On Aug. 23, 2023, the U.S. Securities and Exchange Commission (SEC), in a 3-2 vote, adopted new rules under the Investment Advisers Act of 1940 (Advisers Act) that will have a sweeping impact on investment advisers of private funds. This alert summarizes the adopted rules and highlights some key observations and issues for investment advisers to consider.
Key observations
- The SEC dropped the proposed general prohibition on hedge clauses (i.e., waiver or indemnification provisions) but clarified that an adviser seeking reimbursement, indemnification or exculpation for breaching its federal fiduciary duty would violate the antifraud provisions of the Advisers Act.
- The SEC also dropped the proposed prohibition on charging a portfolio investment for certain fees and will permit other activity that was proposed to be prohibited subject to certain disclosure or consent.
- The SEC added an exception to the definition of “private fund” for “securitized asset funds,” which generally include collateralized loan obligations (CLOs). Thus, advisers do not have to comply with the quarterly statement, audit, preferential treatment and restricted activity rules (as described below) with respect to securitized asset funds.
- On Sept. 1, 2023, industry trade groups filed a challenge to the rules in the United States Court of Appeals for the Fifth Circuit.
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