Over the course of the last year, there have been a number of regulatory developments affecting private funds and their investment advisers that private equity sponsors should be aware of. We would also like to remind our private equity clients of important upcoming regulatory filings and compliance obligations in 2022.[1]


Proposed Rules to Enhance Investor Protection and Improve Cybersecurity Risk Management

On February 9, 2022, the SEC announced two significant proposals regarding new investor protection and cybersecurity rules for private fund advisers.[2]

With respect to investor protection, the SEC proposed:

  • requiring registered private fund advisers to prepare and distribute to investors quarterly statements detailing, among other things, fund-level fees and expenses (including fees and expenses paid by underlying portfolio investments to the adviser or its related persons) as well as standardized gross and net performance information for all advised private funds;
  • requiring registered private fund advisers to obtain an annual financial statement audit of each advised private fund;
  • requiring registered private fund advisers to obtain a fairness opinion in connection with adviser-led secondary transactions where the adviser offers fund investors the option to sell their fund interests or exchange them for new interests in another vehicle managed by the adviser;
  • prohibiting all private fund advisers, including those that are not registered with the SEC, from engaging in certain activities regardless of whether a fund’s constituent documents would otherwise allow or investors have consented to such activities following disclosure, including (i) charging certain fees and expenses to a private fund or portfolio investment, including accelerated monitoring fees and costs of regulatory examinations and investigations of the adviser; and (ii) seeking reimbursement, indemnification, exculpation or limitation of liability from a private fund or its investors for a breach of fiduciary duty, willful misfeasance, bad faith, negligence or recklessness in providing services to the private fund;
  • prohibiting all private fund advisers, including those that are not registered with the SEC, from providing preferential treatment to certain private fund investors regarding redemptions or information about portfolio holdings or exposures. The SEC also proposed prohibiting any other type of preferential treatment unless the adviser discloses such treatment to other current and prospective investors;[3]
  • amending the Advisers Act books and records rule to require advisers to retain books and records related to the proposed quarterly statement rule; and
  • amending the Advisers Act compliance rule to require all registered advisers, including those that do not manage private funds, to document the annual review of their compliance policies and procedures in writing.

With respect to cybersecurity, the SEC proposed:

  • requiring registered advisers to adopt and implement written cybersecurity policies and procedures that are reasonably designed to address cybersecurity risks;
  • requiring registered advisers to report significant cybersecurity incidents to the SEC via a newly-proposed Form ADV-C;
  • enhancing disclosures related to cybersecurity risks and incidents, including amending Form ADV Part 2A (the brochure) to require disclosure of cybersecurity risks and incidents; and
  • requiring registered advisers to create and maintain certain cybersecurity-related books and records.

We will follow up in the near future with a separate alert providing further details on both proposals.

New Advisers Act Marketing Rule

In December 2020, the SEC substantially amended its rules under the Investment Advisers Act of 1940 (Advisers Act) governing advertisements by registered investment advisers and compensation paid to solicitors by such advisers.[4] The amendments create a single rule (the marketing rule) that replaces the current advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively. The SEC also made related revisions to Form ADV and Rule 204-2, the books and records rule.[5] The amendments will consolidate SEC staff positions from no-action letters and other guidance in a single rule and will replace the broadly drawn limitations in the current rules with more principle-based requirements. The marketing rule has a compliance date of November 4, 2022.

New Marketing Rule – Amendments to Rule 206(4)-1

Definition of Advertisement. The amended definition of “advertisement” in the marketing rule contains two parts: one that covers communications currently covered by the advertising rule and another that governs solicitation activities previously covered by the cash solicitation rule.

  1. The first part of the definition includes any direct or indirect communication an investment adviser makes that: (i) offers the adviser’s investment advisory services with regard to securities to prospective clients or private fund investors; or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. This part of the definition generally excludes one-on-one communications to private fund investors.[6]
  2. The second part of the definition generally includes any endorsement[7] or testimonial[8] for which an adviser provides cash or non-cash compensation directly or indirectly. This part of the definition effectively governs activities covered by the current cash solicitation rule and applies to communications made by placement agents and other solicitors of private fund investors.

Note that an advertisement (including an endorsement or testimonial) can be written, digital or verbal.

General Prohibitions. The marketing rule prohibits certain practices and replaces elements of the current advertising rule, such as the prohibition on testimonials and profitable past recommendations. To establish a violation of the marketing rule, the SEC does not need to demonstrate that an investment adviser acted with scienter; negligence is sufficient. The new prohibited practices are:

  • making an untrue statement of a material fact, or omitting a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading;
  • making a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC;[9]
  • including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser;
  • discussing any potential benefits without providing fair and balanced treatment of any associated material risks or limitations;
  • referencing specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
  • including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and
  • including information that is otherwise materially misleading.

