis for the calculation of 

the adviser’s fees. The collection of 

information is necessary to provide 

private fund investors with information 

about their private fund investments. 

Each requirement to disclose 

information, offer to provide 

information, or adopt policies and 

procedures constitutes a ‘‘collection of 

information’’ requirement under the 

PRA. This collection of information is 

found at 17 CFR 275.206(4)–10 and is 

mandatory to the extent the adviser 

provides investment advice to a private 

fund. The respondents to these 

collections of information requirements 

will be investment advisers that are 

registered or required to be registered 

with the Commission that advise one or 

more private funds. All responses 

required by the audit rule would be 

mandatory. One response type (the 

audited financial statements) would be 

distributed only to investors in the 

private fund and would not be 

confidential. 

Based on IARD data, as of December 

31, 2022, there were 15,361 investment 

advisers registered with the 

Commission.1827 According to this data, 

5,248 registered advisers, excluding 

advisers managing solely SAFs, provide 

advice to private funds.1828 We estimate 

that these advisers, on average, each 

provide advice to 10 private funds, 

excluding SAFs.1829 We further estimate 

that these private funds, excluding 

SAFs, each have a total of 80 investors, 

on average.1830 As a result, an average 

private fund adviser would have, on 

average, a total of 800 investors across 

all private funds it advises. 

One commenter generally criticized 

the hours estimates underlying the cost 

estimates in the Proposing Release as 

unsupported, arbitrary, and possibly 

underestimated.1831 Several 

commenters highlighted the costs 

associated with the audit rule, stating 

that it would substantially increase 

audit prices because, for example, there 

may be an insufficient number of 

suitable auditors available.1832 One 

commenter asserted that the 

Commission failed to provide an 

adequate justification or backup in its 

analysis.1833 This commenter argued 

that the cost estimate is underestimated 

by at least 100 percent. 

We have made certain estimates of 

this data, as discussed below, solely for 


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1834The following types of private fund advisers 

(excluding advisers managing solely SAFs), among 

others, would be subject to the rule: unregistered 

advisers (i.e., advisers that may be prohibited from 

registering with us), foreign private advisers, and 

advisers that rely on the intrastate exemption from 

SEC registration and/or the de minimis exemption 

from SEC registration. However, we are unable to 

estimate the number of advisers in certain of these 

categories because these advisers do not file reports 

or other information with the SEC and we are 

unable to find reliable, public information. As a 

result, the above estimate is based on information 

from SEC-registered advisers to private funds, 

exempt reporting advisers (at the State and Federal 

levels), and State-registered advisers to private 

funds, in each instance excluding advisers that 

manage solely SAFs. These figures are approximate, 

exclude in each instance advisers that manage 

solely SAFs, and assume that all exempt reporting 

advisers are advisers to private funds. The 

breakdown is as follows: 5,248 SEC-registered 

advisers to private funds; 5,234 exempt reporting 

Continued 

this PRA analysis. The table below 

summarizes the initial and ongoing 

annual burden estimates associated with 

the proposed rule’s reporting 

requirement. We have adjusted this 

estimate upwards from the proposal to 

reflect the final rule, updated data, new 

methodology for certain estimates, and 

comments we received to our estimates 

asserting that we underestimated these 

figures in the proposal. We have further 

adjusted these estimates to reflect that 

the final rule will not apply to SAF 

advisers with respect to SAFs they 

advise. 

TABLE 2—RULE 206(4)–10 PRA ESTIMATES

Internal initial 

burden hours 

Internal annual burden 

hours Wage rate 1 Internal time cost Annual external cost burden 

Estimates 

Distribution of audited financial statements 2.

0 hours .............. 1.33 hours 3 ...................... $175 (blended rate for intermediate accountant 

($200), general accounting supervisor ($252), 

and general clerk ($73)).

$232.75 ............................. $75,000.4

Total new annual burden 

per private fund.

........................... 1.33 hours ......................... ........................................... $232.75 ............................. $75,000.5

Avg. number of private 

funds per adviser.

........................... 10 private funds ................ ........................................... 10 private funds ................ 10 private funds. 

Number of advisers ........... ........................... 5,248 advisers .................. ........................................... 5,248 advisers .................. 5,248 advisers. 

Total new annual burden .. ........................... 69,798.4 6 hours ............... ........................................... $12,214,720 6 .................... $3,936,000,000.6

Notes: 

1See SIFMA data sets supra Note 1 to Table 1 Rule 211(h)(1)–2 PRA Estimates. 2The audit provision will require an adviser to obtain an audit at least annually and upon an entity’s liquidation. To the extent not prohibited, we anticipate that, in 

some cases, the fund will bear the audit expense, in other cases the adviser will bear it, and in other instances both the adviser and fund will share the expense. The 

liquidation audit would serve as the annual audit for the fiscal year in which it occurs. See rule 206(4)–10. 3This estimate takes into account that the financial statements must be distributed once annually under the audit rule and that a liquidation audit would replace a 

final audit in a year. Based on our experience under the custody rule, we estimate the hour burden imposed on the adviser relating to the distribution of the audited financial statements with respect to the investors in each fund should be minimal, approximately one minute per investor. See 2009 Custody Rule Release, supra footnote 510, at 63. 4Based on our experience, we estimate that the party (or parties) that bears the audit expense would pay an average audit fee of $75,000 per fund. We estimate 

that individual fund audit fees would tend to vary over an estimated range from $15,000 to $300,000, and that some fund audit fees would be higher or lower than 

this range. We understand that the price of the audit has many variables, such as whether it is a liquid fund or illiquid fund, the number of its holdings, availability of a 

PCAOB registered and inspected auditor, economies of scale, and the location and size of the auditor. 5We assume the same frequency of these cost estimates as for the internal annual burden hours estimate. 

6Based on Form ADV data, apart from SAFs approximately 88% of private fund advisers already cause their private funds to undergo a financial statement audit. 

See Section VI (Economic Analysis—Economic Baseline—Fund Audits). Accordingly, we expect the incremental burdens associated with the rule to be substantially 

lower than the figures reflected herein. 

D. Restricted Activities 

Final rule 211(h)(2)–1 prohibits all 

private fund advisers from, directly or 

indirectly, engaging in the following 

activities, unless they provide written 

disclosure to investors and, in some 

cases, obtain investor consent regarding 

such activities: charging the private 

fund for fees or expenses associated 

with an investigation of the adviser or 

its related persons by any governmental 

or regulatory authority (other than fees 

and expenses related to an investigation 

that results or has resulted in a court or 

governmental authority imposing a 

sanction for a violation of the 

Investment Advisers Act of 1940 or the 

rules promulgated thereunder); charging 

the private fund for any regulatory or 

compliance fees or expenses, or fees or 

expenses associated with an 

examination, of the adviser or its related 

persons; reducing the amount of any 

adviser clawback by actual, potential, or 

hypothetical taxes applicable to the 

adviser, its related persons, or their 

respective owners or interest holders; 

charging or allocating fees and expenses 

related to a portfolio investment on a 

non-pro rata basis when more than one 

private fund or other client advised by 

the adviser or its related persons have 

invested in the same portfolio company; 

and borrowing money, securities, or 

other private fund assets, or receiving a 

loan or extension of credit, from a 

private fund client. 

As noted above, in the Proposing 

Release we did not submit a PRA 

analysis for rule 211(h)(2)–1 because the 

proposed rule flatly prohibited certain 

conduct and, accordingly, proposed rule 

211(h)(2)–1 did not contain a 

‘‘collection of information’’ requirement 

within the meaning of the PRA. 

However, final rule 211(h)(2)–1 

prohibits an adviser from engaging in 

certain activity, unless the adviser 

provides certain disclosure to investors. 

Accordingly, we are requesting 

comment on this collection of 

information requirement in this release 

and intend to submit these requirements 

to the OMB for review under the PRA. 

The collection of information is 

necessary to provide private fund 

investors with information about their 

private fund investments. We believe 

that many advisers fail to provide 

disclosure of the activities covered by 

the restrictions or, when disclosure is 

provided, it is often insufficient. 

Each requirement to disclose 

information, offer to provide 

information, or adopt policies and 

procedures constitutes a ‘‘collection of 

information’’ requirement under the 

PRA. This collection of information is 

found at 17 CFR 275.211(h)(2)–1 and is 

mandatory if the adviser engages in the 

restricted activity. The respondents to 

these collections of information 

requirements would be all investment 

advisers that advise one or more private 

funds. Based on IARD data, as of 

December 31, 2022, there were 12,234 

investment advisers (including both 

registered and unregistered advisers, but 

excluding advisers managing solely 

SAFs) that provide advice to private 

funds.1834 We estimate that these 


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advisers (at the Federal level); 562 State-registered 

advisers to private funds; and 1,922 State exempt 

reporting advisers. 

1835See final rule 211(h)(2)–2. 

1836Excluding advisers that provide advice solely 

to SAFs, there were 15,288 investment advisers 

registered with the Commission. 

1837See Form ADV, Part 1A, Schedule D, Section 

7.B.(1). The final rule will not apply to SAF 

advisers with respect to SAFs they advise. These 

figures do not include SAF advisers that manage 

only SAFs. 

1838See supra section VII.B. 

advisers, on average, each provide 

advice to 8 private funds (excluding 

SAFs). We further estimate that these 

private funds would, on average, each 

have a total of 63 investors. As a result, 

an average private fund adviser would 

have a total of 504 investors across all 

private funds it advises. As noted above, 

because the information collected 

pursuant to final rule 211(h)(2)–1 

requires disclosures to private fund 

investors, these disclosures would not 

be kept confidential. 

We have made certain estimates of 

this data solely for this PRA analysis. 

The table below summarizes the initial 

and ongoing annual burden estimates 

associated with the rule. We request 

comment on whether the estimates 

associated with the new collection of 

information requirements in ‘‘Rule 

211(h)(2)–1 under the Advisers Act’’ are 

reasonable in Section VII.I below. 

TABLE 3—RULE 211(h)(2)–1 PRA ESTIMATES

Internal initial 

burden hours 

Internal annual burden 

hours Wage rate 1 Internal time cost Annual external cost burden 

Proposed Estimates 

Preparation of written notices and consents.12 hours ............ 8 hours 2 ........................... $422 (blended rate for 

compliance attorney 

($425), accounting manager ($337), senior portfolio manager ($383) 

and assistant general 

counsel ($543)).

$3,376 ............................... $3,178.3

Provision, distribution, collection, retention, and 

tracking of written notices and consents.

6 hours .............. 4 hours 4 ........................... $73 (rate for general clerk) $292.

Total new annual burden 

per private fund.

........................... 12 hours ............................ ........................................... $3,668 ............................... $3,178. 

Avg. number of private 

funds per adviser.

........................... 8 private funds .................. ........................................... 8 private funds .................. 8 private funds. 

Number of advisers ........... ........................... 12,234 advisers ................ ........................................... 12,234 advisers ................ 9,176 advisers.5

Total new annual burden .. ........................... 1,174,464 hours ................ ........................................... $358,994,496 .................... $233,290,624. 

Notes: 

1See SIFMA data sets, supra Note 1 to Table 1 Rule 211(h)(1)–2 PRA Estimates. 2This includes the internal initial burden estimate annualized over a three-year period, plus 4 hours of ongoing annual burden hours and assumes notices and consent forms would be issued once a quarter to investors. The estimates assume that most private fund advisers will rely on the disclosure-based or investor consent 

exceptions to the rules and thus distribute written notices and consent forms to investors (and collect, retain, and track consent forms); however, the estimates also 

take into account that certain fund agreements may not permit or otherwise contemplate the activity restricted by the rule (e.g., liquid funds may not contemplate an 

adviser clawback of performance compensation) and, accordingly, the estimates take into account that advisers to those funds will not prepare written notices (or, if 

applicable, prepare, collect, retain, and track consent forms) as contemplated by the rule. The estimate of 8 hours is based on the following calculation: ((12 initial 

hours/3 years) + 4 hours of additional ongoing burden hours) = 8 hours. 3This estimated burden is based on the estimated wage rate of $565/hour, for 5 hours, for outside legal services and $353/hour, for one hour, for outside accounting services, at the same frequency as the internal burden hours estimate. The Commission’s estimates of the relevant wage rates for external time costs, such as 

outside legal services, take into account staff experience, a variety of sources including general information websites, and adjustments for inflation. 4This includes the internal initial burden estimate annualized over a three-year period, plus 2 hours of ongoing annual burden hours. The estimate of 4 hours is 

based on the following calculation: ((6 initial hours/3 years) + 2 hours of additional ongoing burden hours) = 4 hours. 5We estimate that 75% of advisers will use outside legal services for these collections of information. This estimate takes into account that advisers may elect to 

use outside legal services (along with in-house counsel), based on factors such as adviser budget and the adviser’s standard practices for using outside legal services, as well as personnel availability and expertise. 

E. Adviser-Led Secondaries 

Final rule 211(h)(2)–2 requires an 

adviser registered or required to be 

registered with the Commission that is 

conducting an adviser-led secondary 

transaction to distribute to investors a 

fairness opinion or valuation opinion 

from an independent opinion provider 

and a summary of any material business 

relationships the adviser or any of its 

related persons has, or has had within 

the past two years, with the 

independent opinion provider.1835 This 

requirement provides an important 

check against an adviser’s conflicts of 

interest in structuring and leading a 

transaction from which it may stand to 

profit at the expense of private fund 

investors and helps ensure that private 

fund investors are offered a fair price for 

their private fund interests. Specifically, 

this requirement is designed to help 

ensure that investors receive the benefit 

of an independent price assessment, 

which we believe will improve their 

decision-making ability and their 

overall confidence in the transaction. 

