SEC proposals: Private fund advisers and RIA compliance reviews
FINANCIAL REPORTING INSIGHTS |
Authored by RSM US LLP
The SEC recently issued several proposed rules, which, if finalized would amend and create new requirements under the Investment Advisers Act of 1940 (Advisers Act). Specifically, the proposal would:
- Require registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses and performance within 45 days after each calendar quarter end.
- Require a registered (or required to be registered) private fund adviser to obtain an annual financial statement audit of each private fund it advises and to distribute the audited financial statements to current investors promptly after the completion of the audit.
- The audit must be performed by a public accounting firm that is independent in accordance with Rules 2-01(b) and (c) of SEC Regulation S-X and that is registered with (and subject to regular inspection by) the Public Company Accounting Oversight Board. The audit would be performed in accordance with generally accepted auditing standards of the United States. The auditor would be required to notify the SEC Division of Examinations upon the auditor’s termination/resignation/dismissal or issuance of a modified opinion.
- The audited financial statements must be prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP), or in the case of foreign private funds, must contain information substantially similar to statements prepared in accordance with U.S. GAAP, and any material differences would be required to be reconciled to U.S. GAAP.
- The proposed rule would require registered private fund advisers, including those that currently opt to undergo a surprise examination for custody rule compliance purposes, to have their private fund clients undergo a financial statement audit. An audit also must be obtained upon an entity’s liquidation.
- Require an adviser to obtain a fairness opinion in connection with certain adviser-led secondary transactions where an adviser offers fund investors the option to sell their interests in the private fund, or to exchange them for new interests in another vehicle advised by the adviser. The rule would require the opinion to be issued only by an independent opinion provider and for the opinion to be distributed to investors in the private fund, prior to the closing of the transaction.
- Prohibit all private fund advisers, including those that are not registered with the SEC, from providing preferential terms to certain investors regarding redemption or information about portfolio holdings or exposures. The proposal also would prohibit 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.
- Prohibit all private fund advisers, including those that are not registered with the SEC, from engaging in several activities, including seeking reimbursement, indemnification, exculpation or limitation of liability for certain activity; charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services and fees associated with an examination or investigation of the adviser; reducing the amount of an adviser clawback by the amount of certain taxes; charging fees or expenses related to a portfolio investment on a non-pro rata basis; and borrowing or receiving an extension of credit from a private fund client (in the form of money, securities or other assets).
In addition, the SEC proposed amendments to the Advisers Act compliance rule that would require all SEC-registered investment advisers (RIAs), including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.
The proposed rules include a one-year transition period for advisers to come into compliance with the new and amended rules if they are adopted.
The proposal sets forth a number of requests for comment regarding the proposed reforms. Industry participants should carefully contemplate the implications of the proposal, and consider submitting feedback to the SEC on the proposed changes. The public comment period will remain open for 30 days after the proposal is published in the federal register.
Call us at (509) 455-8173 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by RSM US LLP and originally appeared on 2022-03-02.
2021 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
HMA CPA is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how HMA CPA can assist you, please call (509) 455-8173.