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August 21, 2023

SEC Should Adopt Private Fund Adviser Rules to Protect Investors from Conflicts of Interest and Shady Side Agreements

WASHINGTON, D.C.—On Wednesday, August 23rd, the U.S. Securities and Exchange Commission (SEC) will consider, among other things, whether to adopt proposed rules governing private fund advisers.  Better Markets’ Legal Director and Securities Specialist Stephen Hall released the following statement in anticipation of the Commission’s vote on these critical reforms:

“One of the key sets of proposed rules that the SEC is going to consider on Wednesday at its open meeting addresses an appalling array of unfair, predatory, and opaque practices that have become all too common in the world of private fund advisers.  These rules include important and overdue reforms for an industry that has escaped meaningful transparency and oversight for far too long even though it affects tens of millions of hardworking Main Street Americans.  The SEC should adopt the proposed rules to better protect investors and our capital markets and make this increasingly important financial sector substantially fairer and more transparent.

“The rules that the SEC proposed in March of 2022 would require enhanced disclosures by private fund advisers and would prohibit adviser practices that are especially harmful to fund investors.  Many in the private fund industry staunchly oppose these reforms because the status quo delivers them outsized profits at investors’ expense with too little oversight.  Here’s a summary of key issues, what’s at stake, and why the SEC should adopt these key reforms without diluting them:

  • PRIVATE FUNDS AFFECT EVERYDAY AMERICANS. The reforms in the proposed rules would benefit everyday Americans, who participate in the private funds market through pension plans or mutual funds.  In recent years, institutional investors representing pension systems and mutual funds have invested heavily in private markets—for example, in the fourth quarter of 2020, public pension plans had $1.5 trillion invested in private funds while private pension plans had $1.248 trillion invested in private funds.  Thus, private funds play a key role in managing the assets of retail customers, largely in the form of retirement savings.
  • MORE DISCLOSURE ABOUT THE MOST BASIC FUND FEATURES. The proposed rules would require registered investment advisers to prepare quarterly statements for any private funds they advise disclosing the private fund’s fees, expenses, and performance.  Currently, fund disclosures do not offer sufficient detail or clarity to enable investors—even sophisticated investors—to develop a clear understanding of the fees and expenses the fund must bear or how well the fund is actually performing.  The proposed required quarterly statements will better inform investors about the fees and expenses charged to the fund and the performance of the fund since inception.
  • INDEPENDENT AUDITS. The proposed rules would require private funds to obtain a financial statement audit annually, and upon liquidation, by an independent public accountant. This mandatory independent audit requirement will help bolster investor confidence in private market valuations of portfolio assets and create a more level playing field between private fund advisers that currently obtain and disclose independent audits and those that do not.
  • FAIRNESS OPINIONS WHEN ADVISERS SUGGEST TRANSACTIONS. The proposed rules would prohibit adviser-led secondary transactions unless the adviser obtains an independent fairness opinion. An adviser-led secondary transaction is a transaction initiated by the investment adviser that offers the private fund’s investors the choice to either sell their interests in the private fund or convert or exchange their interests in the private fund for interests in another vehicle advised by the adviser.  The requirement to obtain an independent fairness opinion will protect investors from unreasonable valuations by private fund advisers when investors are seeking to liquidate some or all of their holdings in a given fund or roll their investments into a new fund.
  • NO MORE WAIVERS OF AN ADVISER’S CORE OBLIGATION TO SERVE INVESTORS’ BEST INTEREST. The proposed rules would prohibit private fund advisers from, among other things, limiting or eliminating their liability for adviser misconduct, including by limiting liability for a breach of fiduciary duty.  A survey of limited partners investing in private equity found that 71% of respondents saw fiduciary duties modified or eliminated in at least half of their funds.  But the fiduciary duty is the bedrock principle of the Investment Advisers Act of 1940, and advisers must not be allowed to avoid their fiduciary duty to their clients by getting their clients to enter into agreements that only benefit the adviser.
  • LIMITS ON PREFERENTIAL TREATMENT OF CERTAIN INVESTORS. The proposed rules would prohibit private fund advisers from providing preferential terms to certain investors regarding redemptions or information about fund holdings or exposures and from providing other forms of preferential treatment to certain investors unless the adviser provides written disclosures to prospective and current investors.

“We’ll be watching closely on Wednesday to see how the SEC delivers on its proposed reforms aimed at making the world of private funds substantially more fair and transparent.”

See our comment letter for more information.


Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit


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