Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews

1Unless otherwise noted, when we refer to the Advisers Act, or any section of the Advisers Act, we are referring to 15 U.S.C. 80b, at which the Advisers Act is codified. When we refer to rules under the Advisers Act, or any section of those rules, we are referring to title 17, part 275 of the Code of Federal Regulations [17 CFR part 275], in which these rules are published. SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 275 [Release No. IA–6383; File No. S7–03–22] RIN 3235–AN07 Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) is adopting new rules under the Investment Advisers Act of 1940 (‘‘Advisers Act’’ or ‘‘Act’’). The rules are designed to protect investors who directly or indirectly invest in private funds by increasing visibility into certain practices involving compensation schemes, sales practices, and conflicts of interest through disclosure; establishing requirements to address such practices that have the potential to lead to investor harm; and restricting practices that are contrary to the public interest and the protection of investors. These rules are likewise designed to prevent fraud, deception, or manipulation by the investment advisers to those funds. The Commission is adopting corresponding amendments to the Advisers Act books and records rule to facilitate compliance with these new rules and assist our examination staff. Finally, the Commission is adopting amendments to the Advisers Act compliance rule, which affect all registered investment advisers, to better enable our staff to conduct examinations. DATES:
Effective date: These rules are effective November 13, 2023. Compliance date: See Section IV. Comments due date: Comments regarding the collection of information requirements within the meaning of the Paperwork Reduction Act of 1995 should be received on or before October 16, 2023. FOR FURTHER INFORMATION CONTACT:
Shane Cox, Robert Holowka, and Neema Nassiri, Senior Counsels; Tom Strumpf, Branch Chief; Adele Murray, Private Funds Attorney Fellow; Melissa Roverts Harke, Assistant Director, Investment Adviser Rulemaking Office; or Marc Mehrespand, Branch Chief, Chief Counsel’s Office, at (202) 551–6787 or IArules@sec.gov, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–8549. SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is adopting rule 17 CFR 275.206(4)–10 (final rule 206(4)–10), 17 CFR 275.211(h)(1)–1 (final rule 211(h)(1)–1), 17 CFR 275.211(h)(1)–2 (final rule 211(h)(1)–2), 17 CFR 275.211(h)(2)–1 (final rule 211(h)(2)–1), 17 CFR 275.211(h)(2)–2 (final rule 211(h)(2)–2), and 17 CFR 275.211(h)(2)–3 (final rule 211(h)(2)–3) under the Investment Advisers Act of 1940 [15 U.S.C. 80b–1 et seq.] (‘‘Advisers Act’’); 1 and amendments to 17 CFR 275.204–2 (final amended rule 204–2) and 17 CFR 275.206(4)–7 (final amended rule 206(4)–7) under the Advisers Act.
Table of Contents
I. Introduction
A. Risks and Harms to Investors B. Rules To Address These Risks and Harms
C. The Commission Has Authority To
Adopt the Rules
II. Discussion of Rules for Private Fund
Advisers
A. Scope of Advisers Subject to the Final Private Fund Adviser Rules B. Quarterly Statements
1. Fee and Expense Disclosure
2. Performance Disclosure
3. Preparation and Distribution of
Quarterly Statements
4. Consolidated Reporting for Certain Fund
Structures
5. Format and Content Requirements
6. Recordkeeping for Quarterly Statements
C. Mandatory Private Fund Adviser Audits
1. Requirements for Accountants
Performing Private Fund Audits
2. Auditing Standards for Financial
Statements
3. Preparation of Audited Financial
Statements
4. Distribution of Audited Financial
Statements
5. Annual Audit, Liquidation Audit, and
Audit Period Lengths
6. Commission Notification
7. Taking All Reasonable Steps To Cause
An Audit
8. Recordkeeping Provisions Related to the
Audit Rule
D. Adviser-Led Secondaries
1. Definition of Adviser-led Secondary
Transaction
2. Fairness Opinion or Valuation Opinion
3. Summary of Material Business
Relationships
4. Distribution of the Opinion and
Summary of Material Business Relationships
5. Recordkeeping for Adviser-Led
Secondaries
E. Restricted Activities
1. Restricted Activities With Disclosure￾Based Exceptions
(a) Regulatory, Compliance, and Examination Expenses (b) Reducing Adviser Clawbacks for Taxes (c) Certain Non-Pro Rata Fee and Expense Allocations
2. Restricted Activities With Certain
Investor Consent Exceptions (a) Investigation Expenses (b) Borrowing F. Certain Adviser Misconduct
1. Fees for Unperformed Services
2. Limiting or Eliminating Liability
G. Preferential Treatment
1. Prohibited Preferential Redemptions
2. Prohibited Preferential Transparency
3. Similar Pool of Assets
4. Other Preferential Treatment and
Disclosure of Preferential Treatment
5. Delivery
6. Recordkeeping for Preferential
Treatment
III. Discussion of Written Documentation of
All Advisers’ Annual Reviews of Compliance Programs
IV. Transition Period, Compliance Date,
Legacy Status
V. Other Matters
VI. Economic Analysis
A. Introduction
B. Broad Economic Considerations
C. Economic Baseline
1. Industry Statistics and Affected Parties
2. Sales Practices, Compensation
Arrangements, and Other Business Practices of Private Fund Advisers
3. Private Fund Adviser Fee, Expense, and
Performance Disclosure Practices
4. Fund Audits, Fairness Opinions, and
Valuation Opinions
5. Books and Records
6. Documentation of Annual Review Under
the Compliance Rule
D. Benefits and Costs
1. Overview
2. Quarterly Statements
3. Restricted Activities
4. Preferential Treatment
5. Mandatory Private Fund Adviser Audits
6. Adviser-Led Secondaries
7. Written Documentation of All Advisers’
Annual Review of Compliance Programs
8. Recordkeeping
E. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
F. Alternatives Considered
1. Alternatives to the Requirement for
Private Fund Advisers To Obtain an Annual Audit
2. Alternatives to the Requirement To
Distribute a Quarterly Statement to Investors Disclosing Certain Information Regarding Costs and Performance
3. Alternative to the Required Manner of
Preparing and Distributing Quarterly Statements and Audited Financial Statements
4. Alternatives to the Restrictions From
Engaging in Certain Sales Practices, Conflicts of Interest, and Compensation Schemes
5. Alternatives to the Requirement That An
Adviser To Obtain a Fairness Opinion or

2See infra section I.C.
3See infra section VI.E. See also Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Investment Advisers Act Release No. 5955 (Feb. 9, 2022) [87 FR 16886 (Mar. 24, 2022)] (‘‘Proposing Release’’); Reopening of Comment Periods for ‘‘Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews’’ and ‘‘Amendments Regarding the Definition of ‘Exchange’ and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities,’’ Investment Advisers Act Release No. 6018 (May 9, 2022) [87 FR 29059 (May 12, 2022)]; Resubmission of Comments and Reopening of Comment Periods for Certain Rulemaking Releases, Investment Advisers Act Release No. 6162 (Oct. 7,
2022) [87 FR 63016 (Oct. 18, 2022)]. The
Commission voted to issue the Proposing Release on Feb. 9, 2022. The release was posted on the Commission website that day, and comment letters were received beginning that same date. The comment period closed on Nov. 1, 2022. We have considered all comments received since Feb. 9, 2022. 4Section 202(a)(29) of the Advisers Act defines the term ‘‘private fund’’ as an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3) (‘‘Investment Company Act’’), but for section 3(c)(1) or 3(c)(7) of that Act. We use ‘‘private fund’’ and ‘‘fund’’ interchangeably throughout this release. Securitized asset funds are excluded from the term ‘‘private funds’’ for purposes hereof, unless stated otherwise. See infra section II.A (Scope of Advisers Subject to the Final Private Fund Adviser Rules) for a discussion of the application of the final rules to securitized asset funds. 5See, e.g., Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Investment Advisers Act Release No. 5248 (June 5,
2019) [84 FR 33669 (July 12, 2019)] (‘‘2019 IA
Fiduciary Duty Interpretation’’).
6 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, § 403, 404, 124 Stat, 1378, 1571–72 (Jul. 2010), codified at 15 U.S.C. 80b–4(b). 7Private equity funds, hedge funds, and venture capital funds are further described below. 8See Dodd-Frank Act, section 403. 9See Dodd-Frank Act, sections 407 and 408; Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Investment Advisers Act Release No. 3222 (June 22, 2011) [76 FR 39645 (July 6, 2011)] (‘‘Exemptions Adopting Release’’). The Dodd-Frank Act also provided the Commission with the ability to require the limited number of advisers to private funds that did not have to register to file reports about their business activities. 10See Form ADV data (inclusive of assets attributable to securitized asset funds). 11 Id. (inclusive of securitized asset funds). Valuation Opinion in Connection With Certain Adviser-Led Secondary Transactions
6. Alternatives to the Prohibition From
Providing Certain Preferential Terms and Requirement To Disclose All Preferential Treatment
VII. Paperwork Reduction Act
A. Introduction
B. Quarterly Statements
C. Mandatory Private Fund Adviser Audits
D. Restricted Activities E. Adviser-Led Secondaries F. Preferential Treatment G. Written Documentation of Adviser’s Annual Review of Compliance Program H. Recordkeeping
I. Request for Comment Regarding Rule
211(h)(2)–1
VIII. Final Regulatory Flexibility Analysis
A. Reasons for and Objectives of the Final Rules and Rule Amendments
1. Final Rule 211(h)(1)–1
2. Final Rule 211(h)(1)–2
3. Final Rule 206(4)–10
4. Final Rule 211(h)(2)–1
5. Final Rule 211(h)(2)–2
6. Final Rule 211(h)(2)–3
7. Final Amendments to Rule 204–2
8. Final Amendments to Rule 206(4)–7
B. Significant Issues Raised by Public Comments
C. Legal Basis
D. Small Entities Subject to Rules E. Projected Reporting, Recordkeeping, and Other Compliance Requirements
1. Final Rule 211(h)(1)–1
2. Final Rule 211(h)(1)–2
3. Final Rule 206(4)–10
4. Final Rule 211(h)(2)–1
5. Final Rule 211(h)(2)–2
6. Final Rule 211(h)(2)–3
7. Final Amendments to Rule 204–2
8. Final Amendments to Rule 206(4)–7
F. Significant Alternatives Statutory Authority
I. Introduction
The Commission oversees private fund advisers, many of which are registered with the SEC or report to the SEC as exempt reporting advisers. Despite the Commission’s examination and enforcement efforts with respect to private fund advisers, such advisers continue to engage in certain practices that may impose significant risks and harms on investors and private funds. Consequently, there is a compelling need for the Commission to exercise its congressional authority for the protection of investors.2 Based on the Commission’s extensive experience overseeing private fund advisers, the Commission is adopting carefully tailored rules to address the risks and harms to investors and funds, while promoting efficiency, competition, and capital formation.3 Background Private funds are privately offered investment vehicles that pool capital from one or more investors and invest in securities and other instruments or investments.4 Each investor in a private fund invests by purchasing securities (which are generally issued by the fund in the form of interests or shares) and then participates in the fund through the securities that it holds. Private funds are generally advised by investment advisers that are subject to a Federal fiduciary duty as well as the antifraud and other provisions of the Act.5 A private fund adviser, which often has broad discretion to provide investment advisory services to the fund, uses the money contributed by investors to make investments on behalf of the fund. Congress expanded the Commission’s role overseeing private fund advisers and their relationship with private funds and their investors in the wake of the 2007–2008 financial crisis, when it passed, and the President signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’). While the antifraud provisions of section 206 already applied to private fund advisers and the Commission already had brought enforcement actions against private fund advisers before the enactment of the Dodd-Frank Act, Congress increased the Commission’s oversight responsibility of private fund advisers. Among other things, Congress amended the Advisers Act generally to require advisers to private funds to register with the Commission and to authorize the Commission to establish reporting and recordkeeping requirements for advisers to private funds for investor protection and systemic risk purposes.6 Specifically, Title IV of the Dodd-Frank Act repealed an exemption from registration contained in section 203(b)(3) of the Advisers Act—known as the ‘‘private adviser exemption’’—on which many private fund advisers, including those to private equity funds, hedge funds, and venture capital funds,7 had relied.8 In addition to eliminating this provision, Congress directed the Commission to adopt more limited exemptions for advisers that solely advise private funds, if the adviser has assets under management in the United States of less than $150 million, or that solely
advise venture capital funds.9 Section 203(b)(3) of the Act, as amended by the Dodd￾Frank Act, also provides an exemption from registration for certain foreign private advisers. As a result, private fund advisers outside of these narrow exemptions became subject to the same regulatory oversight and other Advisers Act requirements that apply to other SEC-registered investment advisers. Increasing Importance of Private Funds and Their Advisers to Investors Investment advisers’ private fund assets under management have steadily increased over the past decade, growing from $9.8 trillion in 2012 to $26.6 trillion in 2022.10 Similarly, the number of private funds has increased from 31,717 in 2012 to 100,947 in 2022.11 Additionally, private funds and their advisers play an increasingly important role in the lives of millions of

12See Division of Investment Management:
Analytics Office, Private Funds Statistics Report:
Third Calendar Quarter 2022 (April 6, 2023) (‘‘Form PF Statistics Report’’), at 15, available at https:// www.sec.gov/files/investment/private-funds￾statistics-2022-q3.pdf (showing beneficial ownership of all funds by category as reported on Form PF). See also, e.g., Public Investors, Private Funds, and State Law, Baylor Law Review, Professor William Clayton (June 15, 2020), at 354 (‘‘Professor Clayton Public Investors Article’’) (stating that public pension plans have dramatically increased their investment in private funds). 13See Form PF Statistics Report, supra at footnote
12. See also, e.g., Comment Letter of Healthy
Markets Association (Apr. 15, 2022) (‘‘Healthy Markets Comment Letter I’’) (discussing the growing number of private funds and increasing allocations that public pension plans and endowments are making to private funds); Comment Letter of Better Markets, Inc. (Apr. 25, 2022) (‘‘Better Markets Comment Letter’’) (discussing the growth of the private markets and the exposure of millions of Americans to the private markets, including through pension plans). The comment letters on the Proposing Release are available at https:// www.sec.gov/comments/s7-03-22/s70322.htm. 14States on average have less than 70% of the assets needed to fund their pension liabilities with that figure for some states reaching as low as 34%. See, e.g., Professor Clayton Public Investors Article, supra footnote 12; Sarah Krouse, The Pension Hole for U.S. Cities and States is the Size of Germany’s Economy, Wall Street J. (July 30, 2018), available at https://www.wsj.com/articles/the-pension-hole-for￾u-s-cities-and-states-is-the-size-of-japans-economy￾1532972501; Pew Charitable Trusts, Issue Brief, The State Pension Funding Gap: 2017 (June 27, 2019), available at https://www.pewtrusts.org/en/research￾and-analysis/issue-briefs/2019/06/the-state￾pension-funding-gap-2017. 15See, e.g., Healthy Markets Comment Letter I; UBS Wealth Management USA, US Economy:
Public Pension Plans Tilt Toward Alternatives (Jan. 12, 2023), available at https://www.ubs.com/us/en/ wealth-management/insights/market-news/
article.1582725.html (discussing State and local
pension funds’ increasing allocation to private funds over last two decades). 16See National Data, Public Plans Data, available at https://publicplansdata.org/quick-facts/national/ #:∼:text;=Collectively%2C%20these%20plans%20 have%3A,members%20and%2011.7%20million% 20retirees. 17See infra section VI.C.1. 18 Including the private fund operating agreement to which the adviser or its affiliate and the private fund investors are typically both parties. 19Compensation at the underlying ‘‘portfolio investment-level’’ is more common for certain private funds, such as private equity, venture capital or real estate funds, and less common for others, such as hedge funds. 20See Form PF Statistics Report, supra at footnote 12, at 31 (showing aggregate portfolio turnover for hedge funds managed by large hedge fund advisers (i.e., advisers with at least $1.5 billion in hedge fund assets under management) as reported on Form PF). 21See id. 22See id. See infra section II.A (Scope of Advisers Subject to the Final Private Fund Adviser Rules) for a discussion of securitized asset funds as well. Americans planning for retirement.12 While private funds typically issue their securities only to certain qualified investors, such as institutions and high net worth individuals, individuals have indirect exposure to private funds through those individuals’ participation in public and private pension plans, endowments, foundations, and certain other retirement plans, which all invest directly in private funds. For example, public service workers, including law enforcement officers, firefighters, public school educators and community service workers, participate in these retirement plans and other vehicles and thus have exposure to private funds. Many pension plans, endowments, and non-profits invest in private funds to meet their internal return targets, to diversify their holdings, and to provide retirement security or other benefits for their stakeholders.13 In particular, public pension plans face a stark funding gap 14 and many have turned to private funds in an attempt to address underfunding problems.15 As a result, the 26.7 million working and retired U.S. public pension plan beneficiaries are more likely to have increased exposure to private funds.16 The Commission staff have also observed a trend of rising interest in private fund investments by smaller investors with less bargaining power, such as the growth of new platforms to facilitate individual access to private investments with small investment sizes, or non￾institutional investor groups pooling funds to invest in private funds, or other means by which smaller individual investors can access private investments.17 Role of Investment Advisers in Private Fund Structure and Organization While there are many different ways that private funds are structured and organized, private funds typically rely on an investment adviser (or affiliated entities, such as the fund’s general partner or managing member) to
provide management, investment, and other services, and such person usually has delegated authority to take actions on behalf of the private fund without the consent or approval of any other person. A private fund rarely has employees of its own—its officers, if any, are usually employed by the private fund’s adviser. As a result, it is the adviser or its affiliated entities who generally draft the private fund’s private placement memorandum and governing documents,18 negotiate fund terms with the private fund investors, select and execute investments, charge or allocate fees and expenses to the private fund, and provide information on the private fund’s activities and performance to private fund investors. Advisers are also often involved in marketing the private fund to prospective investors, including marketing to current investors in other private funds managed by the adviser. Investors in a private fund generally pay both fees and expenses to the private fund adviser and/or its related persons. Investors typically, directly or indirectly through the fund interests they hold, pay management fees and performance-based compensation to the adviser of the private fund or the adviser’s related person (e.g., a general partner or managing member). Additionally, investors directly or indirectly bear the fees and expenses associated with the fund and the fund’s investments. It is also not uncommon for a private fund’s underlying portfolio investments to pay the adviser (or a related person) monitoring, transaction or other fees and expenses, which can be, but are not always, offset against the management fees paid to the adviser.19 In certain cases, advisers also negotiate with investors to have investors pay certain of the adviser’s own expenses (such as certain compliance costs of the adviser). There are many different types of private funds. Two broad categories of private funds are hedge funds and private equity funds. Hedge funds tend to invest in more liquid assets and generally allow investors the opportunity to voluntarily withdraw their interests with certain limitations, including for example, restrictions on timing and notice requirements and, for certain funds, the amount that can be redeemed at one time or over a period of time. Private equity funds, on the other hand, tend to invest in illiquid assets and generally do not permit investors to voluntarily withdraw their interests in the fund. Hedge funds engage in trillions of dollars in listed equity and futures transactions each month,20 while private equity funds tend to focus on private investments, whether through mergers and acquisitions, non-bank lending, restructurings, and other transactions. Hedge funds have over nine trillion dollars in gross asset value and private equity funds have over six trillion.21 Beyond hedge funds and private equity funds, there are other categories of private funds, some of which overlap with these two. For example, venture capital funds are in many
ways structurally similar to private equity funds and provide funding to start-up and early-stage companies. As another example, real estate private funds generally invest in illiquid real estate assets, and as such typically do not permit investors to withdraw their interests in the fund voluntarily. Venture capital and real estate private funds have over one trillion dollars in gross asset value.22

23Form ADV has also increased transparency to investors. 24See Securities and Exchange Commission’s Division of Examinations 2023 Examination Priorities (Feb. 7, 2023), available at https:// www.sec.gov/files/2023-exam-priorities.pdf. 25To the extent that these issues negatively affect the efficiency with which investors search for and match with advisers, the alignment of investor and adviser interests, investor confidence in private fund markets, or competition between advisers, then the final rules may improve efficiency, competition, and capital formation in addition to benefiting investors. See infra sections VI.B, VI.E. See, e.g., Comment Letter of Consumer Federation of America (Apr. 25, 2022) (‘‘Consumer Federation of America Comment Letter’’). 26See, e.g., In the Matter of Blackstone Management Partners, L.L.C., et. al., Investment Advisers Act Release No. 4219 (Oct. 7, 2015) (settled action) (alleging that the adviser received undisclosed fees) (‘‘In the Matter of Blackstone’’); In the Matter of Lincolnshire Management, Inc., Investment Advisers Act Release No. 3927 (Sept. 22, 2014) (settled action) (alleging that the adviser misallocated fees and expenses among private fund clients) (‘‘In the Matter of Lincolnshire’’); In the Matter of Cherokee Investment Partners, LLC and Cherokee Advisers, LLC, Investment Advisers Act Release No. 4258 (Nov. 5, 2015) (settled action) (alleging that the adviser improperly shifted expenses related to an examination and an investigation away from itself). 27 Id. 28See In the Matter of re Kohlberg Kravis Roberts & Co. L.P., Investment Advisers Act Release No. 4131 (June 29, 2015) (settled action) (‘‘In the Matter of Kohlberg Kravis Roberts & Co.’’). 29See In re NB Alternatives Advisers LLC, Investment Advisers Act Release No. 5079 (Dec. 17,
2018) (settled action) (‘‘In the Matter of NB
Alternatives Advisers’’). 30See, e.g., In re Global Infrastructure Management, LLC, Investment Advisers Act Release No. 5930 (Dec. 20, 2021) (settled action) (alleging private fund adviser failed to properly offset management fees to private equity funds it managed and made false and misleading statements to investors and potential investors in those funds concerning management fee offsets); In the Matter of EDG Management Company, LLC, Investment Advisers Act Release No. 5617 (Oct. 22, 2020) (settled action) (alleging that private equity fund adviser failed to apply the management fee calculation method specified in the limited partnership agreement by failing to account for write downs of portfolio securities causing the fund and investors to overpay management fees); In the Matter of Energy Capital Partners Management, LP, Investment Advisers Act Release No. 6049 (June 15,
2022) (settled action) (alleging that the adviser
allocated undisclosed and disproportionate expenses to a private fund client) (‘‘In the Matter of Energy Capital Partners’’); In the Matter of Insight Venture Management, LLC, Investment Advisers Act Release No. 6322 (June 20, 2023) (settled action) (alleging that the adviser failed to disclose a conflict of interest relating to its fee calculations and overcharged management fees) (‘‘In the Matter of Insight’’). 31See In the Matter of Mitchell J. Friedman, Investment Advisers Act Release No. 5338 (Sept. 4,
2019) (settled action).
32See In the Matter of Diastole Wealth Management, Inc., Investment Advisers Act Release No. 5855 (Sept. 10, 2021) (settled action). 33See Proposing Release, supra footnote 3. Need for Further Commission Oversight With over a decade since the Dodd￾Frank Act required private fund advisers to register with us, the Commission now has extensive experience in overseeing and regulating private fund advisers. Form ADV and Form PF reporting have been critical to improving our ability to understand private fund advisers’ operations and relationships with funds and investors as private funds continue growing in size, complexity, and number.23 The information from these forms has enabled us to enhance our assessment of private fund advisers for purposes of targeting examinations and responding to emerging trends. For example, the Commission’s Division of Examinations stated in its 2023 examination priorities that it will continue to focus on registered private fund advisers, including such advisers’ conflicts of interest and calculations and allocations of fees and expenses.24 This information has also improved our ability to identify practices that could harm private fund investors and has helped us not only promote compliance but also detect, investigate, and deter fraud and other misconduct. In the course of this oversight of private fund advisers, we have observed three primary factors that contribute to investor protection risks and harms:
lack of transparency, conflicts of interest, and lack of governance mechanisms.25 We have observed that these three factors contribute to significant investor harm, such as an adviser incorrectly, or improperly, charging fees and expenses to the private fund, contrary to the adviser’s fiduciary duty, contractual obligations to the fund, or disclosures by the adviser.26 The Commission has pursued enforcement actions against private fund advisers for fraudulent practices related to fee and expense charges or allocations that are influenced by the advisers’ conflicts of interest.27 For example, the Commission has brought a settled action alleging private fund advisers misallocated more than $17 million in so-called ‘‘broken deal’’ expenses to an adviser’s flagship private equity fund 28 and improperly allocated approximately $2 million of compensation-related expenses to three private equity funds that an adviser managed.29 Our staff has examined private fund advisers to assess both the issues and risks presented by their business models and the firms’ compliance with their existing legal obligations. Despite these enforcement and examination efforts, problematic practices persist.30 For example, the Commission has brought charges against private fund advisers for failing to disclose material conflicts of interest to a private fund that an adviser managed as well as misleading its investors by misrepresenting an investment opportunity,31 and for failing to disclose to investors that the adviser periodically made loans to a company owned by the son of the principal of the advisory firm and that the private fund’s investment in the company could be used to repay the loans made by the adviser.32 Additionally, any risks and harms imposed by private fund advisers on private funds and their investors indirectly expose the investors’ individual stakeholders and beneficiaries (e.g., public service workers, law enforcement officers, firefighters, public school educators, and community service workers) to the same risks and harms. Accordingly, we proposed a series of new rules under the Advisers Act to protect investors, promote more efficient capital markets, and encourage capital formation.33 After considering comments, the Commission is adopting rules with modifications that make the rules less restrictive and more flexible, while still providing investors with the protections to which they are entitled. The adopted rules will help address risks and harms to investors in a carefully tailored way that promotes efficiency, competition, and capital formation, as well as investor protection. A. Risks and Harms to Investors These rules and amendments are important enhancements to private fund adviser regulation because they protect the adviser’s private fund clients and those who invest in private funds by increasing visibility into certain activities, curbing practices that lead to harm to funds and their investors, and restricting adviser activity that is
contrary to the public interest and the protection of investors. The private fund adviser reforms are designed specifically to address the following three factors for risks and harms that are common in an adviser’s relationship with private funds and their investors:
lack of transparency, conflicts of interest, and lack of effective governance mechanisms for client disclosure, consent, and oversight. Lack of Transparency. Private fund investments are often opaque, and advisers do not frequently or consistently provide investors with sufficiently detailed information about the terms of the advisers’ relationships with funds and their investors. For example, there are no specific requirements for the information that private fund advisers must disclose to private fund investors about the funds’

