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Q3 2023 Asset Management Regulatory Update

November 14, 2023

Table of Contents:

SEC Adopts Final Private Fund Adviser Rules

SEC Adopts Final Amendments to the Investment Company Names Rule

SEC Adopts Money Market Fund Reforms


On August 23, 2023, the Securities and Exchange Commission (the “SEC” or the “Commission”) voted to adopt a final set of new rules and amendments under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) (collectively the “Private Fund Adviser Rules” or the “Rules”) that expand the regulatory compliance requirements for both registered, and to some extent, private fund advisers. The Private Fund Adviser Rules consist of five regulations and prohibitions:

  • Restricted Activities Rule,
  • Preferential Treatment Rule,
  • Quarterly Statement Rule,
  • Private Fund Audit Rule, and
  • Adviser-Led Secondaries Rule.

The Rules also include amendments to the Advisers Act’s Books and Records Rule that will require SEC-registered advisers to retain records to facilitate the SEC’s ability to assess such adviser’s compliance with the Final Rules, including the delivery of quarterly statements and annual audited financials to private fund investors, as well as certain records related to the Restricted Activities Rule and the Preferential Treatment Rule.

Notably, the Private Fund Adviser Rules do not apply to investment advisers to securitized asset funds. Along that same vein, the Rules apply specifically to “private funds.” Section 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, as amended (the “Investment Company Act”), but for section 3(c)(1) or 3(c)(7) of that Act. Real estate funds relying on Section 3(c)(5)(C), as well as others, are outside the technical scope of the Rules.

As explained in the Adopting Release, the Private Fund Adviser Rules were designed specifically to address consequences relating to transparency, conflicts of interest, and governance mechanisms for client disclosure, consent, as well as oversight matters that are common in an adviser’s relationship with private funds and their investors.

In addition to these new Rules, the SEC also adopted amendments to the existing Compliance Rule for all registered investment advisers, whether or not advising private funds.

By way of background, the SEC proposed the initial form of the Private Fund Adviser Rules (collectively, the “Proposed Rules”) on February 9, 2022. The Proposed Rules drew significant industry debate with more than 300 public comments submitted by various industry participants, groups, and stakeholders over two rounds of comment period. In their initial form, the Proposed Rules departed in many ways from the Adviser Act’s disclosure-based regulatory regime for conflicts of interest, prescribing and prohibiting specific actions by advisers instead of focusing on the quality of advisers’ disclosures or negotiations between advisers and private fund investors. Similarly, the Proposed Rules did not include a “grandfathering” provision to reduce the burden of amending existing agreements or changing certain practices in older private funds to comply with the Proposed Rules. The SEC ultimately chose not to adopt Proposed Rules relating to prohibitions on charging fees for unperformed services (e.g., accelerated monitoring fees) and limiting adviser liability and related indemnification/exculpation in a private fund’s governing documents. Likewise, the SEC chose to include grandfathering provisions, as the Final Rules provide “legacy status” and disapply certain portions of the Restricted Activities Rule and Preferential Treatment Rule with respect to preexisting contractual arrangements. Although the final Private Fund Adviser Rules are less extensive than the Proposed Rules, they still introduce new obligations and limitations expected to change business practices significantly and lead to additional administrative responsibilities and expenses. The new Rules also remain shrouded in controversy: on September 1, 2023, a lawsuit was filed jointly by six trade associations with the Fifth Circuit Court of Appeals in New Orleans, challenging the validity and enforceability of the Private Fund Adviser Rules. While the lawsuit does not automatically stop the transition periods of the Rules or delay their compliance date, a stay of the Rules may be requested or granted, either by court order as part of the proceedings or as otherwise determined by the SEC.

Generally, advisers covered by the Final Rules will have either a 12-month or an 18-month compliance transition window following the November 13 effective date, depending on their status as “Larger” or “Smaller” Private Fund Advisers. The Adopting Release defines Larger Private Fund Advisers with $1.5 billion or more in private fund assets under management. Smaller Private Fund Advisers are advisers with private fund assets under management of less than $1.5 billion in private funds assets. For the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule, the compliance date for Larger Private Fund Advisers is September 14, 2024, and for Smaller Private Fund Advisers, March 14, 2025. For the Private Fund Audit and Quarterly Statement Rule, the compliance date for all SEC-registered private fund advisers, regardless of size, will be March 14, 2025.

The compliance date for the Compliance Rule amendments regarding a Written Annual Review is November 13, 2023.