Testimonials and Endorsements. The current advertising rule prohibits the use of testimonials. The new marketing rule permits testimonials and endorsements in an advertisement, subject to the adviser satisfying certain disclosure, oversight and disqualification provisions:

  • Disclosure. Advertisements must clearly and prominently disclose whether the person giving the testimonial or endorsement (the promoter) is a current client or investor and whether the promoter is compensated. Additional disclosures are required regarding compensation and conflicts of interest. There are exceptions from the disclosure requirements for SEC-registered broker-dealers under certain circumstances. The new rule eliminates the current rule’s requirement that the adviser obtain from each investor acknowledgements of receipt of the disclosures.
  • Oversight and Written Agreement. An adviser that uses testimonials or endorsements in an advertisement must have a reasonable basis for believing that the testimonial or endorsement complies with the marketing rule. An adviser also must enter into a written agreement with a promoter that describes the scope of its activities and the terms of any compensation, except where the promoter is an affiliate of the adviser or the promoter receives de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
  • Disqualification. The rule prohibits certain “bad actors” from acting as promoters.

These requirements will apply to private fund placement agent arrangements and will require advisers to police the conduct of placement agents to seek to ensure that solicitation activities comply with the marketing rule.

Third-Party Ratings. The new rule prohibits the use of third-party ratings in an advertisement, unless the adviser provides disclosures and satisfies certain criteria pertaining to the preparation of the rating.

Performance Information. The new rule prohibits including in any advertisement:

  • gross performance, unless the advertisement also presents net performance[10] with equal prominence using the same time periods and calculation methodology;[11]
  • any performance results for accounts other than private funds, unless they are provided for one-, five- and ten-year periods (if applicable);
  • any statement that the SEC has approved or reviewed any calculation or presentation of performance results;
  • performance results from fewer than all portfolios with substantially similar investment policies, objectives and strategies as those being offered in the advertisement, unless the advertised performance results are not materially higher than if all related portfolios had been included;
  • performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
  • hypothetical performance (which includes target or projected returns), unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain information underlying the hypothetical performance; and
  • predecessor performance,[12] unless (i) the persons who were primarily responsible for achieving the prior performance results manage accounts at the advertising adviser; (ii) the accounts managed at the predecessor adviser are sufficiently similar to the accounts managed at the advertising adviser that the performance results would provide relevant information to clients and investors; and (iii) all accounts that were managed in a substantially similar manner are advertised unless the exclusion of any such account would not result in materially higher performance. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement.

Amendments to Books and Records Rule and Form ADV

In connection with the marketing rule amendments and merger of the current advertising and cash solicitation rules, the SEC amended Rule 204-2 to conform recordkeeping requirements to the new provisions.

In addition, the SEC amended Item 5 of Part 1 of Form ADV to require advisers to provide additional information regarding their marketing practices to help facilitate the SEC’s inspection and enforcement capabilities. An adviser will be required to state whether:

  • any of its advertisements include performance results, a reference to specific investment advice, testimonials, endorsements or third-party ratings;
  • it pays or otherwise provides cash or non-cash compensation, directly or indirectly, in connection with the use of testimonials, endorsements or third-party ratings (this question will only require ‘yes’ or ‘no’ responses and will not require additional information); and
  • any of its advertisements include hypothetical performance and predecessor performance.

Effective and Compliance Dates

The new marketing rule, amended books and records rule and related Form ADV amendments became effective on May 4, 2021. However, in order to give advisers time to prepare for the requirements imposed by the new rules, the compliance date has been set as November 4, 2022. Any advertisements disseminated on or after the compliance date by advisers registered or required to be registered with the SEC are subject to the new marketing rule. Similarly, advisers filing Form ADV on or after November 4, 2022 will be required to complete the amended form.[13]

SEC Enforcement Action Regarding Improper Calculation of Fees and Expenses and Related Disclosure Issues

On December 20, 2021, a registered investment adviser agreed to pay $4.5 million in civil penalties to settle SEC charges of fee offset and disclosure failures resulting from deficiencies in the firm’s compliance program. In addition to these civil penalties, the firm voluntarily repaid $5.4 million to affected private fund clients.

The SEC charged the adviser with violations of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder in relation to three of its fund clients. Specifically, the SEC’s order found that, for two funds, the adviser failed to offset fund-level management fees against certain portfolio company fees, as required under each fund’s offering and governing documents.