34See, e.g., In the Matter of Insight, supra footnote 30 (alleging that, due to lack of disclosure, investors were unaware of the extent of the conflict of interest associated with an adviser’s permanent impairment criteria and that the adviser charged excessive management fees). 35See infra section II.B. 36See, e.g., Comment Letter of Ohio Public Employees Retirement System (Apr. 25, 2022) (‘‘OPERS Comment Letter’’); Comment Letter of Institutional Limited Partners Association (Apr. 25,
2022) (‘‘ILPA Comment Letter I’’).
37See, e.g., In the Matter of Insight, supra footnote 30 (alleging that the adviser charged excess management fees and failed to disclose a conflict of interest to investors relating to its fee calculations). 38See infra sections VI.B, VI.C.1. 39Emerging Trends in the Evolving Continuation Fund Market, Private Equity Law Report (July 2022), available at https://www.pelawreport.com/ 19285026/emerging-trends-in-the-evolving￾continuation-fund-market.thtml (stating that the market volume for private fund secondaries increased from $37 billion in 2016 to $132 billion in 2021 and that ‘‘much of that growth was driven by an explosion in GP-led continuation fund activity’’). 40A fund’s LPAC or board typically acts as the decision-making body with respect to conflicts that may arise between the interests of the third-party investors and the interests of the adviser. In certain cases, advisers seek the consent of the LPAC or board for conflicted transactions, such as transactions involving investments in portfolio companies of related funds or where the adviser seeks to cause the fund to engage a service provider that is affiliated with the adviser. 41See infra section VI.B. investments, performance, or incurred fees and expenses, notwithstanding the applicability of the antifraud provisions of the federal securities laws and any relevant requirements of the marketing rule and private placement rules. Rather, information and disclosure about these items and the terms of an investment in a private fund are generally individually negotiated between private fund investors and the fund’s adviser. Since private fund structures can be complex and involve multiple entities that are related to, or otherwise affiliated with, the adviser, absent specifically negotiated disclosure, it may be difficult for investors to understand the conflicts embedded within these structures and the overall compensation received by the adviser. Without specific information, even sophisticated investors cannot understand the fees and expenses they are paying, the risks they are assuming, and the performance they are achieving in return.34 Investors have received reduced returns due to improperly charged fees and expenses,35 and they must sometimes choose between expending resources to negotiate for detailed fee and expense or performance reporting or using their bargaining power to improve the economic, informational, or governance terms of the investors’ relationships with funds and their advisers.36 Conflicts of Interest. These rules address many of the problems raised by the conflicts of interest commonly present in private fund adviser practices. Conflicts of interest can harm investors, such as when an adviser grants preferential redemption rights to entice a large investor that will increase overall management fees to commit to a private fund, and then, when the fund experiences a decline, such preferential redemption rights allow a large investor to exit the private fund before
and on more advantageous terms than other investors. Investors are also harmed by not being informed of conflicts of interest concerning the private fund adviser and the fund, which reduces the information available to investors to guide their investment decisions.37 There is a trend of rising interest in private funds by smaller investors with less bargaining power, who may be particularly impacted by these practices, including where advisers grant preferential terms to larger investors that may exacerbate conflicts of interest as well as the risks of resulting investor harm.38 Certain conflicts of interest between advisers and private funds also involve sales practices or compensation schemes that are problematic for investors. For example, advisers have a conflict of interest with private funds (and, indirectly, investors in those funds) when they value the fund’s assets and use that valuation as the basis for the calculation of the adviser’s fees and fund performance. Similarly, advisers have a conflict of interest with the fund (and, indirectly, its investors) when they offer existing fund investors the choice between selling and exchanging their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons as
part of an adviser-led secondary
transaction.39 In both of these examples, there are opportunities for advisers, funds, and investors to benefit, but there is also a potential for significant harm if the adviser’s conflicts are not managed appropriately, including diminishing the fund’s returns because of excess fees and expenses paid to the fund’s adviser or its related persons. Lack of Governance Mechanisms. These rules are designed to respond to harms arising out of private fund governance structures. In a typical private fund structure, the private fund is the adviser’s client and investors in the private fund are not clients of the adviser (unless investors have a separate advisory relationship with the adviser in addition to their investment in the private fund). The adviser (or its related person) commonly serves as the general partner or managing member (or similar control person) of the fund. Because the adviser (or its related person) acts on behalf of the fund client and is typically not required to obtain the input or consent of investors in the fund, the governance structure of a typical private fund is not designed to prioritize investor oversight of the adviser and general partner or managing member (or similar control person) or investor policing of conflicts of interest. For example, although some private funds may have limited partner advisory committees (‘‘LPACs’’) or boards of directors, these types of bodies may not have sufficient independence, authority, or accountability to oversee and consent to these conflicts.40 Such LPACs or boards of directors do not have a fiduciary obligation to the private fund investors. Moreover, private fund advisers often provide certain investors with preferential terms, such as representation in an LPAC, that can create potential conflicts among the fund’s investors. The interests of one or more private fund investors may not represent the interests of, or may otherwise conflict with the interests of, other investors in the private fund due to, among other things, business or personal relationships or other private fund investments. To the extent investors are afforded LPAC representation or similar rights, certain fund agreements may permit such investors to exercise their rights in a manner that places their interests ahead of the private fund or the investors as a whole. For example, certain fund agreements state that, subject to applicable law, LPAC members owe no duties to the private fund or to any of the other investors in the private fund and are not obligated to act in the interests of the private fund or the other investors as a whole. The rules we are adopting are designed to protect private fund investors by addressing private fund advisers’ conflicts of interest, sales practices, and compensation schemes. Such protection is necessary because investors face difficulties in negotiating for reformed practices, including stronger governance structures, because of the bargaining power held by advisers and by
investors who benefit from current adviser practices, such as investors who receive preferential treatment from their advisers.41 In addition, as discussed above, the indirect exposure of the general public to the risks of private fund investments

42See Proposing Release, supra footnote 3. 43See, e.g., Comment Letter of United for Respect (Apr. 12, 2022) (‘‘United for Respect Comment Letter I’’); Comment Letter of Private Equity Stakeholder Project (Apr. 25, 2022); Comment Letter of Trine Acquisition Corp. (Apr. 21, 2022) (‘‘Trine Comment Letter’’). 44See, e.g., Comment Letter of InvestX (Mar. 18,
2022) (‘‘InvestX Comment Letter’’); Comment Letter
of American Association for Justice (Apr. 25, 2022) (‘‘American Association for Justice Comment Letter’’); OPERS Comment Letter. 45See, e.g., Comment Letter of Public Citizen (Apr. 15, 2022) (‘‘Public Citizen Comment Letter’’); Comment Letter of the Comptroller of the State of New York (Apr. 25, 2022) (‘‘NY State Comptroller Comment Letter’’); Comment Letter of Comptroller of the City of New York (Apr. 21, 2022) (‘‘NYC Comptroller Comment Letter’’). 46See, e.g., Comment Letter of General Treasurer of Rhode Island, For the Long Term and Illinois State Treasure, For the Long Term (June 13, 2022) (‘‘For the Long Term Comment Letter’’); Comment Letter of the Regulatory Fundamentals Group (Apr. 25, 2022) (‘‘RFG Comment Letter II’’); United for Respect Comment Letter I. 47See Better Markets Comment Letter. 48See Comment Letter of District of Columbia Retirement Board (Apr. 22, 2022) (‘‘DC Retirement Board Comment Letter’’). 49See, e.g., Comment Letter of the Private Investment Funds Forum (Apr. 25, 2022) (‘‘PIFF Comment Letter’’); Comment Letter of the Alternative Investment Management Association Limited and the Alternative Credit Council (Apr. 25, 2022) (‘‘AIMA/ACC Comment Letter’’); Comment Letter of the Securities Industry and Financial Markets Association Asset Management Group (Apr. 25, 2022) (‘‘SIFMA–AMG Comment Letter I’’). 50See, e.g., Comment Letter of Lockstep Ventures (Apr. 26, 2022) (‘‘Lockstep Ventures Comment Letter’’); Comment Letter of Thin Line Capital (Apr. 21, 2022) (‘‘Thin Line Capital Comment Letter’’); Comment Letter of Blended Impact (Apr. 24, 2022) (‘‘Blended Impact Comment Letter’’). 51See infra section II.B for a discussion of the comments on this aspect of the rule. 52The final quarterly statement, audit, adviser-led secondaries, restricted activities, and preferential treatment rules do not apply to investment advisers with respect to securitized asset funds they advise. See infra section II.A (Scope of Advisers Subject to the Final Private Fund Adviser Rules). 53See Proposing Release, supra footnote 3, at
section I.
54See infra section II.C for a discussion of the comments on this part of the rule. 55See infra section II.C. 56See infra section II.C.8 for a discussion of the comments on this part of the rule. heightens the need for specific rulemaking to address these concerns. B. Rules To Address These Risks and Harms The Commission proposed rules to address the risks and harms to investors and funds, and we received many comment letters on the proposal.42 A number of commenters supported the proposal and stated that it would have an overall positive impact on the industry.43 Some commenters stated that it would establish baseline protections for investors, such as increased transparency and standardized reporting.44 Other commenters expressed frustration with the conflicts of interest in the private funds industry 45 and supported prohibitions on certain unfair practices.46 One commenter stated that the rules, if adopted, ‘‘would implement a variety of essential improvements in the regulation of the private funds markets, making this increasingly important financial sector substantially more fair and transparent.’’ 47 Another commenter stated that the proposed rules are essential to protect the right of investors to access information critical to making informed investment decisions, especially because private market investments will likely play an increasingly growing role in the asset allocations and funding targets of institutional investors.48 In contrast, other commenters opposed the proposal and expressed concern that it would negatively impact the industry by stifling capital formation and reducing competition.49 Certain commenters asserted that the proposed requirements would overburden advisers (especially smaller advisers) with compliance costs, which may ultimately be passed on to investors, directly or indirectly.50 These and other comments are discussed more fully below. The final rules include modifications in response to concerns raised and provide additional flexibility and tailoring to the rules as proposed, while preserving the needed investor protections. The Quarterly Statement Rule. The Commission proposed a rule to require SEC-registered advisers to private funds to provide investors with periodic information about private fund fees, expenses, and performance.51 The Commission is adopting the rule with changes in response to comments: 52 Æ Advisers to illiquid funds are required to calculate performance information with and without the impact of subscription facilities, rather than only without; Æ We have refined the definition of illiquid fund to be based primarily on withdrawal and redemption capability; Æ Instead of requiring advisers to present liquid fund performance since inception, we are only requiring a 10- year lookback; and Æ We are allowing additional time for delivery of fourth quarter statements and additional time for delivery of all statements for funds of funds. As discussed more fully below, we are adopting the
quarterly statement rule because we see this lack of transparency in many areas, including investment advisers’ disclosure regarding private fund fees, expenses, and performance. For example, some private fund investors do not have sufficient information regarding private fund fees and expenses because those fees and expenses have varied labels across private funds and are subject to complicated calculation methodologies.53 Increased transparency on fees can also help address conflicts of interest concerns. For example, some private fund advisers and their related persons charge a number of fees and expenses to the fund’s portfolio companies, and it may be difficult for investors to track fee streams that flow to the adviser or its related persons and reduce the return on their investment. Investors will also benefit from increased transparency into how private fund performance is calculated. Currently, private fund advisers use different metrics and specifications for calculating performance, which makes it difficult for investors to compare data across funds and advisers, even when advisers disclose the assumptions they used. More standardized requirements for performance metrics will allow private fund investors to compare more effectively the returns of similar fund strategies over different market environments and over time. In addition, they would improve investors’ ability to interpret complex performance reporting and assess the relationship between the fees paid in connection with an investment and the return on that investment as they monitor their investment and consider potential future investments. The Audit Rule. The Commission is adopting the requirement that an SEC￾registered adviser cause each private fund that it advises to undergo an annual audit; however, in a change from the proposal, we are requiring the audit to comply with the audit provision under 17 CFR 275.206(4)–2 of the Advisers Act (‘‘rule 206(4)–2’’ ‘‘custody rule’’).54 To address the valuation concerns described above and more fully below,55 we are requiring SEC￾registered advisers to cause the private funds they manage to obtain an annual audit. By addressing the concerns that arise in the valuation process, the rule will help prevent fraud and deception by the adviser. The Adviser-led Secondaries Rule. The final rule will require SEC￾registered advisers conducting an adviser-led secondary transaction to satisfy certain requirements; however, in a change from the proposal, advisers may obtain a fairness opinion or a valuation opinion under the final rule.56 SEC-registered advisers conducting an adviser-led secondary transaction must

57See infra sections II.E and II.F for a discussion of the comments on this part of the rule. 58As discussed in greater detail below, this does not change the applicability of any other disclosure and consent obligations, whether under law, rule, regulation, contract, or otherwise. For example, the adviser, as a fiduciary, is obligated to act in the fund’s best interest and to make full and fair disclosure of all conflicts and material facts which might incline an investment adviser—consciously or unconsciously—to render advice which is not disinterested such that a client can provide informed consent to the conflict. See 2019 IA Fiduciary Duty Interpretation, supra footnote 5. 59See infra section II.G for a discussion of the comments on this part of the rule. 60See, e.g., Securities and Exchange Commission
v. Philip A. Falcone, Harbinger Capital Partners
Offshore Manager, L.L.C. and Harbinger Capital Partners Special Situations GP, L.L.C., Civil Action No. 12 Civ. 5027 (PAC) (S.D.N.Y.) and Securities and Exchange Commission v. and (sic) Harbinger Capital Partners LLC, Philip A. Falcone and Peter A. Jenson, Civil Action No. 12 Civ. 5028 (PAC) (S.D.N.Y.), Civil Action No. 12 Civ. 5027 (PAC) (S.D.N.Y.), U.S. Securities and Exchange Commission Litigation Release No. 22831A (Oct. 2,
2013) (‘‘Harbinger Capital’’) (private fund adviser
granted favorable redemption and liquidity terms to certain large investors in a private fund without disclosing these arrangements to the fund’s board of directors and the other fund investors). See also 17 CFR 275.206(4)–8 (rule 206(4)–8 under the Advisers Act). 61See infra section III for a discussion of the comments on this part of the rule. 62See infra sections II.B.6, II.C.8, II.D.5, and II.G.6 for discussions of the comments on this part of the rule. 63The recordkeeping requirements associated with the restricted activities rule align with the modifications from the prohibited activities rule in the proposal. See infra section II.E for a discussion of the comments on this part of the rule. also prepare and distribute a written summary of any material business relationships between the adviser or its related persons and the independent opinion provider. By requiring that investors receive a third-party opinion and a written summary of any material business relationships before deciding whether to participate in an adviser-led secondary transaction, the final rule will help prevent investors from being defrauded, manipulated, and deceived when the adviser is on both sides of the transaction. The Restricted Activities Rule. The final rule will address concerns about five activities with respect to private fund advisers.57 In a change from the proposal, while the restricted activities rule (referred to as the prohibited activities rule in the proposal) prohibits advisers from engaging in certain activity, the final rule includes certain disclosure-, and in some cases, consent￾based exceptions. As a result, advisers generally are not flatly prohibited from engaging in the following activities,58 so long as they provide appropriate specified disclosure and, in some cases, obtain investor consent:
Æ Charging or allocating to the private fund fees or expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority; however, regardless of any disclosure or consent, an adviser may not charge or allocate fees and expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for violating the Investment Advisers Act of 1940 or the rules promulgated thereunder; Æ Charging or allocating to the private fund any regulatory or compliance fees or expenses, or fees or expenses associated with an examination, of the adviser or its related persons; Æ Reducing the amount of an adviser clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders; Æ Charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis when multiple private funds and other clients advised by the adviser or its related persons have invested (or propose to invest) in the same portfolio investment, where such non-pro rata allocation is fair and equitable; and Æ Borrowing money, securities, or other private fund assets, or receiving a loan or an extension of credit, from a private fund client. In a change from the proposal, we are not adopting the prohibition on fees for unperformed services because we believe this activity generally already runs contrary to an adviser’s obligations to its clients under the Federal fiduciary duty. We are also not adopting the indemnification prohibition that we proposed because much of the activity that it would have prohibited is already prohibited by the Federal fiduciary duty and antifraud provisions. The Preferential Treatment Rule. The Commission is adopting a preferential treatment rule that prohibits advisers from providing preferential treatment with respect to redemption rights and portfolio holdings or exposure information, in each instance, that the adviser reasonably expects would have a material, negative effect on other investors, and requires disclosure of all other types of preferential treatment.59 In a change from the proposal, the final rule includes certain exceptions from the redemptions prohibition (i.e., if the redemption right is required by law or offered to all other existing investors) and information prohibition (i.e., if the information is offered to all other existing investors) and limits the proposed requirement to provide advance written notice of preferential treatment to only apply to material economic terms (as opposed to all investment terms). Like the proposal, however, the final rule requires advisers to provide comprehensive post￾investment disclosure. We are also adopting the preferential treatment rule, in part, because all investors will benefit from increased transparency regarding the preferred terms granted to certain investors in
the same private fund (e.g., seed investors, strategic investors, those with large commitments, and employees, friends, and family). In some cases, these terms materially disadvantage other investors in the private fund or otherwise impact the terms applicable to their investment.60 This new rule will help investors better understand marketplace dynamics and potentially improve efficiency for future investments, for example, by expediting the process for reviewing and negotiating adviser’s fees and expenses. The Annual Review Rule. As proposed, the final rule will amend the annual review component of Advisers Act rule 206(4)–7 (‘‘compliance rule’’) to require all SEC-registered advisers to document their annual review in writing, and we are adopting this rule as proposed.61 We are adopting this requirement for two key reasons. First, written documentation of the annual review may help advisers better assess whether they have considered any compliance matters that arose during the previous year, any changes in the adviser’s or an affiliate’s business activities during the year, and any changes to the Advisers Act or other rules and regulations that may suggest a need to revise an adviser’s policies and procedures. Second, the availability of written documentation of the annual review should allow the Commission and the Commission staff to determine if the adviser is regularly reviewing the adequacy of the adviser’s policies and procedures. The Recordkeeping Rule. As proposed, the final rule will amend the Advisers Act recordkeeping rule to require advisers who are registered or required to be registered to retain books and records related to the quarterly statement rule, the audit rule, the adviser-led secondaries rule, and the preferential treatment rule.62 In a change from the proposal, we are also amending the Advisers Act recordkeeping rule to require advisers who are registered or required to be registered to retain books and records related to the restricted activities rule.63

