On June 5, 2024, the U.S. Fifth Circuit Court of Appeals (Fifth Circuit) issued an opinion that vacated the SEC's Private Fund Adviser Rules, holding that the SEC exceeded its statutory authority in adopting the Rule. The SEC has several options:
Appealing to the Fifth Circuit
Requesting that the U.S. Solicitor General approve a petition for a “writ of certiorari” with the U.S. Supreme Court, which essentially orders a lower court to deliver its record in a case so that the higher court may review it. However, an appeal to the Supreme Court would likely take considerable additional time to resolve and require the SEC to devote additional resources that could distract from other initiatives.
In the meantime, the Private Funds rule has been vacated in its entirety, a little more than three months before what would have been the first compliance date.
The SEC finalized the Private Fund Advisers Rule on November 13, 2023. DFIN has been closely reviewing all aspects and interpretations, as well as the impact on the industry and end investor.
The Private Fund Adviser rule will require investment advisers registered under the ’40 Act to create a quarterly report for any private fund that they advise directly or indirectly and which has at least two full fiscal quarters of operating results.
Key takeaways include:
Compliance Date:
- All private fund advisers have 18 months after publication in the federal register to comply with new reporting requirements (March 14, 2025; first reporting cycle is Q1 2025).
Quarterly Reports:
- Must be distributed within 45 days after each fiscal quarter within each fiscal year.
- Must be distributed within 90 days at the end of the fiscal year.
- Fund of funds are slightly longer with distribution periods of 75 days (within the fiscal year) and 120 days (annual).
- Different requirements for new launches and liquidations.
Report Format:
- The format of the quarterly report has been lightly prescribed by the SEC. Any additional information “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.”
Machine Readable
- The SEC encourages machine-readable format, but it is not mandatory. “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.”
Fund Table (Required):
- The following must be presented within the table (must show total dollar amount):
- Fees and expenses allocated to or paid by the private fund during the reporting period both before and after the application of any offsets, rebates or waivers.
- 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 both before and after the application of any offsets, rebates or waivers.
- 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.
Portfolio Investment Table (Required):
- The table must show the portfolio investment compensation allocated or paid to the investment adviser or any of its related persons by the private fund during the reporting period (must show total dollar amount) both before and after the application of any offsets, rebates or waivers.
Calculations and Cross-References (Required):
- The report must have a prominent disclosure regarding calculation methodology and cross-references to the sections of the private fund’s organizational and offering documents that set forth the applicable calculation methodology.
Fund Performance (Required):
- No later than the time the adviser sends the initial quarterly statement, the adviser must determine that the private fund is an illiquid or a liquid fund.
- For a liquid fund, the report must show:
- Annual net total returns for each fiscal year over the past ten fiscal years or since inception, whichever period is shorter.
- Average annual net total returns over the one-, five- and ten-fiscal-year periods.
- 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.
- For an illiquid fund, the report must show:
- Gross Internal Rate of Return (IRR) and gross Multiple on Investment Capital (MOIC) for the illiquid fund.
- Net IRR and net MOIC for the illiquid fund.
- 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.
Content Requirements:
- The quarterly statement must use clear, concise, plain English and be presented in a format that facilitates review from one quarterly statement to the next.
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 required reporting requirements to cover similar pools of assets.
Distribution:
- The report must be sent to all investors in the private fund.
- If the investor is in a pooled investment vehicle controlled by the adviser or its related persons, the investors in those pools must receive the statements.
Use of Virtual Data Rooms (VDR):
- The quarterly reports can be distributed electronically through a VDR. However, this distribution must be done in accordance with the SEC’s guidance on electronic delivery.
- Advisers should notify investors when the quarterly report is uploaded to the VDR within the applicable time periods for preparation and delivery of the statement and ensure that all investors have access to the quarterly reports within it.
Baseline-level Reporting:
- The rule outlines that the required elements outlined within are only baseline-level reporting and do not restrict the adviser from adding additional disclosures to the report that an investor may negotiate. However, investors cannot opt out of the quarterly reports altogether (i.e., an investor can get more reporting than is outlined in the rule, but not less).
Annual Financial Statements Audit Requirements:
- While not impacting the quarterly reports, private fund advisers are now subject to new audit requirements on the annual report. On each fiscal year-end report, the financial statements must be audited by an independent public accountant in accordance with Regulation S-X. The financial statements must be prepared in accordance with U.S. GAAP (or reconciled to U.S. GAAP). The audited financial statements must be distributed within 120 days of the fiscal year-end of the fund, and as soon as possible upon liquidation.
For a summary of the rule, please view the SEC’s New Private Fund Adviser Rules: Overview Chart.
DFIN will continue to provide thought leadership and guidance to educate our clients and ensure compliance with confidence.
DFIN provides streamlined solutions to meet all of the Private Fund Advisers rule requirements for quarterly statements, including reporting, distribution and virtual data rooms.
- Reporting: ArcReporting was purpose-built by experts who know the investment industry inside and out. With decades of experience, DFIN understands that your organization has unique needs.
- Distribution: ArcDigital is DFIN’s all-in-one digital content delivery solution that gives our clients access to digital assets stored in any repository, and the power to deliver them to any recipient through the communications channels they prefer.
- Virtual Data Room: Our Venue virtual data room and corporate repository platform are continually optimized for security, productivity and usability and reinforced by regional experts.
To learn more about the DFIN solution that’s right for you, please Contact Us.