The collection of information is 

necessary to provide investors with 

information about securities 

transactions in which they may engage. 

Each requirement to disclose 

information, offer to provide 

information, or adopt policies and 

procedures constitutes a ‘‘collection of 

information’’ requirement under the 

PRA. This collection of information is 

found at 17 CFR 275.211(h)(2)–2 and is 

mandatory. The respondents to these 

collections of information requirements 

will be investment advisers that are 

registered or required to be registered 

with the Commission that advise one or 

more private funds. Based on IARD 

data, as of December 31, 2022, there 

were 15,361 investment advisers 

registered with the Commission.1836

According to this data, 5,248 registered 

advisers provide advice to private 

funds.1837 Of these 5,248 advisers, we 

estimate that 10%, or approximately 525 

advisers, conduct an adviser-led 

secondary transaction each year. Of 

these advisers, we further estimate that 

each conducts one adviser-led 

secondary transaction each year. As a 

result, an adviser will have obligations 

under the rule with regard to 80 

investors.1838 As noted above, because 

the information collected pursuant to 

final rule 211(h)(2)–2 requires 

disclosures to private fund investors, 


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1839See AIC Comment Letter I. Another 

commenter’s calculation of aggregate costs 

associated with the adviser-led secondaries rule 

yields substantially higher aggregate costs, but perfund costs comparable to those reflected here. The 

commenter’s aggregate cost result is driven by the 

commenter assuming, without basis or discussion, 

that the adviser-led secondaries rule’s costs will be 

borne over 4,533 fairness opinions instead of 504, 

as was assumed by the Proposing Release. See 

LSTA Comment Letter, Exhibit C. We believe this 

to be an error in the commenter’s analysis and have 

continued to assume approximately 10 percent of 

advisers conduct an adviser-led secondary 

transaction each year. See supra section VI.D.6. 

1840See AIC Comment Letter I; Houlihan 

Comment Letter; MFA Comment Letter I; MFA 

Comment Letter I, Appendix A; Ropes & Gray 

Comment Letter. 

1841MFA Comment Letter I; MFA Comment 

Letter I, Appendix A; AIC Comment Letter I. 

1842See Houlihan Comment Letter; LSTA 

Comment Letter. 

1843See final rule 211(h)(2)–3(b). 

1844See final rule 211(h)(2)–3(b)(1). 

these disclosures will not be kept 

confidential. 

One commenter generally criticized 

the hours estimates underlying the cost 

estimates in the Proposing Release as 

unsupported, arbitrary, and possibly 

underestimated.1839 Some commenters 

asserted that the Commission’s estimate 

of the cost for a fairness opinion was 

likely too low in light of available 

information on fairness opinions.1840

However, many of these commenters 

stated that a valuation opinion would 

likely be less costly in most 

circumstances.1841 We believe that these 

commenters’ concerns on costs are 

substantially mitigated by the option in 

the final rule for a valuation opinion 

instead of a fairness opinion; however, 

we have adjusted the estimates upwards 

to address comments received, which 

generally stated that the proposed 

estimate underestimated the cost of 

fairness opinions.1842 We have also 

adjusted this estimate upwards from the 

proposal to reflect the final rule and 

updated data for certain estimates. We 

have adjusted these estimates to reflect 

that the final rule will not apply to SAF 

advisers with respect to SAFs they 

advise. 

We have made certain estimates of 

this data solely for this PRA analysis. 

The table below summarizes the annual 

burden estimates associated with the 

rule’s requirements. 

TABLE 4—RULE 211(h)(2)–2 PRA ESTIMATES

Internal initial 

burden hours Internal annual burden hours Wage rate 1 Internal time cost Annual external cost burden 

Estimates 

Preparation/Procurement of 

fairness or valuation opinion.

0 hours .............. 10 hours 2 .............................. $429.33 (blended rate for 

compliance attorney 

($425), assistant general 

counsel ($543), and senior 

business analyst ($320)).

$4,293.30 .............................. $100,000.3

Preparation of material business relationship summary.0 hours .............. 2 hours .................................. $484 (blended rate for compliance attorney ($425) and 

assistant general counsel 

($543)).

$968 ...................................... $565.4

Distribution of fairness/valuation opinion and material 

business relationship summary.

0 hours .............. 1 hour .................................... $73 (rate for general clerk) ... $73 ........................................ $0. 

Total new annual burden per 

private fund.

........................... 13 hours ................................ ................................................ $5,334.30 .............................. $100,565. 

Number of advisers ................ ........................... 525 advisers 5 ........................ ................................................ 525 advisers .......................... 525 advisers. 

Total new annual burden ....... ........................... 6,825 hours ........................... ................................................ $2,800,507.50 ....................... $52,796,625. 

Notes: 

1See SIFMA data sets supra Note 1 to Table 1 Rule 211(h)(1)–2 PRA Estimates. 2 Includes the time an adviser will spend gathering materials to provide to the independent opinion provider so that the latter can prepare the fairness or valuation 

opinion. 3This estimated burden is based on our understanding of the general cost of a fairness/valuation opinion in the current market. The cost will vary based on, among 

other things, the complexity, terms, and size of the adviser-led secondary transaction, as well as the nature of the assets of the fund. 4This estimated burden is based on the estimated wage rate of $565/hour, for 1 hour, for outside legal services at the same frequency as the internal burden hours 

estimate. The Commission’s estimates of the relevant wage rates for external time costs, such as outside legal services, take into account staff experience, a variety 

of sources including general information websites, and adjustments for inflation. 5We estimate that 10% of all registered private fund advisers conduct an adviser-led secondary transaction each year. 

F. Preferential Treatment 

Final rule 211(h)(2)–3 prohibits all 

private fund advisers from providing 

preferential terms to investors regarding 

certain redemptions or providing certain 

information about portfolio holdings or 

exposures, subject to certain limited 

exceptions.1843 The rule also prohibits 

these advisers from providing any other 

preferential treatment to any investor in 

the private fund unless the adviser 

provides written disclosures to 

prospective and current investors in a 

private fund regarding all preferential 

treatment the adviser or its related 

persons are providing to other investors 

in the same fund. For prospective 

investors, the new rule requires advisers 

to provide the written notice regarding 

any preferential treatment related to any 

all material economic terms prior to an 

investor’s investment in the fund.1844

The final rule also requires advisers to 

provide investors with comprehensive 

annual disclosure of all preferential 

treatment provided by the adviser or its 

related persons since the last annual 

notice. The final rule requires the 

adviser to distribute to current investors 

an initial notice of such preferential 

treatment (i) for an illiquid fund, as 

soon as reasonably practicable following 

the end of the fund’s fundraising period 

and (ii) for a liquid fund, as soon as 

reasonably practicable following the 

investor’s investment in the private 

fund. 

The new rule is designed to protect 

investors and serve the public interest 

by requiring disclosure of preferential 

treatment afforded to certain investors. 

The new rule will increase transparency 

to better inform investors regarding the 

breadth of preferential terms, the 

potential for those terms to affect their 

investment in the private fund, and the 

potential costs (including compliance 

costs) associated with these preferential 

terms. Also, this disclosure will help 

investors shape the terms of their 

relationship with the adviser of the 

private fund. The collection of 

information is necessary to provide 


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1845The following types of private fund advisers 

(excluding advisers managing solely SAFs), among 

others, will be subject to the rule: unregistered 

advisers (i.e., advisers those that may be prohibited 

from registering with us), foreign private advisers, 

and advisers that rely on the intrastate exemption 

from SEC registration and/or the de minimis 

exemption from SEC registration. However, we are 

unable to estimate the number of advisers in certain 

of these categories because these advisers do not file 

reports or other information with the SEC and we 

are unable to find reliable, public information. As 

a result, the above estimate is based on information 

from SEC-registered advisers to private funds, 

exempt reporting advisers (at the State and Federal 

levels), and State-registered advisers to private 

funds. These figures are approximate, exclude in 

each instance advisers that manage solely SAFs, 

and assume that all exempt reporting advisers are 

advisers to private funds. The breakdown is as 

follows: 5,248 SEC-registered advisers to private 

funds; 5,234 exempt reporting advisers (at the 

Federal level); 562 State-registered advisers to 

private funds; and 1,922 State exempt reporting 

advisers. 

1846See AIC Comment Letter I. 

1847See CCMR Comment Letter I. 

1848See MFA Comment Letter I. We note, 

however, that the final rule contains a legacy 

provision. 

private fund investors with information 

about their private fund investments. 

Each requirement to disclose 

information, offer to provide 

information, or adopt policies and 

procedures constitutes a ‘‘collection of 

information’’ requirement under the 

PRA. This collection of information is 

found at 17 CFR 275.211(h)(2)–3 and is 

mandatory. The respondents to these 

collections of information requirements 

will be all investment advisers that 

advise one or more private funds. Based 

on IARD data, as of December 31, 2022, 

there were 12,234 investment advisers 

(including both registered and 

unregistered advisers, but excluding 

advisers managing solely SAFs) that 

provide advice to private funds.1845 We 

estimate that these advisers, on average, 

each provide advice to 8 private funds 

(excluding SAFs). We further estimate 

that these private funds, on average, 

each have a total of 63 investors. As a 

result, an average private fund adviser 

has a total of 504 investors across all 

private funds it advises. As noted above, 

because the information collected 

pursuant to rule 211(h)(2)–3 requires 

disclosures to private fund investors 

and prospective investors, these 

disclosures will not be kept 

confidential. 

One commenter generally criticized 

the hours estimates underlying the cost 

estimates in the Proposing Release as 

unsupported, arbitrary, and possibly 

underestimated.1846 Another commenter 

emphasized that existing fund 

documents would need to be amended 

to come into compliance with the 

proposed rules and that the release fails 

to identify or quantify the transaction 

costs associated with the renegotiation 

of fund documents.1847 Another 

commenter made a similar argument, 

asserting that, without a legacy status 

provision for existing relationships, the 

proposed changes likely will require 

advisers to renegotiate agreements with 

investors and that proposal significantly 

underestimates the costs of the 

proposals on existing private funds.1848

We have adjusted this estimate 

upwards from the proposal to reflect the 

final rule (including with respect to the 

exceptions in paragraph (a) of the final 

rule), updated data, new methodology 

for certain estimates, and comments we 

received to our estimates asserting that 

we underestimated these figures in the 

proposal. We have also adjusted these 

estimates to reflect that the final rule 

will not apply to SAF advisers with 

respect to SAFs they advise. 

We have made certain estimates of 

this data solely for this PRA analysis. 

The table below summarizes the initial 

and ongoing annual burden estimates. 

TABLE 5—RULE 211(h)(2)–3 PRA ESTIMATES

Internal initial 

burden hours 

Internal annual burden 

hours Wage rate 1 Internal time cost Annual external cost burden 

Estimates 

Preparation of written notice 6.

12 hours ............ 8 hours 2 .......................... $435 (blended rate for 

compliance attorney 

($425), accounting 

manager ($337), and 

assistant general counsel ($543)).

$3,480 ..................................... $565.3

Provision/distribution of 

written notice 6.

1 hours .............. 3.33 hours 4 ..................... $73 (rate for general 

clerk).

$243.09.

Total new annual burden 

per private fund.

........................... 11.33 hours ..................... ......................................... $3,723.09 ................................ $565. 

Avg. number of private 

funds per adviser.

........................... 8 private funds ................ ......................................... 8 private funds ......................... 8 private funds. 

Number of advisers ......... ........................... 12,234 advisers ............... ......................................... 12,234 advisers ....................... 9,176 advisers.5

Total new annual burden ........................... 1,108,890 hours .............. ......................................... $364,386,264.48 ..................... $41,475,520. 

Notes: 

1See SIFMA data sets, supra Note 1 to Table 1 Rule 211(h)(1)–2 PRA Estimates. 2This includes the internal initial burden estimate annualized over a three-year period, plus 4 hours of ongoing annual burden hours and assumes notices will be 

issued once annually to existing investors and once quarterly for prospective investors. The estimate of 8 hours is based on the following calculation: ((12 initial 

hours/3 years) + 4 hours of additional ongoing burden hours) = 8 hours. The burden hours associated with reviewing preferential treatment provided to other investors 

in the same fund and updating the written notice take into account that (i) most closed-end funds will only raise new capital for a finite period of time and thus the burden hours will likely decrease after the fundraising period terminates for such funds since they will not continue to seek new investors and will not continue to agree 

to new preferential treatment for new investors and (ii) most open-end private funds continuously raise capital and thus the burden hours will likely remain the same 

year over year since they will continue to seek new investors and will continue to agree to preferential treatment for new investors. 3This estimated burden is based on the estimated wage rate of $565/hour, for 1 hours, for outside legal services at the same frequency as the internal burden 

hours estimate. The Commission’s estimates of the relevant wage rates for external time costs, such as outside legal services, take into account staff experience, a 

variety of sources including general information websites, and adjustments for inflation. 4This includes the internal initial burden estimate annualized over a three-year period, plus 3 hours of ongoing annual burden hours. The estimate of 3.33 hours is 

based on the following calculation: ((1 initial hours/3 years) + 3 hours of additional ongoing burden hours) = 3.33 hours. 5We estimate that 75% of advisers will use outside legal services for these collections of information. This estimate takes into account that advisers may elect to 

use outside legal services (along with in-house counsel), based on factors such as adviser budget and the adviser’s standard practices for using outside legal services, as well as personnel availability and expertise. 6 References to written notices in this table, and the burdens associated with the preparation, provision, and distribution thereof, include estimates related to advisers (i) offering the same preferential redemption terms to all existing and future investors and (ii) offering the same preferential information to all other investors, in 

each case, in accordance with the exceptions to the prohibitions aspect of the final rule. 


