On August 23, 2023, the US Securities & Exchange Commission (SEC) took a progressive step by adopting new and amended rules under the Investment Advisers Act of 1940, colloquially known as the Advisers Act. The motive behind the new rules centers around the SEC’s aim to deal with perceived “risks and harms that are common in an adviser’s relationship with private funds and their investors”, according to legal firm McDermott Will & Emery.
The new rules hold considerable implications for investment advisers to private funds as well as their relationships with the funds and investors they advise.
Specific details of the new rules include substantive requirements and mandates for firms that advise privately held equity funds, debt funds, venture capital funds, and similar investments. These amendments and regulatory changes were put into place to ensure transparency and protect retail investors from potential harms and risks. The changes were also engineered to give institutional investors more solid ground in understanding complex investment decisions.
A few highlights of the new rules revolve around conflict of interest issues as well as disclosure requirements. Advisers are now required to provide detailed and transparent information about their practices, specifically involving allocation of investment opportunities and the associated fees and expenses. Enhanced due diligence is expected to be the norm, thus establishing a higher standard of fiduciary duty towards investors.
This marks a significant point in the ongoing evolution of the advisory relationship between investment advisers and private funds, as they are now regulated under a more detailed and comprehensive framework.
In summary, the SEC’s adoption of new rules reflects its continuous desire for strengthening protections around private fund investors while ensuring that the business conduct of investment advisers remains consistent with their fiduciary duty.