64Under Federal law, an investment adviser is a fiduciary, and this fiduciary duty is made enforceable by the antifraud provisions of the Advisers Act. See 2019 IA Fiduciary Duty Interpretation, supra footnote 5. 65See Advisers Act, sections 206 and 211(h). 66 15 U.S.C. 80b–6(4). 67S. REP. NO. 1760, 86th Cong., 2d Sess. 4, 8 (1960). The Commission has used this authority to adopt several rules addressing abusive marketing practices, political contributions by investment advisers, proxy voting, compliance procedures and practices, deterring fraud with respect to pooled investment vehicles, and custodial arrangements including an audit provision. Rule 206(4)–1; 275.206(4)–2; 275.206(4)–6; 275.206(4)–7; and 275.206(4)8. Section 206(4) was added to the Advisers Act in Public Law 86–750, 74 Stat. 885, at sec. 9 (1960). See H.R. REP. NO. 2197, 86th Cong., 2d Sess., at 7–8 (1960) (‘‘Because of the general language of section 206 and the absence of express rulemaking power in that section, there has always been a question as to the scope of the fraudulent and deceptive activities which are prohibited and the extent to which the Commission is limited in this area by common law concepts of fraud and deceit . . . [Section 206(4)] would empower the Commission, by rules and regulations to define, and prescribe means reasonably designed to prevent, acts, practices, and courses of business which are fraudulent, deceptive, or manipulative. This is comparable to Section 15(c)(2) of the Securities Exchange Act [15 U.S.C. 78o(c)(2)] which applies to brokers and dealers.’’). See also S. REP. NO. 1760, 86th Cong., 2d Sess., at 8 (1960) (‘‘This [section 206(4) language] is almost the identical wording of section 15(c)(2) of the Securities Exchange Act of 1934 in regard to brokers and dealers.’’). The Supreme Court, in United States v. O’Hagan, interpreted nearly identical language in
section 14(e) of the Securities Exchange Act [15
U.S.C. 78n(e)] as providing the Commission with authority to adopt rules that are ‘‘definitional and prophylactic’’ and that may prohibit acts that are ‘‘not themselves fraudulent . . . if the prohibition is ‘reasonably designed to prevent . . . acts and practices [that] are fraudulent.’ ’’ United States v. O’Hagan, 521 U.S. 642, 667, 673 (1997). The wording of the rulemaking authority in section 206(4) remains substantially similar to that of
section 14(e) and section 15(c)(2) of the Securities
Exchange Act. See also Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles, Investment Advisers Act Release No. 2628 (Aug. 3,
2007) [72 FR 44756 (Aug. 9, 2007)] (‘‘Prohibition of
Fraud Adopting Release’’) (stating, in connection with the suggestion by commenters that section 206(4) provides us authority only to adopt prophylactic rules that explicitly identify conduct that would be fraudulent under a particular rule, ‘‘We believe our authority is broader. We do not believe that the commenters’ suggested approach would be consistent with the purposes of the Advisers Act or the protection of investors.’’). 68See the discussion of the Dodd-Frank Act above in the introductory portion of section I. 69 Dodd-Frank Act, section 913(g). 70See 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at 23. 71See id., at 26. We are adopting these requirements to enhance advisers’ internal compliance efforts and to facilitate the Commission’s enforcement and examination capabilities by improving our staff’s ability to assess an adviser’s compliance with the final rule.
C. The Commission Has Authority To
Adopt the Rules
The Commission regulates investment advisers under the Advisers Act.64 For the reasons we discussed in the Proposing Release and throughout this release, our adoption of these private fund adviser rules is a proper exercise of our rulemaking authority under the Advisers Act to prevent fraudulent, deceptive, and manipulative conduct, facilitate the provision of simple and clear disclosures to investors, and prohibit or restrict certain sales practices, conflicts of interest, and compensation schemes.65 We have authority under section 206(4) to adopt rules ‘‘reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive or manipulative.’’ 66 Among other things,
section 206(4) permits the Commission
to adopt prophylactic rules against conduct that is not itself necessarily fraudulent.67 The Dodd-Frank Act expanded the Commission’s oversight responsibility for private fund advisers.68 It also added section 211(h) of the Advisers Act, which, among other things, directs the Commission to ‘‘facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with . . . investment advisers’’ and ‘‘examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.’’ 69 As applied here, a sales practice includes any conduct by an investment adviser, or on its behalf, to induce or solicit a person to invest, or continue to invest, in a private fund client advised by the adviser or its related persons. For instance, an adviser offering preferential terms to certain private fund investors to attract, or retain, their investment in the private fund is a ‘‘sales practice.’’ As the Commission has previously stated, a conflict of interest means an interest that might incline an adviser, consciously or unconsciously, to render advice that is not disinterested.70 Conflicts of interest can arise when an adviser’s own interests conflict with, or are otherwise different than, its client’s interests or when the interests of different clients conflict.71 For instance, an adviser has a conflict of interest in an adviser-led secondary transaction because the adviser and its related persons typically are involved on both sides of the transaction. As applied here, a compensation scheme includes any arrangement through which an investment adviser is compensated— directly or indirectly—for providing services to its clients (e.g., performance￾based compensation). An example of a problematic compensation scheme is when an adviser opportunistically values a private fund to increase the adviser’s compensation. Sections 206(4) and 211(h) of the Advisers Act are the principal authority for all of the five new rules to regulate the activities of investment advisers to private funds. The new rules are within the Commission’s legal authority under those sections of the Advisers Act as a means reasonably designed to prevent fraudulent or deceptive acts and practices, facilitate simple and clear disclosures to investors, and prohibit or restrict certain sales practices, conflicts of interest, and compensation schemes in the market for advisory services to private funds. The quarterly statement rule is designed to facilitate the provision of simple and clear disclosures to private fund investors regarding some of the most important and fundamental terms of their relationships with investment advisers—namely what fees and expenses those investors will pay and what performance they receive for their private fund
investments. The audit rule is designed to help prevent the fraud, deception, or manipulation that might result from material misstatements in financial statements, and it is intended to address the conflicts of interest and potential compensation schemes that may result from an adviser valuing assets and charging fees related to those assets. When advisers offer investors the choice between selling and exchanging their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons as part of an adviser-led secondary transaction, advisers have a conflict of interest with the fund and its investors, and the adviser-led secondaries rule is designed to address this concern. The restricted activities rule is designed to prohibit certain activities that involve conflicts of interest and compensation schemes that are contrary to the public interest and the protection of investors unless such activities are disclosed to, and in some cases, consented to, by investors. Finally, the preferential treatment rule addresses our concern that an adviser’s current sales practices do not provide all investors with sufficient detail regarding preferential terms granted to other investors, and we believe that disclosure (and in some cases prohibition) of preferential treatment is necessary to guard against fraudulent and deceptive practices. We have examined a range of alternatives to

72See, e.g., Consumer Federation of America Comment Letter; Better Markets Comment Letter. 73See Better Markets Comment Letter. 74See Consumer Federation of America Comment Letter. 75See, e.g., Comment Letter of Stuart Kaswell (Apr. 18, 2022) (‘‘Stuart Kaswell Comment Letter’’); Comment Letter of the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce (Apr. 25, 2022) (Chamber of Commerce Comment Letter’’); Comment Letter of the Managed Funds Association (Apr. 25, 2022) (‘‘MFA Comment Letter I’’); Comment Letter of American Investment Council (July 27, 2022) (‘‘AIC Comment Letter III’’). 76See, e.g., Comment Letter of Brian Cartwright, Jay Clayton, Joseph A. Grundfest, Paul G. Mahoney, Harvey L. Pitt, Adam Pritchard, James S. Spindler, Robert B. Stebbins, J.W. Verret, and Charles Whitehead (Apr. 25, 2022) (‘‘Cartwright et al. Comment Letter’’); MFA Comment Letter I (stating that the legislative history surrounding Section 211(h), and Section 913 of the Dodd-Frank Act demonstrates that Section 211(h) was clearly intended to address the relationship between retail clients and their advisers). 77Section 913(g)(2) of the Dodd-Frank Act added
section 211(h) to the Advisers Act.
78See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter I (stating that Section 913 focused on harmonizing and standardizing the standard of conduct with respect to retail customers and clients and therefore section 913(g) should also be narrowly interpreted to apply to this subset of the investor community). Another commenter asserted that, in amending the Advisers Act to add section 211(h), it was intended to only apply to retail customers because it was part of section 913 of the Dodd-Frank Act and, further, that this interpretation is supported by section 913 of the Dodd-Frank Act permitting promulgation of a best interest standard for retail customers under the
section 211(g) amendment to the Advisers Act to
include certain terms that this commenter asserted would be restricted by this rulemaking but permitted under section 211(g). See Comment Letter of the Committee on Private Investment Funds and the Committee on Investment Management Regulation of the New York City Bar Association (Apr. 25, 2022) (‘‘NYC Bar Comment Letter II’’) (pointing to section 211(g) stating under such a best interest standard ‘‘any material conflicts of interest shall be disclosed and may be consented to by the customer’’ and ‘‘receipt of compensation based on commission or fees shall not, in and of itself, be considered a violation of such standard’’). 79See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter I. Some commenters stated that analysis of provisions in section 913 of the Dodd￾Frank Act supports a reading that it was enacted in response to a concern that retail investors did not appreciate the distinction between broker-dealers and advisers. See, e.g., Stuart Kaswell Comment Letter; NYC Bar Comment Letter II. 80See AIC Comment Letter III. We disagree. For the reasons discussed in the Proposing Release and throughout this release, our adoption of these private fund adviser rules is a proper exercise of our rulemaking authority under the Advisers Act to prevent fraudulent, deceptive, and manipulative conduct, facilitate the provision of simple and clear disclosures to investors, and prohibit or restrict certain sales practices, conflicts of interest, and compensation schemes. This commenter also asserted that before finalizing a number of rulemaking proposals affecting private fund advisers, including the proposal underlying this final rule, we must (i) ‘‘publish a reasonable assessment of the cumulative effects’’ of these rules, (ii) reopen the comment periods for these rules ‘‘to provide the public an opportunity to assess holistically the Commission’s proposals’’, and (iii) ‘‘with the benefit of an appropriate analysis and public comment,’’ finalize these rules ‘‘holistically’’ taking into account ‘‘not just the expected effects on investors and our capital markets but also practical realities such as adoption timelines as well as information technology requirements.’’ Comment Letter of the American Investment Council (Aug. 8,
2023) (‘‘AIC Comment Letter IV’’). This commenter
asserted that failing to do so ‘‘would be a violation of the Commission’s obligations under the Administrative Procedures Act.’’ The effects of any final rule may be impacted by recently adopted rules that precede it. Accordingly, each economic analysis in each adopting release considers an updated economic baseline that incorporates any new regulatory requirements, including compliance costs, at the time of each adoption, and considers the incremental new benefits and incremental new costs over those already resulting from the preceding rules. That is, the economic analysis appropriately considers existing regulatory requirements, including recently adopted rules, as
part of its economic baseline against which the
costs and benefits of the final rule are measured. See infra sections VI.C, VI.D.1, and VI.E.2 below. 81 Dodd-Frank Act, Section 913(a). 82 Dodd-Frank Act, Section 913(g)(2). 83 Id. 84 Id. 85See Stuart Kaswell Comment Letter II. our proposal, carefully considered all comments, and made revisions to the proposed rules where we concluded it was appropriate. The final rules represent an appropriate response to the developments we discuss above regarding the market for private fund advisory services. Some commenters supported the Commission’s legal foundation for the rulemaking.72 For example, one commenter stated that all of the reforms in the proposal are fully within the Commission’s ample legal authority to regulate advisers.73 Another commenter emphasized that, importantly, the Commission’s legal authority under
section 211(h) is broad.74 Other
commenters, however, questioned the Commission’s authority to promulgate the proposed rules 75 and argued that the rules undermine congressional intent regarding the regulation of private funds.76 Some commenters argued that Congress, in drafting section 913(g) of the Dodd-Frank Act,77 did not intend to apply section 211(h) of the Advisers Act to private fund advisers and instead intended this section to only apply to retail investors.78 Commenters also stated that the legislative history surrounding section 913(g) and section 211(h) support a narrower reading that limits these provisions to retail customers and clients.79 Another commenter stated that Congress would have provided clear congressional authorization to empower the Commission to materially alter the regulatory regime for private funds if it intended to do so.80
Section 913 of the Dodd-Frank Act
contains numerous sub-parts, several of which specifically pertain to ‘‘retail customers,’’ which Congress defined as ‘‘a natural person, or the legal representative of such natural person, who (1) receives personalized investment advice about securities from a broker or dealer or investment adviser; and (2) uses such advice primarily for personal, family, or household purposes.’’ 81 Congress also mentioned private fund investors in Section 913, specifically indicating in adding section 211(g) of the Advisers Act that ‘‘the Commission shall not ascribe a meaning to the term ‘customer’ that would include an investor in a private fund[.]’’ 82 In the same provision, in adding section 211(h) of the Advisers Act entitled ‘‘Other Matters,’’ Congress spoke of ‘‘investors,’’ and in so doing gave no indication that it was referring to ‘‘retail customers,’’ a term it had defined and used in various other sub￾parts.83 The ‘‘Other Matters’’ provision likewise contains no instruction to the Commission to include or exclude private fund investors from the term ‘‘investors’’; in fact, it does not mention ‘‘private fund investors’’ at all.84 This provision makes no mention of ‘‘retail’’ customers, ‘‘retail’’ clients, or ‘‘retail’’ investors, and therefore does not by its plain meaning apply to only retail investors. While commenters seek to read a ‘‘retail’’ limitation into the statute, that view is unsupported by the plain text of the statute. Another commenter similarly argued that, because Congress added section 211(e) to the Advisers Act requiring the promulgation of rules to establish the form and content of certain reports regarding private funds required to be filed with the Commission under subsection 204(b) of the Advisers Act, it ‘‘is inconceivable that Congress intended Section 211(h) to grant the broad private fund disclosure authority it claims when Congress spoke with such precision [in adding section 211(e)] within the same section of the Advisers Act.’’ 85 Contrary to this commenter’s assertion, we find again that the juxtaposition of such provisions within the amendments Congress made to 211 of the Advisers Act show Congress knew when it wanted to limit a provision to private fund advisers, when it wanted to limit a provision to retail customers, and when it wanted to apply a provision to all investment advisers and investors. Another commenter asserted that Congress only intended to regulate the activities of private funds and their investment advisers in Title IV of the Dodd-Frank Act, and not in Title IX of the Dodd￾Frank Act, and thus section 211(h) cannot be read to apply to private fund

86See NYC Bar Comment Letter II. 87For example, there is nothing limiting the remit of the Investor Advisory Committee mandated by
section 911 of the Dodd-Frank Act from considering
investors in private funds and section 911 requires that such committee include representation of the interests of institutional investors, including pension funds, and thus many of the investors in private funds. There is also nothing to suggest the study of the examination of investment advisers under section 914 of the Dodd-Frank Act should exclude examination of private fund advisers. Finally, there is nothing under section 915 of the Dodd-Frank Act (codified as section 4(g) of the Exchange Act), which mandated the creation of an Investor Advocate at the Commission, to limit its remit to non-private fund advisers—indeed section 915 of the Dodd-Frank Act specifically refers to ‘‘retail investors’’ in some subsections and ‘‘investors’’ in others, showing Congress chose the application of its directives and grants of authority quite specifically. Compare section 4(g)(4)(A) of the Exchange Act (providing the Investor Advocate shall ‘‘assist retail investors in resolving significant problems such investors may have with the Commission or self-regulatory organizations’’) with
section 4(g)(4)(B) of the Exchange Act (providing
the Investor Advocate shall ‘‘identify areas in which investors would benefit from changes in the regulations of the Commission or the rules of self￾regulatory organizations’’). 88See, e.g., Comment Letter of the Loan Syndications and Trading Association (Apr. 25,
2022) (‘‘LSTA Comment Letter’’); Comment Letter
of Citadel (May 3, 2022) (‘‘Citadel Comment Letter’’). 89See 15 U.S.C. 80a–18 and 17 CFR 270.18c–1, 17 CFR 270.18c–2, 17 CFR 270.18f–1, 17 CFR 270.18f–2, and 17 CFR 270.18f–4 under the Investment Company Act. 90See 15 U.S.C. 80a–22 and 17 CFR 270.22e–4 under the Investment Company Act. 91See 15 U.S.C. 80a–12. 92See 15 U.S.C. 80a–13. 93See 15 U.S.C. 80a–10 (independence of directors) and 15 U.S.C. 80a–16 (election of directors). 94See Stuart Kaswell Comment Letter. 95See, e.g., 17 CFR 275.204A–1 (rule 204A–1) (requiring registered advisers to adopt codes of ethics); 17 CFR 275.205–3 (permitting investment advisers to charge performance fees to certain clients); 17 CFR 275.206(4)–1 (rule 206(4)–1) (regulating registered adviser marketing); rule 206(4)–2 (regulating the custody practices of registered advisers); 17 CFR 275.206(4)–5 (rule 206(4)–5) (prohibiting registered advisers and certain advisers exempt from registration from engaging in certain pay to play activities); rule 206(4)–8 (prohibiting advisers to pooled investment vehicles from making false or misleading statements to, or otherwise defrauding, investors or prospective investors in those pooled vehicles). 96For example, the various exemptions in section 203(b), the venture capital exemptions in section 203(l), and the private fund exemption in section 203(m). See also section 211(a) of the Act (‘‘The Commission shall have authority from time to time to make, issue, amend, and rescind such rules and regulations and such orders as are necessary or appropriate to the exercise of the functions and powers conferred upon the Commission elsewhere in this title, including rules and regulations defining technical, trade, and other terms used in this title, except that the Commission may not define the term ‘client’ for purposes of paragraphs (1) and (2) of section 206 to include an investor in a private fund managed by an investment adviser, if such private fund has entered into an advisory contract with such adviser.’’) 97See, e.g., Comment Letter of American Investment Council (June 13, 2022) (‘‘AIC Comment Letter II’’); SIFMA–AMG Comment Letter I. advisers.86 We disagree. While Title IV contains a number of provisions specific to private fund advisers, there are many other provisions of the Dodd-Frank Act applicable to private fund advisers outside of that title, and while Title IX contains provisions that affect all investment advisers, there is no indication that Congress intended to restrict its coverage to exclude private fund advisers except where it explicitly does so.87 Some commenters challenged our ability to rely on sections 211(h) and 206 of the Advisers Act on the grounds that our use of such authority directly conflicts with Congress’s intent in enacting the Investment Company Act of 1940 (‘‘Investment Company Act’’).88 Specifically, commenters stated that the rules are an attempt to regulate private funds despite the fact that Congress explicitly excluded such funds from the
definition of an ‘‘investment company’’ and therefore excluded them from regulation under the Investment Company Act. The final rules, however, regulate the activities of investment advisers to private funds, over whom the Commission has been given substantial authority, while the substantive provisions of the Investment Company Act, and rules thereunder, regulate investment companies. These final rules are not an indirect mechanism for regulating private funds because the rules focus on the adviser and do not apply to or restrict the private fund itself. For example, the rules do not dictate or limit the ability of private funds to engage in excessive leverage or borrowing,89 do not regulate fund payment of redemption proceeds or require funds to comply with specific rules to maintain liquidity sufficient to meet redemptions,90 do not regulate layering of fees or fund structures,91 or changes in investment policies,92 and do not impose a governance structure 93 the way that the Investment Company Act, and rules thereunder, impose such limitations on registered funds and their operations. One commenter stated that Congress amended the Advisers Act to address private fund adviser registration and did not authorize a disclosure system for private funds or allow the Commission to circumvent that by putting the obligation on advisers.94 We disagree. In amending the Advisers Act in connection with requiring most private fund advisers to register, Congress enacted other requirements specific to private fund advisers. For example,
section 204(b) of the Act, entitled
‘‘Records and Reports of Private Funds,’’ specifically authorizes the Commission to require registered investment advisers to maintain such records of, and file with the Commission such reports regarding, private funds advised by the investment adviser, as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the Financial Stability Oversight Council and to provide or make available to the Council those reports or records or the information contained therein. It further provides that the records and reports of any private fund to which an investment adviser registered under this title provides investment advice shall be deemed to be the records and reports of the investment adviser. Congress thus appears to have squarely contemplated, for example, that reports regarding private funds would be achieved by putting the obligation on advisers. Even further, in amending the Advisers Act to require registration of private fund advisers, Congress did not mandate or restrict the Commission from applying rules adopted under the Advisers Act to these advisers. It did not indicate that a registered private fund adviser should be more or less subject to the Commission’s rules under the Advisers Act than any other registered adviser simply because its clients are private funds.95 Where Congress intended for certain private fund advisers to be treated differently from other registered investment advisers, it has been specific.96 Some commenters stated that the rules are inconsistent with precedent treating the Advisers Act as a disclosure-based regime, that the 2019 IA Fiduciary Duty Interpretation re￾affirmed the practice of consent through disclosure, and that the Commission is abandoning this approach in favor of acting as a merit regulator.97 The Advisers Act sets forth specific requirements for advisers, including advisers to private funds, and confers specific rulemaking authority to the Commission in sections 206(4) and 211(h). Nowhere in these sections or in the Advisers Act more broadly did Congress provide that the Advisers Act is purely a disclosure-based regime or that the Commission’s rulemaking authority with respect to the Advisers Act is limited to disclosure-based rules. Furthermore, other statutory provisions of the Advisers Act are explicit when restricting the Commission’s rulemaking authority to require disclosure compared to imposing other obligations. Indeed, while section 211(h)(1) of the Act specifies that the Commission shall facilitate the provision of certain

98See, e.g., Citadel Comment Letter (discussing indemnification clauses); NYC Bar Comment Letter II. 99The audit rule increases the likelihood that fraudulent activity or problems with valuation are uncovered, thereby deterring advisers from engaging in fraudulent conduct. Similarly, the quarterly statement rule increases the likelihood that fraudulent activity or problems with fees, expenses, and performance are uncovered, thereby deterring advisers from engaging in fraudulent conduct. The adviser-led secondaries rule is designed to ensure that the private fund and investors that participate in the secondary transaction are offered a fair price, which is a critical component of preventing the type of harm that might result from the adviser’s conflict of interest in leading the transaction. The restricted activities rule and preferential treatment rule prevent advisers from engaging in certain activities that could result in fraud and investor harm, unless advisers make appropriate disclosures or obtain consent, as applicable. 100See, e.g., Comment Letter of American Investment Council (Apr. 25, 2022) (‘‘AIC Comment Letter I’’); Citadel Comment Letter. 101See, e.g., Comment Letter of Haynes and Boone, LLP (Apr. 25, 2022) (‘‘Haynes & Boone Comment Letter’’); Comment Letter of Committee on Capital Market Regulation (Oct. 17, 2022) (‘‘CCMR Comment Letter II’’); Citadel Comment Letter. 102See AIC Comment Letter I. 103See CCMR Comment Letter II. 104See, e.g., AIC Comment Letter I; Citadel Comment Letter. 105See Haynes & Boone Comment Letter. 106Applicability of the Advisers Act of 1940 to Financial Planners, Pension Consultants, and Other Persons Who Provide Others with Investment Advice as a Component of Other Financial Services, Investment Advisers Act Release No. 1092 (Oct. 8,
1987) (‘‘Release 1092’’). See also United States v.
Miller, 833 F.3d 274 (3d Cir. 2016). 107See United for Respect Comment Letter I. disclosures, the very next subsection (section 211(h)(2) of the Act) provides that the Commission shall examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes. The authority granted to the Commission under
section 206(4) of the Act, which enables
the Commission to promulgate rules to define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative, also makes no mention of disclosure. Similarly, the 2019 IA Fiduciary Duty Interpretation addressed advisers’ fiduciary duties to their fund clients but did not state or seek to imply that advisers to private funds were otherwise exempt from the specifically worded provisions in the Advisers Act. We are not seeking to amend or change the Commission’s existing rules or past interpretations of the Advisers Act with respect to private fund advisers. Rather, in this rulemaking, we are seeking to employ the rulemaking authority in sections 206(4) and 211(h) of the Act, as Congress set forth, to address the types of harms Congress specifically identified in those sections. Other commenters argued that the Commission cannot rely on section 206 because the Commission has neither proposed to define fraudulent practices nor demonstrated how the rules would prevent fraud.98 Section 206(4) gives the Commission the authority to prescribe means reasonably designed to prevent fraud, and we are employing the authority that Congress provided us in
section 206(4). As detailed below in the
discussion of the final rules in section II of the release, the rules we are adopting today are reasonably designed to prevent fraud, deception, or manipulation because, for example, requiring advisers to provide enhanced disclosure around potential and actual conflicts of interest decreases the likelihood that investors will be defrauded by certain practices, many of which involve conflicts of interest.99 In addition, preventing advisers from engaging in certain activities, in some cases unless they provide disclosure, is another means to prevent fraud, deception, or manipulation. Some commenters stated that the ‘‘sales practices,’’ ‘‘conflicts of interest’’ and ‘‘compensation schemes’’ referenced in section 211(h) should be read and understood all together in the context of an advisory relationship, not as a list of distinct items, but as sales practices that lead to conflicts of interest with associated compensation schemes, and that the word ‘‘certain’’ also underscores the limited reach of these terms’ combined meaning.100 These commenters’ reading would effectively eliminate ‘‘conflicts of interest’’ and ‘‘compensation schemes’’ from the statutory language and reduce section 211(h)(2) to refer only to certain sales practices. We see no basis for reading out of the statute words Congress specifically chose to include. First, by providing a specific list of items in
section 211(h) that the Commission
‘‘shall examine and, where appropriate, promulgate rules,’’ Congress intended for the Commission to address this particularized set of scenarios—‘‘sales practices, conflicts of interest, and compensation schemes’’—via rulemaking. Accordingly, we have sought to identify clearly which of these scenarios we are attempting to address in each rule that is based on our rulemaking authority under section 211(h). Second, we agree that ‘‘certain’’ indicates that 211(h) does not apply to all sales practices, conflicts of interest and compensation schemes, but rather only those that, after examination, the Commission deems contrary to the public interest and protection of investors. Following our examination, as described in this release, these rules aim to restrict only sales practices, conflicts of interest and compensation schemes that we believe are harmful to investors. There are other examples of sales practices, conflicts of interest and compensation schemes in the private fund industry that are not addressed in this rulemaking, some of which we do not currently view as rising to the level of concern set forth in section 211(h). Some commenters offered their own interpretations of the term ‘‘sales practices.’’ 101 A commenter interpreted the plain meaning of ‘‘sales practice’’ to be ‘‘a mode or method of making sales,’’ 102 while another commenter interpreted ‘‘sales practice’’ to be ‘‘a repeated or customary manner of promoting or selling goods.’’ 103 Some commenters suggested cold calling as an example of a ‘‘sales practice.’’ 104 Yet another commenter interpreted ‘‘sales practice’’ to apply only to ‘‘an adviser’s marketing or promotion of its funds.’’ 105 We agree that such interpretations involve a sales practice, and we have taken them into consideration in interpreting this term. Our interpretation is appropriate because it is sufficiently broad to capture sales practices as they continue to evolve in the industry but not so broad as to capture operational activities that are independent of sales functions. Likewise, our interpretation of ‘‘sales practice’’ is not so narrow that it would exclude conduct that should be within scope. For example, the term would not exclude conduct because it is not ‘‘repeated’’ or ‘‘customary.’’ Similarly, it would not exclude activity that follows a period of marketing or promotion when an adviser takes steps to effectuate an investment. Likewise, the staff has broadly interpreted the term ‘‘compensation,’’ explaining that ‘‘the receipt of any economic benefit, whether in the form of an advisory fee or some other fee relating to the total services rendered, commissions, or some other combination of the foregoing’’ would satisfy the ‘‘for compensation’’ prong of the definition of investment adviser set forth in Section 202(a)(11) of the Advisers Act.106 A commenter suggested that fees and expenses being passed on to investors, such as accelerated monitoring fees, costs related to governmental or regulatory
investigations, compliance expenses, and costs related to obtaining external financing, should be characterized as ‘‘compensation schemes.’’107 Another

