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By: Robert Crea, Lauren Ford, Scott Franc, Carol Schepp - BCLP

The Securities and Exchange Commission has long used enforcement actions to challenge certain preferential treatment of investors by private fund sponsors as violations of anti-fraud provisions under the Investment Advisers Act of 1940. In 2023, the SEC adopted the Private Funds Rules, which, in part, explicitly prohibited private fund advisers from giving investors preferential redemption or information rights that materially harm other investors. The Fifth Circuit Court of Appeals vacated these rules in their entirety in 2024 on grounds that the SEC exceeded its statutory authority under the Advisers Act in adopting them. Without these rules in place, practitioners must again rely on historical SEC enforcement actions for guidance on prohibited preferential treatment.

We have conducted a review of the SEC enforcement actions to document the specific types of preferential treatment that have consistently resulted in regulatory violations and significant penalties, including those actions explicitly cited in the releases for the now-vacated Private Fund Rules. These enforcement actions reveal clear patterns of prohibited conduct that all private fund advisers should understand and avoid to minimize regulatory risk and civil liability.

These actions consistently involve findings that advisers breached their fiduciary duties by putting their own interests or the interests of favored investors ahead of th......................

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