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1849See rule 206(4)–7(b). 

1850Curtis Comment Letter; SBAI Comment 

Letter. 

1851See final amended rule 204–2. 

1852See final amended rule 204–2(a)(20)(i) and 

(ii), and (a)(22). 

G. Written Documentation of Adviser’s 

Annual Review of Compliance Program 

The amendment to rule 206(4)–7 

requires investment advisers that are 

registered or required to be registered to 

document the annual review of their 

compliance policies and procedures in 

writing.1849 We believe that such a 

requirement will focus renewed 

attention on the importance of the 

annual compliance review process and 

will help ensure that advisers maintain 

records regarding their annual 

compliance review that will allow our 

staff to determine whether an adviser 

has complied with the compliance rule. 

This collection of information is 

found at 17 CFR 275.206(4)–7 and is 

mandatory. The Commission staff uses 

the collection of information in its 

examination and oversight program. As 

noted above, responses provided to the 

Commission in the context of its 

examination and oversight program 

concerning the amendments to rule 

206(4)–7 will be kept confidential 

subject to the provisions of applicable 

law. 

Based on IARD data, as of December 

31, 2022, there were 15,361 investment 

advisers registered with the 

Commission. In our most recent PRA 

submission for rule 206(4)–7, we 

estimated a total hour burden of 

1,293,840 hours and a total monetized 

time burden of $322,036,776. As noted 

above, all advisers that are registered or 

required to be registered, including 

advisers to SAFs, will be required to 

document their annual review in 

writing. 

Commenters argued there would be 

certain additional costs associated with 

the amendment to rule 206(4)–7, such as 

compliance consultants or outside 

counsel.1850 We have adjusted this 

estimate upwards from the proposal to 

reflect the final amendments, updated 

data, and comments we received to our 

estimates asserting that we 

underestimated these figures in the 

proposal. The table below summarizes 

the initial and ongoing annual burden 

estimates associated with the 

amendments to rule 206(4)–7. 

TABLE 6—RULE 206(4)–7 PRA ESTIMATES

Internal annual 

burden hours Wage rate 1 Internal time cost Annual external cost burden 

Estimates 

Written documentation of annual review.5.5 hours 2 .......... $484 (blended rate for compliance attorney ($425) 

and assistant general 

counsel ($543)).

$2,662 ................................... $459.3

Number of advisers ............... 15,361 advisers .. ............................................... 15,361 advisers .................... 7,681 advisers.4

Total new annual burden ...... 84,486 hours ...... ............................................... $40,890,982 .......................... $3,525,579. 

Notes: 

1See SIFMA data sets, supra Note 1 to Table 1 Rule 211(h)(1)–2 PRA Estimates. 2We estimate that these amendments will increase each registered investment adviser’s average annual collection burden under rule 206(4)–7 

by 5.5 hours. 3This estimated burden is based on the sum of the estimated wage rate of $565/hour, for 0.5 hours, ($282.5) for outside legal services and 

the estimated wage rate of $353/hour, for 0.5 hours, ($176.5) for outside accountant assistance. 4We estimate that 50% of advisers will use outside legal services for these collections of information. This estimate takes into account that advisers may elect to use outside legal services (along with in-house counsel), based on factors such as adviser budget and the adviser’s standard 

practices for using outside legal services, as well as personnel availability and expertise. 

H. Recordkeeping 

The amendments to rule 204–2 will 

require advisers to private funds, where 

the adviser is registered or required to 

be registered with the Commission, to 

retain books and records related to the 

quarterly statement rule, the audit rule, 

the adviser-led secondaries rule, the 

restricted activities rules, and the 

preferential treatment rule.1851 These 

amendments will help facilitate the 

Commission’s inspection and 

enforcement capabilities. 

Specifically, the books and records 

amendments related to the quarterly 

statement rule will require advisers to 

(i) retain a copy of any quarterly 

statement distributed to fund investors 

as well as a record of each addressee 

and the date(s) the statement was sent; 

(ii) retain all records evidencing the 

calculation method for all expenses, 

payments, allocations, rebates, offsets, 

waivers, and performance listed on any 

statement delivered pursuant to the 

quarterly statement rule; and (iii) make 

and keep documentation substantiating 

the adviser’s determination that the 

private fund it manages is a liquid fund 

or an illiquid fund pursuant to the 

quarterly statement rule.1852

The books and records amendments 

related to the audit rule will require 

advisers to keep a copy of any audited 

financial statements distributed along 


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1853See final amended rule 204–2(a)(21)(i). 

1854See final amended rule 204–2(a)(21)(ii). 

1855See final amended rule 204–2(a)(23). 

1856See final amended rule 204–2(a)(7)(v). 

1857 Id. 

1858See Form ADV, Part 1A, Schedule D, Section 

7.B.(1). The final quarterly statement, audit, 

adviser-led secondaries, restricted activities, and 

preferential treatment rules will not apply to SAF 

advisers with respect to SAFs they advise. These 

figures do not include SAF advisers that manage 

only SAFs. 1859See Form ADV, Part 1A, Schedule D, Section 

7.B.(1). The final quarterly statement, audit, 

adviser-led secondaries, restricted activities, and 

preferential treatment rules will not apply to SAFs. 

These figures do not include SAFs. 

1860See Form ADV, Part 1A, Schedule D, Section 

7.B.(1).A., #13. 

1861Supporting Statement for the Paperwork 

Reduction Act Information Collection Submission 

for Revisions to Rule 204–2, OMB Report, OMB 

3235–0278 (May 2023). 

1862Under the currently approved PRA for Rule 

204–2, there is no cost burden other than the 

internal cost of the hour burden, and we believe 

that the amendments will not result in any external 

cost burden. 

1863See, e.g., AIMA/ACC Comment Letter; ATR 

Comment Letter. 

with a record of each addressee and the 

corresponding date(s) sent.1853

Additionally, the rule will require the 

adviser to keep a record documenting 

steps it took to cause a private fund 

client with which it is not in a control 

relationship to undergo a financial 

statement audit that will comply with 

the rule.1854

The books and records amendments 

related to the adviser-led secondaries 

rule will require advisers to retain a 

copy of any fairness or valuation 

opinion and summary of material 

business relationships distributed 

pursuant to the rule along with a record 

of each addressee and the corresponding 

date(s) sent.1855

The books and records amendments 

related to the preferential treatment rule 

will require advisers to retain copies of 

all written notices sent to current and 

prospective investors in a private fund 

pursuant to final rule 211(h)(2)–3.1856 In 

addition, advisers will be required to 

retain copies of a record of each 

addressee and the corresponding date(s) 

sent.1857

The books and records amendments 

related to the restricted activities rule 

will require advisers to retain copies of 

all notifications, consent forms, or other 

documents distributed to (and received 

from) private fund investors pursuant to 

the restricted activities rule, along with 

a record of each addressee and the 

corresponding date(s) sent. 

The respondents to these collections 

of information requirements will be 

investment advisers that are registered 

or required to be registered with the 

Commission that advise one or more 

private funds. Based on IARD data, as of 

December 31, 2022, there were 15,361 

investment advisers registered with the 

Commission. According to this data, 

5,248 registered advisers provide advice 

to private funds.1858 We estimate that 

these advisers, on average, each provide 

advice to 10 private funds.1859 We 

further estimate that these private funds, 

on average, each have a total of 80 

investors.1860 As a result, an average 

private fund adviser has, on average, a 

total of 800 investors across all private 

funds it advises. 

In our most recent PRA submission 

for rule 204–2,1861 we estimated for rule 

204–2 a total hour burden of 2,803,536 

hours, and the total annual internal cost 

burden is $179,000,834.1862 This 

collection of information is found at 17 

CFR 275.204–2 and is mandatory. The 

Commission staff uses the collection of 

information in its examination and 

oversight program. As noted above, 

responses provided to the Commission 

in the context of its examination and 

oversight program concerning the 

amendments to rule 204–2 will be kept 

confidential subject to the provisions of 

applicable law. 

Several commenters stated that the 

recordkeeping requirements would be 

burdensome.1863 We have adjusted the 

estimates upwards from the proposal to 

reflect the final amendments, updated 

data, and comments we received to our 

estimates asserting that we 

underestimated these figures in the 

proposal. We are also revising the 

estimates upwards to reflect the 

additional recordkeeping obligations we 

are adopting, such as the requirement to 

maintain records related to the 

restricted activities rule. We have 

adjusted these estimates to reflect that 

the final quarterly statement, audit, 

adviser-led secondaries, restricted 

activities, and preferential treatment 

rules will not apply to SAF advisers 

with respect to SAFs they advise as 

well. 

The table below summarizes the 

initial and ongoing annual burden 

estimates associated with the 

amendments to rule 204–2. 

TABLE 7—RULE 204–2 PRA ESTIMATES

Internal annual 

burden hours 1 Wage rate 2 Internal time cost 

Annual 

external 

cost 

burden 

Estimates 

Retention of quarterly statement and 

calculation information; making 

and keeping records re liquid/illiquid fund determination.

0.50 hours ...... $77.5 (blended rate for general clerk 

($73) and compliance clerk ($82)).

$38.75 ............................................... $0 

Avg. number of private funds per adviser.10 private 

funds.

........................................................... 10 private funds ................................ $0 

Number of advisers .......................... 5,248 advisers ........................................................... 5,248 advisers .................................. $0 

Sub-total burden ............................... 26,240 hours .. ........................................................... $2,033,600 ........................................ $0 

Retention of written notices re preferential treatment.1 hours ........... $77.5 (blended rate for general clerk 

($73) and compliance clerk ($82)).

$77.5 ................................................. $0 

Avg. number of private funds per adviser.10 private 

funds 3.

........................................................... 10 private funds 3 .............................. $0 

Number of advisers .......................... 5,248 advisers ........................................................... 5,248 advisers .................................. $0 

Sub-total burden ............................... 52,480 hours .. ........................................................... $4,067,200 ........................................ $0 


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1864 5 U.S.C. 603(a). 

TABLE 7—RULE 204–2 PRA ESTIMATES—Continued 

Internal annual 

burden hours 1 Wage rate 2 Internal time cost 

Annual 

external 

cost 

burden 

Retention and distribution of audited 

financial statements; making and 

keeping records re: steps to cause 

a private fund client that the adviser does not control to undergo 

a financial statement audit.

0.50 hours ...... $77.5 (blended rate for general clerk 

($73) and compliance clerk ($82)).

$38.75 ............................................... $0 

Avg. number of private funds per adviser.10 private 

funds.

........................................................... 10 private funds ................................ $0 

Number of advisers .......................... 5,248 advisers ........................................................... 5,248 advisers .................................. $0 

Sub-total burden ............................... 26,240 hours .. ........................................................... $2,033,600 ........................................ $0 

Retention and distribution of fairness/valuation opinion and summary of material business relationships.1.5 hour ......... $77.5 (blended rate for general clerk 

($73) and compliance clerk ($82)).

$116.25 ............................................. $0 

Avg. number of private funds per adviser that conduct an adviser-led 

transaction.

1 private fund ........................................................... 1 private fund .................................... $0 

Number of advisers .......................... 525 advisers 4 ........................................................... 525 advisers 4 ................................... $0 

Sub-total burden ............................... 787.5 hours .... ........................................................... $61,031.25 ........................................ $0 

Retention of written notices, consent 

forms, and other documents for 

restricted activities.

3.5 hours ........ $77.5 (blended rate for general clerk 

($73) and compliance clerk ($82)).

$271.25 ............................................. $0 

Avg. number of private funds per adviser.10 private 

funds 3.

........................................................... 10 private funds 3 .............................. $0 

Number of advisers .......................... 5,248 advisers ........................................................... 5,248 advisers .................................. $0 

Sub-total burden ............................... 183,680 hours ........................................................... $14,235,200 ...................................... ................

Total burden ...................................... 289,427.5 

hours.

........................................................... $22,430,631.25 ................................. $0 

Notes: 

1 Hour burden and cost estimates for these rule amendments assume the frequency of each collection of information for the substantive rule 

with which they are associated. For example, the hour burden estimate for recordkeeping obligations associated with the amendments to rule 

204–2(a)(20) and (22) will assume the same frequency of collection of information as under final rule 211(h)(1)–2. 2See SIFMA data sets, supra Note 1 to Table 1 Rule 211(h)(1)–2 PRA Estimates. 3Final rules 211(h)(2)–1 and 211(h)(2)–3 apply to all private fund advisers, but the amendments to rule 204–2 only apply to advisers that are 

registered or required to be registered with the Commission. As discussed above, we estimate that advisers that are registered or required to be 

registered with the Commission each advise 10 private funds on average. 4See supra section VII.E (Adviser-Led Secondaries). 

I. Request for Comment Regarding Rule 

211(h)(2)–1 

We request comment on whether the 

estimates associated with the new 

collection of information requirements 

in ‘‘Rule 211(h)(2)–1 under the Advisers 

Act’’ are reasonable. Pursuant to 44 

U.S.C. 3506(c)(2)(B), the Commission 

solicits comments to: (1) evaluate 

whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Commission, including whether the 

information will have practical utility; 

(2) evaluate the accuracy of the 

Commission’s estimate of the burden of 

the proposed collection of information; 

(3) determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(4) determine whether there are ways to 

minimize the burden of the collection of 

information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology. 

Persons wishing to submit comments 

on the collection of information 

requirements should direct them to the 

OMB Desk Officer for the Securities and 

Exchange Commission, 

MBX.OMB.OIRA.SEC_desk_officer@

omb.eop.gov, and should send a copy to 

Vanessa A. Countryman, Secretary, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–1090, with reference to File No. 

