SEC Announces New Audit Requirement for Private Fund Advisers

The Securities and Exchange Commission announced new rules yesterday that impact all registered advisers, particularly those that advise private funds. The changes are designed to protect investors from compensation schemes, conflicts of interest, fraud, deception and other practices that could lead to investor harm.

Among these new rules is a requirement for all private fund advisers to obtain an annual financial statement audit of each private fund it advises. In connection with adviser-led secondary transactions, the adviser will also need to obtain a fairness opinion or valuation opinion from an independent provider.

The new rules also:

  • Require registered private fund advisers to distribute quarterly statements to investors, disclosing fund-level information on performance, costs of investing, and certain fees and expenses.
  • Restrict private fund advisers, including those not registered with the SEC, from engaging in certain activities without specific disclosures and, in certain cases, investor consent. These activities include: charging or allocating to the fund expenses associated with an investigation of the adviser; reducing the amount of an adviser clawback by the amount of certain taxes; charging or allocating to the fund regulatory, examination, or compliance fees; and borrowing an extension of credit from a client, among other restrictions.
  • Prohibit private fund advisers from providing certain types of preferential treatment, such as certain redemptions from the fund and certain preferential information about portfolio holdings or exposures.

Depending on the size of your fund portfolio, these rules will take effect within 12-18 months after publication in the Federal Register.

In addition, changes to the compliance rules will require all registered advisers, including those that do not advise private funds, to document in writing the annual review of their compliance policies and procedures. This change will be required 60 days after publication in the Federal Register.

According to the SEC, these changes will increase the commission’s ability to address practices that impose significant risk of harm to investors, including those who have indirect exposure through retirement plans, endowments and foundations. But they will also significantly increase private fund advisers’ compliance burden.

Grassi’s Financial Services and Valuation professionals can alleviate this burden and guide you through implementing these changes with confidence. For more information, contact Adam Ross, Audit Partner, at or 212.223.1724.

Adam Ross Adam is an Audit Partner in Grassi’s Financial Services Practice. He has more than 10 years of experience in public accounting, auditing, and management consulting for financial services entities. Over the years, he has worked on a diverse client basis, auditing mutual funds varying in net assets from $10 million to over $4 billion. He also has experience working on hedge funds and private... Read full bio

Categories: Advisory