The Investment Advisers Act of 1940
The Act regulates investment advisers – firms and individuals compensated for advising others about securities investments. The Act requires such advisers to register with the SEC and conform to regulations to protect investors. Since the Act was amended in 1996 and 2010, generally, only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission. Other investment advisers typically register with the state where the investment adviser maintains their principal place of business.
Proposed New Rules and Amendments
On February 9, 2022, the SEC voted to propose new rules and amendments under the Investment Advisers Act of 1940 (Advisers Act) to enhance private fund advisers’ regulation and protect private fund investors by increasing transparency, competition, and efficiency in the $18-trillion marketplace.
Quarterly Statements Required
The proposed rules would increase transparency by requiring registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance.
Disclosure of Preferential Treatment
Additionally, the proposed rules would prohibit private fund advisers, including those that are not registered with the SEC, from providing certain types of preferential treatment to investors in their funds and all other preferential treatment unless it is disclosed to current and prospective investors.
New Audit and Books and Records Requirements
The proposed changes also would create new requirements for private fund advisers related to fund audits, books and records, and adviser-led secondary transactions.
The proposals also would prohibit all private fund advisers from engaging in several activities, including seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity; charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services and fees associated with an examination or investigation of the adviser; reducing the amount of an adviser clawback by the amount of certain taxes; charging fees or expenses related to a portfolio investment on a non-pro rata basis; and borrowing or receiving an extension of credit from a private fund client.
In addition, the SEC proposed amendments to the Advisers Act compliance rule that would require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.