The SEC’s order additionally noted the adviser’s failure to implement policies and procedures to identify and address inconsistencies in fund documents and communications with investors. Specifically, offering and governing documents for two funds contained inconsistent language around key operational points, including calculation methodologies for management fees and other expenses. The Adviser also lacked reasonable written policies and procedures addressing whether personnel were communicating accurate, consistent information to investors. In addition to paying the SEC’s penalty and refunding erroneously collected fees to affected clients, the adviser enhanced its fund disclosures and improved procedures and controls around the calculation of fee offsets.

This settlement reflects the SEC’s broader focus on enhancing clarity and regulation around private fund managers’ fee arrangements. As discussed below, SEC Chair Gary Gensler recently emphasized the need for greater transparency around such fee arrangements as well as additional consideration of certain fee-related practices.

SEC Chair Announces Initiatives to Increase Transparency and Competition in the Private Fund Industry

During a speech delivered on November 10, 2021 at the Institutional Limited Partners Association Summit, SEC Chair Gary Gensler announced that he had instructed SEC staff to consider recommending new rules that would increase “efficiency, competition, and transparency” in the private fund industry.[14] Gensler noted that private funds currently manage approximately $17 trillion in gross assets and play a crucial role in capital markets and the overall economy, and therefore “… it’s time we take stock of the rapid growth and changes in this field…, and bring more sunshine and competition to the private funds space.”

Fees and Expenses. Gensler stated that in light of the fact that private fund managers charge multiple layers of fees (management and performance fees and expenses at the fund level and often other fees charged at the portfolio company level), the SEC should promote additional transparency to give investors consistent and comparable information to allow them to make informed investment decisions. He also noted that while mutual fund fees have generally declined over time, there does not appear to have been a similar reduction for private funds. Therefore, Gensler has asked the SEC staff to consider what recommendations they can make to bring greater transparency to private fund fee arrangements.

Side Letters. Gensler noted the increasing use of side letters to allow different investors to participate in private funds on varying terms. While acknowledging that some side letter terms are “benign,” others create preferred fee rates, liquidity terms or disclosures, which “… can create an uneven playing field among limited partners based upon those negotiated terms.” Gensler has asked the SEC staff to consider recommendations regarding how to strengthen transparency regarding side letters or whether certain side letter provisions should not be permitted.

Performance Metrics. Gensler referenced the debate regarding whether private equity funds outperform the public markets and noted that while there was a significant amount of standardized, public information regarding mutual fund performance, similar information about private funds generally was less available, “…not only to the public, but even to the investors themselves.” Therefore, he has asked the SEC staff to consider how the SEC can enhance private fund performance transparency.

Fiduciary Duties and Conflicts of Interest. Gensler also discussed his concerns around market integrity for private funds. He noted that some general partners seek waivers at the state level of their fiduciary duties to investors and that many limited partners have concerns about these waivers. Gensler reiterated that a private fund adviser has a federal fiduciary duty to the fund under the Advisers Act, and this duty may not be waived, regardless of the sophistication of the client. Gensler has asked the SEC staff how the SEC can better mitigate the effects of conflicts of interest between general partners, their affiliates and investors, which could include considering the need for prohibitions on certain conflicts and practices.

Form PF. Finally, Gensler noted the central role Form PF performs in providing information about private fund activities to regulators and stated his belief that the form’s requirements may need to be updated. Therefore, he has asked the SEC staff for recommendations regarding enhancing reporting and disclosure through Form PF or other reforms in order to ensure that the SEC and other financial regulators have the information they need to protect markets and investors.

SEC Issues Risk Alert Regarding Observations from Private Fund Adviser Exams

On January 27, 2022, the SEC’s Division of Examinations published a risk alert[15] providing an overview of compliance issues observed during recent examinations of private fund advisers. Noting the growing size and role of such advisers in financial markets, the alert identified specific deficiencies in advisers’ compliance practices, including:

Operating inconsistently with material disclosures. The alert discussed numerous examples of private fund advisers failing to operate consistent with material disclosures made to investors or clients. Specifically, the Staff noted deficiencies relating to (i) obtaining informed consent from LPACs and similar bodies; (ii) post-commitment period management fee calculation practices; (iii) compliance with stated investment strategies; (iv) misrepresenting or omitting material information regarding fund recycling procedures; (v) complying with LPA liquidation and fund extension terms; and (vi) adhering to fund disclosures regarding key persons.

Providing investors with misleading or inaccurate track records and marketing statements. Such shortcomings included inaccuracies in disclosures regarding performance results and calculation methodologies (e.g., data from incorrect time periods, mischaracterization of return of capital distributions as dividends from portfolio companies, projected rather than actual performance used in performance calculations), failing to maintain proper books and records supporting predecessor performance or omitting materials facts regarding predecessor performance, misleading statements concerning awards received by advisers as well as characteristics of the firms themselves and false or inaccurate claims that investments were “overseen” or “supported” by the SEC or U.S. Government.