108See Haynes & Boone Comment Letter. 109See Release 1092, supra footnote 106, at 10. 110CFS Securities Corp., SEC Staff Letter (Feb. 27,
1987) (expressing the staff’s view that a fee
designed to cover costs would constitute ‘special compensation’’’); Touche Holdings, Inc., SEC Staff Letter (Nov. 30, 1987) (explaining the staff’s view that ‘‘[t]he compensation element is satisfied even if payments for services only cover the cost of the services’’). 111See Release 1092, supra footnote 106, at 10. 112One commenter supported a broad interpretation of ‘‘compensation scheme’’ and suggested that this authority has the potential to address significant failures in our markets. See Consumer Federation of American Comment Letter. However, another commenter maintained that the statutory context indicates that ‘‘compensation schemes’’ should be interpreted to refer to structural incentives that may encourage a broker￾dealer or investment adviser to push an investor into an unsuitable transaction. See AIC Comment Letter I. As discussed above, this suggested interpretation would effectively eliminate ‘‘conflicts of interest’’ and ‘‘compensation schemes’’ from the statutory language and reduce section 211(h)(2) to refer only to certain sales practices. We see no basis for reading out of the statute words Congress specifically chose to include. Another commenter stated that ‘‘compensation scheme’’ has yet to be applied or interpreted to prohibit indemnification provisions or the passing through of certain fee and expense types. See Comment Letter of Committee on Capital Market Regulation (Apr. 25, 2022) (‘‘CCMR Comment Letter I’’). 113See, e.g., MFA Comment Letter I; AIC Comment Letter I; Goldstein v. SEC, 451 F.3d 873 (DC Cir. 2006) (‘‘Goldstein v. SEC’’). 114See AIC Comment Letter I; Goldstein v. SEC, supra footnote 113 (clarifying that the ‘‘client’’ of an investment adviser managing a pool is the pool itself, not an investor in the pool). 115Further, the Dodd-Frank Act eliminated the ‘‘private adviser’’ exemption under section 203(b)(3) of the Advisers Act, which the court interpreted in Goldstein v. SEC. Thus, we do not believe the court’s ruling in Goldstein v. SEC is necessarily relevant because we are not relying on repealed section 203(b)(3). 116See rule 206(4)–8 under the Advisers Act. 117See supra section I.A. 118See, e.g., Stuart Kaswell Comment Letter; AIC Comment Letter II. 119See, e.g., SIFMA–AMG Comment Letter I; Comment Letter of Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association (Apr. 28, 2022); MFA Comment Letter I. 120The final quarterly statement, audit, adviser￾led secondaries, restricted activities, and preferential treatment rules do not apply to investment advisers with respect to securitized asset funds they advise. See discussion below in this section II.A. All references to private funds shall not include securitized asset funds. commenter suggested that we distinguish between ‘‘compensation’’ and ‘‘reimbursement’’ for purposes of defining a ‘‘compensation scheme.’’ 108 Previously, our staff has explained that the receipt of any economic benefit to a person
providing a variety of services to a client, including investment advisory services, qualifies as ‘‘compensation.’’ 109 It has consistently recognized that reimbursements covering only the cost of services are ‘‘compensation.’’ 110 And staff has viewed ‘‘compensation’’ as including indirect payments for investment advisory services.111 We similarly broadly interpret the term ‘‘compensation scheme’’ for purposes of this rulemaking to include any manner in which an investment adviser is compensated and receives economic benefit—directly or indirectly—for providing services to its clients.112 Commenters also argued that the Commission’s approach runs contrary to the D.C. Circuit Court’s decision in Goldstein v. SEC.113 One commenter stated that the proposal, by offering protections directly to private fund investors, relies on the same ‘‘look￾through’’ approach that the D.C. Circuit rejected in Goldstein v. SEC.114 The exercise of our statutory authority under sections 211(h) and 206(4) is not inconsistent with the court’s ruling in Goldstein v. SEC because section 206(4) is not limited in its application to ‘‘clients’’ and section 211(h) was designed to provide protection to ‘‘investors.’’ Notably, neither section 206(4) nor 211(h) references ‘‘client,’’ and section 211(h) references ‘‘investors’’ which does not exclude any particular type of investor, such as private fund investors. A plain interpretation of the statute supports a reading that Congress intended to allow the Commission to promulgate rules to protect investors directly (including private fund investors) and therefore does not contradict the court’s ruling in Goldstein v. SEC.115 Moreover, private fund advisers are already subject to rule 206(4)–8 under the Advisers Act, which prohibits investment advisers to pooled investment vehicles, which include private funds, from engaging in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.116 We recognize that the private fund is the adviser’s client, but this rulemaking addresses with particularity the risk of fraud, deception, or manipulation upon investors in private funds. As a means of preventing fraudulent, deceptive, or manipulative acts upon the fund, we are also addressing the relationship with the fund investors, with whom the adviser typically negotiates the terms of its relationship with the fund. Moreover, as fund clients often lack an effective governance process that is independent of the adviser to receive or provide consent,117 these rules protect both the fund and its investors by empowering investors to receive disclosure and provide such informed consent. Relatedly, some commenters stated that our interpretation of our authority under section 211(h) is inconsistent with the fact that, at the same time it added section 211(h), Congress amended 211(a) to clarify that advisers do not owe a duty to
private fund investors.118 On the contrary, the fact that Congress made these amendments to 211(a) at the same time it added
section 211(h) supports our
interpretation. In amending section 211(a), Congress made an explicit differentiation between a fund client of an adviser and investors in such fund client for purposes of establishing potential liability under sections 206(1) and 206(2) of the Advisers Act in the Advisers Act. However, Congress did not frame 211(h) in such terms. Rather, Congress did not use the term ‘‘client’’ in 211(h) at all but used the term ‘‘investors’’ specifically in 211(h). Congress addressed adviser-client relationships when it wished, but used a different framing and different terms in 211(h). Some commenters stated that section 205 provides the only authority under the Advisers Act to regulate contracts and that section 205(b) carves out contracts with funds exempt from the Investment Company Act under section 3(c)(7) of that Act.119 While section 205(a) provides authority under the Advisers Act to regulate investment advisory contracts, it does not state that such contracts or private funds are otherwise not subject to the other provisions of the Advisers Act, including disclosure requirements, antifraud provisions, or other investor protection provisions. The plain interpretation of section 205 is that Congress intended to exempt certain private funds from the prohibition on the specified advisory contract terms set forth in section 205(a) but did not otherwise attempt to imply that private finds are broadly exempted from the requirements of the Advisers Act.
II. Discussion of Rules for Private Fund
Advisers
A. Scope of Advisers Subject to the Final Private Fund Adviser Rules The scope of advisers subject to the final private fund adviser rules is unchanged from the proposal, except as discussed below with respect to advisers to securitized asset fund.120 The quarterly statement, audit, and adviser-led secondaries rule apply to all SEC-registered advisers, and the restricted activities and preferential treatment rules apply to all advisers to private funds, regardless of whether

121Compare the affirmative obligations in rule 204A–1 (requiring SEC-registered investment advisers to, among other things, establish, maintain and enforce a written code of ethics) and rule 206(4)–2 (requiring SEC-registered investment advisers to follow certain practices if they have custody of client funds or securities) with the prohibition in rule 206(4)–8 (prohibiting both registered and unregistered investment advisers to pooled investment vehicles from making false or misleading statements to, or otherwise defrauding, investors or prospective investors in those pooled vehicles). 122See, e.g., AIMA/ACC Comment Letter (adviser￾led secondaries rule); Comment Letter of Standards Board for Alternative Investments (Apr. 25, 2022) (‘‘SBAI Comment Letter’’) (adviser-led secondaries rule, quarterly statement rule); Comment Letter of Andrew (Apr. 25, 2022) (quarterly statement rule). 123An exempt reporting adviser is an investment adviser that qualifies for the exemption from registration under section 203(l) of the Advisers Act or 17 CFR 275.203(m)–1 (rule 203(m)–1) under the Advisers Act. 124Comment Letter of the North American Securities Administrators Association, Inc. (Apr. 25, 2022) (‘‘NASAA Comment Letter’’). 125See, e.g., AIC Comment Letter II; Comment Letter of the British Private Equity and Venture Capital Association (Apr. 25, 2022) (‘‘BVCA Comment Letter’’); PIFF Comment Letter. 126See, e.g., Exemptions Adopting Release, supra footnote 9, at 77 (Most of the substantive provisions of the Advisers Act do not apply with respect to the non-U.S. clients of a non-U.S. adviser registered with the Commission.); Registration Under the Advisers Act of Certain Hedge Fund Advisers, Investment Advisers Act Release No. 2333 (Dec. 2,
2004) [69 FR 72054, 72072 (Dec. 10, 2004)] (‘‘Hedge
Fund Adviser Release’’) (stating that the following rules under the Advisers Act would not apply to a registered offshore adviser, assuming it has no U.S. clients: compliance rule, custody rule, and proxy voting rule and stating that the Commission would not subject an offshore adviser to the rules governing adviser advertising [17 CFR 275.206(4)– 1], or cash solicitations [17 CFR 275.206(4)–3] with respect to offshore clients). We note that our staff has taken a similar position. See, e.g., American Bar Association, SEC Staff No-Action Letter (Aug. 10,
2006) (confirming that the substantive provisions of
the Act do not apply to offshore advisers with respect to those advisers’ offshore clients (including offshore funds) to the extent described in those letters and the Hedge Fund Adviser Release); Information Update For Advisers Relying On The Unibanco No-Action Letters, IM Information Update No. 2017–03 (Mar. 2017). Any staff statements cited represent the views of the staff. They are not a rule, regulation, or statement of the Commission. Furthermore, the Commission has neither approved nor disapproved their content. These staff statements, like all staff statements, have no legal force or effect: they do not alter or amend applicable law; and they create no new or additional obligations for any person. 127See, e.g., Investment Adviser Marketing, Investment Advisers Act Release No. 5653 (Dec. 22, 2021), at n.200 (‘‘Marketing Release’’). 128See Proposing Release, supra footnote 3, at
section II.D. 129See Proposing Release, supra footnote 3, at
section II.D. 130See, e.g., BVCA Comment Letter; Comment
Letter of Invest Europe (Apr. 25, 2022) (‘‘Invest Europe Comment Letter’’); AIC Comment Letter II; PIFF Comment Letter; AIMA/ACC Comment Letter. 131See, e.g., Healthy Markets Comment Letter I; Consumer Federation of America Comment Letter. 132AIMA/ACC Comment Letter. See also SIFMA– AMG Comment Letter I. they are registered with the Commission. Our scoping decisions generally align with the Commission’s historical approach and are based on the fact that the quarterly statement, audit, and adviser-led secondaries rules impose affirmative obligations on advisers, while the restricted activities and preferential treatment rules prohibit activity or require disclosure and, in some cases, consent.121 Commenters generally supported the proposed application of the quarterly statement rule, audit rule, and adviser￾led secondaries rule to SEC-registered advisers.122 One commenter asserted that the proposed quarterly statement rule and audit rule should also apply to exempt reporting advisers (‘‘ERAs’’),123 arguing that investors in private funds advised by ERAs would similarly benefit from information about the funds’ fees, expenses, and performance and from fund audits.124 Other commenters asked for clarification that the proposed quarterly statement rule, audit rule, and adviser-led secondaries rule would not apply to an adviser whose principal office and place of business is outside of the United States (offshore adviser) with regard to any of its non-U.S. private fund clients even if the non-U.S. private fund clients have U.S. investors.125 We are applying these three rules to SEC-registered advisers, as proposed. No commenter requested we extend application of the adviser-led secondaries rule to ERAs or other unregistered advisers. Regarding the quarterly statement rule, we believe extending the rule to ERAs, such as venture capital fund advisers, would raise matters that we believe would benefit from further consideration—for example, whether different fee, expense, and performance information might be informative in the context of start-up investments. Similarly, while one commenter asserted that many ERAs are already obtaining audits and thus application of the audit rule would benefit investors in ERA-advised funds, we received no other comments on this topic and believe we would benefit from further comment on the benefits and costs of such a requirement, particularly from smaller ERAs. We have previously stated, and continue to take the position, that we do not apply most of the substantive provisions of the Advisers Act with respect to the non-U.S. clients (including private funds) of an SEC￾registered offshore adviser.126 This approach was designed to provide appropriate flexibility where an adviser has its principal office and place of business outside of the United States.127 It is appropriate to continue to apply this historical approach to these three new rules. The quarterly statement rule, audit rule, and adviser-led secondaries rule
are substantive rules under the Advisers Act that we will not apply with respect to the non-U.S. private fund clients of an SEC-registered offshore adviser (regardless of whether they have U.S. investors). The restricted activities rule prohibits all private fund advisers, regardless of registration status, from engaging in certain sales practices, conflicts of interest, and compensation schemes, unless the adviser satisfies certain disclosure, and, in some cases, consent obligations. Likewise, the preferential treatment rule prohibits all private fund advisers, regardless of registration status, from providing preferential treatment to any investor in a private fund (and in some cases to any investor in a similar pool of assets), unless the adviser satisfies certain disclosure obligations. We proposed to continue to apply the Commission’s historical position on the substantive provisions of the Advisers Act to the prohibited activities rule such that the rule would not apply with respect to a registered offshore adviser’s non-U.S. private funds, regardless of whether those funds have U.S. investors.128 We requested comment on whether this approach should apply to the proposed prohibited activities rule and the other proposed rules.129 Several commenters supported applying the Commission’s historical approach to all of the proposed rules.130 Other commenters stated that the Commission’s historical approach should not apply to the proposed prohibited activities rule because it is the domicile of the investor and not the domicile of the private fund that is most important for protecting U.S. investors.131 The Commission’s historical approach applies such that none of the final rules or amendments apply with respect to the offshore fund clients of an SEC-registered offshore adviser. One commenter stated that the proposed prohibited activities rule and the preferential treatment rule should not apply to an unregistered offshore adviser to offshore private funds because the proposal would result in SEC-registered offshore advisers being subject to less regulation than offshore ERAs and other offshore unregistered advisers.132 This commenter stated that the result would be that offshore SEC￾registered advisers to offshore funds

133AIMA/ACC Comment Letter.
134See, e.g., BVCA Comment Letter; Invest Europe Comment Letter. 135See Exemptions Adopting Release, supra footnote 9, at 77 (stating that disregarding an offshore adviser’s activities for purposes of the private fund adviser exemption reflects our long￾held view that non-U.S. activities of non-U.S. advisers are less likely to implicate U.S. regulatory interests and that this territorial approach is in keeping with general principles of international comity); see also id. at 96 (stating that non-U.S. advisers relying on the private fund adviser exemption are subject to the Advisers Act antifraud provisions). 136Section 402 of the Dodd-Frank Act; section 202(a)(30) of the Advisers Act. 137BVCA Comment Letter. 138BVCA Comment Letter, See Hedge Fund Adviser Release, supra footnote 126, at section II.D.4.c. 139See section 211(h)(2) of the Advisers Act.
Section 211(h)(2) of the Advisers Act applies to
SEC- and State-registered advisers as well as other advisers that are exempt from registration and advisers that are prohibited from registering under the Advisers Act. 140See 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at n.3 (stating that section 206 of the Advisers Act applies to SEC- and State￾registered advisers as well as other advisers that are exempt from registration and advisers that are prohibited from registering under the Advisers Act). 141See, e.g., Comment Letter of the Investment Adviser Association (Apr. 25, 2022) (‘‘IAA Comment Letter II’’) (arguing that the prohibited activities rule should not apply to State-registered advisers or ERAs, regardless of whether they are onshore or offshore); Comment Letter of Schulte Roth & Zabel LLP (Apr. 25, 2022) (‘‘Schulte Comment Letter’’) (arguing that the prohibited activities rule and preferential treatment rule should not apply to unregistered advisers); AIMA/ ACC Comment Letter (arguing that all of the rules should not apply to ERAs and advisers relying on the foreign private adviser exemption); SBAI Comment Letter (arguing that the prohibited activities rule should only apply to SEC RIAs). 142 IAA Comment Letter II. 143Moreover, this approach is consistent with the historical scope of section 206 of the Advisers Act, which was enacted before, and was unchanged by, the enactment of NSMIA. 144Rule 206(4)–8 under the Advisers Act, for example, was adopted under section 206(4) and applies to all unregistered advisers, including State￾registered advisers. See Prohibition of Fraud Adopting Release, supra footnote 67), at 7, n.16 (‘‘[o]ur adoption of [rule 206(4)–8] will not alter our jurisdictional authority’’). See also Comment Letter of NASAA on Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles; Accredited Investors in Certain Private Investment Vehicles (Dec. 27, 2006) (‘‘NASAA supports the application of the proposed rule to advisers registered or required to register at the state level.’’). 145See, e.g., NASAA Comment Letter (stating that ‘‘the Proposal appropriately prohibits these activities for all PFAs [private fund advisers], not only those registered or required to be registered with the SEC’’); Healthy Markets Comment Letter I; Consumer Federation of America Comment Letter (both stating that the prohibited activities rule should also apply with respect to an offshore private fund managed by an offshore SEC-registered investment adviser where such fund has U.S. investors). 146See, e.g., In the Matter of SparkLabs Global Ventures Management, LLC, Investment Advisers Act Release No. 6121 (Sept. 12, 2022) (settled action) (alleging unregistered advisers that managed private funds breached their fiduciary duty by causing private fund clients to lend to each other in violation of the funds’ governing documents and failing to disclose conflicts of interest to the funds); In the Matter of Augustine Capital Management, LLC, Investment Advisers Act Release
No. 4800 (Oct. 26, 2017) (settled action) (alleging unregistered private fund adviser caused the fund client to engage in conflicted transactions, including investments and loans, without disclosure to or consent by investors); In the Matter of Alumni Ventures Group, LLC, Investment Advisers Act Release No. 5975 (Mar. 4, 2022) (settled action) (alleging exempt reporting adviser that managed private funds breached its fiduciary duty by causing private fund clients to lend to each other in violation of the funds’ governing documents and failing to disclose conflicts of interest to the fund investors). 147This approach is consistent with another rule adopted under section 206 of the Advisers Act, rule 206(4)–5, which applies to SEC-registered advisers, advisers relying on the foreign private adviser exemption, and ERAs. Rule 206(4)–5 was intended to combat pay-to-play arrangements in which advisers are chosen based on their campaign contributions to political officials rather than on merit. Rule 206(4)–5 applies to an investment adviser registered (or required to be registered) with the Commission or unregistered in reliance on the exemption available under section 203(b)(3) of the Advisers Act, or that is an exempt reporting adviser, as defined in rule 17 CFR 275.204–4(a) under the Advisers Act. would benefit by avoiding the proposed prohibited activities rule and preferential treatment rule, while unregistered offshore advisers to offshore funds would be subject to these two rules.133 Other commenters requested clarification that the two rules would not apply to offshore advisers, regardless of their registration status.134 We agree with commenters and clarify that the restricted activities rule and the preferential treatment rule do not apply to offshore unregistered advisers with respect to their offshore funds (regardless of whether the funds have U.S. investors). This scoping is consistent with our historical treatment of other types of offshore advisers, including ERAs,135 advisers relying on the foreign private adviser exemption,136 and other unregistered advisers. One commenter stated that the Commission has historically limited the application of prescriptive rules to offshore advisers.137 This approach is also consistent with our historical position of not applying substantive provisions of the Advisers Act to SEC￾registered offshore advisers with respect to their offshore clients, including private fund clients.138 It is appropriate to apply these two rules to all investment advisers, regardless of registration status, because these rules focus on prohibiting advisers from engaging in certain problematic sales practices, conflicts of interest, or compensation schemes.139 Also, these rules are adopted pursuant to the authority under section 206 of the Advisers Act, which applies to all investment advisers, regardless of registration status.140 Several commenters addressed the proposed scope of the prohibited activities rule and the
preferential treatment rule, and many commenters supported a narrower scope.141 For example, one commenter stated that the application of the proposed prohibited activities rule to State-registered advisers would upend the balance of State and Federal authority that the National Securities Markets Improvement Act (‘‘NSMIA’’) established.142 We do not believe that the application of the restricted activities rule and the preferential treatment rule to State-registered advisers and advisers that are otherwise subject to State regulation (e.g., advisers that are exempt from State registration) runs contrary to the lines NSMIA established because we are adopting these two rules under sections 206 and 211 of the Advisers Act, which sections apply to all advisers.143 Commission rules adopted using this authority, accordingly, may apply to all advisers, regardless of their registration status.144 In contrast, other commenters either supported the scope of the rules as proposed or supported an even broader scope.145 We are not narrowing the scope of the restricted activities and preferential treatment rules to exclude ERAs, State￾regulated advisers, advisers relying on the foreign private adviser exemption, or advisers that are otherwise unregistered. The sales practices, conflicts of interest, and compensation schemes addressed by the restricted activities rule and the preferential treatment rule can lead to advisers placing their interests ahead of their clients’ (and, by extension, their investors’) interests, and can result in significant harm to the private fund and its investors. As a result, all of these advisers are subject to the restricted activities rule and the preferential treatment rule. A number of our enforcement cases against advisers to private funds based on conflicts of interests have been brought against advisers that are not registered under the Advisers Act,146 and we believe this demonstrates a need to apply these rules to unregistered private fund advisers.147 Investment Advisers to Securitized Asset Funds The final quarterly statement, restricted activities, adviser-led secondaries, preferential treatment, and audit rules do not apply to investment advisers with respect to securitized asset funds (we refer to these advisers,

