SEC: Possible changes to private funds

By Taher Kameli



The Securities and Exchange Commission (SEC) has been very busy in recent weeks, as a series of rules have been announced as part of their 2022 agenda. These include areas such as cybersecurity, risk management, more reporting under Form PF, environmental, social, and governance (ESG) disclosures, beneficial proposed changes in ownership regulations, and new reporting under short-term sales rules are included.


The SEC will also make significant changes to the Investment Adviser Act of 1940, which could affect the day-to-day operations of almost all private fund advisors, including those who are exempt from registration. The proposed rules are:

  • Specific requirements for providing investors with a detailed quarterly report.
  • Obtain audited financial statements for each private fund.
  • Provide investors and future investors with specific disclosure of their incentives.
  • Prohibition of various activities.
 What do you need to know?
What do you need to care about? How can you be prepared?

The main points are as follows:

Banned practices

The new rules prohibit all private fund advisors from engaging in various activities, even exempting them from registration. These include:

  • Charges for services not provided.
  • Private fund advisor inspection or investigation defense and compliance costs.
  • Reduction of refunds from actual, potential, or virtual taxes applicable to advisors, them affiliates, or their respective owners or shareholders.
  • Use of safeguard clauses, i., H. Refunds, compensations, apologies, or limited liability for breach of trustee obligations, willful misconduct, malicious intent, negligence, or recklessness in providing services to private funds.
  • Allocation of fees and expenses associated with portfolio investments on a non-proportionate basis.
  • Borrow or receive loans or credits from retail fund clients.
  • Grant incentives for redemption rights and access to portfolio information.

For this change, the timing of the investment may be everything, and if multiple investors are involved, the advisor should consider the timing of this process to comply with the rules. The facts and circumstances are necessary. We need to discuss how and what to disclose with the person preparing the disclosure.


Quarterly reports

Changes: Registered investment advisers must provide private fund investors with detailed

quarterly financial statements, including standardized disclosures of fees and expenses (both at fund level and portfolio investment level) and investment performance. Different performance information is required depending on whether the fund is liquid or illiquid. The statement must be submitted to the investor within 45 days of the end of each calendar quarter.

One thing to worry about is that this will affect funds that are expected to perform for at least two quarters, so you need to send a statement to all fund investors, including those in the investment pool.



Modifications: All private funds managed by registered or required advisors must be audited by an independent company that is a member of the Public Company Accounting Oversight Board (PCAOB). Upon completion, the audited financial statements must be presented “quickly” to the fund’s investors. The auditor must notify the SEC if they announce a qualified opinion, resigns, or are dismissed.

Something to think about is that this is like what most businesses already do, but this rule makes it mandatory. And the timing and attendance flexibility that exists under custody rules does not exist under this requirement.

Secondary transaction 

Changes: The sale of shares in a private fund or exchange of shares in a fund managed by another advisor deemed initiated by the advisor is a fair opinion. Consider that traditionally, advisors have disclosed potential conflicts of interest in advisor-led secondary transactions to investors. But it is not clear how “consultant-led” is defined or how the costs and time are required.




Please contact the Kameli Law at or give us a call at (312)-233-1000 if you have any further questions.

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