Annual Letter: 2024
This is our annual letter briefly reviewing various issues that our investment adviser clients should consider over the next few weeks. We will be pleased to respond to questions, assist you in preparing needed forms and otherwise assist you in satisfying any of the requirements discussed below. Please contact one of the Shartsis Friese attorneys in the Investment Funds & Advisers Group if you need assistance.
Legal and Regulatory Changes
1. SEC Issues New Rules for Private Fund Advisers. On August 23, 2023, the Securities and Exchange Commission (the “SEC”) adopted significant new rules for private fund advisers (the “Private Fund Rules”). Some of the new Private Fund Rules apply to all investment advisers to private funds, including advisers exempt from registering with the SEC and state-registered advisers, while others only apply to SEC-registered investment advisers. The Private Fund Rules affecting all investment advisers to private funds include the preferential treatment rule and the restricted activities rule. The Private Fund Rules affecting only SEC-registered advisers to private funds are the quarterly statement rule, the audit rule, the adviser-led secondaries rule and the compliance rule amendment. Additional information on the Private Fund Rules is available in our client alert: SEC Adopts New Rules for Private Fund Advisers.
The Private Fund Rules have several different compliance deadlines, dependent upon the specific sub-rule and the investment adviser’s assets under management. The compliance rule amendment has been enforceable since November 13, 2023, for all SEC-registered advisers (requiring annual compliance reviews to be documented in writing). Investment advisers with less than $1.5 billion of private fund assets under management as of the end of their most recent fiscal year will see all other applicable Private Fund Rules come into effect on March 14, 2025. Investment advisers with $1.5 billion or more of private fund assets under management as of the end of their most recent fiscal year have until September 14, 2024, to comply with the preferential treatment, restricted activities and adviser-led secondaries rules, and until March 14, 2025, to comply with the quarterly statement and audit rules. The Private Fund Rules permit “legacy status” for some practices that would otherwise be prohibited.
In anticipation of the applicable compliance dates, all investment advisers should identify which of their activities will be restricted or prohibited in the future, prepare for new periodic reporting, evaluate what additional disclosures are required for their operations for both current and prospective investors and consider updating their policies and procedures for such changes. Registered investment advisers should prepare to populate a detailed form of quarterly statement for each private fund they advise and plan to engage an auditor to conduct an audit for such private funds that have been relying on surprise exams. Investment advisers that are considering launching new private funds should be mindful of how the Private Fund Rules may affect their future operations. Please contact us if you have questions about your obligations under the Private Fund Rules.
2. Corporate Transparency Act Compliance. The Corporate Transparency Act (the “Transparency Act”) requires that all corporations, limited liability companies, and other business entities that are formed within any U.S. State or foreign jurisdiction that are registered to do business in the U.S. disclose certain information regarding their beneficial owners. The Transparency Act contains 21 exemptions, some of which are aimed specifically at some types of funds and advisers to relieve such funds and advisers from the reporting requirements. Mutual funds, SEC-registered investment advisers, venture capital fund advisers and private investment funds managed by those advisers are exempt from Transparency Act reporting requirements. Offshore private investment funds operated by SEC-registered advisers, however, must file abbreviated reports of their ownership statements to the Financial Crimes Enforcement Network (“FinCEN”). State-registered and exempt reporting advisers and the funds they manage are not exempt (unless another exemption applies) and are subject to the reporting requirements.
FinCEN previously adopted a rule implementing the Transparency Act, which became effective on January 1, 2024. An entity formed before January 1, 2024, that is subject to the reporting requirements must file its first report by January 1, 2025. An entity formed on or after January 1, 2024, must file its initial report within 90 days of its formation. Reporting companies will have 30 days to report updates to information in prior reports and must correct inaccurate information within 30 days after the reporting company becomes aware of or has reason to know of the inaccuracy. Please see our client alerts regarding the Transparency Act for further compliance information: Corporate Transparency Act Compliance and Corporate Transparency Act Compliance – Update.