S7–03–22. OMB is required to make a 

decision concerning the collections of 

information between 30 and 60 days 

after publication of this release; 

therefore a comment to OMB is best 

assured of having its full effect if OMB 

receives it within 30 days after 

publication of this release. Requests for 

materials submitted to OMB by the 

Commission with regard to these 

collections of information should be in 

writing, refer to File No. S7–03–22, and 

be submitted to the Securities and 

Exchange Commission, Office of FOIA 

Services, 100 F Street NE, Washington, 

DC 20549–2736. 

VIII. Final Regulatory Flexibility 

Analysis 

The Commission has prepared the 

following Final Regulatory Flexibility 

Analysis (‘‘FRFA’’) in accordance with 

section 4(a) of the RFA.1864 It relates to 

the following rules and rule 

amendments under the Advisers Act: (i) 

rule 211(h)(1)–1; (ii) rule 211(h)(1)–2; 

(iii) rule 206(4)–10; (iv) rule 211(h)(2)– 

1; (v) rule 211(h)(2)–2; (vi) rule 

211(h)(2)–3; (vii) amendments to rule 

204–2; and (viii) amendments to rule 

206(4)–7. 

A. Reasons for and Objectives of the 

Final Rules and Rule Amendments 

1. Final Rule 211(h)(1)–1 

We are adopting final rule 211(h)(1)– 

1 under the Advisers Act (‘‘definitions 

rule’’), which contains numerous 

definitions for purposes of final rules 

211(h)(1)–2, 206(4)–10, 211(h)(2)–1, 

211(h)(2)–2, and 211(h)(2)–3 and the 


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1865See final rule 211(h)(1)–1. 

1866See final rule 211(h)(1)–2. 

1867However, the final rule prohibits advisers 

from charging for fees and expenses related to an 

investigation that results or has resulted in a court 

or governmental authority imposing a sanction for 

a violation of the Act or the rules promulgated 

thereunder. 

1868See final rule 211(h)(2)–1(a). 

final amendments to rule 204–2.1865 We 

chose to include these definitions in a 

single rule for ease of reference, 

consistency, and brevity. 

2. Final Rule 211(h)(1)–2 

We are adopting final rule 211(h)(1)– 

2 under the Advisers Act, which 

requires any investment adviser 

registered or required to be registered 

with the Commission that provides 

investment advice to a private fund 

(other than a SAF) that has at least two 

full fiscal quarters of operating results to 

prepare and distribute a quarterly 

statement to private fund investors that 

includes certain standardized 

disclosures regarding the costs of 

investing in the private fund and the 

private fund’s performance.1866 We 

believe that providing this information 

to private fund investors in a simple and 

clear format is appropriate and in the 

public interest and will improve 

investor protection and make investors 

better informed. The reasons for, and 

objectives of, final rule 211(h)(1)–2 are 

discussed in more detail in sections I 

and II above. The burdens of this 

requirement on small advisers are 

discussed below as well as above in 

sections VI and VII, which discuss the 

burdens on all advisers. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

3. Final Rule 206(4)–10 

We are adopting final rule 206(4)–10 

under the Advisers Act, which will 

generally require all investment advisers 

that are registered or required to be 

registered with the Commission to have 

their private fund clients (other than a 

SAF client) undergo a financial 

statement audit that meets the 

requirements of the audit provision of 

the custody rule (i.e., rule 206(4)– 

2(b)(4)), which are incorporated into the 

new rule by reference, as described 

above in section II. The final rule is 

designed to provide protection for the 

fund and its investors against the 

misappropriation of fund assets and to 

provide an important check on the 

adviser’s valuation of private fund 

assets, which often serve as the basis for 

the calculation of the adviser’s fees, and 

to align with the audit requirements in 

the audit provision of the custody rule. 

The reasons for, and objectives of, the 

final audit rule are discussed in more 

detail in sections I and II, above. The 

burdens of these requirements on small 

advisers are discussed below as well as 

above in sections VI and VII, which 

discuss the burdens on all advisers. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

4. Final Rule 211(h)(2)–1 

Final rule 211(h)(2)–1 will restrict all 

private fund advisers (other than an 

adviser to SAFs with respect to such 

funds) from, directly or indirectly, 

engaging in certain sales practices, 

conflicts of interest, and compensation 

schemes that are contrary to the public 

interest and the protection of investors. 

Specifically, the rule prohibits an 

adviser from engaging in the following 

activities, unless it provides written 

disclosure to investors and, in some 

cases, obtain investor consent: (1) 

charging certain fees and expenses to a 

private fund (including fees or expenses 

associated with an investigation of the 

adviser or its related persons by 

governmental or regulatory authorities, 

regulatory, examination, or compliance 

expenses or fees of the adviser or its 

related persons,1867 or fees and 

expenses related to a portfolio 

investment (or potential portfolio 

investment) on a non-pro rata basis 

when multiple private funds and other 

clients advised by the adviser or its 

related persons have invested (or 

propose to invest) in the same portfolio 

investment); (2) reducing the amount of 

any adviser clawback by actual, 

potential, or hypothetical taxes 

applicable to the adviser, its related 

persons, or their respective owners or 

interest holders; and (3) borrowing 

money, securities, or other fund assets, 

or receiving a loan or an extension of 

credit, from a private fund client.1868

Each of these restrictions is described in 

more detail above in section II. As 

discussed above, we believe that these 

sales practices, conflicts of interest, and 

compensation schemes must be 

restricted, and the final rule will 

prohibit these activities, unless the 

adviser provides specified disclosures to 

investors and, in some cases, obtain 

investor consent under the final rule. 

Also, the final rule restricts these 

activities even if they are performed 

indirectly, for example by an adviser’s 

related persons, because the activities 

have an equal potential to harm 

investors regardless of whether the 

adviser engages in the activity directly 

or indirectly. The reasons for, and 

objectives of, the final rule are discussed 

in more detail in sections I and II, 

above. The burdens of these 

requirements on small advisers are 

discussed below as well as above in 

sections VI and VII, which discuss the 

burdens on all advisers. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

5. Final Rule 211(h)(2)–2 

We are adopting final rule 211(h)(2)– 

2 under the Advisers Act, which 

generally requires an adviser that is 

registered or required to be registered 

with the Commission and is conducting 

an adviser-led secondary transaction 

with respect to any private fund that it 

advises (other than a SAF), where the 

adviser (or its related persons) offers 

fund investors the option between 

selling their interests in the private 

fund, and converting or exchanging 

them for new interests in another 

vehicle advised by the adviser or its 

related persons, to, prior to the due date 

of an investor participation election 

form in respect of the transaction, obtain 

and distribute to investors in the private 

fund a fairness opinion or valuation 

opinion from an independent opinion 

provider and a summary of any material 

business relationships that the adviser 

or any of its related persons has, or has 

had within the two-year period 

immediately prior to the issuance date 

of the fairness opinion or valuation 

opinion, with the independent opinion 

provider. The specific requirements of 

the final rule are described above in 

section II. The final rule is designed to 

provide an important check against an 

adviser’s conflicts of interest in 

structuring and leading a transaction 

from which it may stand to profit at the 

expense of private fund investors. The 

reasons for, and objectives of, the final 

rule are discussed in more detail in 

sections I and II above. The burdens of 

these requirements on small advisers are 

discussed below as well as above in 

sections VI and VII, which discuss the 

burdens on all advisers. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

6. Final Rule 211(h)(2)–3 

Final rule 211(h)(2)–3 will prohibit a 

private fund adviser (other than an 

adviser to SAFs with respect to such 

funds), directly or indirectly, from: (1) 

granting an investor in a private fund or 

in a similar pool of assets the ability to 

redeem its interest on terms that the 

adviser reasonably expects to have a 

material, negative effect on other 

investors in that private fund or in a 

similar pool of assets, with an exception 


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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 63381 

1869See final rule 211(h)(2)–3. 

1870See final rule 211(h)(2)–3(b). 

1871See LSTA Comment Letter, Exhibit C. 

1872See supra section VI.B. 

1873This commenter stated that, according to a 

benchmark from the Small Business 

Administration, ‘‘investment vehicles’’ with assets 

of under $35 million would constitute a ‘‘small 

business.’’ See LSTA Comment Letter, Exhibit C. 

1874See supra section VI.E.2. 

1875 Id. 

1876 Id. 

1877 Id. 

for redemptions that are required by 

applicable law, rule, regulation, or order 

of certain governmental authorities and 

another if the adviser offers the same 

redemption ability to all existing and 

future investors in the private fund or 

similar pool of assets; or (2) providing 

information regarding the portfolio 

holdings or exposures of the private 

fund, or of a similar pool of assets, to 

any investor in the private fund if the 

adviser reasonably expects that 

providing the information would have a 

material, negative effect on other 

investors in that private fund or in a 

similar pool of assets, with an exception 

where the adviser offers such 

information to all other existing 

investors in the private fund and any 

similar pool of assets at the same time 

or substantially the same time.1869 The 

final rule will also prohibit these 

advisers from providing any other 

preferential treatment to any investor in 

a private fund unless the adviser 

provides written disclosures to 

prospective investors of the private fund 

regarding preferential treatment related 

to any material economic terms, as well 

as written disclosures to current 

investors in the private fund regarding 

all preferential treatment, which the 

adviser or its related persons has 

provided to other investors in the same 

fund.1870 These requirements are 

described above in section II. The final 

rule is designed to restrict sales 

practices that present a conflict of 

interest between the adviser and the 

private fund client that are contrary to 

the public interest and protection of 

investors and certain practices that can 

be fraudulent and deceptive. The 

disclosure elements of the final rule are 

designed to also help investors shape 

the terms of their relationship with the 

adviser of the private fund. The reasons 

for, and objectives of, the final rule are 

discussed in more detail in sections I 

and II, above. The burdens of these 

requirements on small advisers are 

discussed below as well as above in 

sections VI and VII, which discuss the 

burdens on all advisers. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

7. Final Amendments to Rule 204–2 

We are also adopting related 

amendments to rule 204–2, the books 

and records rule, which sets forth 

various recordkeeping requirements for 

registered investment advisers. We are 

amending the current rule to require 

investment advisers to private funds to 

make and keep records relating to the 

quarterly statements required under 

final rule 211(h)(1)–2, the financial 

statement audits performed under final 

rule 206(4)–10, disclosures regarding 

restricted activities provided under final 

rule 211(h)(2)–1, fairness opinions or 

valuation opinions required under final 

rule 211(h)(2)–2, and disclosure of 

preferential treatment required under 

final rule 211(h)(2)–3. The reasons for, 

and objectives of, the final amendments 

to the books and records rule are 

discussed in more detail in sections I 

and II above. The burdens of these 

requirements on small advisers are 

discussed below as well as above in 

sections VI and VII, which discuss the 

burdens on all advisers. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

8. Final Amendments to Rule 206(4)–7 

We are adopting amendments to rule 

206(4)–7 to require all SEC-registered 

advisers to document the annual review 

of their compliance policies and 

procedures in writing, as described 

above in section III. The final 

amendments are designed to focus 

renewed attention on the importance of 

the annual compliance review process 

and will better enable our staff to 

determine whether an adviser has 

complied with the review requirement 

of the compliance rule. The reasons for, 

and objectives of, the final amendments 

are discussed in more detail in sections 

I and III, above. The burdens of these 

requirements on small advisers are 

discussed below as well as above in 

sections VI and VII, which discuss the 

burdens on all advisers. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

B. Significant Issues Raised by Public 

Comments 

One commenter provided its own 

calculations of the number of small 

entities impacted by the rules using 

both the Commission’s definition of 

small entity and a different definition, 

and the commenter’s reasoning for using 

a different definition is premised on the 

commenter’s belief that the Commission 

is required to conduct a regulatory 

impact analysis. 1871 However, as 

discussed above, the Commission was 

not required to perform a regulatory 

impact analysis.1872 Under Commission 

rules, for the purposes of the Advisers 

Act and the RFA, an investment adviser 

generally is a small entity if it meets the 

definition set forth in Advisers Act rule 

0–7(a). 

Additionally, in providing its own 

calculations, this commenter calculated 

the number of private funds that would 

be ‘‘small entities’’ according to its own 

definition,1873 as well as the definition 

set forth in Advisers Act rule 0–7(a), 

which sets forth the criteria for 

determining whether an investment 

adviser (and not a private fund) is a 

‘‘small entity’’ for purposes of the RFA 

analysis. As a result, this commenter 

assumed that the ‘‘small entities’’ 

directly subject to the rules would be 

private funds, rather than investment 

advisers to private funds. The 

Commission’s analysis, however, 

correctly analyzed the impact on 

investment advisers. 

More generally, as discussed above, 

many commenters expressed broader 

concerns that there may be negative 

effects on competition, including 

through effects on smaller, emerging 

advisers.1874 For example, commenters 

stated that restrictions on preferential 

treatment may hinder smaller advisers’ 

abilities to secure initial seed or anchor 

investors, stating that smaller, emerging 

advisers often need to provide anchor 

investors significant preferential 

rights.1875 Commenters also stated more 

generally that increased compliance 

costs on advisers may reduce 

competition by causing advisers, 

particularly smaller advisers, to close 

their funds and reducing the choices 

investors have among competing 

advisers and funds.1876 In particular, 

some commenters stated that the 

combined costs of multiple ongoing 

rulemakings would harm investors by 

making it cost-prohibitive for many 

advisers to stay in business or for new 

advisers to start a business, and that this 

effect would further harm competition 

by creating new barriers to entry.1877

Commenters lastly stated that the loss of 

smaller advisers would result in 

reduced diversity of investment 

advisers, based on an assertion that 

most women- and minority-owned 

advisers are smaller and more 

frequently associated with first time 

funds, and that reduced diversity of 

investment advisers may also have 


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1878 Id. 