Conducting adequate due diligence. The Staff observed advisers failing “to conduct a reasonable investigation into an investment, to follow the due diligence process described to clients or investors and to adopt and implement reasonably designed due diligence policies and procedures pursuant to [Advisers Act Rule 206(4)-7].”

Including language purporting to limit adviser liability (Hedge Clauses). The alert stated that whether a clause in an agreement, or a statement in disclosure documents provided to clients and investors, that purports to limit an adviser’s liability (a hedge clause) is misleading and would violate Sections 206(1) and 206(2) of the Advisers Act depends on all of the surrounding facts and circumstances. The Staff observed private fund advisers that included potentially misleading hedge clauses in documents that purported to waive or limit their Advisers Act fiduciary duty except for certain exceptions, such as a non-appealable judicial finding of gross negligence, willful misconduct or fraud, and noted that such clauses could be inconsistent with Sections 206 and 215(a) of the Advisers Act.

FTC Increases Gramm-Leach-Bliley Act Cyber Requirements

The Federal Trade Commission (FTC) has amended the Safeguards Rule (which applies to non-banking financial institutions, including many private funds) to include substantial cyber security requirements, effective December 9, 2022. Most notably, the amendment sets out detailed criteria for covered financial institutions in implementing and maintaining the comprehensive information security programs that were previously required. The amendment addresses, among other things, access controls, encryption requirements, the use of multi-factor authentication, testing, vendor management and incident response. It also requires covered entities to designate one individual responsible for the entity’s information security program and for reporting annually to the entity’s boards of directors. The FTC has noted that it is considering additional changes, such as reporting requirements in connection with certain data breaches.[16]



(Annual Amendment due by March 31, 2022)

Investment advisers that are registered with the SEC under the Advisers Act, and advisers filing as exempt reporting advisers with the SEC, must file an annual amendment to Form ADV within 90 days of the end of their fiscal year (i.e., by March 31, 2022 for advisers with a fiscal year-end of December 31).[18]

Registered investment advisers must file an updated Part 1 and Part 2A brochure of such adviser’s Form ADV, while exempt reporting advisers must file an updated Part 1. Registered investment advisers are also required to update, but are not required to file with the SEC, Part 2B brochure supplements of their Form ADV. In addition, registered investment advisers are required to provide a copy of the updated Form ADV Part 2A brochure (or a summary of changes with an offer to provide the complete brochure) and, in certain cases, an updated Part 2B brochure supplement to each client.


(Annual Filing due by April 30, 2022)[19]

Registered investment advisers to private equity funds with more than $150 million of assets under management attributable to those funds (as of the last day of their most recent fiscal year) are required to file Form PF with the SEC within 120 days after such adviser’s fiscal year-end (i.e., by April 30, 2022 for advisers with a fiscal year-end of December 31).[20] Form PF requires disclosure of the adviser’s assets under management and information on each private fund it advises.


(Annual Affirmation of De Minimis and Commodity Trading Advisor Exemptions due by March 1, 2022)

Many private equity fund sponsors are able to rely on the exemption from registration with the National Futures Association (NFA) that is available under Commodity Futures Trading Commission (CFTC) Rule 4.13(a)(3) (the de minimis exemption) and have claimed such exemption. The de minimis exemption is subject to an annual affirmation which must be completed within 60 days after the end of each calendar year. Failure to affirm the exemption is deemed a withdrawal of the exemption once the 60 day period has elapsed. The annual affirmation must include a representation that neither the sponsor nor any of its “principals” are subject to certain statutory disqualifications. Private fund sponsors that do not qualify for the de minimis exemption may be subject to registration with the NFA as commodity pool operators and commodity trading advisors.

In addition, many fund managers rely on the “solely incidental” exemption from registering as a commodity trading advisor pursuant to CFTC Rule 4.14(a)(8). An annual affirmation of this exemption is also required to be filed within 60 days after the end of each calendar year.


All private funds registered under the Cayman Islands Private Funds Act must (i) pay an annual registration fee of CI$3,500 (US$4,268) by January 15 of each year; and (ii)(A) have their accounts audited annually by a Cayman Islands-based auditor approved by the Cayman Islands Monetary Authority (the Authority) and (B) submit its audited accounts, along with the Fund Annual Return, to the Authority within six months of the end of each fiscal year.


Registered investment advisers to private funds must comply with certain custody procedures, including generally maintaining client funds and securities with a qualified custodian and either (i) undergoing an annual surprise examination of client assets conducted by an independent public accountant; or (ii) obtaining an audit of each private fund by an independent public accountant and delivering the audited financial statements, prepared in accordance with generally accepted accounting principles, to fund investors within 120 days of the fund’s fiscal year-end. Private fund sponsors should review their custody procedures to ensure compliance with these rules.