Restricted Activities Rule (Rule 211(h)(2)-1)

The Restricted Activities Rule generally prohibits all advisers to private funds — regardless of whether they are registered with the SEC — from engaging in certain “restricted” practices unless the prescribed disclosure-based or disclosure and consent-based requirements are followed. Departing from the SEC’s flat probation on certain adviser activities and expense practices as Proposed, the adopted Rules include exceptions for each “restricted” activity. For example, Unlike the Proposed Rules, the Final Rules do not explicitly prohibit advisers from charging portfolio investment monitoring fees, servicing fees, consulting fees, or other similar fees in respect of any services the investment adviser does not or does not reasonably expect to, provide to the portfolio investment.

The Restricted Activities Rule will restrict private fund advisers from the following activities:

  • Regulatory, Compliance, and Examination Expenses Restriction: Private fund advisers are restricted from reducing charging or allocating fees regulatory or compliance fees and expenses of the adviser or its related persons unless the adviser distributes a written notice of any such fees or expenses, and the dollar amount thereof, to the investors of such private fund client within 45 days after the end of the fiscal quarter in which the charge occurs.
  • Post-Tax Clawback Restriction: Private fund advisers are restricted from reducing the amount of an adviser-carried interest clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders unless it sends a written notice to the investors of the private fund that sets forth the aggregate dollar amounts of its clawback before and after any such tax reduction for actual, potential, or hypothetical taxes within 45 days after the end of the fiscal quarter in which the adviser in which the clawback occurs.
  • Non-Pro-Rata Allocation of Fees and Expenses Restriction: Private fund advisers may not directly or indirectly 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 have invested (or propose to invest) in the same portfolio investment unless the adviser meets two requirements: (i) the non-pro rata charge or allocation is fair and equitable under the circumstances and (ii) before 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.
  • Investigation Expenses Restriction: Private fund advisers may not charge private fund clients for fees and expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority, even if the conduct would otherwise be indemnifiable under the applicable private fund governing documents unless the adviser requests and obtains consent of a majority in interest of investors that are not related persons of the adviser. Under the Rule, regardless of disclosure and consent, an Adviser may not chargeback fees or expenses related to an investigation that results in sanction(s) for violating the Advisers Act. The SEC noted that investor consent to bearing such fees and expenses is likewise impermissible, as the SEC would view any waiver as invalid under section 215(a) of the Advisers Act.
  • Borrowing Restriction: Private fund advisers may not borrow money, securities, or other fund assets or receive an extension of credit from the fund unless the adviser (i) provides written notice to each investor of the material terms of such transactions and (ii) obtains advance consent from at least a majority in interest of investors that are not related persons of the adviser.

As explained in the Adopting Release, the consent-based exceptions require informed consent from the fund’s investors; approval from fund governance bodies, such as LPACs, advisory boards, or boards of directors, are deemed insufficient to satisfy the consent requirements. Moreover, consent must be obtained from a majority-in-interest of investors who are not “related persons” of the adviser (as defined in Form ADV).

The SEC has extended “legacy status” to a portion of the Restricted Activities Rule that requires informed investor consent for the adviser to borrow from a private fund or to charge certain investigation fees and expenses. Specifically, for any private funds commencing operation prior to the applicable compliance date (“existing private funds”), the restrictions do not apply so long as the existing private fund’s contractual agreements were in place prior to the compliance date and would require the parties to amend the agreement in order to comply. The “commencement of operations” includes any bona fide activity directed towards operating a private fund, including investment, fundraising, or operational activity. Examples of such bona fide activity include issuing capital calls, setting up a subscription facility for the fund, holding an initial closing, conducting due diligence on potential fund investments or making an investment on behalf of the fund.

Preferential Treatment Rule (Rule 211(h)(2)-3)

The Preferential Treatment Rule prohibits all advisers to private funds — regardless of whether they are registered with the SEC — from providing preferential redemption rights to a subset of investors or providing portfolio holdings or investment exposure information to a subset of investors, with certain limited exceptions.

Specifically, advisers will be prohibited from granting preferential redemption rights that would have a material, negative effect on the other investors in the fund or similar pool or assets unless (1) such redemptions are required by law or (2) the adviser has offered the same redemption ability to existing/future investors without qualification.

Advisers are also prohibited from granting preferential rights related to portfolio holdings or fund exposure information if the adviser reasonably expects or should expect that the disclosure would have a material, negative effect on other investors in the fund or similar pool of assets unless the adviser offers such information to all other existing investors at substantially the same time. The Rule applies to all types of investor communications: formal, informal, written, visual, and oral.