1879Certain other commenters expressed broader 

concerns that there may be negative effects on 

competition, including through effects on smaller, 

emerging advisers. See supra section VI.E.2. 

1880 Id. 

1881Some registered advisers may therefore have 

the option of reducing their assets under 

management in order to forgo registration, thereby 

avoiding the costs of the final rules that only apply 

to registered advisers, such as the mandatory audit 

rule. Id. 

1882 Id. 

1883See supra sections VI.D, VI.E.2. 

1884 Id. 

1885See supra section IV (allowing up to 18 

months for smaller private fund advisers to comply 

with the quarterly statement rule, the mandatory 

private fund adviser audit rule, the adviser-led 

secondaries rule, and the restricted activities rule). 1886See supra section IV (allowing legacy status 

under limited circumstances to prevent advisers 

and investors from having to renegotiate existing 

fund documents). 1887See supra section II.E (discussing disclosurebased exceptions and, in some cases, consent-based 

exceptions for certain fees and expenses, post-tax 

clawbacks, non-pro rata allocations, and 

borrowing). 1888See supra section II.D.2. 1889See supra section II.G. 1890See supra section VI.E.2. 1891 17 CFR 275.0–7(a) (Advisers Act rule 0–7(a)). 

downstream effects on entrepreneurial 

diversity.1878

The Commission’s analysis more 

generally considered potential impact 

on small entities, meaning small 

advisers, and identified several factors 

that may mitigate potential negative 

effects.1879 First, the potential harms to 

smaller advisers from the preferential 

treatment rule will be mitigated to the 

extent that smaller, emerging advisers 

do not need to be able to offer anchor 

investors preferential rights that have a 

material negative effect on other 

investors in order to effectively 

compete, and to the extent that smaller 

emerging advisers are able to compete 

effectively by offering anchor investors 

other types of preferential terms.1880

Second, the compliance cost effects on 

the smallest advisers will be mitigated 

where those advisers do not meet the 

minimum assets under management 

required to register with the SEC.1881

Third, the literature on the downstream 

effects of diversity in investment 

advisory services indicates that the 

effects are strongest for venture capital, 

and so the effect may be mitigated 

wherever an adviser’s funds are 

sufficiently concentrated in venture 

capital that they may forgo SEC 

registration and thus forgo many of the 

costs of the final rules.1882 Lastly, with 

respect to commenter concerns on the 

combined costs of multiple 

rulemakings, each adopting release 

considers an updated economic baseline 

that incorporates any new regulatory 

requirements, including compliance 

costs, at the time of each adoption, and 

considers the incremental new benefits 

and incremental new costs over those 

already resulting from the preceding 

rules.1883 With respect to competitive 

effects, the Commission acknowledges 

that there are incremental effects of new 

compliance costs on advisers that may 

vary depending on the total amount of 

compliance costs already facing advisers 

and acknowledges costs from 

overlapping transition periods for 

recently adopted rules and the final 

private fund adviser rules.1884

We have also taken several steps to 

lessen the possible burden on smaller 

advisers. First, for significant portions of 

the rules, we have allowed a longer 

transition period, i.e., up to 18 months, 

for smaller private fund advisers.1885

Second, we have provided certain 

legacy status provisions, namely 

regarding contractual agreements that 

govern a private fund and that were 

entered into prior to the compliance 

date if the rule would require the parties 

to amend such an agreement, for all 

advisers under the prohibitions aspect 

of the preferential treatment rule and 

certain aspects of the restricted 

activities rule.1886 Third, for the 

restricted activities rule, we adopted 

certain disclosure-based exceptions 

rather than outright prohibitions.1887

Fourth, we have extended the adviserled secondaries rule to allow for 

valuation opinions in addition to 

fairness opinions.1888 Fifth, for the 

preferential activities prohibitions, we 

adopted certain exceptions to the 

prohibition on the provision of certain 

preferential redemption terms, such as 

when those terms are offered to all 

investors.1889 To the extent the effects 

identified by commenters still occur 

with these changes to the final rules, 

smaller advisers may be impacted, but 

these potential negative effects on 

smaller advisers must be evaluated in 

light of (1) the other pro-competitive 

aspects of the final rules, in particular 

the pro-competitive effects from 

enhancing transparency, which are 

likely to help smaller advisers 

effectively compete, and (2) the other 

benefits of the final rules.1890

C. Legal Basis 

The Commission is adopting final 

rules 211(h)(1)–1, 211(h)(1)–2, 

211(h)(2)–1, 211(h)(2)–2, 211(h)(2)–3, 

and 206(4)–10 under the Advisers Act 

under the authority set forth in sections 

203(d), 206(4), 211(a), and 211(h) of the 

Investment Advisers Act of 1940 (15 

U.S.C. 80b–3(d), 80b–6(4) and 80b–11(a) 

and (h)). The Commission is adopting 

amendments to rule 204–2 under the 

Advisers Act under the authority set 

forth in sections 204 and 211 of the 

Investment Advisers Act of 1940 (15 

U.S.C. 80b–4 and 80b–11). The 

Commission is adopting amendments to 

rule 206(4)–7 under the Advisers Act 

under the authority set forth in sections 

203(d), 206(4), and 211(a) of the 

Investment Advisers Act of 1940 (15 

U.S.C. 80b–3(d), 80b–6(4), and 80b– 

11(a)). 

D. Small Entities Subject to Rules 

In developing these rules and 

amendments, we have considered their 

potential impact on small entities. Some 

of the rules and amendments will affect 

many, but not all, investment advisers 

registered with the Commission, 

including some small entities. The 

amendments to rule 206(4)–7 will affect 

all investment advisers that are 

registered or required to be registered 

with the Commission, including some 

small entities, and final rules 211(h)(2)– 

1 and 211(h)(2)–3 will apply to all 

advisers to private funds (even if not 

registered), including some small 

entities. Final rule 211(h)(1)–1 will 

affect all advisers that are also affected 

by one of the rules applying to private 

fund advisers discussed below, 

including all that are small entities, 

regardless of whether they are 

registered. Under Commission rules, for 

the purposes of the Advisers Act and 

the RFA, an investment adviser 

generally is a small entity if it: (1) has 

assets under management having a total 

value of less than $25 million; (2) did 

not have total assets of $5 million or 

more on the last day of the most recent 

fiscal year; and (3) does not control, is 

not controlled by, and is not under 

common control with another 

investment adviser that has assets under 

management of $25 million or more, or 

any person (other than a natural person) 

that had total assets of $5 million or 

more on the last day of its most recent 

fiscal year.1891

Other than the definitions rule, 

restrictions rule, and preferential 

treatment rule, our rules and 

amendments will not affect most 

investment advisers that are small 

entities (‘‘small advisers’’) because those 

rules apply only to registered advisers, 

and small registered advisers are 

generally registered with one or more 

State securities authorities and not with 

the Commission. Under section 203A of 

the Advisers Act, most small advisers 

are prohibited from registering with the 

Commission and are regulated by State 

regulators. Based on IARD data, we 

estimate that as of December 31, 2022, 


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1892Based on SEC-registered investment adviser 

responses to Items 5.F. and 12 of Form ADV. 

1893The final quarterly statement, audit, and 

adviser-led secondaries rules will not apply to SAF 

advisers with respect to SAFs they advise. This 

figure does not include SAF advisers that manage 

only SAFs. 

1894See section 203(l) of the Advisers Act and 

rule 203(m)–1. 

1895 In order for an adviser to be an SEC ERA it 

would first need to have an SEC registration 

obligation, and an adviser with that little in assets 

under management (i.e., assets under management 

that is low enough to allow the adviser to qualify 

as a small entity) would not have an SEC 

registration obligation. 

1896See section 202(a)(30) of the Advisers Act 

(defining ‘‘foreign private adviser’’). 

1897This includes the internal time cost and the 

annual external cost burden and assumes that, for 

purposes of the annual external cost burden, 50% 

of small advisers will use outside legal services, as 

set forth in the PRA estimates table. 

approximately 489 SEC-registered 

advisers are small entities under the 

RFA.1892 All of these advisers will be 

affected by the amendments to the 

compliance rule, and we estimate that 

approximately 26 small advisers to one 

or more private funds will be affected by 

the quarterly statement rule, audit rule, 

and secondaries rule.1893

The restricted activities rule and the 

preferential treatment rule, however, 

will have an impact on all investment 

advisers to private funds, regardless of 

whether they are registered with the 

Commission, one or more State 

securities authorities, or are 

unregistered. It is difficult for us to 

estimate the number of advisers not 

registered with us that have private fund 

clients. However, we are able to provide 

the following estimates based on IARD 

data. As of December 31, 2022, there are 

5,368 ERAs, all of whom advise private 

funds, by definition.1894 All ERAs will, 

therefore, be subject to the rules that 

will apply to all private fund advisers. 

We estimate that there are no ERAs that 

would meet the definition of ‘‘small 

entity.’’ 1895 We do not have a method 

for estimating the number of Stateregistered advisers to private funds that 

would meet the definition of ‘‘small 

entity.’’ 

Additionally, the restricted activities 

rule and the preferential treatment rule 

will apply to other advisers that are not 

registered with the SEC or with the 

States and that do not make filings with 

either the SEC or States. This includes 

foreign private advisers,1896 advisers 

that are entirely unregistered, and 

advisers that rely on the intrastate 

exemption from SEC registration and/or 

the de minimis exemption from SEC 

registration. We are unable to estimate 

the number of advisers in each of these 

categories because these advisers do not 

file reports or other information with 

the SEC and we are unable to find 

reliable, public information. As a result, 

our estimates are based on information 

from SEC-registered advisers to private 

funds, exempt reporting advisers (at the 

State and Federal levels), and Stateregistered advisers to private funds. 

The definitions rule will affect all 

advisers that are also affected by one of 

the rules applying to private fund 

advisers discussed above. It has no 

independent substantive requirements 

or economic impacts. Therefore, the 

number of small advisers affected by 

this rule is accounted for in those 

discussions and not separately and 

additionally delineated. 

E. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

1. Final Rule 211(h)(1)–1 

Final rule 211(h)(1)–1 will not impose 

any reporting, recordkeeping, or other 

compliance requirements on investment 

advisers because it has no independent 

substantive requirements or economic 

impacts. The rule will not affect an 

adviser unless it was complying with 

final rules 211(h)(1)–2, 206(4)–10, 

211(h)(2)–1, 211(h)(2)–2, or 211(h)(2)–3, 

each of which is discussed below. 

2. Final Rule 211(h)(1)–2 

Final rule 211(h)(1)–2 will impose 

certain compliance requirements on 

investment advisers, including those 

that are small entities. It will require 

any investment adviser registered or 

required to be registered with the 

Commission that provides investment 

advice to a private fund (other than a 

SAF) that has at least two full fiscal 

quarters of operating results to prepare 

and distribute quarterly statements with 

certain fee and expense and 

performance disclosure to private fund 

investors. The final requirements, 

including compliance and related 

recordkeeping requirements that will be 

required under the final amendments to 

rule 204–2 and rule 206(4)–7, are 

summarized in this FRFA (section 

VIII.A. above). All of these final 

requirements are also discussed in 

detail, above, in sections I and II, and 

these requirements and the burdens on 

respondents, including those that are 

small entities, are discussed above in 

sections VI and VII (the Economic 

Analysis and Paperwork Reduction Act 

analysis, respectively) and below. The 

professional skills required to meet 

these specific burdens are also 

discussed in section VII. 

As discussed above, there are 

approximately 26 small advisers to 

private funds currently registered with 

us, and we estimate that 100 percent of 

these advisers will be subject to the final 

rule 211(h)(1)–2. As discussed in our 

Paperwork Reduction Act Analysis in 

section VII above, we estimate that the 

final rule 211(h)(1)–2 under the 

Advisers Act, which will require 

advisers to prepare and distribute 

quarterly statements, will create a new 

annual burden of approximately 190 

hours per adviser, or 4,940 hours in 

aggregate for small advisers. We 

therefore expect the annual monetized 

aggregate cost to small advisers 

associated with the final rule to be 

$2,416,310.1897

3. Final Rule 206(4)–10 

Final rule 206(4)–10 will impose 

certain compliance requirements on 

investment advisers, including those 

that are small entities. All SECregistered investment advisers that 

provide investment advice, including 

small entity advisers, to private fund 

clients (other than a SAF) will be 

required to comply with the final rule’s 

requirements to have their private fund 

clients undergo a financial statement 

audit (at least annually and upon 

liquidation) and distribute audited 

financial statements to private fund 

investors, in alignment with the 

requirements of the audit provision of 

the custody rule (which the final rule 

will incorporate by reference). The final 

requirements, including compliance and 

related recordkeeping requirements that 

will be imposed under the final 

amendments to rule 204–2 and rule 

206(4)–7, are summarized in this FRFA 

(section VIII.A. above). All of these final 

requirements are also discussed in 

detail, above, in sections I and II, and 

these requirements and the burdens on 

respondents, including those that are 

small entities, are discussed above in 

sections VI and VII (the Economic 

Analysis and Paperwork Reduction Act 

analysis, respectively) and below. The 

professional skills required to meet 

these specific burdens are also 

discussed in section VII. 

As discussed above, there are 

approximately 26 small advisers to 

private funds currently registered with 

us, and we estimate that 100 percent of 

these advisers will be subject to the final 

rule 206(4)–10. As discussed above in 

our Paperwork Reduction Act Analysis 

in section VII above, we estimate that 

final rule 206(4)–10 under the Advisers 

Act will create a new annual burden of 

approximately 13.30 hours per adviser, 

or 345.80 hours in aggregate for small 

advisers. We therefore expect the annual 

monetized aggregate cost to small 


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63384 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

1898This includes the internal time cost and the 

annual external cost burden, as set forth in the PRA 

estimates table. 

