In 2022, the US Securities and Exchange Commission (“SEC”) proposed numerous new and amended rules (“Proposals”) that would apply to SEC-registered investment advisers (“Registered Advisers”), including advisers to private funds, and in certain cases, exempt reporting advisors (“ERAs”). This electronic update provides an overview of certain key proposals, all of which are listed in the SEC’s most recently published rulemaking agenda as being at the final rule stage, with the exception of the “Investment Adviser Outsourcing Proposal,” which is in the proposed rule stage.1
Improved proposal to protect investors in private funds
On February 9, 2022, the SEC proposed a wide-ranging set of new rules that would have a significant impact on private funds and private fund advisers.2 The proposal will apply to private fund advisers who are registered advisers and, for certain aspects, ERAs.
The proposal would, among other things, require all registered consultants to:
- Provide investors with quarterly reports detailing private fund performance, fees and expenses;
- Obtain an annual audit for each private fund and have the private fund’s auditor notify the SEC on certain events; and
- In connection with an advisor-led secondary transaction, distribute to investors a fairness opinion and a written summary of certain material business relationships between the advisor and the opinion provider.
All private fund advisors, including ERA, will be prohibited from engaging in certain activities and practices that are contrary to the public interest and investor protection, including:
- Charging certain fees and expenses to a private fund or its portfolio investments, such as fees for services not performed (eg, expedited monitoring fees) and fees related to a review or investigation of the consultant;
- Seeking reimbursement, indemnification, release or limitation of liability for a particular activity, including simple negligence; and
- Borrowing or obtaining an extension of credit from a private fund client.
All registered advisers will be required to document their annual compliance reviews in writing pursuant to Rule 206(4)-7 under the Investment Advisers Act of 1940 (the “Advisers Act”).
Form PF proposals
SEC proposed two amendments to Form PF in 2022.
On January 26, 2022, the SEC proposed amendments to Form PF that require private equity advisers and large hedge funds to file current reports within one business day of the occurrence of certain reporting events.3
- Advisors to private equity funds will be required to report one or more reporting events related to the execution of an advisor-led secondary transaction, the execution of a return of a general partner or limited partner, the removal of a general partner of a fund, the termination of a fund’s investment period or a fund’s termination.
- Large hedge fund advisers will be required to report one or more reportable events with respect to their qualifying hedge funds relating to certain extraordinary investment losses, significant margin and counterparty default events, material changes in prime broker relationships, changes in unencumbered cash, operational events, and withdrawal and redemption events.
The proposed amendments would also lower the threshold for reporting as a large private equity advisor from $2 billion to $1.5 billion in assets under management of a private equity fund.
On August 10, 2022, the SEC proposed changes to Form PF that would require private fund advisers to report more detailed information about hedge fund investment strategies, counterparty exposures, and trading and clearing arrangements. In addition, the proposal would require registered advisers to account separately for each pooled fund in complex fund structures, such as master source arrangements and parallel fund structures.4
Cybersecurity Reporting Proposal
On February 9, 2022, the SEC proposed new Rule 206(4)-9 under the Advisers Act, which would require registered advisers to adopt and implement written policies and procedures to address cybersecurity risks. Registered advisers will also be required to report significant cybersecurity incidents to the SEC on a new Form ADV-C and to disclose such incidents and other cybersecurity risks to clients on Form ADV Part 2A.5
ESG Disclosure Proposal
On May 22, 2022, the SEC proposed amendments that would require registered advisers and ERAs to disclose their ESG strategies on Form ADV Part 1A. With respect to registered advisers, Form ADV Part 2A will be amended to require: (i) a description of the ESG factor or factors it considers for each significant investment strategy or method of analysis; (ii) disclosure of any material relationship or arrangement the consultant has with a related party that is an ESG consultant or other provider of ESG services; and (iii) disclosing whether the adviser has proxy voting policies or procedures that incorporate ESG considerations.6
Outsourcing by investment consultants
On October 26, 2022, the SEC proposed new Rule 206(4)-11, which would require registered advisers to conduct due diligence, oversight, and recordkeeping service providers before delegating certain functions to them.7 Generally, the requirements will apply to outsourced valuation, sub-adviser, client services, cyber security, investment risk, portfolio accounting, pricing, reconciliation, trading desk, trade communication and investment adviser distribution and compliance.
Modernization of reporting of beneficial owners
On February 10, 2022, the SEC proposed amendments to the rules governing the reporting of beneficial owners.8 The proposal would speed up the deadlines for filing 13D and 13G applications; extending the application of Regulation 13D-G to certain derivative securities; and clarify the circumstances in which two or more persons have formed a “pool” that would be subject to beneficial owner reporting obligations.
Brief position and brief reporting of activity from a proposal of institutional investment managers
On February 25, 2022, the SEC proposed new Rule 13f-2 and amendments to Regulation SHO under the Securities Exchange Act of 1934 and the Consolidated Audit Trail (CAT) to increase transparency in the short selling market.9 The proposed rule would require market participants to collect and submit certain data related to short sales to the SEC on a monthly basis through the proposed Form SHO. The SEC will aggregate data on large short positions, including publicly available daily short sales data for individual securities.
These proposals highlight the SEC’s expanding regulation of investment advisers, including, in particular, advisers to private funds. Dorsey will closely monitor and report on the SEC’s rulemaking efforts related to investment advisers.
1 List of SEC Agency Rules – Fall 2022 available here.
2“Private Fund Advisers; Documentation for Compliance Reviews of Registered Investment Advisers,” Investment Advisers Act Release No. 5955 (Feb. 9, 2022), available at https://www.sec.gov/rules/proposed/2022/ia-5955.pdf .
3 “Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Investment Advisers and Large Liquidity Fund Advisers,” Investment Advisers Law Release No. 5950 (January 26, 2022) available in https://www.sec.gov/rules/proposed/2022/ia-5950.pdf. ERAs are not required to file Form PF. See Form PF, General Instruction 1, available in https://www.sec.gov/files/formpf.pdf.
4 “Form PF; Reporting Requirements for All Filers and Advisers of Large Hedge Funds,” Investment Advisers Act Release No. 6083 (August 10, 2022) available in https://www.sec.gov/rules/proposed/2022/ia-6083.pdf.
5 “Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies,” Release No. 33-11028; 34-94197; IA-5956; IC-34497 (February 9, 2022) available in https://www.sec.gov/rules/proposed/2022/33-11028.pdf.
6 “Enhanced Disclosures by Certain Investment Advisers and Investment Firms Regarding Environmental, Social and Governance Investment Practices,” Releases No. IA-6034; IC-34594 (May 22, 2022) available in https://www.sec.gov/rules/proposed/2022/ia-6034.pdf.
7 “Outsourcing by Investment Advisers”, Investment Advisers Law Release No. 6176 (October 26, 2022) available in https://www.sec.gov/rules/proposed/2022/ia-6176.pdf.
8 “Modernizing Beneficial Ownership Reporting,” Release No. 33-11030; 34-94211 (February 10, 2022) available in https://www.sec.gov/rules/proposed/2022/33-11030.pdf.
9 “Short Position and Short Activity Reporting by Institutional Investment Managers,” Issue No. 34-94313 (February 25, 2022) available in https://www.sec.gov/rules/proposed/2022/34-94313.pdf.