Whether any particular preferential treatment is expected to have a “material, negative effect” on other investors in the private fund is a facts and circumstances analysis.

The Final Rule defines a “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 similar investment policies, objectives, or strategies to those of the private fund managed by the adviser or its related persons. The SEC noted that the term will capture parallel funds, funds-of-one, and co-investment vehicles. However, separately managed accounts are excluded from the definition.

In addition, the Preferential Treatment Rule prohibits all private fund advisers from directly or indirectly providing any “other preferential treatment” to an investor unless (1) the adviser provides advance disclosure to prospective investor’s investment of material economic terms granted preferentially to other investors and (2) the adviser or its related persons has provided to other investors in the same private fund notice of all preferential terms “as soon as reasonably practicable” after the end of the fundraising period (for illiquid funds) or the investor’s investment (for liquid funds) and at least annually after that (if new preferential terms are granted since the last notice).

“Material economic terms” are terms that a prospective investor “would find most important and significantly impact its bargaining position.” The SEC gave the example of co-investment rights as a term that would generally qualify as a material, economic concession 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).

The SEC has extended limited legacy status to the Preferential Treatment Rule only with respect to the prohibition of preferential treatment relating to redemption and information rights. Critically, “legacy status” will apply only to existing private fund’s contractual agreements entered into before the compliance date if the Preferential Treatment Rule would otherwise require the parties to amend such an agreement.

Accordingly, existing funds must disclose “other” preferential treatment previously granted but not yet disclosed. This means the preferential terms of side letters agreements and other confidential arrangements providing preferential treatment entered into prior to the compliance will need to be disclosed (1) to prospective investors investing in the fund after the compliance date and (2) to all investors (i) with respect to liquid funds, as soon as reasonably practicable following the new investor’s investment in the private fund and (ii) with respect to illiquid funds, as soon as reasonably practicable following the final closing date.

Quarterly Statement Rule (Rule 211(h)(1)-2)

Under the Quarterly Statement Rule, SEC-registered private fund advisers (or their administrators) will be required to prepare and distribute quarterly statements for each private fund that contain certain fund-level fee and expense disclosures, investment-level compensation disclosures, and specific performance disclosures, the content of which, depends on whether the private fund is a liquid fund or an illiquid fund, as determined by the adviser. For standard private funds, the quarterly statements are due within 45 days after the end of the first three fiscal quarters of each fiscal year and 90 days after the end of each fiscal year (with an extended timeline for fund of funds to 75 and 120 days, respectively). Investors may not waive the Quarterly Statement rule.

Specifically, the fee and expense-related quarterly statement must include a “fund table” with fund-level reporting across (i) all compensation, fees, and other amounts allocated or paid to the adviser or any of its related persons by the private fund, (ii) all fees and expenses (including separate line items for organizational, accounting, legal, administration, audit, tax, due diligence and travel), (iii) any offsets or rebates carried forward to reduce future management fee payments. Moreover, the investment level compensation quarterly statement must also include a “portfolio Investment table” with investment-level reporting across all “portfolio investment compensation” allocated or paid by each “covered portfolio investment” (including 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). In the Adopting Release, the SEC noted no exclusions for de minimus expenses, general grouping of more negligible expenses into broad categories, or labeling expenses as miscellaneous; instead, advisers must list and label each expense category.

The performance-related quarterly statements must provide fund-level performance data specified intervals (the past 10 fiscal years or since inception) depending on the type of private fund (illiquid or liquid) through the latest quarter-end computed with and without the impact of any “fund-level subscription facilities,” that includes (1) Gross IRR and Gross MOIC, (2) Net IRR and Net MOIC, (3) Gross IRR and Gross MOIC for the realized and unrealized portions of the fund’s portfolio (shown separately) and (4) statement of contributions and distributions. “Fund-level subscription facilities” are defined 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. The definition of an illiquid fund is based primarily on the lack of withdrawal and redemption capability. An “illiquid fund” is defined as a private fund that (1) is not required to redeem interests upon an investor’s request and (2i) has limited opportunities, if any, for investors to withdraw before termination of the fund. A “liquid fund” is defined as a private fund that is not an illiquid fund.

The Quarterly Statement Rule also requires that reports include prominent disclosure as to the manner of calculation, including cross-references to the applicable sections of a private fund’s operative documents. While advisers do not need to provide all supporting calculations as part of a quarterly statement, the SEC noted that advisers generally should make them available upon request from an investor.