Registered investment advisers are required to perform a review to assess the adequacy of the adviser’s compliance policies and the effectiveness of their implementation and, if necessary, to update their compliance policies and procedures on an annual basis. In determining the adequacy of an annual review, the SEC has indicated that it will consider a number of factors, including the persons conducting the review, the scope and duration of the review and the adviser’s findings and recommendations resulting from the review. Written evidence of the results of the annual review should be kept and reviewed by the adviser’s chief compliance officer, senior management and, if applicable, outside counsel. Employee compliance training should be conducted at least annually based on the results of the compliance review.


As a general disclosure matter, and for purposes of U.S. federal and state anti-fraud laws, an investment adviser must continually ensure that each of its fund offering documents is kept up to date, is consistent with its other fund offering documents and its Form ADV and contains all material disclosures that may be required in order for investors to be able to make an informed investment decision.

Accordingly, it may be an appropriate time for an investment adviser to review its offering materials (including investor newsletters and pitch books) and confirm whether any updates or amendments are necessary. In particular, an investment adviser should take into account the impact of recent market conditions on its funds and review its current disclosure regarding: investment objectives and strategies; valuation practices; performance and related disclaimers; any mention of specific investments to confirm that there are no “cherry picking” issues; conflicts of interests; risk factors; personnel; service providers; “bad actor” disclosures; and any relevant legal or regulatory developments. In light of the SEC’s continuing focus on the allocation of private fund fees and expenses and conflicts of interest, advisers must take special care in reviewing their practices and disclosure in these areas.


Form 13F

The Securities Exchange Act of 1934 requires investment advisers (whether or not registered) to submit a report on Schedule 13F to the SEC, within 45 days after the last day of any calendar year and within 45 days after the last day of each of the next three calendar quarters following such calendar year, if on the last day of any month of such calendar year the investment adviser exercised discretion with respect to accounts holding Section 13(f) securities (generally, publicly traded securities) having an aggregate fair market value of at least $100 million. Note that the SEC has proposed, but not yet adopted, an amendment increasing this threshold to $3.5 billion.

Form 13H

An investment adviser that is a “large trader” (i.e., it engages in transactions in National Market System securities equal to or in excess of two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month) must promptly (within 10 days) file an initial Form 13H after effecting aggregate transactions equal to, or greater than, the applicable activity level. Following this initial filing, all large traders must make an amended filing to update any previously-disclosed information that becomes inaccurate no later than promptly (within 10 days) following calendar quarter end and must separately file an annual amendment within 45 days after calendar year-end.


Investment advisers and private funds are subject to SEC, CFTC and Federal Trade Commission regulations governing the privacy of certain confidential information. Under such privacy rules, investment advisers and private funds are required to provide notice to individual investors regarding their privacy policies and procedures at the start of the relationship with such individual investor (although they are no longer required to provide an annual privacy notice to such investors unless material changes have been made to the policy).


Form D filings for private funds with ongoing offerings lasting longer than one year need to be amended on an annual basis, on or before the first anniversary of the initial Form D filing. Potential investors can obtain copies of Form D via the SEC’s website. On an annual basis, private fund sponsors should also review their blue sky filings for each state to make sure they meet any renewal requirements. In some states fees apply for late blue sky filings.


Rule 506(d) of Regulation D under the Securities Act of 1933 prohibits a private fund from relying on the safe harbor private placement exemption contained in Regulation D if the fund, or certain specified persons or entities associated with the fund, are subject to disqualifying events as a result of bad acts. It is imperative for private fund sponsors that intend to rely on Regulation D to identify all persons and entities subject to the rule and conduct appropriate due diligence (including receiving written certifications) to ensure that none are subject to disqualification. In addition, for funds that are engaging in continuous and/or long-term offerings, the diligence should be periodically refreshed.


Private fund sponsors should look at each state in which a public entity or a public employee retirement plan is an investor or a potential investor to determine if the investment adviser or its personnel are required to register as lobbyists. This may require engaging local counsel with knowledge of state and municipal laws and regulations.


Many private equity funds limit “benefit plan investors” to less than 25% of any class of equity interest in a fund (the 25% test) so that such fund’s assets are not deemed “plan assets” subject to the U.S. Employee Retirement Income Security Act of 1974 (ERISA), and some private equity fund sponsors have agreed to provide an annual certification to that effect. Such certification generally can be made at any time during the year, but typically investors wish to have a certification made as of a specified annual date, often as of the end of the year, for convenience. Such certifications must take into account the impact of transfers and withdrawals of fund interests during the applicable period, as well as the impact of different ownership percentages of any alternative investment vehicle, or investments, due to excuse and exclusion.