148 If an investment adviser that is a SAF adviser also advises other private funds that are not securitized asset funds, the investment adviser will be subject to the final rules with respect to such other private funds. 149See Comment Letter of Ropes & Gray LLP (Apr. 25, 2022) (‘‘Ropes & Gray Comment Letter’’); LSTA Comment Letter; SIFMA–AMG Comment Letter I; Comment Letter of Teachers Insurance and Annuity Association of America (Apr. 25, 2022) (‘‘TIAA Comment Letter’’); Comment Letter of Fixed Income Investor Network (Apr. 29, 2022) (‘‘Fixed Income Investor Network Comment Letter’’); PIFF Comment Letter; Comment Letter of Structured Finance Association (Apr. 25, 2022) (‘‘SFA Comment Letter I’’). Although commenters generally focused on the application of the proposed rules to CLOs, certain commenters clarified that their comments applied also more broadly to securitization vehicles and vehicles that issue asset-backed securities. See LSTA Comment Letter; SFA Comment Letter I; SIFMA–AMG Comment Letter I; PIFF Comment Letter. 150See LSTA Comment Letter. 151See Ropes & Gray Comment Letter. 152See id. 153Except as specified, we are not altering the applicability of the Advisers Act, or any rules adopted thereunder, to SAF advisers. For example,
Section 206 and rule 206(4)-8 will continue to
apply to SAF advisers with respect to SAFs (and any other private funds) they advise. We are also not limiting the scope of advisers subject to the Advisers Act compliance rule and thus all SEC￾registered advisers, including SEC-registered SAF advisers, must document the annual review of their compliance policies and procedures in writing. 154We will, however, continue to consider whether any additional regulatory action may be necessary with respect to SAF advisers in the future. 155See final rule 211(h)(1)–1. 156We recognize that certain private funds have, in recent years, made modifications to their terms and structure to facilitate insurance company investors’ compliance with regulatory capital requirements to which they may be subject. These funds, which are typically structured as rated note funds, often issue both equity and debt interests to the insurance company investors, rather than only equity interests. Whether such rated note funds meet the SAF definition depends on the facts and circumstances. However, based on staff experience, the modifications to the fund’s terms generally leave ‘‘debt’’ interests substantially equivalent in substance to equity interests, and advisers typically treat the debt investors substantially the same as the equity investors (e.g., holders of the ‘‘debt’’ interests have the same or substantially the same rights as the holders of the equity interests). We would not view investors that have equity-investor rights (e.g., no right to repayment following an event of default) as holding ‘‘debt’’ under the definition, even if fund documents refer to such persons as ‘‘debt investors’’ or they otherwise hold ‘‘notes.’’ Further, we do not believe that many rated note funds will meet the other prong of the definition (i.e., a private fund whose primary purpose is to issue asset backed securities), because they generally do not issue asset-backed securities. solely with respect to the securitized asset funds they advise, as ‘‘SAF advisers’’). These advisers will not be required to comply with the requirements of the final rules solely with respect to the securitized asset funds (‘‘SAFs’’) that they advise.148 Some commenters requested for all or some of the proposed rules not to apply to advisers to securitization vehicles or vehicles that issue asset-backed securities (in particular, collateralized loan obligations (‘‘CLOs’’)).149 One commenter stated that the Commission did not identify specific concerns with SAFs, the rules were generally not applicable to SAFs, and that the rules did not address or contemplate the critical differences between these types of vehicles and other private funds.150 Another commenter stated that, although SAFs are private funds, their structure and purpose are sufficiently distinct from other types of funds that their advisers should be exempt from the rules.151 This commenter stated that SAFs are unlike private funds in several ways, including because: (i) SAFs do not issue equity
but rather issue notes at various seniorities that entitle holders to interest payments and ultimate repayment of principal; (ii) SAFs do not have general partners affiliated with their advisers but rather have unaffiliated trustees as fiduciary agents of the SAF investors; and (iii) their notes are held in street name and traded such that an adviser does not necessarily know who the noteholders are.152 After considering comments, we are not applying the five private fund adviser rules to SAF advisers.153 This approach avoids subjecting SAF advisers to obligations that were designed to address conduct we have observed in other parts of the private fund advisers industry, including with respect to advisers to hedge funds, private equity funds, venture capital funds, real estate funds, credit funds, hybrid funds, and other non-securitized asset funds (‘‘non-SAF advisers’’). We believe that the certain distinguishing structural and operational features of SAFs have together deterred SAF advisers from engaging in the type of conduct that the final rules seek to address. We also believe that the advisory relationship for SAF advisers and their clients presents different regulatory issues than the advisory relationship for non-SAF advisers and their clients. The final rules generally are not designed to take into account these differences, which together sufficiently distinguish SAFs from other types of private funds to warrant this approach.154 As a result, we do not believe that the private fund adviser rules we are adopting here are the appropriate tool to regulate SAF advisers. Definition of Securitized Asset Fund The final rule will define SAF as ‘‘any private fund whose primary purpose is to issue asset backed securities and whose investors are primarily debt holders.’’ 155 This definition, which is based on the corresponding definition for ‘‘securitized asset fund’’ in Form PF and Form ADV, is designed to capture vehicles established for the purpose of issuing asset backed securities, such as collateralized loan obligations. SAFs are special purpose vehicles or other entities that ‘‘securitize’’ assets by pooling and converting them into securities that are offered and sold in the capital markets. The definition therefore will not capture traditional hedge funds, private equity funds, venture capital funds, real estate funds, and credit funds.156 These private funds should not meet the definition because they typically have primarily equity investors, rather than debt investors, and/or they do not have a primary purpose of issuing asset backed securities. It is appropriate to apply the final rules to advisers with respect to these private funds because they present the concerns the final rules seek to address (i.e., lack of transparency, conflicts of interest, and lack of governance). In the context of requesting that the rule not apply with respect to collateralized loan obligations, one commenter stated that the final rule should use the
following definition: any special purpose vehicle advised by an investment adviser that (A) (i) issues tradeable asset-backed securities or loans, the debt tranches of which are rated; and (ii) has at least 80% of its assets comprised of leveraged loans and cash equivalents; (B) is required by its governing transaction documents to appoint an unaffiliated person to, among other things, (i) calculate certain overcollateralization and interest coverage tests; (ii) prepare and make available to investors reports on the CLO, and (iii) make the indenture readily available to investors; and (C) appoints an independent accounting firm to perform a series of agreed upon procedures. Another commenter, when requesting exemptions or other relief from the rules, generally referred to these vehicles as ‘‘special purpose vehicles that issue asset backed securities,’’ while another commenter used the term ‘‘collateralized loan obligations and similar credit securitization products.’’ The definition in the final rule will include the types of funds described by these commenters. The definition of SAFs in the final rule, however, is one that many advisers are familiar with because it is used in both Form PF and Form ADV. For example, Item 7.B. and
Schedule D of Form ADV ask whether
the private fund is a securitized asset

157See Form ADV, Section 7.B.(1) and Schedule D Private Fund Reporting, Question 10. 158See Form PF, Section 1a, Question 3. 159We would also not view, depending on the facts and circumstances, private credit funds that borrow from third party lenders to enhance performance with fund-level leverage and invest in underlying loans alongside the equity investors as meeting this definition, even if they borrow an amount greater than the value of the equity interests they issue. 160See LSTA Comment Letter; SFA Comment Letter I; Fixed Income Investor Network Comment Letter; TIAA Comment Letter. This view by commenters is consistent with the low rate of audits of U.S. GAAP financial statements for SAFs. However, approximately 10% of SAFs do get audits of U.S. GAAP financial statements from independent auditors that are Public Company Accounting Oversight Board (‘‘PCAOB’’)-registered and -inspected. See infra section VI.C.1. Advisers to these funds would not be prohibited under the final rules from continuing to cause the fund to undergo such an audit of U.S. GAAP financial statements. 161See LSTA Comment Letter. 162See Asset-Backed Securities, Securities Act Release No. 8518 (Dec. 22, 2004) (adopting disclosure requirements for asset-backed securities issuers) (https://www.sec.gov/rules/final/33- 8518.htm). 163See id. 164See id. 165See LSTA Comment Letter; SFA Comment Letter I; SIFMA–AMG Comment Letter I; TIAA Comment Letter. fund or another type of private fund, such as a hedge fund or private equity fund.157 Also, under Form PF, certain advisers to securitized asset funds are required to complete Section 1, which requires an adviser to report certain identifying information about itself and the private funds it advises.158 We also chose this definition because it captures the core characteristics that differentiate these vehicles from other types of private funds: vehicles that issue asset￾backed securities collateralized by an underlying pool of assets and that have primarily debt investors. Thus, as discussed above, traditional private funds, would not meet this definition.159 Distinguishing SAF Characteristics and Features Although SAFs generally rely on the same exclusions from treatment as an ‘‘investment company’’ under the Investment Company Act as other types of private funds (i.e., sections 3(c)(1) and (7) thereunder), we agree with commenters that certain fundamental structural and operational differences together sufficiently distinguish them from other types of private funds to warrant carving them out of the final rules. These fundamental differences, when considered in combination with the existing governance and transparency requirements of SAFs, would cause much of the rules to be generally inapplicable and/or ineffective with respect to achieving the rulemaking’s goals. Below we provide examples of these distinguishing features and how they relate to certain aspects of the final rules. We agree with commenters that SAFs have
structural features that distinguish them from most other private funds that are relevant in assessing the benefit of an audit to investors. Commenters stated that Generally Accepted Accounting Principles (‘‘GAAP’’) financial statements are not typically considered relevant for SAFs.160 One commenter stated that GAAP’s efforts to assign, through accruals, a period to a given expense or income are not useful, and potentially confusing, for SAF investors because principal, interest, and expenses of administration of assets can only be paid from cash received.161 We recognize that vehicles that issue asset-backed securities are specifically excluded from other Commission rules that require issuers to provide audited GAAP financial statements.162 Previously, we have stated that GAAP financial information generally does not provide useful information to investors in asset-backed securities.163 Instead, SAF and other asset-backed securities investors have historically been interested in information regarding characteristics and quality of the underlying assets used to pay the notes issued by the issuer, the standards for the servicing of the underlying assets, the timing and receipt of cash flows from those assets, and the structure for distribution of those cash flows.164 We continue to believe that GAAP financial statements may be less useful to SAF investors than they are for non-SAF investors. SAFs also have features that distinguish them from most other private funds that are relevant in assessing the benefit of the preferential treatment rule. Based on staff experience, SAFs typically issue primarily tradeable, interest-bearing debt securities backed by income￾producing assets, unlike other private funds that typically issue equity securities to investors. These debt securities are typically structured as notes and issued in different tranches to investors. The tranches offer different priority of payments subject to a ‘‘waterfall’’ and defined levels of risk with upside participation caps or limits, which are compensated through the payment of increasing coupon rates on the more subordinated notes. Unlike investors in other private funds, the noteholders are similarly situated with all of the other noteholders in the same tranche and they cannot redeem or ‘‘cash in’’ their note ahead of other noteholders in the same tranche. As a result, in our experience, this structure has generally deterred investors from requesting, and SAF advisers from granting, preferential treatment. Thus, we do not believe that preferential treatment for SAFs presents the same conflicts of interest and investor protection concerns as it does for non￾SAF funds. We also believe that the quarterly statement would generally not provide meaningful information for SAF investors. For example, some commenters highlighted that the performance information required to be included in private fund quarterly statements would generally not constitute relevant or useful information for
SAF investors, because the performance of a SAF, as a cash flow investment vehicle, primarily depends on the cash proceeds it realizes from its portfolio assets, as opposed to an increase in the value of its portfolio assets.165 These commenters stated that, instead of the performance metrics required for liquid or illiquid funds under the rules, a yield performance metric and/or information regarding the SAF’s cash distributions to investors (as well as its ability to make future cash distributions) would more appropriately reflect the specific cash flow structure of a SAF investment; and these commenters pointed out that SAF investors already receive this information, which is generally required to be periodically reported to investors in detail in accordance with a SAF’s securitization transaction agreement. We agree with commenters that the required performance metrics would be less useful to SAF investors than they are for non-SAF investors, particularly in light of the detailed information that SAF investors are generally already required to receive. For example, because the performance reporting would report performance at the SAF level, but investors sit in different tranches along the SAF’s distribution waterfall with different risk/return profiles, the required performance reporting would likely be uninformative with respect to any specific tranche. As another example, the ‘‘distribution’’ requirements under the final rules would likely be impracticable for most SAF advisers. Unlike other private funds that are primarily purchased, with respect to U.S. persons, through a primary issuance pursuant to Regulation D, which generally restricts a security’s transferability and does not contemplate an investor’s resale of the security to a third party, SAF interests

166See, e.g., AIC Comment Letter I; Comment Letter of the National Venture Capital Association (Apr. 25, 2022) (‘‘NVCA Comment Letter I’’); Citadel Comment Letter. 167See, e.g., AIC Comment Letter I; Citadel Comment Letter. 168 Including, for many types of private funds, the private fund operating agreement to which the adviser or its affiliate and the private fund investors are typically both parties. 169Such fund terms include, for example, the formulas that determine the amount of carried interest and management fees paid to the adviser in addition to other key terms such as the length of the life of the fund and the mechanics of fund governance. 170See, e.g., In re Global Infrastructure Management, LLC, supra footnote 30 (alleging private fund adviser failed to properly offset management fees to private equity funds it managed and made false and misleading statements to investors and potential investors in those funds concerning management fee offsets); In the Matter of ECP Manager LP, Investment Advisers Act Release No. 5373 (Sept. 27, 2019) (settled action) (alleging that private equity fund adviser failed to apply the management fee calculation method specified in the limited partnership agreement by failing to account for write downs of portfolio securities causing the fund and investors to overpay management fees). 171This includes the private fund operating agreement to which the adviser or its affiliate and private fund investors are typically both parties. 172Put simply, performance is key to the terms of the relationship between private fund investors and advisers because private fund investors pay advisers to seek to generate investment returns, and performance information allows investors to assess how an adviser is fulfilling that obligation. 173See infra footnotes 177–178 (providing examples of misconduct relating to fees, expenses, and performance). are primarily purchased in the United States through a primary issuance and subsequently resold and traded on the secondary market by qualified institutional buyers pursuant to Regulation 144A. Because SAF interests are, unlike interests in other types of private funds, primarily traded on the secondary market, the interests are generally held in street name by broker￾dealers on behalf of the fund’s investors, who are, accordingly, not generally known by the fund or its investment adviser. To address delivery obligations under the fund documents, a SAF’s independent collateral administrator typically establishes a website that is accessible by noteholders where their required reports are furnished, in accordance with the terms of the securitization transaction agreement. As a result, a SAF adviser may not have the necessary contact information for each noteholder of the SAF to satisfy the distribution requirements. Finally, SAF advisers often have a more limited role in the management of a private fund, and SAFs or their sponsors typically engage more independent service providers
than non-SAF funds. The primary role of an adviser to a SAF is, in many cases, to select and monitor the fund’s pool of assets in compliance with certain portfolio requirements and quality tests (such as overcollateralization, diversification, and interest coverage tests) that are set forth in the fund’s securitization transaction agreements. In many cases, the SAF’s transaction agreement appoints an independent trustee to serve as custodian for the underlying investments. The trustee and collateral administrator are typically responsible for preparing detailed monthly and quarterly reports for the investors regarding the SAF’s assets and expenses. We believe that these structural protections provide an important check on the adviser’s activity or otherwise limit the actions the adviser can take to harm investors. For the reasons described above, we believe it is appropriate not to apply all five private fund adviser rules to advisers with respect to SAFs they advise. B. Quarterly Statements
Section 211(h)(1) of the Act states that
the Commission shall facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with brokers, dealers, and investment advisers, including any material conflicts of interest. The quarterly statement rule is designed to facilitate the provision of simple and clear disclosures to investors regarding some of the most important and fundamental terms of their relationships with investment advisers to private funds in which those investors invest—namely what fees and expenses those investors will pay and what performance they receive on their private fund investments. These disclosures will allow investors to better understand their private fund investments and the terms of their relationship with the adviser to those funds. Several commenters stated that
section 211(h)(1) of the Act does not
authorize the quarterly statement rule because details about past performance of funds and fees paid to the adviser are not terms of the relationship between investors and advisers.166 However,
section 211(h)(1) of the Act does not
limit a ‘‘term’’ of the relationship only to the provisions in a contract, as these commenters assert.167 In the private fund context, it is the adviser or its affiliated entities that generally draft the private fund’s private placement memorandum and governing documents,168 negotiate fund terms 169 with the private fund investors, manage the fund, charge and/or allocate fees and expenses to the private fund which are then paid by the private fund investors, and calculate and present performance information to the private fund investors. In this context, fees and performance are essential to the relationship between an investor and an adviser. The method used to calculate fees is typically set forth in the fund contracts. However, based on Commission staff experience, fee and performance disclosures are often not simple or clear, and investors may have difficulty understanding them. As a result, advisers have overcharged certain fees without investors recognizing it immediately.170 Similarly, performance is a crucial term of the relationship between an adviser and investors. Performance is implicitly or explicitly part of the terms of many fund contracts to the extent that advisers are often compensated in part based on the performance of the private fund.171 The amount, calculation, and timing of performance compensation are often negotiated by the adviser and the investors and form the core economic term of their relationship. Calculating performance is also complicated, and methods generally differ among advisers. Without comparable performance metrics and methodologies, it can be unclear how different advisers perform against one another. Performance calculations also generally are the product of many assumptions and criteria, such as the manner in which management fee rates are applied. Without simple and clear disclosures of such assumptions and criteria, investors are at a disadvantage with respect to understanding or being able to verify how their investments are performing.172
Section 206(4) of the Act gives the
Commission the authority to prescribe means reasonably designed to prevent fraud, deception, and manipulation. The quarterly statement rule is reasonably designed to prevent fraud, deception, and manipulation because it requires advisers to provide timely and consistent disclosures that will improve the ability of investors to assess and monitor fees, expenses, and performance. This will decrease the likelihood that investors will be defrauded, deceived, or manipulated because they will be in a better position to monitor the adviser and their respective investments, and it increases the likelihood that any such misconduct will be detected sooner.173 Moreover, the fee, expense and performance information in the quarterly statement will improve investors’ ability to evaluate the adviser’s conflicts of interest with respect to the fees and

174See supra section I (discussing conflicts of interest). 175See, e.g., AIC Comment Letter I; NVCA Comment Letter. 176See Citadel Comment Letter. 177See, e.g., In the Matter of Sabra Capital Partners, LLC and Zvi Rhine, Investment Advisers Act Release No. 5594 (Sept. 25, 2020) (settled order) (alleging that, among other things, an investment adviser misrepresented the performance of a fund it advised in updates sent to the fund’s limited partners); In the Matter of Finser International Corporation and Andrew H. Jacobus, Investment Advisers Act Release No. 5593 (Sept. 24, 2020) (settled order) (alleging that, among other things, an investment adviser charged a fund it advised performance fees contrary to representations made in the fund’s private placement memorandum); In the Matter of Omar Zaki, Investment Advisers Act Release No. 5217 (Apr. 1, 2019) (settled order) (alleging that, among other things, an investment adviser repeatedly misled investors in a fund it advised about fund performance); In the Matter of Corinthian Capital Group, LLC, Peter B. Van Raalte, and David G. Tahan, Investment Advisers Act Release No. 5229 (May 6, 2019) (settled order) (alleging that, among other things, an investment adviser failed to apply a fee offset to a fund it advised and caused the same fund to overpay organizational expenses); In the Matter of Aisling Capital LLC, Investment Advisers Act Release No. 4951 (June 29, 2018) (settled order) (alleging an investment adviser failed to apply a specified fee offset to a fund it advised contrary to the fund’s limited partnership agreement and private placement memorandum). 178See, e.g., In the Matter of Monomoy Capital Management, L.P., Investment Advisers Act Release No. 5485 (Apr. 22, 2020) (settled action); In the Matter of WCAS Management Corporation, Investment Advisers Act Release No. 4896 (Apr. 24,
2018) (settled action); In the Matter of Fenway
Partners, LLC, et. Al., Investment Advisers Act Release No. 4253 (Nov. 3, 2015) (settled action). 179Final rule 211(h)(1)–2. 180See infra section II.B.3 for a discussion of the change to fiscal time periods for the quarterly statement rule. 181Final rule 211(h)(1)–2. 182See, e.g., Comment Letter of National Education Association and American Federation of Teachers (Apr. 12, 2022) (‘‘NEA and AFT Comment Letter’’); Comment Letter of the American Federation of Teachers New Mexico (Apr. IFT Comment Letter Comment Letter of the National Conference on Public Employee Retirement Systems (Apr. 25, 2022) (‘‘NCPERS Comment Letter’’); Better Markets Comment Letter; Comment Letter of Ohio Federation of Teachers (Apr. 25,
2022) (‘‘OFT Comment Letter’’); Comment Letter of
American Federation of State, County and Municipal Employees (Apr. 25, 2022) (‘‘AFSCME Comment Letter’’); Consumer Federation of America Comment Letter; Public Citizen Comment Letter; Comment Letter of National Council of Real Estate Investment Fiduciaries (Apr. 25, 2022) (‘‘NCREIF Comment Letter’’); Comment Letter of New York State Insurance Fund (Apr. 25, 2022) (‘‘NYSIF Comment Letter’’); NYC Comptroller Letter; Comment Letter of AFL–CIO (Apr. 25, 2022) (‘‘AFL–CIO Comment Letter’’); Comment Letter NASAA Comment Letter. 183See, e.g., DC Retirement Board Comment Letter; ILPA Comment Letter I; Comment Letter of National Electrical Benefit Fund Investments (Apr. 25, 2022) (‘‘NEBF Comment Letter’’); OPERS Comment Letter. 184See Healthy Markets Comment Letter I. 185See, e.g., Comment Letter of Andreessen Horowitz (June 15, 2022) (‘‘Andreessen Comment Letter’’); NVCA Comment Letter; SIFMA–AMG Comment Letter I. 186See, e.g., IAA Comment Letter II; AIC Comment Letter I; Comment Letter of Roubaix Capital (Apr. 12, 2022) (‘‘Roubaix Comment Letter’’). 187See, e.g., AIC Comment Letter I; IAA Comment Letter II; Ropes & Gray Comment Letter. 188See, e.g., AIMA/ACC Comment Letter; Comment Letter of Dechert LLP (Apr. 25, 2022) (‘‘Dechert Comment Letter’’); AIC Comment Letter
I. One commenter stated that the Commission made
no attempt to review the investor disclosures provided by open-end funds in order to evaluate whether the proposal would meaningfully increase transparency. See Citadel Comment Letter. On the contrary, Commission staff regularly reviews open￾and closed-end fund investor disclosures as part of the Commission’s examination program and that experience informs this rulemaking. See, e.g., OCIE National Examination Program Risk Alert:
Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020) (‘‘EXAMS Private Funds Risk Alert 2020’’), available at https://www.sec.gov/files/ Continued expenses charged to the fund by the adviser and the performance metrics that the adviser presents to investors.174 Several commenters stated that Commission, in the proposal, failed to define a fraudulent, deceptive, or manipulative act as required by section 206(4) of the Act.175 Another commenter stated that the Commission, in the proposal, failed to connect the proposed reporting requirements to any actual fraudulent act.176 To the contrary, the quarterly statement is designed to prevent fraudulent, deceptive, or manipulative practices, including ones we have observed.177 For example, if an adviser is charging investors a management fee and simultaneously charging a portfolio company a monitoring or similar fee without disclosing that fee to investors, we would view that as fraudulent or deceptive because it involves an undisclosed conflict in breach of fiduciary duty.178 Similarly, if an adviser is knowingly using off-market assumptions (such as highly irregular valuation practices that are not used by similarly-situated advisers) when calculating performance without disclosing such to investors, we would view that practice as deceptive. The rule requires an investment adviser that is registered or required to be registered with the Commission to prepare a quarterly statement that includes certain information regarding fees, expenses, and performance for any private fund that it advises and distribute the quarterly statement to the private fund’s investors, unless a quarterly statement that complies with the rule is prepared and distributed by another person.179 If the private fund is not a fund of funds, then a quarterly statement must be distributed within 45 days after the end of each of the first three fiscal 180 quarters of each fiscal year and 90 days after the end of each fiscal year.181 If the private fund is a fund of funds, then a quarterly statement must be distributed within 75 days after the first, second, and third fiscal quarter ends and 120 days after the end of the fiscal year of the private fund. Many commenters supported the quarterly statement rule as proposed and agreed that it would provide increased transparency to private fund investors who may not currently receive sufficiently detailed, comprehensible, or regular fee, expense, and performance information for each of their private fund investments.182 These commenters generally indicated that the quarterly statement rule would provide increased comparability between private funds and accordingly would enable private fund investors to make more informed investment decisions, as well as potentially lead to increased competitive market pressures on the costs of investing in private funds. Some commenters indicated that the rule’s establishment of a required baseline of recurring reporting
would allow investors to focus their negotiation priorities with private fund advisers on other matters, such as fund governance, and could also provide investors with greater confidence when choosing to allocate capital to private fund investments.183 One commenter suggested that the quarterly statement requirement would particularly help smaller or less sophisticated investors who may receive less timely or complete information than investors that possess greater negotiating power.184 Other commenters did not support this quarterly statement rule (or parts of the rule, as discussed below).185 Of these commenters, a number suggested that this quarterly statement requirement would increase costs for private funds that would ultimately be passed on to investors.186 Some commenters stated that the quarterly statement rule may not provide meaningful information or would confuse investors because the required information would not be personalized to investors, may not be appropriate for certain types of private funds, or may differ from other information already provided to private fund investors.187 Other commenters stated that the rule is unnecessary and duplicative, as advisory firms already provide similar or otherwise sufficient reporting, and investors are generally able to negotiate for and receive additional disclosure that may be appropriate for their particular needs.188