Private Fund Audit Rule (Rule 206(4)-10)

The Private Fund Audit Rule requires SEC-registered private fund advisers to obtain an annual financial statement audit of each covered private fund they advise that complies with the current “Custody Rule” (rule 206(4)-2). The private fund audit must be: (1) performed by an independent public accountant registered with and subject to PCAOB oversight; (2) meet the definition of audit in rule 1-02(d) of Regulation S-X; (3) be prepared in accordance with U.S. GAAP as required under the custody rule; and (4) delivered to investors (i) annually, within 120 days of the private funds fiscal year-end and (ii) promptly upon liquidation. Because the Private Fund Audit Rule effectively mandates that private advisers rely on the “audit exception” under the Custody Rule, the Rule eliminates the surprise audit option for private funds under the Custody Rule. As such, private fund advisers currently relying on the “surprise examination” option under the Custody Rule for private funds will need to be audited annually per the audit requirements of the Custody Rule.

The Private Fund Audit Rule also imposes a separate standard for funds and advisers that are not in a control relationship. An adviser needs only to take reasonable steps to cause the private fund to undergo an audit if the adviser is not in a control relationship.

Adviser-Led Secondaries Rule (Rule 211(h)(2)-2)

The Adviser-Led Secondaries Rule requires that SEC-registered private fund advisers conducting “adviser-led secondary transactions” must, before the due date of the election, (i) obtain and distribute to investors a fairness opinion or a valuation opinion from an independent opinion provider and (ii) prepare and distribute to investors a summary of any material business relationships among the adviser and the independent opinion provider for the two years prior to the issuance of the opinion.

The SEC defined “adviser-led secondary transaction” as 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. The SEC noted that whether the adviser or its related person initiates a secondary transaction requires a facts and circumstances analysis.

Compliance Rule Amendments (Rule 206(4)-7)

Although preparing written annual reviews is a widely adopted “best practice” among advisers, the Advisers Act’s Compliance Rule did not explicitly require it. However, the Final Rules will now mandate that all SEC-registered advisers, including those who do not advise private funds, document the annual review of their compliance policies and procedures in writing. As noted in the Adopting Release, the review should consider any compliance issues that have arisen 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 may require revisions to policies and procedures.


On September 20, 2023, the Commissioners of the SEC voted to adopt final amendments and changes to Rule 35d‑1 (the “Names Rule”) under the Investment Company Act.

By way of background, the Names Rule generally requires a registered investment company or business development company (“BDC,” and together with registered investment companies, “Registered Funds”) with a name that suggests it has a focus on particular types of investments, industries or geographic regions, or whose distributions are tax-exempt, to adopt a policy to invest at least 80% of the value of its assets in investments that are consistent with its name (an “80% investment policy”).

The amendments broaden the scope of funds that are subject to the 80% investment policy requirement required by Rule 35d-1 to include fund names with terms suggesting that the fund focuses on investments that have or investments whose issuers have particular characteristics, including a name with terms such as “growth,” “value,” or terms that reference a thematic investment focus such as indicating that the fund’s investment decisions incorporate one or more ESG factors. The amendments require Registered Funds subject to the 80% investment policy requirement to disclose in their prospectuses the definitions of the terms used in their names, including the criteria the funds use to select the investments the term describes.

Beyond the expansion of the scope of the 80% investment policy, the amendments revised Rule 35d-1 to provide for in the event of a fund’s departure from its 80% investment policy as a result of a drift or other-than-normal circumstances, the fund will now have 90 days to get back into compliance with the 80% investment policy requirement.

The amendments also clarified that registered funds must use the notional amount of a derivatives instrument (with certain adjustments) rather than its market value to determine compliance with the 80% investment policy.

Moreover, registered funds subject to the 80% investment policy requirement will be required to disclose on their quarterly Form N-PORT the definitions of terms used in their names, the value of their 80% baskets, and each investment included in the 80% basket.

The amendments also include specific recordkeeping requirements, requiring Registered Funds with an 80% investment policy requirement to document compliance with the amended Rule.

The compliance date is September 22, 2025 (24 months following the effective date) for larger entities and March 20, 2026 (30 months following the effective date) for smaller entities. The Adopting Release defines larger entities as funds that, together with other investment companies in the same “group of related investment companies” (as that term is defined in Rule 0-10 under the Investment Company Act) have net assets of $1 billion or more as of the end of the most recent fiscal year, and smaller entities are funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year.


