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Statement on Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews

Aug. 23, 2023

Thank you, Chair Gensler. In the Commission’s ongoing fight against crypto assets, it argued in Terraform that “[w]hen distinguishing between classes of investors, courts construe the federal securities laws’ provisions to provide more—not less—protection to retail investors.”[1] Today, the Commission seeks to impose rules for private funds – which are generally available only for sophisticated investors – that are far more burdensome and restrictive than those products for retail investors. This inconsistency is only one reason why these final rules are arbitrary and capricious.

The Commission relies on questionable statutory authority, fails to consider the aggregate impact of the multitude of rules promulgated since 2022 affecting investment advisers, and dismisses warnings that it will have a disparate impact on smaller advisers, including those that are minority- and women-owned.

When the Commission adopted rules implementing Title IV of the Dodd-Frank Act,[2] it explained that “[private fund advisers] will be subject to the same registration requirements, regulatory oversight, and other requirements that apply to other SEC-registered investment advisers.”[3] These other requirements prohibit investment advisers to pooled vehicles from engaging in fraudulent conduct,[4] impose safekeeping requirements on investment advisers that have custody of client assets,[5] and regulate how investment advisers market their services.[6] Moreover, the Investment Advisers Act of 1940 (“Advisers Act”) establishes a fiduciary standard enforceable by the statute’s antifraud provisions.[7]

Today, the Commission no longer is content to regulate private fund advisers to the same extent as other investment advisers. Instead, private fund advisers will be subject to six additional requirements with respect to the private funds they manage: (1) private funds must have annual financial statement audits, (2) private funds must prepare and deliver quarterly statements, (3) private funds are prohibited from entering into specified arrangements with their advisers – including certain fee and expense allocation arrangements – unless they satisfy certain conditions, (4) adviser-led secondary transactions will be prohibited unless the adviser obtains and distributes a fairness or valuation opinion, (5) private fund advisers may not enter into tailored arrangements with private fund investors regarding redemption rights and portfolio holdings disclosures unless those same arrangements are offered to all other investors, and (6) private fund advisers may not enter into any other type of tailored arrangements with a private fund investor unless existing and prospective investors receive written notice.[8]

The Adopting Release concedes that the Commission already has the authority to bring enforcement actions against private fund advisers to address “fraudulent practices related to fees and expenses and conflicts.”[9] So why is the Commission adopting these rules? The Commission appears to be convinced that some sophisticated investors have “less bargaining power”[10] than others, and that the Commission should step in to address this perceived problem. In the course of arms-length negotiations, some investors might receive terms that differ from others due to various factors, including the amount of capital committed. However, these sophisticated investors are free to conclude that accepting such terms is a fair tradeoff for gaining access to a particular fund. This result should come as no surprise when investor demand for a private fund outstrips the capital sought by the fund. Investors who do not agree with that tradeoff can invest in other products, including registered investment funds. I have significant concerns with using the coercive power of government regulation to favor one side of a private negotiation.

In addition to the Commission’s mistaken belief that it must step in to address bargaining power between private parties, the Commission appears to believe that the gap between private funds and registered funds must be narrowed. This narrowing ignores federal law, which created exclusions for private funds from the Investment Company Act of 1940 (“Investment Company Act”).

Thus, unable to regulate private funds directly under the Investment Company Act, the Commission relies on a tortured reading of Section 211(h)(2) of the Advisers Act, which was added by Section 913(g) of the Dodd-Frank Act, as authority for this rulemaking. This reading ignores the entire context of Section 913(g), which required the Commission to study the effectiveness of existing legal or regulatory standards of care for brokers, dealers, and investment advisers providing personalized investment advice to retail customers, and to promulgate rules regarding such standards where necessary.

Section 211(h)(2)’s heading is “Other Matters” and it is notable that Section 211(h) makes no mention of private funds at all. To uphold the Commission’s reading, one would need to conclude that Congress intended for a sub-paragraph within Section 913(g)’s overall discussion of investment advisers and broker-dealers’ duties to retail customers to have the effect of nullifying the regulatory treatment of private funds under the Advisers Act and Investment Company Act. Under this reading, there appears to be no limiting principle to regulating investment advisers in order to prohibit or restrict any sales practices, conflicts of interest, or compensation schemes.[11]

The Supreme Court has spoken clearly on this very issue: “Congress…does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions — it does not, one might say, hide elephants in mouseholes.”[12] The Commission’s confounding statutory interpretation guts the exclusions for private funds in the Investment Company Act and cannot be supported by any reasonable reading of Dodd-Frank Section 913(g).