1899See supra section VIII.D. 1900This includes the internal time cost and the 

annual external cost burden and assumes that, for 

purposes of the annual external cost burden, 75% 

of small advisers will use outside legal services, as 

set forth in the PRA table. 

1901Similar to the PRA analysis, we assume that 

10% (∼3) of all small advisers will conduct an 

adviser-led secondary transaction on an annual 

basis. 

1902This includes the internal time cost and the 

annual external cost burden, as set forth in the PRA 

estimates table. 

advisers associated with the final rule to 

be $19,560,515.1898

4. Final Rule 211(h)(2)–1 

Final rule 211(h)(2)–1 will impose 

certain compliance requirements on 

investment advisers, including those 

that are small entities. Final rule 

211(h)(2)–1 will restrict all private fund 

advisers (other than an adviser to SAFs 

with respect to such funds) from 

engaging in certain sales practices, 

conflicts of interest, and compensation 

schemes that are contrary to the public 

interest and the protection of investors. 

Specifically, the rule prohibits advisers 

from engaging in the following 

activities, unless they provide written 

disclosure to investors regarding such 

activities and in some cases obtain 

investor consent: (1) charging certain 

fees and expenses to a private fund 

(including fees or expenses associated 

with an investigation of the adviser or 

its related persons by governmental or 

regulatory authorities, regulatory, 

examination, or compliance expenses or 

fees of the adviser or its related persons, 

or fees and expenses related to a 

portfolio investment (or potential 

portfolio investment) on a non-pro rata 

basis when multiple private funds and 

other clients advised by the adviser or 

its related persons have invested (or 

propose to invest) in the same portfolio 

investment); (2) reducing the amount of 

any adviser clawback by actual, 

potential, or hypothetical taxes 

applicable to the adviser, its related 

persons, or their respective owners or 

interest holders; and (3) borrowing 

money, securities, or other fund assets, 

or receiving a loan or an extension of 

credit from a private fund client. The 

requirements, including compliance and 

related recordkeeping requirements that 

will be imposed under the final 

amendments to rule 204–2 and rule 

206(4)–7, are summarized in this FRFA 

(section VIII.A. above). All of these final 

requirements are also discussed in 

detail, above, in sections I and II, and 

these requirements and the burdens on 

respondents, including those that are 

small entities, are discussed above in 

sections VI and VII (the Economic 

Analysis and Paperwork Reduction Act 

analysis, respectively) and below. The 

professional skills required to meet 

these specific burdens are also 

discussed in section VII. 

As discussed above, there are 

approximately 26 small advisers to 

private funds currently registered with 

us, and we estimate that 100 percent of 

these advisers will be subject to the final 

rule 211(h)(2)–1. As discussed above, 

we estimate that there are no ERAs that 

meet the definition of ‘‘small entity’’ 

and we do not have a method for 

estimating the number of Stateregistered advisers to private funds that 

meet the definition of ‘‘small 

entity.’’ 1899 As discussed above in our 

Paperwork Reduction Act Analysis in 

section VII above, rule 211(h)(2)–1 

under the Advisers Act is estimated to 

create a new annual burden of 

approximately 120 hours per adviser, or 

3,120 hours in aggregate for small 

advisers. We therefore expect the annual 

monetized aggregate cost to small 

advisers associated with the rule to be 

$1,589,280.1900

5. Final Rule 211(h)(2)–2 

Final rule 211(h)(2)–2 will impose 

certain compliance requirements on 

investment advisers, including those 

that are small entities. The rule 

generally requires an adviser that is 

registered or required to be registered 

with the Commission and is conducting 

an adviser-led secondary transaction 

with respect to any private fund that it 

advises (other than a SAF), where the 

adviser (or its related persons) offers 

fund investors the option between 

selling their interests in the private 

fund, or converting or exchanging them 

for new interests in another vehicle 

advised by the adviser or its related 

persons, to, prior to the due date of an 

investor participation election form in 

respect of the transaction, obtain and 

distribute to investors in the private 

fund a fairness opinion or valuation 

opinion from an independent opinion 

provider and a summary of any material 

business relationships that the adviser 

or any of its related persons has, or has 

had within the two-year period 

immediately prior to the issuance date 

of the fairness opinion or valuation 

opinion, with the independent opinion 

provider. The final requirements, 

including compliance and related 

recordkeeping requirements that will be 

imposed under final amendments to 

rule 204–2 and 206(4)–7, are 

summarized in this FRFA (section 

VIII.A. above). All of these final 

requirements are also discussed in 

detail, above, in sections I and II, and 

these requirements and the burdens on 

respondents, including those that are 

small entities, are discussed above in 

sections VI and VII (the Economic 

Analysis and Paperwork Reduction Act 

analysis, respectively) and below. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

As discussed above, there are 

approximately 26 small advisers to 

private funds currently registered with 

us, and we estimate that 100 percent of 

these advisers will be subject to final 

rule 211(h)(2)–2. As discussed above in 

our Paperwork Reduction Act Analysis 

in section VII above, we estimate that 

final rule 211(h)(2)–2 under the 

Advisers Act will create a new annual 

burden of approximately 1.5 hours per 

adviser, or 39 hours in aggregate for 

small advisers.1901 We therefore expect 

the annual monetized aggregate cost to 

small advisers associated with the final 

rule to be $317,697.90.1902

6. Final Rule 211(h)(2)–3 

Final rule 211(h)(2)–3 will impose 

certain compliance requirements on 

investment advisers, including those 

that are small entities. Final rule 

211(h)(2)–3 will prohibit a private fund 

adviser (other than an adviser to SAFs 

with respect to such funds), including 

indirectly through its related persons, 

from: (1) granting an investor in the 

private fund or in a similar pool of 

assets the ability to redeem its interest 

on terms that the adviser reasonably 

expects to have a material, negative 

effect on other investors in that private 

fund or in a similar pool of assets, with 

an exception for redemptions that are 

required by applicable law, rule, 

regulation, or order of certain 

governmental authorities and another if 

the adviser offers the same redemption 

ability to all existing and future 

investors in the private fund or similar 

pool of assets; and (2) providing 

information regarding the private fund’s 

portfolio holdings or exposures of the 

private fund or of a similar pool of 

assets to any investor in the private fund 

if the adviser reasonably expects that 

providing the information would have a 

material, negative effect on other 

investors in that private fund or in a 

similar pool of assets, with an exception 

where the adviser offers such 

information to all other existing 

investors in the private fund and any 

similar pool of assets at the same time 

or substantially the same time. The rule 

will also prohibit these advisers from 

providing any other preferential 


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1903See supra section VIII.D. 

1904This includes the internal time cost and the 

annual external cost burden and assumes that, for 

purposes of the annual external cost burden, 75% 

of small advisers will use outside legal services, as 

set forth in the PRA estimates table. 

1905This includes the internal time cost and the 

annual external cost burden, as set forth in the PRA 

estimates table. 

1906This includes the internal time cost and the 

annual external cost burden and assumes that, for 

purposes of the annual external cost burden, 50% 

of small advisers will use outside legal services, as 

set forth in the PRA estimates table. 

treatment to any investor in the private 

fund unless the adviser provides written 

disclosures to prospective investors of 

the private fund regarding preferential 

treatment related to any material 

economic terms, as well as written 

disclosures to current investors in the 

private fund regarding all preferential 

treatment, which the adviser or its 

related persons provided to other 

investors in the same fund. The final 

requirements, including compliance and 

related recordkeeping requirements that 

will be imposed under final 

amendments to rule 204–2 and 206(4)– 

7, are summarized in this FRFA (section 

VIII.A. above). All of these final 

requirements are also discussed in 

detail, above, in sections I and II, and 

these requirements and the burdens on 

respondents, including those that are 

small entities, are discussed above in 

sections VI and VII (the Economic 

Analysis and Paperwork Reduction Act 

analysis, respectively) and below. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

As discussed above, there are 

approximately 26 small advisers to 

private funds currently registered with 

us, and we estimate that 100 percent of 

these advisers will be subject to the final 

rule 211(h)(2)–3. As discussed above, 

we estimate that there are no ERAs that 

meet the definition of ‘‘small entity’’ 

and we do not have a method for 

estimating the number of Stateregistered advisers to private funds that 

meet the definition of ‘‘small 

entity.’’ 1903 As discussed above in our 

Paperwork Reduction Act Analysis in 

section VII above, we estimate that final 

rule 211(h)(2)–3 under the Advisers Act 

will create a new annual burden of 

approximately 113.30 hours per adviser, 

or 2,945.80 hours in aggregate for small 

advisers. We therefore expect the annual 

monetized aggregate cost to small 

advisers associated with the final rule to 

be $1,081,003.40.1904

7. Final Amendments to Rule 204–2 

The final amendments to rule 204–2 

will impose certain recordkeeping 

requirements on investment advisers to 

private funds, including those that are 

small entities. All SEC-registered 

investment advisers to private funds, 

including small entity advisers, will be 

required to comply with recordkeeping 

amendments. Although all SECregistered investment advisers, and 

advisers that are required to be 

registered with the Commission, are 

subject to rule 204–2 under the Advisers 

Act, our final amendments to rule 204– 

2 will only impact private fund advisers 

that are SEC registered. The final 

amendments are summarized in this 

FRFA (section VIII.A. above). The final 

amendments are also discussed in 

detail, above, in sections I and II, and 

the requirements and the burdens on 

respondents, including those that are 

small entities, are discussed above in 

sections VI and VII (the Economic 

Analysis and Paperwork Reduction Act 

analysis, respectively) and below. The 

professional skills required to meet 

these specific burdens also are 

discussed in section VII. 

As discussed above, there are 

approximately 26 small advisers to 

private funds currently registered with 

us, and we estimate that 100 percent of 

advisers registered with us will be 

subject to the final amendments to rule 

204–2. As discussed above in our 

Paperwork Reduction Act Analysis in 

section VII above, we estimate that the 

final amendments to rule 204–2 under 

the Advisers Act, which will require 

advisers to retain certain copies of 

documents required under final rules 

206(4)–10, 211(h)(1)–2, 211(h)(2)–1, 

211(h)(2)–2, and 211(h)(2)–3, will create 

a new annual burden of approximately 

55.17 hours per adviser, or 1,434.50 

hours in aggregate for small advisers. 

We therefore expect the annual 

monetized aggregate cost to small 

advisers associated with our final 

amendments to be $111,173.75.1905

8. Final Amendments to Rule 206(4)–7 

Final amendments to rule 206(4)–7 

will impose certain compliance 

requirements on investment advisers, 

including those that are small entities. 

All SEC-registered investment advisers, 

and advisers that are required to be 

registered with the Commission, will be 

required to document the annual review 

of their compliance policies and 

procedures in writing. The final 

requirements are summarized in this 

FRFA (section VIII.A. above). All of 

these final requirements are also 

discussed in detail in sections I and III 

above, and these requirements and the 

burdens on respondents, including 

those that are small entities, are 

discussed above in sections VI and VII 

(the Economic Analysis and Paperwork 

Reduction Act analysis, respectively) 

and below. The professional skills 

required to meet these specific burdens 

also are discussed in section VII. As 

discussed above, there are 

approximately 489 small advisers 

currently registered with us, and we 

estimate that 100 percent of these 

advisers will be subject to the final 

amendments to rule 206(4)–7. As 

discussed above in our Paperwork 

Reduction Act Analysis in section VII 

above, we estimate that these 

amendments will create a new annual 

burden of approximately 5.5 hours per 

adviser, or 2,689.50 hours in aggregate 

for small advisers. We therefore expect 

the annual monetized aggregate cost to 

small advisers associated with our final 

amendments to be $1,414,173.1906

F. Significant Alternatives 

The RFA directs the Commission to 

consider significant alternatives that 

would accomplish the stated objective, 

while minimizing any significant 

adverse impact on small entities. In 

connection with adopting these rules 

and rule amendments, the Commission 

considered the following alternatives: (i) 

the establishment of differing 

compliance or reporting requirements or 

timetables that take into account the 

resources available to small entities; (ii) 

the clarification, consolidation, or 

simplification of compliance and 

reporting requirements under the rules 

and rule amendments for such small 

entities; (iii) the use of performance 

rather than design standards; and (iv) an 

exemption from coverage of the rules 

and rule amendments, or any part 

thereof, for such small entities. 

Regarding the first alternative, we are 

adopting staggered compliance dates 

based on adviser size for certain of the 

rules. We believe that smaller private 

fund advisers will likely need 

additional time to modify existing 

practices, policies, and procedures to 

come into compliance. Accordingly, we 

are providing certain staggered 

compliance dates, with a longer 

transition period for smaller private 

fund advisers. 

Regarding the fourth alternative, we 

do not believe that differing reporting 

requirements or an exemption from 

coverage of the rules and rule 

amendments, or any part thereof, for 

small entities, would be appropriate or 

consistent with investor protection. 

Because the specific protections of the 

Advisers Act that underlie the rules and 

rule amendments apply equally to 

clients of both large and small advisory 

firms, it would be inconsistent with the 


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63386 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

purposes of the Act to specify different 

requirements for small entities under 

the rules and rule amendments. 