Other private equity funds operate as “venture capital operating companies” (VCOCs) and may have agreed to deliver an initial opinion and annual certification as to the fund’s VCOC status. Such certification requires a determination as to whether at least 50% (based on cost) of the fund’s total investments (excluding cash and other temporary investments) constitute “good” venture capital investments during the 90-day valuation period applicable to the fund. Information regarding the cost of each investment held by the fund on one day during the applicable 90-day period, and confirmation of the management rights required for any “good” investment, should be gathered in preparation for such certification or opinion. Usually the 90-day valuation period is established by the fund in connection with its initial investment. The timing of providing the certification is usually tied to the end of the 90-day period, often 60 days following the end of such period. Fund sponsors should conduct the VCOC or 25% test analysis, as applicable, and deliver the applicable certification to their limited partners.

If a “feeder fund” for investors with a particular tax profile was established to invest in a “master fund,” it is possible that the feeder fund might be designed to hold plan assets of ERISA investors. In such case, it may be necessary to update any mandatory disclosure pursuant to Section 408(b)(2) of ERISA (if applicable) regarding direct and indirect compensation for services, if any, relating to the feeder fund. In the case of a new master fund that intends to operate as a VCOC but has not yet made its first investment, updated disclosure to comply with Section 408(b)(2) of ERISA (and possibly other reporting requirements applicable to ERISA investors) may be required, particularly if expenses or management fees were paid by any ERISA investors before the first investment has been made. The circumstances pertaining to each master and feeder fund differ, and counsel should be consulted regarding compliance with any applicable disclosure requirements.


U.S. private fund sponsors (and non-U.S. private fund sponsors that manage U.S.-domiciled funds) that have portfolio investments in foreign issuers, have issued interests in their funds to foreign residents or have claims on or liabilities to foreign residents may be required to report those transactions to the Federal Reserve Bank of New York on the Treasury International Capital (TIC) system.

TIC Form SLT generally requires U.S. resident entities to report investments in foreign long-term securities (i.e., securities with a maturity of more than one year) and long-term securities issued by such U.S. resident entities to foreign persons equal to $1 billion or more. A private fund adviser is required to consolidate its reportable long-term securities across all funds to determine whether it meets the reporting threshold. The acquisition of 10% or more of the voting securities of an entity is considered a “direct investment” under the form and is excluded for purposes of determining the $1 billion threshold. Form SLT must be filed monthly. Note that sales of U.S.-domiciled fund interests to foreign investors, and sales of foreign-domiciled fund interests to U.S. investors, may count towards the $1 billion reporting threshold.

TIC Form B generally requires (subject to certain thresholds) the reporting of information on certain claims and liabilities (including loans and short-term debt instruments) of U.S. financial institutions with non-U.S. persons. Filing obligations generally may result from private funds that invest directly in non-U.S. debt instruments, provide credit to non-U.S. entities, directly hold non-U.S. short-term securities or maintain credit facilities with non-U.S. financial institutions. However, any claims or liabilities that are serviced by a U.S. entity, or any claims or liabilities for which a U.S. custodian or U.S. sub-custodian is used, do not need to be reported by the private fund adviser. Form B must be filed monthly, with a separate quarterly filing.

TIC Form S generally requires U.S. resident entities to report purchases and sales of long-term securities with foreign entities if, during any month, such transactions equaled $350 million or more in the aggregate. A private fund adviser is required to consolidate its reportable long-term securities transactions across all funds to determine whether it meets or exceeds the reporting threshold. Once the reporting threshold is met in a given month, Form S must be filed monthly for the remainder of the calendar year. Note that sales of U.S.-domiciled fund interests to foreign investors, and sales of foreign-domiciled fund interests to U.S. investors, may count towards the $350 million reporting threshold.


The U.S. Bureau of Economic Analysis (BEA) requires a U.S. entity, including a private fund domiciled in the U.S., to make a filing on Form BE-13 if a non-U.S. person acquires ownership of 10% or more of its voting securities and the cost of acquiring such securities is more than $3 million.[21] The BEA generally does not consider limited partner interests or non-managing member limited liability company interests to be voting securities, so most U.S. funds with foreign investors would not have to file. However, general partner/managing member interests generally are considered voting securities for purposes of Form BE-13. Therefore, a fund domiciled in the U.S. that has a general partner domiciled outside the U.S. generally would be required to file. In addition, if a non-U.S. fund owns 10% or more of the voting securities of a U.S.-domiciled portfolio company, the portfolio company generally would have to file. Reports are required to be filed within 45 days of a reportable transaction. After an initial BE-13 filing is made, the BEA requires quarterly, annual and five-year benchmark filings. A U.S. person must file a Form BE-13 for a reportable transaction even if not directly requested to do so by the BEA.