Private%20Fund%20Risk%20Alert_0.pdf. As of Dec. 17, 2020, the Office of Compliance, Inspections and Examinations (‘‘OCIE’’) was renamed the Division of Examinations (‘‘EXAMS’’). 189See Proposing Release supra footnote 3, at n. 9–11. 190See infra section VI.D.2. 191Furthermore, even if investors are already receiving timely updates regarding fund performance for the funds in which they are currently invested, they may also benefit from no longer needing to expend resources negotiating for it for funds in which they wish to invest in the future. As the quarterly statement rule requires this baseline of performance information, investors will be able to focus their resources on negotiating for more bespoke reporting or other important rights in new funds. 192See infra sections VI.C.3, VI.D.2. 193See, e.g., GPs feel the strain as LPs push for more transparency on portfolio performance and fee structures, Intertrust Group (July 6, 2020), available at https://www.intertrustgroup.com/news/gps-feel￾the-strain-as-lps-push-for-more-transparency-on￾portfolio-performance-and-fee-structures/; ILPA Principals 3.0, (2019), at 36 ‘‘Financial and Performance Reporting’’ and ‘‘Fund Marketing Materials,’’ available at https://ilpa.org/wp-content/ flash/ILPA%20Principles%203.0/?page=36. 194Section 211(h)(1) of the Advisers Act directs the Commission to facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with investment advisers. 195See, e.g., AIC Comment Letter I; IAA Comment Letter II. 196See, e.g., AIC Comment Letter I; Lockstep Ventures Comment Letter; SBAI Comment Letter. As stated elsewhere, we have observed that private fund investments are often opaque; advisers frequently do not provide investors with sufficiently detailed information about private fund investments.189 Without sufficiently clear, comparable information, even sophisticated investors may be unable to protect their interests or make sound investment decisions. Accordingly, we are adopting the quarterly statement rule, in part, because of the lack transparency in key areas including private fund fees and expenses, performance, and conflicts of interest. While we acknowledge that quarterly statements may increase costs, we believe these costs are justified in light of the benefits of the rule.190 As discussed above, investors will benefit from increased transparency into the fees and expenses charged to the fund, as well as the conflicts they present, on a timely basis. Investors will also benefit from mandatory timely updates regarding fund performance if they were not already receiving them.191 We also disagree with commenters’ concerns regarding quarterly statements failing to provide meaningful information. The quarterly statement will present a baseline level of information in a clear format and will help private fund investors to monitor and assess the true cost of their investments better. For example, the enhanced cost
information may allow an investor to identify when the private fund has incorrectly, or improperly, assessed a fee or expense by the adviser. We also disagree with certain commenters’ concerns that the quarterly statement may not be appropriate for certain types of private funds. We believe that the fee, expense, and performance information required in the quarterly statement is a fundamental disclosure that is relevant to all types of private funds. Moreover, we anticipate the costs of compliance with this rule may be of limited magnitude in light of the fact that many private fund advisers already maintain and, in many cases, already disclose similar information to investors.192 Relatedly, we acknowledge that many private fund advisers contractually agree to provide fee, expense, and performance reporting to investors already. However, not all private fund investors are able to obtain this information. Other investors may be able to obtain relevant information, but the information may not be sufficiently clear or detailed regarding the costs and performance of a particular private fund to enable an investor to understand, monitor and make informed investment decisions regarding its private fund investments. For instance, some advisers report only aggregated expenses, or do not provide detailed information about the calculation and implementation of any negotiated rebates, credits, or offsets, which does not allow an investor to identify the actual extent and/or types of costs incurred and to evaluate their validity. Other investors may not have sufficient information regarding private fund fees and expenses in part because those fees and expenses have varied presentations across private funds and are subject to complicated calculation methodologies, which similarly prevents an investor from meaningfully assessing those fees and expenses and comparing private fund investments. Private fund investors are increasingly interested in more disclosure regarding private fund performance, including transparency into the calculation of the performance metrics.193 Providing investors with simple and clear disclosures regarding fees, expenses, and performance will allow investors to understand better their private fund investments and the terms of their relationship with the adviser.194 We also disagree with commenters that suggested the quarterly statement would confuse investors. For example, some commenters asserted that standardized quarterly statement disclosures could confuse investors because the required information may not reflect an investor’s actual, particularized investment experience in a fund.195 However, investors will benefit from receiving a baseline level of simple and clear disclosures regarding fee, expenses, and performance. For example, private fund advisers currently use different metrics and specifications for calculating performance, which makes it difficult for investors to compare information across funds and advisers, even when
advisers disclose the assumptions they used. More standardized requirements for performance metrics will allow private fund investors to compare more easily the returns of similar fund strategies over different market environments and over time. Simple and clear information about costs and performance that is provided on a regular basis will help an investor better decide whether to continue the terms of its relationship with the adviser, whether to remain invested in a particular private fund where the fund allows for withdrawals and redemptions, whether to invest in private funds managed by the adviser or its related persons in the future, and how to invest other assets in the investor’s portfolio. Certain commenters argued that the quarterly statement requirement would be particularly burdensome for small and emerging advisers.196 We first observe that the quarterly statement rule is only applicable to investment advisers that are registered or required to be registered with the Commission. Thus, some private fund advisers, including those solely advising less than $150 million private fund assets under management and those with less than $100 million in regulatory assets under management registered with, and subject to examination by the States, will not be subject to the quarterly statement rule. Second, we understand that firms vary in the extent to which they devote resources specifically to compliance. It is important for all investors in private funds advised by SEC-registered advisers to receive sufficiently detailed, comprehensible, and regular information to enable investors to monitor whether fees and expenses are being mischarged and to ensure that accurate performance information is being clearly presented. We view sufficient fee, expense, and performance information under the rule as together forming, and each as an essential component of, the basic set of information that is generally necessary for private fund investors to evaluate accurately and confidently their private

197One commenter requested the Commission clarify that a registered U.S. sub-adviser would not need to comply with the quarterly statement rule with respect to a private fund whose primary adviser is not subject to the rule. See AIMA/ACC Comment Letter. However, the final rule does not include an exception for such advisers. We believe that the requested exception would diminish the effectiveness of the rule, as the fact that one adviser may not be subject to the final rule does not negate the need for the private fund and its underlying investors to receive the benefit of a quarterly statement. 198See NYC Comptroller Comment Letter. 199See, e.g., ILPA Comment Letter I; Healthy Markets Comment Letter I; OPERS Comment Letter; NYSIF Comment Letter. 200For example, an investor may seek to analyze the performance of each of a fund’s individual portfolio investments to better understand the nature of such fund’s performance as well as the adviser’s skill at investment selection and management at a more granular level. 201See rule 206(4)–1. A communication to a current investor can be an ‘‘advertisement,’’ for example, when it offers new or additional investment advisory services with regard to securities. 202Any class-based assumptions or criteria used to calculate fund-level performance should be prominently disclosed as part of the quarterly statements. For example, if an adviser uses a management fee rate that is averaged across different classes to compute fund-level performance, it should be prominently disclosed in the quarterly statement. See infra section II.B.2.c. 203See, e.g., BVCA Comment Letter; Comment Letter of the German Private Equity and Venture Capital Association (June 2, 2022) (‘‘GPEVCA Comment Letter’’). 204See, e.g., Schulte Comment Letter; Invest Europe Comment Letter; BVCA Comment Letter. 205See, e.g., Ropes & Gray Comment Letter; MFA Comment Letter I; AIMA/ACC Comment Letter. 206See RFG Comment Letter II. 207For example, it is our understanding that the majority of private equity funds currently provide quarterly reporting. Since private equity funds generally invest on a longer time horizon, we do not expect that monthly reporting would inherently provide more beneficial information for investors than quarterly reporting and it would entail substantial additional administrative costs. fund investments. Accordingly, we are not providing any exemptions to the quarterly statement rule for small or emerging advisers. In addition to general comments on the proposed quarterly statement rule, commenters made specific suggestions or sought clarification on discrete parts of the proposal.197 One commenter asked the Commission to clarify that investors may negotiate reporting in addition to what is required in the quarterly statements.198 We confirm that the quarterly statements represent a baseline level of reporting that is required for covered private fund advisers. The quarterly statement rule itself does not restrict or limit the
kinds of additional reporting for which private fund investors may negotiate. Some commenters suggested that we require investor-specific or class￾specific reporting in addition to fund￾level reporting.199 While we recognize the utility to investors of investor-level reporting, we do not believe that requiring investor-level reporting in quarterly statements is essential to this rulemaking. First, the quarterly statements are designed, in part, to allow individual private fund investors to use fund-level information to perform the types of personalized or otherwise customized calculations that underlie investor-specific reporting. Second, we understand that, even if private fund advisers provide investors with investor-specific reporting, many investors would still need to perform personalized or otherwise customized calculations to satisfy their own internal requirements.200 Third, the fund-level reporting requirements do not prevent an adviser from providing (or causing a third party, such as an administrator, consultant, or other service provider, to provide) personalized information, as well as other customized information, to supplement the standardized baseline level (i.e., the mandatory floor) of fund￾level information required to be included in the quarterly statements, provided that such additional information complies with the other requirements of the final rule, the marketing rule,201 and other disclosure requirements, each to the extent applicable. We are requiring what we view as essential baseline, fund-level information, allowing investors to focus their time and bargaining resources on requests for any more personalized information they may need, which may vary from investor to investor. Similarly, while we recognize the value of class-level reporting, requiring class-level reporting on quarterly statements is not necessary for the same reasons as those discussed above for investor-specific reporting. Additionally, requiring class-level reporting would not increase comparability across different advisers. For example, an investor might be in substantially different classes in funds advised by different advisers and thus might have difficulty comparing class￾level reporting across these funds.202 Commenters suggested that we should allow investors to waive this quarterly statement requirement.203 However, if we were to allow investors to waive the quarterly statement requirement, then some private fund advisers may require investors to do so as a precondition to investing in a fund. Furthermore, even if a private fund adviser does not explicitly require such a waiver as a precondition to investment, a private fund adviser could attempt to anchor negotiations around a waiver by including one in a private fund’s subscription agreement and thereby compelling investors to choose between expending resources to negotiate for quarterly statements or for other important terms related to fund governance and investor protection. Such an
outcome would undermine improving transparency for these private fund investors and would fail to address the harms that the rule is intended to address. Some commenters suggested requiring statements annually instead of quarterly.204 Other commenters suggested requiring statements semi￾annually.205 Another commenter suggested requiring these statements more frequently than quarterly for liquid funds as many liquid funds currently provide monthly statements.206 It is our understanding that most private funds (liquid and illiquid) report at least quarterly. Accordingly, we believe that requiring quarterly reporting is well suited to enhance investors’ ability to compare performance as well as fee and expense information across liquid and illiquid private funds because many private investors are accustomed to receiving and reviewing quarterly reports. Monthly or more frequent reporting may also not provide sufficiently more meaningful information to justify imposing the burdens for private funds that do not already provide such frequent reporting.207 All private funds, including liquid funds, may provide additional reporting on a more frequent basis than quarterly. On the other hand, we believe that annual or semi-annual statements are too infrequent and such infrequency would make it difficult for investors to monitor their investments. Receiving a year or six months’ worth of fee and expense information at one time would make it more burdensome for investors to parse (particularly, because some of those outlays may be a year or six months old) and to help ensure that fees are being charged appropriately. Similarly, because a fund’s performance can change drastically over the course of a year or six months, investors often need more frequent and regular performance reporting to make informed investment decisions and to balance their own portfolio. We believe that quarterly reporting strikes the right balance between sufficient frequency to enable investor analysis and decision making and mitigation of burdens on advisers.

208See, e.g., ILPA Comment Letter I; Comment Letter of the Council of Institutional Investors (Apr. 7, 2022) (‘‘CII Comment Letter’’); Comment Letter of the Seattle City Employees’’ Retirement System (Apr. 19, 2022) (‘‘Seattle Retirement System Comment Letter’’); OFT Comment Letter; United for Respect Comment Letter I; Public Citizen Comment Letter; Comment Letter of the Los Angeles County Employees Retirement Association (July 28, 2022) (‘‘LACERA Comment Letter’’); OPERS Comment Letter; NCPERS Comment Letter; Comment Letter of Take Medicine Back (Apr. 25, 2022) (‘‘Take Medicine Back Comment Letter’’); Comment Letter of Segal Marco Advisors (Apr. 25, 2022) (‘‘Segal Marco Comment Letter’’); Comment Letter of the Illinois State Treasurer (May 12, 2022) (‘‘IST Comment Letter’’); AFL–CIO Comment Letter; Comment Letter of Morningstar, Inc. (Apr. 25, 2022) (‘‘Morningstar Comment Letter’’); Comment Letter of CFA Institute (June 24, 2022) (‘‘CFA Comment Letter II’’). 209See, e.g., Comment Letter of Impact Capital Managers, Inc. (Apr. 25, 2022) (‘‘ICM Comment Letter’’); MFA Comment Letter I; Comment Letter of Americans for Tax Reform (Apr. 23, 2022) (‘‘ATR Comment Letter’’). 210See ICM Comment Letter; AIMA/ACC Comment Letter; Dechert Comment Letter; AIC Comment Letter I. 211Certain private fund advisers utilize a pass￾through expense model where the private fund pays for most, if not all, expenses, including the adviser’s expenses, but the adviser does not charge a management fee. See infra section II.E.1. for a discussion of such pass-through expense models. 212 Investors typically enter into agreements under which the private fund pays such compensation directly to the adviser or its affiliates. Investors generally bear such compensation indirectly through their investment in the private fund; however, certain agreements may require investors to pay the adviser or its affiliates directly. 213See Proposing Release, supra footnote 3, at 24–26 (describing the types of fees and expenses private fund investors typically pay or otherwise bear, including portfolio-investment level compensation paid to the adviser or its affiliates). 214See, e.g., LACERA Comment Letter. 215See Hedge Fund Transparency: Cutting Through the Black Box, The Hedge Fund Journal, James R. Hedges IV (Oct. 2006), available at https:// thehedgefundjournal2006).com/hedge-fund￾transparency/ (stating that ‘‘the biggest challenges facing today’s hedge fund industry may well be the issues of transparency and disclosure’’); Fees & Expenses, Private Funds CFO (Nov. 2020)), at 12, available at https://www.troutman.com/images/ content/2/6/269858/PFCFO-FeesExpenses-Nov20- Final.pdf (noting that it is becoming increasingly complicated for investors to determine what the management fee covers versus what is a partnership expense and stating that the ‘‘formulas for management fees are complex and unique to different investors.’’); see also, e.g., ILPA Comment Letter I; For the Long Term Comment
Letter; NCPERS Comment Letter; Comment Letter of Americans for Financial Reform Education Fund (Apr. 25, 2022) (‘‘AFREF Comment Letter I’’). 216See, e.g., Letter from State Treasurers and Comptrollers to Mary Jo White, U.S. Securities and Exchange Commission (July 21, 2015), available at http://comptroller.nyc.gov/wp-content/uploads/ documents/SEC_SignOnPDF.pdf; see also Letter from Americans for Financial Reform Education Fund to Chairman Gary Gensler, U.S. Securities and Exchange Commission (July 6, 2021), available at https://ourfinancialsecurity.org/wp-content/ uploads/2021/07/Letter-to-SEC-re_-Private-Equity￾7.6.21.pdf. 217See, e.g., In the Matter of Blackstone, supra footnote 26. 218See, e.g., In the Matter of Monomoy Capital Management, L.P., Investment Advisers Act Release No. 5485 (Apr. 22, 2020) (settled action). 219See, e.g., In the Matter of Cherokee Investment Partners, LLC and Cherokee Advisers, LLC, supra footnote 26; In the Matter of Yucaipa Master Manager, LLC, Investment Advisers Act Release No. 5074 (Dec. 13, 2018) (settled action). 220See, e.g., In the Matter of Finser International Corporation, et al., Investment Advisers Act Release No. 5593 (Sept. 24, 2020) (settled action). 221See, e.g., In the Matter of Corinthian Capital Group, LLC, et al., Investment Advisers Act Release No. 5229 (May 6, 2019) (settled action). 222See, e.g., In the Matter of Lincolnshire, supra footnote 26 (alleging that an investment adviser that

1. Fee and Expense Disclosure
   The rule requires an investment adviser that is registered or required to be registered to prepare and distribute quarterly statements for any private fund that it advises with certain information regarding the fund’s fees and expenses and any compensation paid or allocated to the adviser or its related persons by the fund, as well as any compensation paid or allocated by the fund’s underlying portfolio investments. The statement will provide investors in those funds with comprehensive fee and expense disclosure for the prior quarterly period (or, in the case of a newly formed private fund’s initial quarterly statement, its first two full fiscal quarters of operating results). Many commenters generally supported the fee and expense disclosure requirement for the quarterly statements and agreed that establishing a standardized baseline level (i.e., a ‘‘floor’’) of fee and expense disclosure would enhance the basic transparency, comparability and investors’ understanding and oversight of their private fund investments.208 Some commenters criticized it on various grounds, as discussed in more detail below, including that the fee and expense disclosure requirement as proposed would be overly broad, costly, and burdensome.209 Certain commenters relatedly suggested that current fee and expense disclosure practices are sufficient because investors can already negotiate for the types of reporting that would meet their needs.210 Although the required fee and expense disclosure in the quarterly statement will impose some additional costs, it is essential that investors receive this information in a timely, detailed, and consistent manner. Private funds are often more expensive than other asset classes because the scope and magnitude of fees and expenses paid directly and indirectly by private fund investors can be extensive and complex. Although the types of fees and expenses charged to private funds can vary across the industry, investors typically compensate the adviser for managing the affairs of a private fund, often in the form of management fees 211 and performance-based compensation.212 A fund’s portfolio investments also may pay fees to the adviser or its related persons.213 The quarterly statement will help ensure disclosure of these fees and expenses, and the corresponding dollar amounts, to current investors on a consistent and regular basis, which will allow investors to understand and assess the cost of their private fund investments. We disagree with the suggestion from some commenters that current fee and expense disclosure practices are sufficient. We understand that some fund investors have struggled to obtain complete and usable expense information, including when institutionally required to do so, for example, by the laws applicable to State and municipal plan investors.214 Many investors also generally lack transparency regarding the total cost of fees and expenses.215 For instance, even though investors can indirectly end up bearing
   the costs associated with a portfolio investment paying fees to the adviser or its related persons, some advisers may not disclose the magnitude or scope of these fees to investors. Opaque reporting practices make it difficult for investors to measure and evaluate performance accurately, to assess whether an adviser’s total fees are justified, and to make better informed investment decisions.216 Moreover, opaque reporting practices may prevent private fund investors from assessing whether the types and amount of fees and expenses borne by the private fund comply with the fund’s governing agreements or whether disclosures regarding fund fees and expenses accurately describe the adviser’s practices or instead may be misleading. The Commission has brought enforcement actions related to the disclosure, misallocation and mischarging of fees and expenses by private fund advisers. For example, we have alleged in settled enforcement actions that advisers have received undisclosed fees,217 received inadequately disclosed compensation from fund portfolio investments,218 misallocated expenses away from the adviser to private fund clients,219 mischarged a performance fee to a private fund client contrary to investor disclosures,220 failed to offset certain fees or other amounts against management fees as set forth in fund documents,221 and directly or indirectly misallocated fees and expenses among private fund and other clients.222

misallocated expenses between its private funds’ portfolio companies and violated its fiduciary duty to the private funds); In the Matter of Rialto Capital Management, LLC, Investment Advisers Release No. 5558 (Aug. 7, 2020) (settled action); In the Matter of Energy Capital Partners, supra footnote 30. 223See EXAMS Private Funds Risk Alert 2020, supra footnote 188. 224See id. 225See id. 226See MFA Comment Letter I; NCREIF Comment Letter. 227Although certain kinds of expense ratios are required in the registered funds context, we understand that fees and expenses are more likely to vary over time in the private fund space. For example, a private equity fund may incur a disproportionate amount of expenses early in its life when it is making the majority of its investments and incur fewer expenses during the middle part of its life when it is focused on holding these investments. The use of an expense ratio in these periods may overstate or understate, respectively, the expense burdens over the life of the fund. 228See supra footnote 201. 229Final rule 211(h)(1)–2(b). 230See final rule 211(h)(1)–1 (defining ‘‘reporting period’’ as the private fund’s fiscal quarter covered by the quarterly statement or, for the initial quarterly statement of a newly formed private fund, the period covering the private fund’s first two full fiscal quarters of operating results). To the extent a newly formed private fund begins generating operating results on a day other than the first day of a fiscal quarter (e.g., Jan. 1), the adviser should include such partial quarter and the immediately succeeding fiscal quarters in the newly formed private fund’s initial quarterly statement. For example, if a fund begins generating operating results on Feb. 1, the reporting period for the initial quarterly statement would cover the period beginning on Feb. 1 and ending on Sept. 30. 231Final rule 211(h)(1)–2(b)(1). 232See, e.g., CII Comment Letter; Seattle Retirement System Comment Letter; IST Comment Letter. 233See, e.g., ICM Comment Letter; Comment Letter of Alumni Ventures (Apr. 25, 2022) (‘‘Alumni Ventures Comment Letter’’); MFA Comment Letter I. 234See Proposing Release, supra footnote 3, at 28–29 (describing the types of adviser compensation private fund investors typically pay or otherwise bear). Commission staff has observed similarly problematic practices in its examinations of private fund advisers.223 For example, Commission staff has observed advisers that charge private funds for expenses not permitted under the fund documents.224 Commission staff has also observed advisers allocating expenses, such as broken-deal, due diligence, and consultant expenses, among private fund clients, other clients advised by an adviser or its related persons, and their own accounts in a manner that was inconsistent with disclosures to investors.225 Investors are less able to monitor effectively whether such fee and expense misallocations are occurring and to respond effectively to this
information without sufficiently timely, regular, and detailed fee and expense information. Some commenters suggested requiring an expense ratio to help provide context as to the relative magnitude of a fund’s expenses.226 Although expense ratios may be helpful in certain circumstances in providing a top-line cost figure, they may be less helpful in others. For instance, if an adviser is misallocating certain smaller expenses, an expense ratio may obscure this practice if overall changes to the top-line cost figure are not obvious. Additionally, expense ratios may fail to capture some of the nuances of private fund fee and expense structures, such as with respect to the current and future impact of offsets, rebates and waivers, and investors might not otherwise receive sufficient disclosure on such fee and expense structures. The focus of this disclosure requirement is to require a private fund adviser to provide its private fund investors regularly and in a timely manner with at least a baseline level of consistent and detailed fee and expense information, so that private fund investors are generally better able to assess and monitor effectively the costs of investing in private funds managed by the adviser.227 If investors receive this information reliably, they will be better able to calculate their own applicable expense ratios. Furthermore, as stated above, advisers under the rule will remain able to provide, and investors are free to request and negotiate for, disclosure of expense ratios, as well as other information, to supplement the standardized baseline level (i.e., the mandatory floor) of fund fee and expense disclosure required in the quarterly statements, provided that such additional information complies with the other requirements of the final rule, the marketing rule,228 and other disclosure requirements, each to the extent applicable. (a) Private Fund-Level Disclosure The quarterly statement rule will require private fund advisers to disclose the following information to investors in a table format:
(1) A detailed accounting of all compensation, fees, and other amounts allocated or paid to the adviser or any of its related persons by the private fund (‘‘adviser compensation’’) during the reporting period; (2) A detailed accounting of all fees and expenses allocated to or paid by the private fund during the reporting period other than those listed in paragraph (1) above (‘‘fund expenses’’); and (3) The amount of any offsets or rebates carried forward during the reporting period to subsequent quarterly periods to reduce future payments or allocations to the adviser or its related persons.229 The table is designed to provide investors with comprehensive fund fee and expense disclosure for the prior quarterly period (or, in the case of a newly formed private fund’s initial quarterly statement, its first two full fiscal quarters of operating results).230 We discuss each of these elements in turn below. Adviser Compensation. Substantially as proposed, the rule will require the fund table to show a detailed accounting of all adviser compensation during the reporting period, with separate line items for each category of allocation or payment reflecting the total dollar amount, as proposed.231 The rule is designed to capture all forms and amounts of compensation, fees, and other amounts allocated or paid to the investment adviser or any of its related persons by the fund, including, but not limited to, management, advisory, sub￾advisory, or similar fees or payments, and performance-based compensation, without permitting the exclusion of de minimis expenses, the general grouping of smaller expenses into broad categories, or the labeling of expenses as miscellaneous. Many commenters generally supported the requirement to report adviser compensation on the quarterly statements.232 Some commenters suggested that this requirement would be overly burdensome, in particular due to the breadth of certain aspects of the requirement (as discussed below), or that current market practices are sufficient.233 Many private funds compensate advisers with a ‘‘2 and 20’’ or similar arrangement, consisting of a 2% management fee and a 20% share of any profits generated by the fund. Certain advisers, however, receive other forms or amounts of compensation from private funds in addition to, or in lieu of, such arrangements.234 Requiring advisers to disclose all forms of adviser compensation as separate line items without prescribing particular categories of fees is appropriate because this requirement will encompass the various and evolving forms of adviser compensation across the private funds industry. In addition to compensation paid to the adviser, the rule requires the fund
table to include disclosure of
compensation, fees, and other amounts allocated or paid to the adviser’s ‘‘related persons.’’ We are defining ‘‘related persons’’ to include: (i) all officers, partners, or directors (or any