Regarding the second alternative, the 

restricted activities rule and the 

preferential treatment rule are 

particularly intended to provide 

clarification to all private fund advisers, 

not just small advisers, as to what the 

Commission considers to be conduct 

that would be prohibited under section 

206 of the Act and contrary to the public 

interest and protection of investors 

under section 211 of the Act. Despite 

our examination and enforcement 

efforts, this type of inappropriate 

conduct persists; these rules will 

prohibit or restrict this conduct for all 

private fund advisers. Similarly, we also 

have endeavored to consolidate, and 

simplify compliance with, the rules for 

all private fund advisers. With respect 

to the rules and amendments other than 

the restricted activities rule and the 

preferential treatment rule, we have 

sought to clarify, consolidate, and/or 

simplify compliance and reporting 

requirements consistent with our 

statutory authority to promulgate rules 

reasonably designed prevent fraudulent, 

deceptive, or manipulative acts, or to 

prohibit or restrict sales practices, 

conflicts of interest or compensation 

schemes that we deem contrary to the 

public interest and protection of 

investors, by investment advisers. For 

instance, we have changed the 

categorization of whether a private fund 

is a liquid or illiquid fund from a six 

factor test in the proposal to a two factor 

text in the final rule in an effort to 

facilitate compliance with this rule. 

Regarding the third alternative, we do 

not consider using performance rather 

than design standards to be consistent 

with our statutory authority to 

promulgate rules reasonably designed to 

prevent fraudulent, deceptive, or 

manipulative acts, or to prohibit or 

restrict sales practices, conflicts of 

interest or compensation schemes, that 

we deem contrary to the public interest 

and protection of investors by 

investment advisers. 

Statutory Authority 

The Commission is adopting final 

rules 211(h)(1)–1, 211(h)(1)–2, 

211(h)(2)–1, 211(h)(2)–2, 211(h)(2)–3, 

and 206(4)–10 under the Advisers Act 

under the authority set forth in sections 

203(d), 206(4), 211(a), and 211(h) of the 

Investment Advisers Act of 1940 [15 

U.S.C. 80b–3(d), 80b–6(4) and 80b–11(a) 

and (h)]. The Commission is adopting 

amendments to rule 204–2 under the 

Advisers Act under the authority set 

forth in sections 204 and 211 of the 

Investment Advisers Act of 1940 [15 

U.S.C. 80b–4 and 80b–11]. The 

Commission is adopting amendments to 

rule 206(4)–7 under the Advisers Act 

under the authority set forth in sections 

203(d), 206(4), and 211(a) of the 

Investment Advisers Act of 1940 [15 

U.S.C. 80b–3(d), 80b–6(4), and 80b– 

11(a)]. 

List of Subjects in 17 CFR Part 275 

Administrative practice and 

procedure, Reporting and recordkeeping 

requirements, Securities. 

Text of Rules 

For the reasons set forth in the 

preamble, the Commission is amending 

title 17, chapter II of the Code of Federal 

Regulations as follows: 

PART 275—RULES AND 

REGULATIONS, INVESTMENT 

ADVISERS ACT OF 1940 

■ 1. The authority citation for part 275 

continues to read in part as follows: 

Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b– 

2(a)(11)(H), 80b–2(a)(17), 80b–3, 80b–4, 80b– 

4a, 80b–6(4), 80b–6a, and 80b–11, unless 

otherwise noted. 

* * * * * 

Section 275.204–2 is also issued under 15 

U.S.C. 80b–6. 

* * * * * 

■ 2. Amend § 275.204–2 by: 

■ a. Removing the period at the end of 

paragraph (a)(7)(iv)(B) and adding ‘‘; 

and’’ in its place; and 

■ b. Adding paragraphs (a)(7)(v) and 

(a)(20) through (24). 

The additions read as follows: 

§ 275.204–2 Books and records to be 

maintained by investment advisers. 

(a) * * * 

(7) * * * 

(v) Any notice required pursuant to 

§ 275.211(h)(2)–3 as well as a record of 

each addressee and the corresponding 

date(s) sent. 

* * * * * 

(20)(i) A copy of any quarterly 

statement distributed pursuant to 

§ 275.211(h)(1)–2, along with a record of 

each addressee and the corresponding 

date(s) sent; and 

(ii) All records evidencing the 

calculation method for all expenses, 

payments, allocations, rebates, offsets, 

waivers, and performance listed on any 

statement delivered pursuant to 

§ 275.211(h)(1)–2. 

(21) For each private fund client: 

(i) A copy of any audited financial 

statements prepared and distributed 

pursuant to § 275.206(4)–10, along with 

a record of each addressee and the 

corresponding date(s) sent; or 

(ii) A record documenting steps taken 

by the adviser to cause a private fund 

client that the adviser does not control, 

is not controlled by, and with which it 

is not under common control to undergo 

a financial statement audit pursuant to 

§ 275.206(4)–10. 

(22) Documentation substantiating the 

adviser’s determination that a private 

fund client is a liquid fund or an illiquid 

fund pursuant to § 275.211(h)(1)–2. 

(23) A copy of any fairness opinion or 

valuation opinion and material business 

relationship summary distributed 

pursuant to § 275.211(h)(2)–2, along 

with a record of each addressee and the 

corresponding date(s) sent. 

(24) A copy of any notification, 

consent or other document distributed 

or received pursuant to § 275.211(h)(2)– 

1, along with a record of each addressee 

and the corresponding date(s) sent for 

each such document distributed by the 

adviser. 

* * * * * 

■ 3. Amend § 275.206(4)–7 by revising 

paragraph (b) to read as follows: 

§ 275.206(4)–7 Compliance procedures 

and practices. 

* * * * * 

(b) Annual review. Review and 

document in writing, no less frequently 

than annually, the adequacy of the 

policies and procedures established 

pursuant to this section and the 

effectiveness of their implementation; 

and 

* * * * * 

■ 4. Add §§ 275.206(4)–9 and 

275.206(4)–10 to read as follows: 

§ 275.206(4)–9 [Reserved] 

§ 275.206(4)–10 Private fund adviser 

audits. 

(a) As a means reasonably designed to 

prevent such acts, practices, and courses 

of business as are fraudulent, deceptive, 

or manipulative, an investment adviser 

that is registered or required to be 

registered under section 203 of the 

Investment Advisers Act of 1940 shall 

cause each private fund that it advises 

(other than a securitized asset fund), 

directly or indirectly, to undergo a 

financial statement audit (as defined in 

§ 210.1–02(d) of this chapter (rule 1– 

02(d) of Regulation S–X)) that meets the 

requirements of § 275.206(4)–2(b)(4)(i) 

through (b)(4)(iii) and shall cause 

audited financial statements to be 

delivered in accordance with 

§ 275.206(4)–2(c), if the private fund 

does not otherwise undergo such an 

audit; 

(b) For a private fund (other than a 

securitized asset fund) that the adviser 

does not control and is neither 

controlled by nor under common 

control with, the adviser is prohibited 


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from providing investment advice, 

directly or indirectly, to the private fund 

if the adviser fails to take all reasonable 

steps to cause the private fund to 

undergo a financial statement audit that 

meets the requirements of § 275.206(4)– 

2(b)(4) and to cause audited financial 

statements to be delivered in accordance 

with § 275.206(4)–2(c), if the private 

fund does not otherwise undergo such 

an audit; and 

(c) For purposes of this section, 

defined terms shall have the meanings 

set forth in § 275.206(4)–2(d), except for 

the term securitized asset fund, which 

shall have the meaning set forth in 

§ 275.211(h)(1)–1. 

■ 5. Add §§ 275.211(h)(1)–1, 

275.211(h)(1)–2, 275.211(h)(2)–1, 

275.211(h)(2)–2, and 275.211(h)(2)–3 to 

read as follows: 

§ 275.211(h)(1)–1 Definitions 

For purposes of §§ 275.206(4)–10, 

275.211(h)(1)–2, 275.211(h)(2)–1, 

275.211(h)(2)–2, and 275.211(h)(2)–3: 

Adviser clawback means any 

obligation of the adviser, its related 

persons, or their respective owners or 

interest holders to restore or otherwise 

return performance-based compensation 

to the private fund pursuant to the 

private fund’s governing agreements. 

Adviser-led secondary transaction 

means any transaction initiated by the 

investment adviser or any of its related 

persons that offers private fund 

investors the choice between: 

(1) Selling all or a portion of their 

interests in the private fund; and 

(2) Converting or exchanging all or a 

portion of their interests in the private 

fund for interests in another vehicle 

advised by the adviser or any of its 

related persons. 

Committed capital means any 

commitment pursuant to which a 

person is obligated to acquire an interest 

in, or make capital contributions to, the 

private fund. 

Control means the power, directly or 

indirectly, to direct the management or 

policies of a person, whether through 

ownership of securities, by contract, or 

otherwise. For the purposes of this 

definition, control includes: 

(1) Each of an investment adviser’s 

officers, partners, or directors exercising 

executive responsibility (or persons 

having similar status or functions) is 

presumed to control the investment 

adviser; 

(2) A person is presumed to control a 

corporation if the person: 

(i) Directly or indirectly has the right 

to vote 25 percent or more of a class of 

the corporation’s voting securities; or 

(ii) Has the power to sell or direct the 

sale of 25 percent or more of a class of 

the corporation’s voting securities; 

(3) A person is presumed to control a 

partnership if the person has the right 

to receive upon dissolution, or has 

contributed, 25 percent or more of the 

capital of the partnership; 

(4) A person is presumed to control a 

limited liability company if the person: 

(i) Directly or indirectly has the right 

to vote 25 percent or more of a class of 

the interests of the limited liability 

company; 

(ii) Has the right to receive upon 

dissolution, or has contributed, 25 

percent or more of the capital of the 

limited liability company; or 

(iii) Is an elected manager of the 

limited liability company; 

(5) A person is presumed to control a 

trust if the person is a trustee or 

managing agent of the trust. 

Covered portfolio investment means a 

portfolio investment that allocated or 

paid the investment adviser or its 

related persons portfolio investment 

compensation during the reporting 

period. 

Distribute, distributes, or distributed 

means send or sent to all of the private 

fund’s investors, unless the context 

otherwise requires; provided that, if an 

investor is a pooled investment vehicle 

that is controlling, controlled by, or 

under common control with (a ‘‘control 

relationship’’) the adviser or its related 

persons, the adviser must look through 

that pool (and any pools in a control 

relationship with the adviser or its 

related persons) in order to send to 

investors in those pools. 

Election form means a written 

solicitation distributed by, or on behalf 

of, the adviser or any related person 

requesting private fund investors to 

make a binding election to participate in 

an adviser-led secondary transaction. 

Fairness opinion means a written 

opinion stating that the price being 

offered to the private fund for any assets 

being sold as part of an adviser-led 

secondary transaction is fair. 

Fund-level subscription facilities 

means any subscription facilities, 

subscription line financing, capital call 

facilities, capital commitment facilities, 

bridge lines, or other indebtedness 

incurred by the private fund that is 

secured by the unfunded capital 

commitments of the private fund’s 

investors. 

Gross IRR means an internal rate of 

return that is calculated gross of all fees, 

expenses, and performance-based 

compensation borne by the private 

fund. 

Gross MOIC means a multiple of 

invested capital that is calculated gross 

of all fees, expenses, and performancebased compensation borne by the 

private fund. 

Illiquid fund means a private fund 

that: 

(1) Is not required to redeem interests 

upon an investor’s request; and 

(2) Has limited opportunities, if any, 

for investors to withdraw before 

termination of the fund. 

Independent opinion provider means 

a person that: 

(1) Provides fairness opinions or 

valuation opinions in the ordinary 

course of its business; and 

(2) Is not a related person of the 

adviser. 

Internal rate of return means the 

discount rate that causes the net present 

value of all cash flows throughout the 

life of the fund to be equal to zero. 

Liquid fund means a private fund that 

is not an illiquid fund. 

Multiple of invested capital means, as 

of the end of the applicable fiscal 

quarter: 

(1) The sum of: 

(i) The unrealized value of the illiquid 

fund; and 

(ii) The value of all distributions 

made by the illiquid fund; 

(2) Divided by the total capital 

contributed to the illiquid fund by its 

investors. 

Net IRR means an internal rate of 

return that is calculated net of all fees, 

expenses, and performance-based 

compensation borne by the private fund. 

Net MOIC means a multiple of 

invested capital that is calculated net of 

all fees, expenses, and performancebased compensation borne by the 

private fund. 

Performance-based compensation 

means allocations, payments, or 

distributions of capital based on the 

private fund’s (or any of its 

investments’) capital gains, capital 

appreciation and/or other profit. 

Portfolio investment means any entity 

or issuer in which the private fund has 

directly or indirectly invested. 

Portfolio investment compensation 

means any compensation, fees, and 

other amounts allocated or paid to the 

investment adviser or any of its related 

persons by the portfolio investment 

attributable to the private fund’s interest 

in such portfolio investment, including, 

but not limited to, origination, 

management, consulting, monitoring, 

servicing, transaction, administrative, 

advisory, closing, disposition, directors, 

trustees or similar fees or payments. 

Related person means: 

(1) All officers, partners, or directors 

(or any person performing similar 

functions) of the adviser; 

(2) All persons directly or indirectly 

controlling or controlled by the adviser; 


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(3) All current employees (other than 

employees performing only clerical, 

administrative, support or similar 

functions) of the adviser; and 

(4) Any person under common control 

with the adviser. 

Reporting period means the private 

fund’s fiscal quarter covered by the 

quarterly statement or, for the initial 

quarterly statement of a newly formed 

private fund, the period covering the 

private fund’s first two full fiscal 

quarters of operating results. 

Securitized asset fund means any 

private fund whose primary purpose is 

to issue asset backed securities and 

whose investors are primarily debt 

holders. 

Similar pool of assets means a pooled 

investment vehicle (other than an 

investment company registered under 

the Investment Company Act of 1940, a 

company that elects to be regulated as 

such, or a securitized asset fund) with 

substantially similar investment 

policies, objectives, or strategies to those 

of the private fund managed by the 

investment adviser or its related 

persons. 