The Directive on Alternative Investment Fund Managers (AIFM Directive) has now been implemented into the national laws of all key European Economic Area (EEA) member states and similar provisions apply in the United Kingdom (U.K.) following Brexit under the Alternative Investment Fund Managers Regulations (AIFMR). Managers bringing funds to the market in the EEA and/or the U.K. have to comply with the AIFM Directive and/or AIFMR (as applicable) and their varied implementation across the different jurisdictions. The AIFM Directive and/or AIFMR (as applicable) subject EEA and U.K. private fund sponsors and private fund sponsors using EEA and U.K. fund vehicles to certain operational and organizational requirements.

The AIFM Directive and AIFMR also impact U.S. (and other non-EEA) private fund managers that market fund interests to investors in the EEA and/or the U.K. by imposing a subset of the full AIFM Directive rules upon them. In particular, such managers become subject to certain ongoing compliance requirements including disclosure and reporting obligations, restrictions on extracting capital from EEA/U.K. portfolio companies and other measures designed to improve transparency when acquiring EEA/U.K. portfolio companies. In each jurisdiction which has implemented the AIFM Directive there is a separate private placement regime governing the registration requirements for that particular jurisdiction – some require a straightforward notification, while others require an application to be submitted, with approvals from regulators being necessary prior to marketing to investors in the relevant jurisdiction. Some EEA jurisdictions have supplemented the AIFM Directive’s minimum requirements for non-EEA private fund sponsors with additional obligations such as, in the case of Denmark and Germany, the appointment of a depositary to oversee the fund’s investments and cash flows. In the case of other jurisdictions, such as Austria and France, workable private placement regimes have not been implemented and therefore the only way for U.S. (and other non-EEA) private fund managers to admit investors from such jurisdictions is following a genuine reverse solicitation fact pattern. Private fund sponsors will have to carefully plan their marketing campaigns and register for marketing (by way of notification or application, as applicable) in any relevant EEA jurisdictions and/or the U.K. in good time. For those jurisdictions where an approval is required, the applications should be submitted well in advance of anticipated marketing efforts commencing since regulators in some EEA jurisdictions have been taking several months to approve marketing, while in others the process can be completed in a matter of days or weeks. In addition, fund managers will be required to carry out a short form compliance process to ensure they are ready to meet the European reporting requirements. We are currently assisting a significant number of U.S.-based and global private fund managers in making applications to EEA/U.K. regulators for approval under the AIFM Directive’s private placement regimes in a variety of EEA jurisdictions and the U.K.

In addition to the above, Directive (EU) 2019/1160 and Regulation (EU) 2019/1156 on the cross-border distribution of collective investment undertakings, which have applied from August 2021, make various changes to the AIFM Directive which require non-EEA fund sponsors marketing funds to EEA investors in certain EEA jurisdictions, among other requirements, to make notifications to local regulators within 2 weeks of beginning “pre-marketing” (i.e., engagement with investors in respect of a fundraising) to such investors.

We are seeing an increasing interest from U.S. (and other non-EEA) private fund managers and their investors in establishing parallel fund structures based in the EEA that can access the AIFM Directive’s single market passporting regime. We would be happy to discuss options with you on a case-by-case basis in due course.

The U.K. left the European Union (E.U.) and the EEA on January 31, 2020 under the terms of a withdrawal agreement (which established an implementation period within which aspects of E.U. law would continue to apply in the U.K. until December 31, 2020). While the terms of the withdrawal agreement did not include a deal regarding the trade of goods and services between the U.K. and the E.U., the U.K. reached a separate agreement with the E.U. regarding such matters on December 24, 2020. Nonetheless, the Brexit deal is limited for financial services and therefore the future application of E.U.-based legislation to the private fund industry in the U.K. and the E.U. will ultimately depend on how the U.K. renegotiates its financial services relationship with the E.U.

There are currently a series of initiatives at the E.U. level that are at varying stages of progress to implement the E.U.’s Action Plan on Financing Sustainable Growth. Regulation (EU) 2019/2088 on Sustainability-related disclosures in the financial services sector (SFDR) has a staggered application, with an initial compliance deadline of March 10, 2021. The purpose of the SFDR is to achieve more transparency on how financial market participants consider any environmental, social or governance event or condition that, if it occurs, could have a negative material impact on the value of an investment (Sustainability Risks). As a result of the SFDR, fund sponsors may be required to provide certain disclosures in pre-contractual documentation and on their websites on the manner in which Sustainability Risks are accounted for and integrated into their investment decision-making process and the potential impact of Sustainability Risks on the returns of their funds.