235Final rule 211(h)(1)–1. Form ADV uses the same definition. The regulations at 17 CFR 275.206(4)–2 (rule 206(4)–2) use a similar definition by defining related person to include any person, directly or indirectly, controlling or controlled by the adviser, and any person that is under common control with the adviser. 236Final rule 211(h)(1)–1. The definition, in addition, provides that: (i) each of an investment adviser’s officers, partners, or directors exercising executive responsibility (or persons having similar status or functions) is presumed to control the investment adviser; (ii) a person is presumed to control a corporation if the person: (A) directly or indirectly has the right to vote 25% or more of a class of the corporation’s voting securities; or (B) has the power to sell or direct the sale of 25% or more of a class of the corporation’s voting securities; (iii) a person is presumed to control a partnership if the person has the right to receive upon dissolution, or has contributed, 25% or more of the capital of the partnership; (iv) a person is presumed to control a limited liability company if the person: (A) directly or indirectly has the right to vote 25% or more of a class of the interests of the limited liability company; (B) has the right to receive upon dissolution, or has contributed, 25% or more of the capital of the limited liability company; or (C) is an elected manager of the limited liability company; or (v) a person is presumed to control a trust if the person is a trustee or managing agent of the trust. Form ADV uses the same definition. 237See, e.g., Comment Letter of Convergence (Apr. 23, 2022) (‘‘Convergence Comment Letter’’); Comment Letter of XTP Implementation Services, Inc. (Apr. 25, 2022) (‘‘XTP Comment Letter’’). 238See, e.g., AIMA/ACC Comment Letter; SBAI Comment Letter; SIFMA–AMG Comment Letter I. 239See AIMA/ACC Comment Letter. 240See id. This commenter also stated that disclosing sub-adviser fees separately could disincentivize sub-advisers from offering discounted or reduced fees to private funds. The final rule will not require separate disclosure of sub-adviser fees to the extent such fees are not paid by the fund, as discussed below. Nevertheless, this comment could also be understood to apply to any disclosure of sub-adviser compensation, including the disclosure of sub-adviser fees that are paid or allocated to the sub-adviser by the fund, which, as discussed below, will be required disclosure under the final rule. In this regard, although sub-adviser compensation, similar to any other adviser compensation, may be subject to upward or downward fee pressures as a result of the disclosure of compensation information, we believe that increased transparency and comparability with respect to the sub-adviser (and other adviser) compensation borne by a private fund is essential to generally enable private fund investors to make more informed investment decisions, and that this information could also lead
to increased competitive market pressures on the costs of investing in private funds. 241See NASAA Comment Letter. 242Final rule 211(h)(1)–1. person performing similar functions) of the adviser; (ii) all persons directly or indirectly controlling or controlled by the adviser; (iii) all current employees (other than employees performing only clerical, administrative, support or similar functions) of the adviser; and (iv) any person under common control with the adviser.235 The term ‘‘control’’ is defined to mean the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract, or otherwise.236 We are adopting both definitions as proposed. Many advisers conduct a single advisory business through multiple separate legal entities and provide advisory services to a private fund through different affiliated entities or personnel. The ‘‘related person’’ and ‘‘control’’ definitions are designed to capture the various entities and personnel that an adviser may use to provide advisory services to, and receive compensation from, private fund clients. Some commenters supported broadening the ‘‘related person’’ and ‘‘control’’ definitions to include, for example, unaffiliated service providers that provide payments to an adviser or over which an adviser has economic influence, former personnel and family members, operational partners, senior advisors, or similar consultants of an adviser, a private fund, or its portfolio investments, and/or any recipient of fund management fees or performance￾based compensation.237 Other commenters supported adopting definitions that are consistent with advisers’ existing reporting obligations,238 with one commenter suggesting that adopting different definitions could capture irrelevant persons or entities and create unnecessary confusion.239 We are adopting definitions that are consistent with the definitions of ‘‘related person’’ and ‘‘control’’ used on Form ADV and Form PF, which advisers already have experience assessing as part of their disclosure obligations on those forms, and which capture the entities and personnel that advisers typically use to conduct a single advisory business and provide advisory services to a private fund. One commenter suggested that the rule’s reference to ‘‘sub-advisory fees’’ in the non-exhaustive list of compensation types covered by the adviser compensation disclosure requirement is inappropriate, because sub-advisory fees are generally not paid to the sub-adviser by a private fund and instead are often paid out of the management fee or other adviser compensation received by the fund’s primary adviser from the fund.240 As proposed, the rule requires disclosure of any adviser compensation allocated or paid to the adviser or any of its related persons, including, without limitation, a related person that is a sub-adviser to the private fund, to the extent that the compensation to the related person is allocated or paid
by the fund. Accordingly, the rule does not require sub-advisory fees allocated or paid to a related person solely by the fund’s adviser (and not by the fund) to be disclosed as a separate item of adviser compensation. Another commenter suggested that the rule should require disclosure of sub-advisory fees to unrelated sub-advisers, in addition to related person sub-advisers.241 Compensation to unrelated sub-advisers is required to be separately disclosed as a fund fee and expense under 17 CFR 211(h)(1)–2(b)(2) (final rule 211(h)(1)– 2(b)(2)), to the extent that such payments are allocated to or paid by the fund. Substantially as proposed, we are defining ‘‘performance-based compensation’’ as allocations, payments, or distributions of capital based on a private fund’s (or its investments’) capital gains, capital appreciation, and/or profit.242 Commenters generally did not provide comments with respect to the proposed definition of ‘‘performance-based compensation.’’ We are, however, making two non-substantive, technical changes to this definition. First, we are revising the definition to include not only capital gains and capital appreciation but also profit. This change will capture performance-based compensation that may be calculated based on other types or measures of investment performance, such as investment income. Second, the parenthetical in the definition now references ‘‘or any of its investments’’ rather than ‘‘or its portfolio investments,’’ because the value of the fund’s investment (i.e., the value of the fund’s interest in a portfolio investment entity or issuer) will typically determine whether the adviser is entitled to performance-based compensation, rather than the value of the portfolio investment entity or issuer itself. The broad scope of this definition, which captures, without limitation, carried interest, incentive fees, incentive allocations, or profit allocations, among other forms of compensation, is appropriate in light of the various and evolving forms of performance-based compensation received by private fund advisers. This definition also covers both cash and non-cash compensation, including, for example, allocations, payments, or distributions of performance-based compensation that are in-kind. Fund Fees and Expenses. The rule requires the table to show a detailed accounting of all fees and expenses allocated to or paid by the private fund during the reporting period, other than those disclosed as adviser compensation, with separate line items

243Final rule 211(h)(1)–2(b)(2).
244Cf. CFA Comment Letter II (noting that proposed rule 211(h)(1)–2(b)(2) could be read to ‘‘not capture fees and expenses that have been accrued and not yet paid’’). 245See, e.g., OFT Comment Letter; Comment Letter of Meketa Investment Group (Mar. 21, 2022) (‘‘Meketa Comment Letter’’); Comment Letter of the Teacher Retirement System of Texas (Apr. 25, 2022) (‘‘TRS Comment Letter’’). 246See, e.g., AIC Comment Letter I; Dechert Comment Letter; ATR Comment Letter. 247See supra footnote 219 and accompanying text. 248See Key Findings ILPA Industry Intelligence Report, ‘‘What is Market in Fund Terms?’’ (2021), at 18–19 (‘‘ILPA Key Findings Report’’), available at https://ilpa.org/wp-content/uploads/2021/10/ Key-Findings-Industry-Intelligence-Report-Fund￾Terms.pdf (stating that ‘‘the importance of elevated transparency for [private fund investors] related to fees and expenses’’ is underscored by the recent trend of ‘‘cost shifting’’ certain expenses traditionally borne by private fund advisers to their private fund clients). 249See, e.g., id.; see also Coming to Terms: Private Equity Investors Face Rising Costs, Extra Fees, Wall Street Journal (Dec. 20, 2021), available at https:// www.wsj.com/articles/coming-to-terms-private￾equity-investors-face-rising-costs-extra-fees￾11640001604. 250See, e.g., AIC Comment Letter II; Comment Letter of CFA Institute (Apr. 25, 2022) (‘‘CFA Comment Letter I’’); IAA Comment Letter II. 251See, e.g., AIC Comment Letter I; PIFF Comment Letter; Ropes & Gray Comment Letter. 252See Convergence Comment Letter. 253See supra footnotes 166–169 and accompanying text. 254See, e.g., AIC Comment Letter I; NVCA Comment Letter; Citadel Comment Letter. for each category of fee or expense reflecting the total dollar amount, substantially as proposed.243 In a change from the proposal, we are revising this requirement to capture not only amounts ‘‘paid by’’ the private fund but also fees and expenses ‘‘allocated to’’ the private fund during the reporting period.244 This clarification is necessary to avoid potentially misleading investors in light of the various ways that a private fund may be caused to bear fees and expenses. Additionally, this change is consistent with the requirement in rule 211(h)(1)–2(b)(1), as proposed and adopted, to disclose compensation allocated or paid to the adviser or any of its related persons by the private fund during the reporting period. Similar to the approach taken with respect to adviser compensation discussed above, the rule captures all fund fees and expenses allocated to or paid by the fund during the reporting period, including, but not limited to, organizational, accounting, legal, administration, audit, tax, due diligence, and travel expenses. The rule’s capturing of all, rather than limited categories of, fund fees and expenses is appropriate because this requirement will encompass the various and evolving forms of private fund fees and expenses. Advisers must list each category of expense as a
separate line item under the rule, rather than group fund expenses into broad categories that obfuscate the nature and/or extent of the fees and expenses borne by the fund. For example, if a fund paid insurance premiums, administrator expenses, and audit fees during the reporting period, a general reference to ‘‘fund expenses’’ on the quarterly statement will not satisfy the rule’s detailed accounting requirement. Instead, an adviser is required to separately list each category of expense (i.e., in the example above, insurance premiums, administrator expenses, and audit fees) and the corresponding total dollar amount. A number of commenters generally supported this requirement to report all fees and expenses paid by the private fund during the reporting period on the quarterly statements.245 Some commenters suggested that this requirement would be too costly or that existing market practices make this requirement unnecessary.246 We have observed two general trends among private fund advisers that support the rule’s approach to adviser disclosure of fund fees and expenses. First, we have observed certain advisers shift certain expenses related to their advisory business to private fund clients.247 For example, some advisers charge private fund clients for salaries and benefits related to personnel of the adviser. Such expenses have traditionally been paid by advisers with their management fee proceeds or other revenue streams but are increasingly being charged as separate fund expenses, in addition to the management fee, and the full nature and extent of these expenses may not be clearly disclosed and transparent to fund investors.248 Second, expenses have risen significantly in recent years for certain private funds due to, among other things, advisers’ use of increasingly complex fund structures, the expansion of global marketing and investment efforts by advisers, and increased service provider costs.249 Advisers often pass on such increases to the private funds they advise without providing investors detailed disclosure about the magnitude and type of expenses actually charged to, or directly or indirectly borne by, the fund. Without this information, however, investors are less able to effectively assess and monitor the costs of investing in private funds managed by an adviser. Some commenters stated that we should allow advisers to group smaller expenses generally into broad categories or disclose them as ‘‘miscellaneous’’ expenses.250 Other commenters requested that we allow exemptions for de minimis amounts in the fee and expense section of the quarterly statement.251 In contrast, one commenter suggested that we specifically not permit advisers to exclude de minimis expenses or group small expenses into broad categories.252 We are not allowing advisers to exclude de minimis expenses, generally group small expenses into broad categories, or label expenses as miscellaneous. Private fund investors need detailed accounting of fees and expenses
to understand fully the costs of their private fund investments. If we were to allow advisers to group small expenses generally into broad categories, they might be able to obscure certain costs from investors, including those that could raise conflict of interest issues. Similarly, advisers might use a de minimis exception to avoid disclosing individual expenses that, in aggregate, could be significant. These alternative approaches would not provide private fund investors with sufficient detail to assess and monitor whether that the private fund expenses borne by the fund conform to contractual agreements and the private fund’s terms. As discussed above,253 some commenters suggested that section 211(h)(1) of the Act, which states that the Commission shall facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with investment advisers, does not authorize the rule’s quarterly disclosure requirement with respect to fund fees and expenses. These commenters generally asserted that ongoing fund fee and expense reporting does not constitute disclosure of the terms of the relationship between private fund investors and private fund advisers for purposes of section 211(h)(1) of the Act and that such terms are instead disclosed only at the outset of the relationship between a private fund investor and a private fund adviser; namely, in the terms set forth in a private fund’s contractual documents.254 Although we recognize that the methodology for calculating fund fees and expenses is typically set forth in a fund’s contractual documents, as discussed above, investors must also receive simple and clear disclosures of the actual fees and expenses borne by their fund in order to be able to understand and confirm effectively the

255Final rule 211(h)(1)–2(b).
256For example, an adviser must show any placement agent fees or excess organizational expenses before and after any management fee offset. 257Offsets, rebates, and waivers applicable to certain, but not all, investors through one or more separate arrangements are required to be reflected and described prominently in the fund-wide numbers presented in the quarterly statement. See final rule 211(h)(1)–2(d) and (g). Advisers are not required to disclose the identity of the subset of investors that receive such offsets, rebates, or waivers. 258Final rule 211(h)(1)–2(b)(3). 259The offset shifts some or all of the economic benefit of the fee from the adviser to the private fund investors. 260See, e.g., Morningstar Comment Letter; CFA Comment Letter II; RFG Comment Letter II. 261See, e.g., IAA Comment Letter II; PIFF Comment Letter. 262See Ropes & Gray Comment Letter. 263For example, certain investors, such as U.S. State pension plans, may be required to report complete information regarding fees and expenses paid to the adviser and its related persons. See LACERA Comment Letter. 264Final rule 211(h)(1)–2(b)(3). 265To the extent advisers are required to offset fund-level compensation (e.g., management fees) by portfolio investment compensation (e.g., monitoring fees), they typically do not reduce adviser compensation below zero, meaning that, in the event the monitoring fee offset amount exceeds the management fee for the applicable period, some fund documents provide for ‘‘carryforwards’’ of the unused amount. The carryforwards are used to offset the management fee in subsequent periods. 266See final rule 211(h)(1)–1 (defining ‘‘portfolio investment compensation’’ as any compensation, fees, and other amounts allocated or paid to the investment adviser or any of its related persons by the portfolio investment attributable to the private fund’s interest in such portfolio investment). 267See final rule 211(h)(1)–1 (defining ‘‘covered portfolio investment’’ as a portfolio investment that allocated or paid the investment adviser or its related persons portfolio investment compensation during the reporting period). 268Final rule 211(h)(1)–1. accuracy of the terms of their relationship with a private fund adviser. To the extent that a fund expense also could be characterized as adviser compensation under the rule, the rule requires advisers to disclose such payment or allocation as adviser compensation as opposed to a fund expense in the quarterly statement. For example, certain private funds may engage the adviser or its related persons to provide non-advisory services to the fund, such as consulting, legal, or back￾office services. The rule requires advisers to disclose any compensation, fees, or other amounts allocated or paid by the fund for such services, whether advisory or non-advisory, as part of the detailed accounting of adviser compensation. This approach will help ensure that investors understand the entire amount of adviser compensation
allocated or paid to the adviser and its related persons during the reporting period by the fund. Offsets, Rebates, and Waivers. We are requiring advisers to disclose adviser compensation and fund expenses in the fund table both before and after the application of any offsets, rebates, or waivers.255 Specifically, the rule requires an adviser to present the dollar amount of each category of adviser compensation or fund expense 256 before and after any such reduction for the reporting period.257 In addition, the rule requires advisers to disclose the amount of any offsets or rebates carried forward during the reporting period to subsequent periods to reduce future adviser compensation.258 We are adopting this portion of the rule as proposed. Advisers may offset, rebate, or waive adviser compensation or fund expenses in a number of circumstances. For example, a private equity adviser may enter into a management services agreement with a fund’s portfolio company, requiring the company to pay the adviser a fee for those services. To the extent that the fund’s governing agreement requires the adviser to share the fee with the fund investors through an offset to the management fee, the management fee would typically be reduced, on a dollar-for-dollar basis, by an amount equal to the fee.259 Under the final rule, the adviser would be required to list the management fee both before and after the application of the fee offset. Some commenters generally supported the requirement that advisers disclose adviser compensation and fund expenses both before and after the application of any offsets, rebates, or waivers.260 Some commenters suggested that advisers should only be required to disclose adviser compensation and fund expenses after the application of any offsets, rebates, or waivers, because information regarding adviser compensation and fund expenses before the application of any offsets, rebates, or waivers does not reflect actual investor experience and accordingly could confuse or be of little or no value to investors.261 One commenter stated that we should consider excepting de minimis offsets, rebates, or waivers from this requirement.262 We considered whether to require advisers to disclose adviser compensation and fund expenses only after the application of offsets, rebates, and waivers, rather than before and after. We recognize that investors may find the reduced numbers more meaningful, given that they generally reflect the actual amounts borne by the fund during the reporting period. However, after considering comments, we believe that presenting both figures will provide investors with greater transparency into advisers’ fee and expense practices, particularly with respect to how offsets, rebates, and waivers affect adviser compensation. Transparency into fee and expense practices is important, even with respect to de minimis amounts, because it will assist investors in monitoring their private fund investments and, for certain investors,
will ease their own efforts at complying with their reporting obligations.263 Advisers should have this information readily available, and both sets of figures will be helpful to investors in monitoring whether and how offsets, rebates, and waivers are applied. In addition, we are requiring advisers to disclose the amount of any offsets or rebates carried forward during the reporting period to subsequent periods to reduce future adviser compensation.264 This information will allow investors to understand whether they are or the fund is entitled to additional reductions in future periods.265 Further, this information will assist investors with their liquidity management and cash flow models, as they should have greater insight into the fund’s projected cash flows and their obligations to satisfy future capital calls for adviser compensation with cash on hand. (b) Portfolio Investment-Level Disclosure The quarterly statement rule requires advisers to disclose a detailed accounting of all portfolio investment compensation 266 allocated or paid by each covered portfolio investment 267 during the reporting period in a single
table. We proposed, but in response to
commenters are not adopting, a requirement that advisers disclose the private fund’s ownership percentage of each covered portfolio investment. We discuss each of these aspects of the final rule below. The rule defines ‘‘portfolio investment’’ as any entity or issuer in which the private fund has invested directly or indirectly, as proposed.268 This definition is designed to capture any entity or issuer in which the private fund holds an investment, including through holding companies, subsidiaries, acquisition vehicles, special purpose vehicles, and other vehicles through which investments are made or otherwise held by the private

269Certain investment strategies can involve complex transactions and the use of negotiated instruments or contracts, such as derivatives, with counterparties. Although such trading involves a risk that a counterparty will not settle a transaction or otherwise fail to perform its obligations under the instrument or contract and thus result in losses to the fund, we would generally not consider the fund to have made an investment in the counterparty in this context. This approach is appropriate because any gain or loss from the investment generally would be tied to the performance of the derivative and the underlying reference security, rather than the performance of the counterparty. 270See Convergence Comment Letter. 271See CFA Comment Letter II (observing that the proposed definition would not cover broken deal expenses). We understand that broken deal fees are often associated with situations in which ownership of a potential portfolio investment is in flux. Because the definition of ‘‘portfolio investment’’ under the rule includes only entities or issuers in which a private fund has invested (whether directly or indirectly), the rule’s portfolio investment compensation requirements would not generally apply to compensation, such as a broken deal fee, from only a potential portfolio investment. A broken deal fee from an unconsummated portfolio investment transaction would thus generally not constitute portfolio investment compensation under the rule, which instead defines ‘‘portfolio investment’’ and ‘‘portfolio investment compensation’’ to broadly cover compensation that could reduce the value of a private fund’s assets. However, to the extent that a fund bears a broken deal expense, rule 211(h)(1)–2(b)(2) will require its disclosure as a fund fee or expense. Because this information will thus be reported as a fund fee or expense under the rule whenever a fund’s assets are actually reduced by broken deal expenses, we believe it is unnecessary to also require disclosure of this information as a type of portfolio investment compensation through changes to the definition of ‘‘portfolio investment’’ under the rule. 272See AIMA/ACC Comment Letter. 273See PIFF Comment Letter; cf. infra footnote 287. 274See AIC Comment Letter I; PIFF Comment Letter. 275See Convergence Comment Letter. 276See final rule 211(h)(1)–1 (defining ‘‘covered portfolio investment’’). 277Because advisers often use separate legal entities to conduct a single advisory business, the rule will capture portfolio investment compensation paid to an adviser’s related persons. fund.269 As a result, the definition may capture more than one entity or issuer with respect to any single investment made by a private fund. For example, if a private fund invests directly in a holding company that owns two subsidiaries, this definition captures all three entities. One commenter supported the proposed definition of ‘‘portfolio investment.’’ 270 Other commenters proposed alternative definitions,
such as to broaden the definition to cover broken deal expenses 271 or to narrow the definition to refer only to an issuer of securities in which the private fund has directly invested.272 One commenter suggested limiting the definition of ‘‘covered portfolio investment’’ to portfolio investments over which the adviser has ‘‘discretion or substantial influence’’ to compensate the adviser or its related persons.273 Many commenters discussed how the proposed definitions of ‘‘portfolio investment’’ and ‘‘covered portfolio investment’’ would impact advisers to funds of funds. Some commenters suggested that we exclude from these definitions funds of funds and other pooled vehicles that invest indirectly through underlying funds or unaffiliated structures.274 In contrast, another commenter stated that we should not exempt funds of funds because advisers to funds of funds should be able to provide the required information.275 Despite commenter concerns, we are adopting these definitions as proposed in order to capture, and improve investor transparency into, portfolio investment compensation arrangements that pose potential or actual conflicts of interest for the adviser, without exception for advisers of fund of funds. A fund of funds adviser should be in a position to determine whether an entity paying the adviser, or a related person, is a portfolio investment of the fund of funds under the final rule. For example, the fund of funds adviser can request information from the payor regarding whether certain underlying funds hold an investment in the payor. The fund of funds adviser can also request a list of investments from the underlying funds to determine whether any of those underlying portfolio investments have a business relationship with the adviser or its related persons. However, we recognize that, despite their best efforts, certain fund of funds advisers may lack information or may not be given information in respect of underlying entities, and depending on a private fund’s underlying investment structure, a fund of funds adviser may have to rely on good faith belief to determine which entity or entities constitute a portfolio investment under the rule. An adviser may consider documenting this determination, as well as its initial and ongoing diligence efforts to determine whether a portfolio investment has compensated the adviser or its related persons, in its records. We recognize that portfolio investments of certain private funds may not pay or allocate portfolio investment compensation to an adviser or its related persons. For example, advisers to hedge funds focusing on passive investments in public companies may be less likely to receive portfolio investment compensation than advisers to private equity funds focusing on control-oriented investments in private companies. Under the final rule, advisers are required to disclose information regarding only covered portfolio investments, which are defined as portfolio investments that
allocated or paid the investment adviser or its related persons portfolio investment compensation during the reporting period, as proposed.276 We believe this approach is appropriate because the portfolio investment table is designed to highlight the scope and magnitude of any investment-level compensation and to improve transparency for investors into the potential and actual conflicts of interest of the adviser and its related persons. If an adviser or its related person does not receive investment￾level compensation under the final definition of covered portfolio investment, the adviser will not have a related disclosure obligation under the rule. Accordingly, the rule does not require advisers to list any information regarding portfolio investments that do not fall within the covered portfolio investment definition for the applicable reporting period. These advisers, however, need to identify portfolio investment payments and allocations in order to determine whether they must provide the disclosures under this requirement. Portfolio Investment Compensation. The rule requires the portfolio investment table to show a detailed accounting of all portfolio investment compensation allocated or paid by each covered portfolio investment during the reporting period, with separate line items for each category of allocation or payment reflecting the total dollar amount, including, but not limited to, origination, management, consulting, monitoring, servicing, transaction, administrative, advisory, closing, disposition, directors, trustees or similar fees or payments by the covered portfolio investment to the investment adviser or any of its related persons. An adviser should generally disclose the identity of each covered portfolio investment to the extent necessary for an investor to understand the nature of the potential or actual conflicts associated with such payments. Similar to the approach taken with respect to adviser compensation and fund expenses discussed above, the rule requires a detailed accounting of all portfolio investment compensation paid or allocated to the adviser and its related persons.277 This will require advisers to list as a separate line item each category of portfolio investment