Statement of contributions and 

distributions means a document that 

presents: 

(1) All capital inflows the private 

fund has received from investors and all 

capital outflows the private fund has 

distributed to investors since the private 

fund’s inception, with the value and 

date of each inflow and outflow; and 

(2) The net asset value of the private 

fund as of the end of the reporting 

period. 

Unfunded capital commitments 

means committed capital that has not 

yet been contributed to the private fund 

by investors. 

Valuation opinion means a written 

opinion stating the value (as a single 

amount or a range) of any assets being 

sold as part of an adviser-led secondary 

transaction. 

§ 275. 211(h)(1)–2 Private fund quarterly 

statements. 

(a) Quarterly statements. As a means 

reasonably designed to prevent such 

acts, practices, and courses of business 

as are fraudulent, deceptive, or 

manipulative, an investment adviser 

that is registered or required to be 

registered under section 203 of the 

Investment Advisers Act of 1940 shall 

prepare a quarterly statement that 

complies with paragraphs (a) through (g) 

of this section for any private fund 

(other than a securitized asset fund) that 

it advises, directly or indirectly, that has 

at least two full fiscal quarters of 

operating results, and distribute the 

quarterly statement to the private fund’s 

investors, if such private fund is not a 

fund of funds, within 45 days after the 

end of each of the first three fiscal 

quarters of each fiscal year of the private 

fund and 90 days after the end of each 

fiscal year of the private fund and, if 

such private fund is a fund of funds, 

within 75 days after the end of the first 

three fiscal quarters of each fiscal year 

and 120 days after the end of each fiscal 

year, in either case, unless such a 

quarterly statement is prepared and 

distributed by another person. 

(b) Fund table. The quarterly 

statement must include a table for the 

private fund that discloses, at a 

minimum, the following information, 

presented both before and after the 

application of any offsets, rebates, or 

waivers for the information required by 

paragraphs (b)(1) and (2) of this section: 

(1) A detailed accounting of all 

compensation, fees, and other amounts 

allocated or paid to the investment 

adviser or any of its related persons by 

the private fund during the reporting 

period, with separate line items for each 

category of allocation or payment 

reflecting the total dollar amount, 

including, but not limited to, 

management, advisory, sub-advisory, or 

similar fees or payments, and 

performance-based compensation; 

(2) A detailed accounting of all fees 

and expenses allocated to or paid by the 

private fund during the reporting period 

(other than those listed in paragraph 

(b)(1) of this section), with separate line 

items for each category of fee or expense 

reflecting the total dollar amount, 

including, but not limited to, 

organizational, accounting, legal, 

administration, audit, tax, due 

diligence, and travel fees and expenses; 

and 

(3) The amount of any offsets or 

rebates carried forward during the 

reporting period to subsequent periods 

to reduce future payments or allocations 

to the adviser or its related persons. 

(c) Portfolio investment table. The 

quarterly statement must include a 

separate table for the private fund’s 

covered portfolio investments that 

discloses, at a minimum, the following 

information for each covered portfolio 

investment: a detailed accounting of all 

portfolio investment compensation 

allocated or paid to the investment 

adviser or any of its related persons by 

the covered portfolio investment during 

the reporting period, with separate line 

items for each category of allocation or 

payment reflecting the total dollar 

amount, presented both before and after 

the application of any offsets, rebates, or 

waivers. 

(d) Calculations and cross-references. 

The quarterly statement must include 

prominent disclosure regarding the 

manner in which all expenses, 

payments, allocations, rebates, waivers, 

and offsets are calculated and include 

cross references to the sections of the 

private fund’s organizational and 

offering documents that set forth the 

applicable calculation methodology. 

(e) Performance. (1) No later than the 

time the adviser sends the initial 

quarterly statement, the adviser must 

determine that the private fund is an 

illiquid fund or a liquid fund. 

(2) The quarterly statement must 

present the following with equal 

prominence: 

(i) Liquid funds. For a liquid fund: 

(A) Annual net total returns for each 

fiscal year over the past 10 fiscal years 

or since inception, whichever time 

period is shorter; 

(B) Average annual net total returns 

over the one-, five-, and 10-fiscal-year 

periods; and 

(C) The cumulative net total return for 

the current fiscal year as of the end of 

the most recent fiscal quarter covered by 

the quarterly statement. 

(ii) Illiquid funds. For an illiquid 

fund: 

(A) The following performance 

measures, shown since inception of the 

illiquid fund through the end of the 

quarter covered by the quarterly 

statement (or, to the extent quarter-end 

numbers are not available at the time 

the adviser distributes the quarterly 

statement, through the most recent 

practicable date) and computed with 

and without the impact of any fundlevel subscription facilities: 

(1) Gross IRR and gross MOIC for the 

illiquid fund; 

(2) Net IRR and net MOIC for the 

illiquid fund; and 

(3) Gross IRR and gross MOIC for the 

realized and unrealized portions of the 

illiquid fund’s portfolio, with the 

realized and unrealized performance 

shown separately. 

(B) A statement of contributions and 

distributions for the illiquid fund. 

(iii) Other matters. The quarterly 

statement must include the date as of 

which the performance information is 

current through and prominent 

disclosure of the criteria used and 

assumptions made in calculating the 

performance. 

(f) Consolidated reporting. To the 

extent doing so would provide more 

meaningful information to the private 

fund’s investors and would not be 

misleading, the adviser must 

consolidate the reporting required by 

paragraphs (a) through (e) of this section 

to cover similar pools of assets. 

(g) Format and content. The quarterly 

statement must use clear, concise, plain 


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English and be presented in a format 

that facilitates review from one 

quarterly statement to the next. 

(h) Definitions. For purposes of this 

section, defined terms shall have the 

meanings set forth in § 275.211(h)(1)–1. 

§ 275.211(h)(2)–1 Private fund adviser 

restricted activities. 

(a) An investment adviser to a private 

fund (other than a securitized asset 

fund) may not, directly or indirectly, do 

the following with respect to the private 

fund, or any investor in that private 

fund: 

(1) Charge or allocate to the private 

fund fees or expenses associated with an 

investigation of the adviser or its related 

persons by any governmental or 

regulatory authority, unless the 

investment adviser requests each 

investor of the private fund to consent 

to, and obtains written consent from at 

least a majority in interest of the private 

fund’s investors that are not related 

persons of the adviser for, such charge 

or allocation; provided, however, that 

the investment adviser may not charge 

or allocate to the private fund fees or 

expenses related to an investigation that 

results or has resulted in a court or 

governmental authority imposing a 

sanction for a violation of the 

Investment Advisers Act of 1940 or the 

rules promulgated thereunder; 

(2) Charge or allocate to the private 

fund any regulatory or compliance fees 

or expenses, or fees or expenses 

associated with an examination, of the 

adviser or its related persons, unless the 

investment adviser distributes a written 

notice of any such fees or expenses, and 

the dollar amount thereof, to the 

investors of such private fund client in 

writing within 45 days after the end of 

the fiscal quarter in which the charge 

occurs; 

(3) Reduce the amount of an adviser 

clawback by actual, potential, or 

hypothetical taxes applicable to the 

adviser, its related persons, or their 

respective owners or interest holders, 

unless the investment adviser 

distributes a written notice to the 

investors of such private fund client that 

sets forth the aggregate dollar amounts 

of the adviser clawback before and after 

any reduction for actual, potential, or 

hypothetical taxes within 45 days after 

the end of the fiscal quarter in which 

the adviser clawback occurs; 

(4) Charge or allocate fees or expenses 

related to a portfolio investment (or 

potential portfolio investment) on a 

non-pro rata basis when multiple 

private funds and other clients advised 

by the adviser or its related persons 

(other than a securitized asset fund) 

have invested (or propose to invest) in 

the same portfolio investment, unless: 

(i) The non-pro rata charge or 

allocation is fair and equitable under the 

circumstances; and 

(ii) Prior to charging or allocating 

such fees or expenses to a private fund 

client, the investment adviser 

distributes to each investor of the 

private fund a written notice of the nonpro rata charge or allocation and a 

description of how it is fair and 

equitable under the circumstances; and 

(5) Borrow money, securities, or other 

private fund assets, or receive a loan or 

an extension of credit, from a private 

fund client, unless the adviser: 

(i) Distributes to each investor a 

written description of the material terms 

of, and requests each investor to consent 

to, such borrowing, loan, or extension of 

credit; and 

(ii) Obtains written consent from at 

least a majority in interest of the private 

fund’s investors that are not related 

persons of the adviser. 

(b) Paragraphs (a)(1) and (a)(5) of this 

section shall not apply with respect to 

contractual agreements governing a 

private fund (and, with respect to 

paragraph (a)(5) of this section, 

contractual agreements governing a 

borrowing, loan, or extension of credit 

entered into by a private fund) that has 

commenced operations as of the 

compliance date and that were entered 

into in writing prior to the compliance 

date if paragraph (a)(1) or (a)(5) of this 

section, as applicable, would require the 

parties to amend such governing 

agreements; provided that this 

paragraph (b) does not permit an 

investment adviser to such a fund to 

charge or allocate to the private fund 

fees or expenses related to an 

investigation that results or has resulted 

in a court or governmental authority 

imposing a sanction for a violation of 

the Investment Advisers Act of 1940 or 

the rules promulgated thereunder. 

(c) For purposes of this section, 

defined terms shall have the meanings 

set forth in § 275.211(h)(1)–1. 

§ 275.211(h)(2)–2 Adviser-led secondaries. 

(a) As a means reasonably designed to 

prevent fraudulent, deceptive, or 

manipulative acts, practices, or courses 

of business within the meaning of 

section 206(4) of the Investment 

Advisers Act of 1940 (15 U.S.C. 80b– 

6(4), an investment adviser that is 

registered or required to be registered 

under section 203 of the Act (15 U.S.C. 

80b–3) conducting an adviser-led 

secondary transaction with respect to 

any private fund that it advises (other 

than a securitized asset fund) shall 

comply with paragraphs (a)(1) and (2) of 

this section. The investment adviser 

shall: 

(1) Obtain, and distribute to investors 

in the private fund, a fairness opinion 

or valuation opinion from an 

independent opinion provider; and 

(2) Prepare, and distribute to investors 

in the private fund, a written summary 

of any material business relationships 

the adviser or any of its related persons 

has, or has had within the two-year 

period immediately prior to the 

issuance of the fairness opinion or 

valuation opinion, with the 

independent opinion provider; in each 

case, prior to the due date of the 

election form in respect of the adviserled secondary transaction. 

(b) For purposes of this section, 

defined terms shall have the meanings 

set forth in § 275.211(h)(1)–1. 

§ 275.211(h)(2)–3 Preferential treatment. 

(a) An investment adviser to a private 

fund (other than a securitized asset 

fund) may not, directly or indirectly, do 

the following with respect to the private 

fund, or any investor in that private 

fund: 

(1) Grant an investor in the private 

fund or in a similar pool of assets the 

ability to redeem its interest on terms 

that the adviser reasonably expects to 

have a material, negative effect on other 

investors in that private fund or in a 

similar pool of assets, except: 

(i) If such ability to redeem is required 

by the applicable laws, rules, 

regulations, or orders of any relevant 

foreign or U.S. Government, State, or 

political subdivision to which the 

investor, the private fund, or any similar 

pool of assets is subject; or 

(ii) If the investment adviser has 

offered the same redemption ability to 

all other existing investors, and will 

continue to offer such redemption 

ability to all future investors, in the 

private fund and any similar pool of 

assets; 

(2) Provide information regarding the 

portfolio holdings or exposures of the 

private fund, or of a similar pool of 

assets, to any investor in the private 

fund if the adviser reasonably expects 

that providing the information would 

have a material, negative effect on other 

investors in that private fund or in a 

similar pool of assets, except if the 

investment adviser offers such 

information to all other existing 

investors in the private fund and any 

similar pool of assets at the same time 

or substantially the same time. 

(b) An investment adviser to a private 

fund (other than a securitized asset 

fund) may not, directly or indirectly, 

provide any preferential treatment to 

any investor in the private fund unless 


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63390 Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Rules and Regulations 

the adviser provides written notices as 

follows: 

(1) Advance written notice for 

prospective investors in a private fund. 

The investment adviser shall provide to 

each prospective investor in the private 

fund, prior to the investor’s investment 

in the private fund, a written notice that 

provides specific information regarding 

any preferential treatment related to any 

material economic terms that the 

adviser or its related persons provide to 

other investors in the same private fund. 

(2) Written notice for current investors 

in a private fund. The investment 

adviser shall distribute to current 

investors: 

(i) For an illiquid fund, as soon as 

reasonably practicable following the end 

of the private fund’s fundraising period, 

written disclosure of all preferential 

treatment the adviser or its related 

persons has provided to other investors 

in the same private fund; 

(ii) For a liquid fund, as soon as 

reasonably practicable following the 

investor’s investment in the private 

fund, written disclosure of all 

preferential treatment the adviser or its 

related persons has provided to other 

investors in the same private fund; and 

(iii) On at least an annual basis, a 

written notice that provides specific 

information regarding any preferential 

treatment provided by the adviser or its 

related persons to other investors in the 

same private fund since the last written 

notice provided in accordance with this 

section, if any. 

(c) For purposes of this section, 

defined terms shall have the meanings 

set forth in § 275.211(h)(1)–1. 

(d) Paragraph (a) of this section shall 

not apply with respect to contractual 

agreements governing a private fund 

that has commenced operations as of the 

compliance date and that were entered 

into in writing prior to the compliance 

date if paragraph (a) of this section 

would require the parties to amend such 

governing agreements. 

By the Commission. 

Dated: August 23, 2023. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2023–18660 Filed 9–13–23; 8:45 am] 

BILLING CODE 8011–01–P 


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