The E.U. has also implemented the Sustainable Finance Taxonomy Regulation (Taxonomy), which is designed to create a benchmark and framework for green products so that investors do not need to conduct their own due diligence with regards to a financial products’ environmental sustainability. The regime began to apply in practice from January 1, 2022. Taxonomy amends the SFDR to require fund managers to disclose either: (i) information on how and to what extent the investments that underlie their products support economic activities that meet the four tests for environmental sustainability under the Taxonomy; or (ii) for financial products that do not invest in taxonomy-compliant activities, a statement that they do not take the Taxonomy into account.

Endnotes    (↵ returns to text)
  1. This Private Equity Alert is not intended to provide a complete list of an investment adviser’s compliance obligations or to serve as legal advice and, accordingly, has not been tailored to the specific needs of a particular investment adviser’s business.
  2. The proposal regarding investor protection can be found here. The proposal regarding cybersecurity can be found here.
  3. The Staff noted that whether any terms are “preferential” would depend on all of the surrounding facts and circumstances.
  4. Exempt reporting advisers are not subject to the new rules.
  5. The adopting release can be found here.
  6. Importantly, the first prong of the definition does not include: (i) extemporaneous, live, oral communications; (ii) any information contained in a statutory or regulatory notice, filing, or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication; or (iii) a communication that includes hypothetical performance that is provided: (A) in response to an unsolicited request for such information from a prospective or current client or investor in a private fund advised by the investment adviser; or (B) to a prospective or current investor in a private fund advised by the investment adviser in a one-on-one communication. Note that unsolicited hypothetical performance given in a one-on-one presentation to a current or prospective client other than a fund investor would be considered an advertisement. “Hypothetical performance” is generally defined as performance results that were not actually achieved by any portfolio of the investment adviser and includes, but is not limited to: (i) performance derived from model portfolios; (ii) performance that is backtested by the application of a strategy to data from prior time periods when the strategy was not actually used during those time periods; and (iii) targeted or projected performance returns with respect to any portfolio or to the investment advisory services with regard to securities offered in the advertisement.
  7. The marketing rule defines “endorsement” as any statement by a person other than a current client or investor in a private fund advised by the investment adviser that: (i) indicates approval, support, or recommendation of the investment adviser or its supervised persons or describes that person’s experience with the investment adviser or its supervised persons; (ii) directly or indirectly solicits any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser; or (iii) refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser.
  8. The marketing rule defines “testimonial” as any statement by a current client or investor in a private fund advised by the investment adviser: (i) about the client or investor’s experience with the investment adviser or its supervised persons; (ii) that directly or indirectly solicits any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser; or (iii) that refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser.
  9. This requirement in particular will likely lead to an increased recordkeeping burden since it will require advisers to maintain documentary proof for each material factual assertion made in an advertisement.
  10. The marketing rule requires disclosure regarding any estimates or assumptions used in the calculation of performance results. Additionally, any model fees used to calculate net performance results should equate to the highest fee charged to investors, unless the use of an alternative model fee would not materially improve the advertised performance results.
  11. The SEC’s proposed marketing rule would have allowed advisers to omit net performance if the advertisement was given only to non-retail investors. However, this distinction between retail and non-retail investors was not included in the final rule, and therefore net performance generally must be included in all advertisements (but note that one-on-one communications to private fund investors are not considered advertisements under the rule).
  12. The marketing rule defines “predecessor performance” as investment performance achieved by a group of investments consisting of an account or a private fund that was not advised at all times during the period shown by the investment adviser advertising the performance.
  13. Consistent with the marketing rule’s adopting release, the SEC issued an information update in October 2021 identifying a total of 203 statements (primarily no-action letters) related to the current advertising and cash solicitation rules that are being either withdrawn or modified effective November 4, 2022 (the marketing rule’s compliance date). The information update can be found here.
  14. The speech can be found here.
  15. The Risk Alert can be found here.
  16. The FTC’s press release can be found here. The amended Rule can be found here.
  17. Certain deadlines are calculated based on the assumption that the adviser has a fiscal year-end of December 31.
  18. In addition, an investment adviser must update its Form ADV promptly if certain information becomes inaccurate as indicated in the instructions to Form ADV.
  19. Form PF is submitted through FINRA’s electronic filing system, which accepts filings made on weekends. Accordingly, while the April 30 deadline falls on a Saturday in 2022, the Form PF filing must be made by April 30 to be considered timely.
  20. Please note that certain large “hedge fund” advisers and “liquidity fund” advisers are subject to more frequent and extensive reporting requirements and shorter deadlines.
  21. If the 10% threshold, but not the $3 million threshold, is crossed, a BE-13 Claim for Exemption must be filed.