The US Securities and Exchange Commission (SEC) recently adopted sweeping new rules under the Investment Advisers Act of 1940 (Advisers Act) that apply in certain circumstances to non-US advisers to private investment funds.
On June 5, 2024, the US Court of Appeals for the Fifth Circuit vacated the entire set of regulations, including amendments to existing rules. See our LawFlash, Fifth Circuit Vacates SEC Private Fund Adviser Rules in Full, detailing the court’s decision.
On August 23, 2023, the SEC voted to adopt five new rules applicable to advisers to private funds [1] : (1) the quarterly statement rule; (2) the mandatory private fund audit rule; (3) the adviser-led secondary rule; (4) the restricted activities rule; and (5) the preferential treatment rule. [2]
Quick Facts:
As discussed herein, these rules apply in certain cases to an adviser whose principal office and place of business is outside of the United States (as used herein, “non-US adviser”). For more information on the final rules, refer to our related Report on the topic.
In the adopting release, the SEC clarified and restated its position that it does not apply the “substantive provisions” of the Advisers Act with respect to the non-US clients (in this case, non-US funds) of a registered non-US adviser. The SEC elaborated that these final rules will not apply to the non-US fund clients of a registered non-US adviser, regardless of whether such funds have US investors.
The SEC further clarified that, consistent with this approach, it will not extend the restricted activities rule or the preferential treatment rule—which, as discussed above, are of broader scope and applicability than the other rules—to apply to non-US unregistered advisers with respect to their non-US funds, regardless of whether such funds have US investors. The same approach applies to non-US unregistered advisers relying on exempt reporting adviser status (including venture capital advisers) and advisers relying on the foreign private fund adviser exemption, in each case with respect to their non-US funds.
However, when a non-US adviser manages a US domiciled fund (as used herein, an “onshore fund”), such adviser would be within the scope of the rules with respect to such onshore fund and would have to comply with the prohibitions contained in the restricted activities rule and the preferential treatment rule. In addition, to the extent such non-US adviser is registered with the SEC (as opposed to, for example, being only an exempt reporting adviser), such adviser would have to comply with the quarterly statement rule, the mandatory private fund audit rule, and the adviser-led secondary rule.
Advisers with multiple global offices, including offices and operations in the United States, should carefully consider whether their funds could be scoped into the new rules in whole or in part based on their US affiliates. In addition, both US and non-US advisers with onshore and non-US sub-advisory arrangements should consider the extent to which the new rules impact their advisory complexes.
For example, the preferential treatment rule effectively prohibits private fund advisers from providing preferential terms to investors in a private fund or a “similar pool of assets” regarding (1) certain redemptions from the fund, unless the ability to redeem is required by applicable law or regulation or the adviser offers the preferential redemption rights to all other investors without qualification and (2) certain preferential information about portfolio holdings or exposures of the fund, unless such preferential information is offered to all investors. [4]
The SEC broadly defined “similar pool of assets” to mean a pooled investment vehicle (other than an investment company registered under the Investment Company Act) with substantially similar investment policies, objectives, or strategies to those of the private fund managed by the investment adviser or its related persons. [5]
Non-US advisers to a master-feeder or parallel fund structure with both non-US and onshore vehicles should carefully analyze this aspect of the new rule. The SEC indicated in the adopting release that whether a pool of assets is “similar” is a facts-and-circumstances analysis; for example, according to the SEC, an adviser’s healthcare-focused private fund may be considered a “similar pool of assets” to the adviser’s technology-focused private fund under the definition. [6]
The below table summarizes the application of the rules based on the type of investment adviser and location of its fund clients.
|
Type of Adviser* |
Fund Type (Non-US / Onshore) |
Investor Type (US / Non-US) |
Applicable Rules |
|
Non-US
SEC RIA |
Non-US |
All |
None |
|
Onshore |
All |
|
|
|
Non-US
ERA (including venture capital advisers), state-regulated, foreign private adviser, unregistered |
Non-US |
All |
None |
|
Onshore |
All |
|
|
|
Onshore
SEC RIA |
All |
All |
|
|
Onshore
ERA (including venture capital advisers), state-regulated, foreign private adviser, unregistered |
All |
All |
|
* Assumes that the adviser satisfies the definition of an “investment adviser” under the Advisers Act.
The compliance dates for the rules are as follows:
|
Rule |
Compliance Date |
|
March 14, 2025 |
|
Staggered depending on an adviser's private fund AUM:
|
|
November 13, 2023 |
On September 1, 2023, several industry organizations, including the National Association of Private Fund Managers, filed a lawsuit challenging the SEC’s statutory authority to issue the new rules under the Advisers Act. Morgan Lewis is tracking the ongoing litigation, but currently it is unlikely to be resolved prior to May 31, 2024 at the earliest and, accordingly, investment advisers should begin preparing for compliance with the rules given the timeline.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
[1] Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Investment Advisers Act Release No. IA-6383 (August 23,2023) (Adopting Release); published at 88 Fed. Reg. 63206 (September 14, 2023). Note that the new rules apply to “private funds” as defined in the Advisers Act, which means an issuer that would be an investment company, as defined in the Investment Company Act of 1940 (Investment Company Act), but for reliance on Section 3(c)(1) or 3(c)(7) of that Act. For purposes of the application of the new rules, the definition of “private fund” would not apply to a non-US fund that is excluded from SEC regulation pursuant to Section 7(d) of the Investment Company Act.
[2] In addition to these rules, the SEC also adopted amendments to Rule 204-2 (books and records rule) that require registered investment advisers to document in writing the annual review of their compliance policies and procedures.
[3] Non-US advisers with both onshore and non-US funds should, nonetheless, be mindful of the “similar pool of assets” provision in the preferential treatment rule.
[4] Rule 257.211(h)(2)-3. Note that these prohibitions apply only if the adviser reasonably expects that such preferential treatment would have a material, negative effect on other investors in the private fund or similar pool of assets.
[5] Rule 257.211(h)(1)-1. Note that separately managed accounts are excluded from such definition. It is also worth noting that because a pool need only have an investment policy, investment objective, or investment strategy that is substantially similar to that of the private fund, and because many funds’ investment objectives tend to be thematic and high-level, it is possible that certain private funds will have a large universe of “similar pools of assets” to consider.
[6] Adopting Release at p. 286.