I am also deeply concerned that the Commission is effectively sidestepping its economic analysis obligation by refusing to consider the aggregate impact of recent rulemakings for investment advisers.[13] The Commission disingenuously argues that “[e]ach adopting release considers an updated economic baseline that incorporates the compliance costs facing advisers from each adopted rule preceding it and considers new risks that advisers or investors will face barriers to entry.”[14] But that misses the point. The ability to comment is significantly constrained when the public lacks, at the proposing stage, the Commission’s analysis and views about the aggregate impact from overlapping and interrelated proposals. At best, the Commission is playing fast and loose with the requirements of the Administrative Procedure Act (“APA”).[15] At worst, the Commission is unlawfully circumventing the APA.

Finally, many commenters expressed concern that the rules will disproportionately impact smaller advisory firms, which are owned to a greater degree by women and minorities. Smaller firms will have more difficulty undertaking the additional obligations required by these rules. The House Appropriations Committee “strongly encouraged” the Commission “to reconduct the economic analysis for the Private Fund Advisers proposal to ensure the analysis adequately considers the disparate impact on emerging minority and women-owned asset management firms, minority and women-owned businesses, and historically underinvested communities.”[16] It is unfortunate that the Adopting Release dismissively responds to these concerns by stating that investment advisers “have the option of reducing their assets under management to forego registration, thereby avoiding the costs of the final rule that only apply to registered advisers, such as the mandatory audit rule.”[17]

Asking women- and minority-owned advisers to reduce their assets under management to under $100 million to avoid registration is astonishingly terrible advice. In other words, never dream big. One has to question whether the Commission considers the entrenchment of the largest investment advisory firms as a feature – rather than a flaw – of this rulemaking.

Under its current regulatory agenda, the Commission is on a precarious path that will inhibit capital formation and innovation, and will interfere with sophisticated investors’ abilities to invest in private funds. The Commission is also pursuing this path in contravention of Congressional intent by grossly contorting a provision of the Dodd-Frank Act that deals with the duties of broker-dealers and investment advisers to retail customers. While I recognize the efforts of the staff in the Divisions of Investment Management and Economic and Risk Analysis, as well as the Office of the General Counsel, I am unable to support today’s rulemaking.

[1] See SEC v. Terraform Labs Pte Ltd., No. 1:23-cv-01346, (S.D.N.Y. 2023) ECF No. 49, at 4-5, available at

[2] See Rules Implementing Amendments to the Investment Advisers Act of 1940, Advisers Act Release No. 3221 (June 22, 2011) [76 FR 42949 (July 19, 2011)], available at

[3] See SEC Adopts Dodd-Frank Act Amendments to Investment Advisers Act, Release No. 2011-133 (June 22, 2011), available at

[4] See 17 CFR § 275.206(4)-8.

[5] See 17 CFR § 275.206(4)-2.

[6] See 17 CFR § 275.206(4)-1.

[7] See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (June 5, 2019) [84 Fed. Reg. 33669 (July 12, 2019)], available at

[8] See Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Advisers Act Release No. 6383 (Aug. 23, 2023) (“Adopting Release”), available at

[9] Id. at 14.

[10] See, e.g., id. at 10.

[11] Section 211(h)(2) requires the Commission determine whether it is contrary to the public interest and the protection of investors.

[12] See Whitman v. American Trucking Assns., Inc., 531 U.S. 457 (2001), available at

[13] These rules include the recent amendments to Form PF, the recently-proposed safeguarding rule, the recently-proposed rule regarding investment adviser outsourcing, the proposal to expand the definition of “dealer,” and the proposal regarding investment advisers’ use of ESG strategies. See Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, Advisers Act Release No. 6297 (May 3, 2024) [88 FR 38146 (June 12, 2023)], available at; Outsourcing by Investment Advisers, Advisers Act Release No. 6176 (Oct. 26, 2022) [87 FR 68816 (Nov. 16, 2022)], available at; Further Definition of “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer, Exchange Act Release No. 94524 (Mar. 28, 2022) [87 FR 23054 (Apr. 18, 2022)], available at; and Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Securities Act Release No. 11068 (May 25, 2022) [87 FR 36654 (June 17, 2022)], available at

[14] See Adopting Release, supra note 8, at 526.

[15] 5 U.S.C. 551 et seq.

[16] See H.R. Rep No. 117-393, at 102 (2023), available at CRPT-117hrpt393.pdf (

[17] See Adopting Release, supra note 8, at 525.

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