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By: Robert Seber, Vinson & Elkins

On February 9, 2022, the Securities and Exchange Commission proposed new rules under the Investment Advisers Act of 1940 to regulate advisers to private funds. One set of the proposed rules is intended to enhance transparency through mandatory quarterly statements, annual audits, and fairness opinions in general partner-led secondary transactions. Another, and the more far-reaching, set of the proposed rules would prohibit certain activities, even to the extent of prohibiting or overriding negotiated fund terms.

Private funds are primarily hedge, private equity, venture capital and real estate funds. In 2021*, registered investment advisers in the U.S. managed over 37,000 private funds with over $17 trillion in gross assets and almost $12 trillion in net assets. The principal categories of investors in these funds, based on net asset values, were other private funds (fund-of-funds) (17.7%), public pension plans (13.3%), private pension plans (10.8%), high-net worth individuals (10.2%), non-profit organizations (endowments and foundations) (10.0%), sovereign wealth funds (7.2%), and insurance companies (4.8%).

The SEC vote on the proposed rules was 3 to 1. In her dissent, Commissioner Hester Peirce called the proposed rules a "sea change" that "embodies a belief that many sophisticated institutions and high net worth individuals are not competent or assertive enough to obtain and analyze the information they need to make good inves......................

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