On July 12, the SEC adopted rule and form amendments concerning money market funds (“MMFs”) under Rule 2a-7 of the Investment Company Act. As noted in the Adopting Release, the amendments are designed to improve the resilience and transparency of money market funds and address concerns about prime and tax-exempt money market funds highlighted by raised by large outflows from money market funds during the COVID-19 pandemic.

Increase of the Minimum Daily and Weekly Liquidity Requirements

The amendments increase the minimum liquidity requirement to at least 25% of the fund’s total daily liquid assets and at least 50% of a fund’s total assets in weekly liquid assets. The increased thresholds are designed to provide a more substantial buffer to equip MMFs better to manage significant and rapid investor redemptions. The amendments also incorporate a new board reporting requirement for funds that fall below certain liquidly thresholds: an MMF holding less than 12.5% of its total assets or weekly liquid assets equal to less than 25% of its total assets will be required to notify its board within one business day of the shortfall and provide the board with a description of the circumstances leading to the shortfall within 4 business days of the event.

Removal of Temporary Redemption Gates

MMFs will no longer be able to impose temporary gates to suspend redemptions. Specifically, the amendments remove provisions in Rule 2a-7 that permit an MMF to impose a temporary redemption gate. The amendments also remove provisions in Rule 2a-7 that tied a money market fund’s ability to impose liquidity fees to its level of weekly liquid assets. Accordingly, MMFs will no longer be permitted to impose liquidity fees if their weekly liquid assets fall below a certain threshold.

Liquidity Fee Requirement

Under the new amendments, the SEC has introduced a revised framework for liquidity fees that incorporates both mandatory liquidity fees for institutional money funds and discretionary liquidity fees for non-government MMFs. The new framework separates the fee type from the fund’s weekly liquid assets, meaning that whether the fee is mandatory or discretionary will not depend on the fund’s weekly liquid assets. A money fund’s board will be responsible for making liquidity fee determinations under the mandatory and discretionary liquidity fee requirements and is permitted to delegate this responsibility to the fund’s investment adviser or officers, subject to certain oversight requirements.

Under the amendments, institutional prime and institutional tax-exempt MMFs will be required to impose mandatory liquidity fees when the fund experiences daily net redemptions over 5% of net assets. Accordingly, the amount of the liquidity fee must be a good faith estimate, supported by data, of the costs the fund would incur if it sold a pro-rata amount of each security in its portfolio (a “vertical slice”) to satisfy the amount of net redemptions, including transaction costs and market impacts.

The SEC retained the ability of a non-government MMF’s board to impose a discretionary liquidity fee. Accordingly, non-government MMFs must impose a discretionary liquidity fee of up to 2% if the fund’s board determines a fee is in the fund’s best interest.

Other Amendments

In addition to the changes detailed above, the amendments will require funds to calculate Weighted Average Maturity (“WAM”) and Weighted Average Life (“WAL”) based on the percentage of each security’s market value in the portfolio.

The amendments also address potential negative interest rates on the operation of government MMFs and retail MMFs that seek to maintain a stable share price. Under the amendments, retail and government money market funds may handle a negative interest rate environment either by converting from a stable share price to a floating share price or by reducing the number of shares outstanding to maintain a stable net asset value per share (a “reverse distribution mechanism”), subject to certain board determinations and disclosures to investors.

The amendments also incorporate corresponding changes to Form N-CR concerning reporting of liquidity threshold events and amend Form N-MFP to include additional information about shareholders, portfolio securities sold by institutional prime MMFs, liquidity fees, and use of share cancellation, as well as to make certain conforming changes to Form N-1A to reflect certain of the other amendments. The SEC also adopted amendments to reporting by large liquidity fund advisers in respect of the liquidity funds that they manage in Section 3 of Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, to maintain consistency with the reporting requirements for registered MMFs under amended Form N-MFP and the final amendments.

The amendments also include amendments to the recordkeeping rule under the Investment Company Act (Rule 31a-2) to require money funds to preserve records that document how they determine the amount of any liquidity fee.

The SEC adopted a tiered approach to the transition periods for compliance with the amendments. MMFs will no longer be permitted to impose redemption gates immediately upon October 2, 2023, the effective date of the amendments. The effective and compliance date for the amendments to Forms N-MFP, N-CR, and PF is June 11, 2024. Further, on April 2, 2024, six months from the effective date of the amendments, MMFs will be required to comply with the increased daily and weekly liquid asset minimums.

Finally, funds will be required to comply with the amendment’s liquidity fee framework on October 2, 2024, 12 months from the effective date of the amendments.