SEC adopts rules to boost oversight of private-fund advisors

investmentnews.com:

An SEC split along party lines approved rules Wednesday to increase the transparency and oversight of private funds, a move that could make it more expensive for investment advisors who manage such funds.

In a 3-2 vote, the Securities and Exchange Commission adopted regulations designed to better illuminate the inner workings of private funds. Under the new rules, advisors to the vehicles would have to provide quarterly statements to investors regarding fees, expenses, performance and advisor compensation. In addition, the funds would have to undergo an annual audit under the conditions of the existing advisor custody rule, according to an SEC fact sheet.

The regulations also would restrict certain activities of advisors to private funds. They would not be able to charge the fund fees related to regulatory compliance or portfolio investment, or reduce their clawback from the fund based on certain taxes, without disclosing the moves to investors. Other restricted activities, such as charging the fund for expenses related to an investigation of the advisor and borrowing from fund, require disclosure and investor consent.

The restrictions represent a modification from the original proposal, which prohibited many advisor activities that had become routine in the industry. The final rules put some limitations on another common private fund practice — giving preferential terms and treatment to some investors regarding redemptions and information. That can only be done under the new rules with appropriate disclosure and by offering the same terms to all investors.

The new reporting rules could increase regulatory costs for investment advisors who manage private funds for high-net-worth clients. At the end of March, 5,473