278This includes cash or non-cash compensation, including, for example, stock, options, and warrants. 279See final rule 211(h)(1)–1 (defining ‘‘portfolio investment compensation’’). 280This information should be meaningful for investors regardless of whether the private fund has an equity ownership interest or another kind of interest in the covered portfolio investment. For example, if a private fund’s interest in a covered portfolio investment is represented by a debt instrument, the amount of portfolio-investment compensation paid or allocated to the adviser may hinder or prevent the covered portfolio investment from satisfying its obligations to the fund under the debt instrument. 281See, e.g., OFT Comment Letter; LACERA Comment Letter; XTP Comment Letter. 282See, e.g., AIC Comment Letter I; Comment Letter of the Goldman Sachs Group, Inc. (Apr. 25,
2022) (‘‘Goldman Comment Letter’’); IAA Comment
Letter II.
283See, e.g., MFA Comment Letter I; PIFF Comment Letter. 284See MFA Comment Letter I. 285See PIFF Comment Letter. This commenter also suggested that including adviser compensation paid by a subsidiary of the fund as portfolio investment compensation will result in duplicate disclosure of these compensation amounts. To the extent that a subsidiary of the fund compensates the investment adviser on behalf of the fund, whether such compensation amounts should be disclosed in the fund table or the portfolio-investment table will depend on the facts and circumstances and, in particular, whether the subsidiary is an entity or issuer in which the fund has invested (i.e., a portfolio investment). However, such compensation amounts would not need to be disclosed twice (unless the adviser discloses such compensation amounts before and after the application of any offsets, rebates, or waivers, if applicable). compensation 278 and the corresponding total dollar amount. The rule requires advisers to disclose the amount of portfolio investment compensation attributable to a private fund’s interest in a covered portfolio investment.279 Such amount should not reflect the portion attributable to any other person’s interest in the covered portfolio investment. For example, if the private fund and another person co￾invested in the same portfolio investment and the portfolio investment paid the private fund’s adviser a monitoring fee, the table would list the total dollar amount of the monitoring fee attributable only to the fund’s interest in the portfolio investment. In addition to the required disclosure under the rule relating to the fund’s interest in the portfolio investment, advisers may, but are not required to, list the portion of the fee attributable to any other person’s interest in the portfolio investment. This approach is appropriate because it will reflect the amount borne by the fund and, by extension, the investors. This will be meaningful information for investors because the amount attributable to the fund’s interest generally reduces the value of investors’ indirect interest in the portfolio investment.280 Similar to the approach discussed above with respect to adviser compensation and fund expenses, an adviser is required to list the amount of portfolio investment compensation allocated or paid with respect to each covered portfolio investment both before and after the application of any offsets, rebates, or waivers. This will require an adviser to present the aggregate dollar amount attributable to the fund’s interest before and after any such reduction for the reporting period. Advisers will be required to disclose the amount of any portfolio investment compensation that they initially charge and the amount that they ultimately retain at the expense of the private fund and its investors. We continue to believe that this approach is appropriate given that portfolio investment compensation can take many different forms and often varies based on
fund type. For example, portfolio investments of private credit funds may pay the adviser a servicing fee for managing a pool of loans held directly or indirectly by the fund. Portfolio investments of private real estate funds may pay the adviser a property management fee or a mortgage￾servicing fee for managing the real estate investments held directly or indirectly by the fund. This disclosure will help inform investors about the scope of portfolio investment compensation allocated or paid to the adviser and related persons and provide insight to investors into the nature of some of the potential or actual conflicts of interest their private fund advisers face. For example, in cases where an adviser controls a fund’s portfolio investment, the adviser also generally has discretion over whether to charge portfolio investment compensation and, if so, the rate, timing, method, amount, and recipient of such compensation. Additionally, where the private fund’s governing documents require the adviser to offset portfolio investment compensation against other revenue streams or otherwise provide a rebate to investors, this information will help investors monitor the application of such offsets or rebates. As with adviser compensation and fund expenses, this approach should provide investors with sufficient detail to validate that portfolio investment compensation borne by the fund conforms to contractual agreements. Some commenters supported this portfolio investment compensation reporting requirement, stating that it will increase transparency.281 Other commenters suggested that this requirement will be overly burdensome or unnecessary.282 Some commenters similarly suggested that this portfolio investment compensation disclosure requirement will be overly broad in its application, as described below.283 One commenter stated that each private fund is itself a ‘‘related person’’ of the adviser, so any amounts paid to a fund (e.g., dividends on equity investments or interest and fees on debt investments) would be reportable under the rule as drafted, even though the fund’s investors receive 100% of the benefit.284 Another commenter requested that we clarify that the definition of ‘‘portfolio investment compensation’’ excludes fund-level fees and other compensation paid by a subsidiary of the fund in accordance with the fund’s governing documents.285 To clarify, this portfolio investment compensation disclosure requirement does not include distributions representing profit or return of capital to the fund, in each case, in respect of the fund’s ownership or other interest in a portfolio investment (e.g., dividends). This disclosure requirement is intended generally to capture potentially or actually conflicted compensation arrangements where the fund’s interest in a portfolio investment may be negatively impacted by that portfolio investment’s allocation or payment of portfolio investment compensation to the fund’s adviser or its related persons, such as
when an adviser or its related person charges a monitoring fee to a portfolio investment of a fund it advises, including when such charges are made in accordance with the fund’s governing documents. Although investors may contractually agree, per a fund’s governing documents and with appropriate initial disclosure, to an adviser’s ability to receive portfolio investment compensation, investors may be misled with respect to the magnitude and scope of such compensation to the extent that an adviser does not disclose information relating to the total dollar amount of such compensation after the fact. The rule requires an adviser to include the portfolio investment compensation paid to a related person, including, without limitation, a related person that is a sub-adviser, in its quarterly statement. Because portfolio investment compensation to related sub￾advisers presents the same conflicts of interest concerns discussed above with respect to portfolio investment compensation to advisers, the portfolio investment compensation disclosure requirements under the rule extends to portfolio investment compensation to an

286See, e.g., PIFF Comment Letter; CFA Comment Letter I; Goldman Comment Letter. 287See, e.g., AIMA/ACC Comment Letter; SIFMA–AMG Comment Letter I; SBAI Comment Letter; see also supra footnote 273. 288See Convergence Comment Letter. 289See, e.g., AIC Comment Letter I; Goldman Comment Letter. 290An adviser may be subject to a potential or actual conflict of interest arising out of its substantial influence over a portfolio investment, for example, if a fund it advises owns a sizeable but non-controlling share of the investment or if the portfolio investment is otherwise dependent on the adviser to operate its business. More broadly, we have recognized that an adviser is generally subject to a potential or actual conflict of interest with an advisory client when it has a conflicting interest that ‘‘might incline [the] investment adviser— consciously or unconsciously—to render advice which was not disinterested.’’ IA Fiduciary Duty Release, supra footnote 58, at 23. 291See, e.g., PIFF Comment Letter; AIMA/ACC Comment Letter. 292See CFA Comment Letter I. 293See ATR Comment Letter. 294See PIFF Comment Letter. 295See Convergence Comment Letter. adviser or any of its related persons, including a related sub-adviser, as proposed. Some commenters stated that we should require only aggregate portfolio investment-level disclosure and not each instance of portfolio investment compensation in order to provide more helpful information to investors, reduce costs and compliance burdens for advisers, or to avoid potentially causing portfolio companies to decline private fund investments.286 Although we recognize that it could be simpler or less burdensome for certain advisers to provide aggregate information, it is important that investors are made aware of each instance of portfolio investment compensation to the adviser. Investors should be able to analyze each such instance and raise any potential concerns about these compensation schemes with the adviser. Aggregated information could provide investors with a sense of the magnitude of such compensation schemes, but investors may not be able to understand the nature and scope of the conflicts associated with portfolio investment compensation to the adviser. Several commenters stated that the requirement to disclose portfolio investment compensation should be limited to circumstances in which an adviser has the discretion or authority to cause a portfolio investment to compensate the adviser or its related persons, as those are the circumstances in which conflicts of interest would arise.287 In contrast, another commenter supported our proposed approach and stated that advisers should be required to report portfolio investment compensation regardless of whether they have such discretion or authority over a portfolio investment.288 Other commenters suggested that the portfolio investment compensation disclosure requirement should exclude portfolio investment compensation to an adviser’s related persons that are
operationally and otherwise independent of the adviser, stating that some advisers have related persons who negotiate with advisers or their affiliates on an arm’s-length basis and would not represent their interests when negotiating with a portfolio investment.289 Although we understand that conflicts of interest issues are heightened when an adviser has the discretion or authority to control a portfolio investment (and in the context of portfolio investment compensation to a related person, to control such related person), we recognize that potential or actual conflicts of interest are not limited to scenarios where an adviser has such control and may arise, for instance, where an adviser does not have control but has substantial influence over a portfolio investment (or in the context of portfolio investment compensation to a related person, over such related person) and the portfolio investment is compensating the adviser or its related persons.290 As a result, we believe that it is necessary to provide investors with comprehensive information regarding payments of portfolio investment compensation allocated or paid to an adviser or its related person, without limitation to circumstances in which an adviser has discretion or authority over the portfolio investment (or over the related person, as applicable). Some commenters raised concerns about potential confidentiality issues if advisers are required to disclose the names of portfolio investments as part of this portfolio investment compensation disclosure.291 Although we appreciate these confidentiality concerns, we believe that many investors may likely already know the names of the fund’s portfolio investments. Even if investors do not know this information, investors are typically subject to contractual obligations to maintain the confidentiality of this information. Further, as stated above, advisers should generally disclose the identity of each covered portfolio investment to the extent necessary for an investor to understand the nature of the potential or actual conflicts associated with such payments. To the extent the identity of any covered portfolio investment is not necessary for an investor to understand the nature of the conflict, advisers may use consistent code names (e.g., ‘‘portfolio investment A’’). Ownership Percentage. We proposed but are not adopting a requirement that the portfolio investment table include a list of the fund’s ownership percentage of each covered portfolio investment. At proposal, we stated that we believed this information would provide investors with helpful context for the amount of portfolio investment compensation paid or allocated to the adviser or its related persons relative to the fund’s ownership. For example, if portfolio investment compensation is calculated based on the portfolio investment’s total enterprise value, then investors would be able to compare the amount of portfolio investment compensation relative to the fund’s ownership
percentage. One commenter indicated that these ownership percentages would not be helpful for investors in practice.292 Another commenter stated that calculating and recording ownership percentages of portfolio investments would be onerous and costly.293 Another commenter suggested that we should require advisers to disclose these ownership percentages only if the adviser has discretion or substantial influence to cause the accompanying portfolio investment compensation to be paid to the adviser.294 In contrast, one commenter suggested expanding the ownership percentage disclosure obligation to cover any economic right, interest, or benefit that the fund has in a company.295 Although we maintain that these ownership percentages might provide illustrative information for investors in certain circumstances, like the one noted above, we recognize that they might be misleading or unhelpful in other cases. For instance, if a fund owns voting stock in a company with a significant amount of non-voting stock, then the ownership percentage might appear low relative to the amount of control that the fund’s adviser actually exerts. Similarly, if a fund owns only a debt interest in a portfolio investment, its ownership percentage would be represented as zero even if the debt interest is substantial enough that the fund’s adviser can exact some sort of compensation for itself. We do not want investors to misestimate the degree to which advisers are able to influence portfolio investments to provide compensation. Accordingly, in response to commenters, we have decided not to adopt this requirement to include ownership percentages for covered portfolio investments.

296Final rule 211(h)(1)–2(d).
297 Id.
298See, e.g., Comment Letter of Albourne Group (Apr. 22, 2022) (‘‘Albourne Comment Letter’’); TRS Comment Letter; Comment Letter of the California Public Employees’ Retirement System (May 3, 2022) (‘‘CalPERS Comment Letter’’). 299See, e.g., LSTA Comment Letter; AIMA/ACC Comment Letter; IAA Comment Letter II. 300The definition of a liquid fund is discussed below in this section II.B.2. 301The definition of an illiquid fund is discussed below in this section II.B.2. 302As discussed below, we are adopting modifications to (i) the proposed definition of illiquid fund and, by reference, the proposed definition of liquid fund and (ii) certain aspects of the required performance disclosure for illiquid funds. 303Final rule 211(h)(1)–2(e)(2). For example, the rule requires an adviser to an illiquid fund to show gross internal rate of return with the same prominence as net internal rate of return. Similarly, the rule requires an adviser to a liquid fund to show the annual net total return for each fiscal year with the same prominence as the cumulative net total return for the current fiscal year as of the end of the most recent fiscal quarter covered by the quarterly statement. 304See, e.g., CII Comment Letter; NEA and AFT Comment Letter; OPERS Comment Letter; Morningstar Comment Letter. 305See, e.g., IAA Comment Letter II; Comment Letter of ApeVue, Inc. (Apr. 25, 2022); ICM Comment Letter. 306See, e.g., Ropes & Gray Comment Letter; NYC Bar Comment Letter II. While we acknowledge that quarterly statements may increase costs, we believe these costs are justified in light of the benefits of the rule. As discussed above, investors will benefit from mandatory timely updates regarding fund performance. See supra the introductory discussion in section II.B. 307See, e.g., Schulte Comment Letter; PIFF Comment Letter; NYC Bar Comment Letter II. 308See infra section VI.D.2. 309See infra section II.B.2.a) and section II.B.2.b) for discussion of the use of the particular performance metrics obligations for liquid funds and illiquid funds, respectively, in the final rule. (c) Calculations and Cross-References to Organizational and Offering Documents As proposed, the quarterly statement rule requires each statement to include prominent disclosure regarding the manner in which expenses, payments, allocations, rebates, waivers, and offsets are calculated.296 This disclosure should assist private fund investors in understanding and evaluating the adviser’s calculations. This disclosure will generally require advisers to describe, among other things, the structure of, and the method used to determine, any performance-based compensation set forth in the quarterly statement (such as the distribution waterfall, if applicable) and the criteria on which each type of compensation is based (e.g., whether such compensation is fixed, based on performance over a certain period, or based on the value of the fund’s assets). To facilitate an investor’s ability to seek additional
information and understand the basis of any expense, payment, allocation, rebate, waiver, or offset calculation, the quarterly statement also must include cross-references to the relevant sections of the private fund’s organizational and offering documents that set forth the applicable calculation methodology.297 Some commenters supported this calculation and cross-reference disclosure requirement, stating that it would help investors monitor and understand fees and expenses.298 Other commenters suggested that this calculation and cross-reference disclosure requirement would be too costly or that it would clutter the statement and make it more difficult for investors to read and digest the information contained therein.299 The required cross-references to the fund’s documents will enable investors to compare what the private fund’s documents establish that the fund (and indirectly the investors) will be obligated to pay to what the fund (and indirectly the investors) actually paid during the reporting period and thus to assess and monitor more effectively the accuracy of the payments. Including this information in the quarterly statement will better enable an investor to confirm that the adviser calculated, for example, advisory fees in accordance with the fund’s organizational and offering documents and to identify whether the adviser deducted or charged incorrect or unauthorized amounts.
2. Performance Disclosure
As proposed, in addition to providing information regarding fees and expenses, the rule requires advisers to include standardized fund performance information in each quarterly statement provided to fund investors. The rule requires advisers to liquid funds 300 to show performance based on net total return on an annual basis for the 10 fiscal years prior to the quarterly statement or since the fund’s inception (whichever is shorter), over one-, five-, and 10-fiscal year periods, and on a cumulative basis for the current fiscal year as of the end of the most recent fiscal quarter. For illiquid funds,301 the rule requires advisers to show performance based on internal rates of return and multiples of invested capital since inception and to present a statement of contributions and distributions.302 The rule requires advisers to display the different categories of required performance information with equal prominence.303 Many commenters supported the performance disclosure requirement and generally suggested that it would better enable investors to monitor, compare, or otherwise alter their private fund investments.304 Other commenters did not support this requirement for a number of reasons.305 In general, opponents of this requirement stated that the required performance disclosure in the quarterly statements would lead to increased costs that would ultimately be passed down to private fund investors with potentially little or no corresponding benefit, as many advisers already regularly provide performance reporting that they assert investors deem adequate.306 These commenters stated that current market practices are typically sufficient and can potentially be more effective in conveying relevant and fund-tailored information regarding a private fund’s performance than a standardized disclosure approach would.307 While we acknowledge that quarterly statements may increase costs, we believe these costs are justified in light of the benefits of the rule.308 It is essential that quarterly statements include performance in order to enable investors to compare private fund investments, comprehensively understand their existing investments, and determine what to do holistically with their overall investment portfolio.309 A quarterly statement that includes fee, expense, and performance information will allow investors to monitor their investments better for market developments and potential fund-level abnormalities (e.g., if performance varies drastically quarter to quarter or differs extensively from relevant market trends or, if applicable, comparable benchmarks), as well as to understand more broadly the impact of fees and expenses on the performance of their investments. Simple and clear disclosure of this information is fundamental to the terms of an investor’s relationship with an adviser because it is critical to investors’ abilities to make investment decisions. For example, a quarterly statement that includes fee and expense, but not
performance, information would not allow an investor to perform a cost￾benefit analysis to determine whether to retain the current investment or consider other options. Similarly, an investor without fee, expense, and performance information would be unable to determine whether to invest in other private funds managed by the same adviser. In addition, investors may use fee, expense, and performance information about their current investments to inform their overall investment decisions (e.g., whether to diversify) and their view of the market. The inclusion of performance disclosure

310See AIMA/ACC Comment Letter. 311Advertisements to prospective clients and investors include advertisements to current clients and investors about new or additional advisory services with regard to securities. See Marketing Release, supra footnote 127, at section II.A.2.a.iv (noting that the definition of ‘‘advertisement’’ includes a communication to a current investor that offers new or additional advisory services with regard to securities, provided that the communication otherwise satisfies the definition of ‘‘advertisement’’). 312The marketing rule and its specific protections generally do not apply in the context of a quarterly statement. See Marketing Release, supra footnote 127, at sections II.A.2.a.iv and II.A.4. 313Private funds can have various types of complicated structures and involve complex financing mechanisms. As a result, an adviser may need to make certain assumptions when calculating performance for private funds. 314See David Snow, Private Equity: A Brief Overview: An introduction to the fundamentals of an expanding, global industry, PEI Media (2007), at 11 (discussing variations on private equity performance metrics). 315See infra section II.B.2.b). 316See NYC Comptroller Comment Letter. 317See rule 206(4)–1. A communication to a current investor is an ‘‘advertisement’’ when it offers new or additional investment advisory services with regard to securities. 318This includes the antifraud provisions of
section 206 of the Advisers Act, rule 206(4)–8 under
the Advisers Act (rule 206(4)–8), section 17(a) of the Securities Act, and section 10(b) of the Exchange Act (and rule 10b–5 thereunder), to the extent relevant. in the quarterly statement also helps prevent fraud, deception, and manipulation because it requires advisers to provide timely and consistent performance disclosures to enable and empower investors to assess adviser performance. This disclosure will decrease the likelihood that investors will be defrauded, deceived, or manipulated by deceptive or manipulative representations of performance and it increases the likelihood that any misconduct will be detected sooner. One commenter stated that we should align the performance reporting standards with the principles-based approach reflected in the marketing rule.310 Although there are commonalities between the performance reporting elements of the final rule and the performance elements of our recently adopted marketing rule, the two rules have different purposes that stem from the needs of the different types of clients and investors they seek to protect. While the marketing rule is focused on prospective clients and investors,311 the quarterly statement rule is focused on current clients and investors. All clients and investors should be protected against misleading, deceptive, and confusing information, but current clients and investors have different needs from those of prospective clients and investors. Current investors should receive performance reporting that allows them to evaluate an investment alongside corresponding fee and expense information. Current investors also should receive performance reporting that is provided at timely, predictable intervals so that an investor can monitor and evaluate an investment’s progress over time, remain abreast of changes, compare information from quarter to quarter, and take action where possible.312 Although the marketing rule requires net performance to accompany gross performance, it does not prescribe a breakdown of fees and expenses to accompany performance as is required under the quarterly statement rule. The marketing rule also does not require performance to be delivered at specified intervals as is required under the quarterly statement rule. While these rules both promote investor protection, the quarterly statement rule is specifically designed to meet the needs of current investors to evaluate their current portfolios. Without standardized performance metrics (and adequate disclosure of the criteria used and assumptions made in calculating the performance),313 it is more difficult for investors to compare their private fund investments managed by the same adviser or gauge the value of an adviser’s investment management services by comparing the performance of private funds advised by different advisers.314 Currently, there are various approaches to report private fund performance to fund investors, often depending on the type of private fund (e.g., the fund’s strategy, structure,
target asset class, investment horizon, and liquidity profile). Certain of these approaches to performance reporting may be misleading without the benefit of adequately disclosed assumptions, and others may lead to investor confusion. For example, an adviser showing internal rate of return with the impact of fund-level subscription facilities could mislead investors as fund-level subscription facilities can artificially increase performance metrics.315 An adviser showing private fund performance as compared to a public market equivalent (‘‘PME’’) in a case where the private fund does not have an appropriate benchmark may mislead investors to believe that the private fund performance is comparable to the performance of the PME. Certain investors may also be led to believe that their private fund investment has a liquidity profile that is similar to an investment in the PME or an index that is similar to the PME. Standardized performance information will help an investor decide whether to continue to invest in the private fund or, if applicable, redeem or withdraw from the private fund, as well as more holistically to make decisions about other components of the investor’s portfolio. Furthermore, requiring advisers to show performance information alongside fee and expense information in the quarterly statement will provide a more complete picture of an investor’s private fund investment. This information will help investors understand the true cost of investing in the private fund and be particularly valuable for investors that are paying performance-based compensation. This performance reporting will also provide greater transparency into how private fund performance is calculated, improving an investor’s ability to understand performance. One commenter requested that we clarify that investors may negotiate for performance and other reporting in addition to what is required by this rule.316 The rule recognizes the need for different performance metrics for private funds based on certain fund characteristics, but also imposes a general framework to help ensure there is sufficient standardization in order to provide useful, comparable information to investors. An adviser remains free to include additional performance metrics in the quarterly statement as long as the quarterly statement presents the performance metrics prescribed by the rule and complies with the other requirements in the rule. However, advisers that choose to include additional information should consider what other rules and regulations might apply. For example, although we generally do not consider information in the quarterly statement required by the rule to be an ‘‘advertisement’’ under the marketing rule, an adviser that offers new or additional investment advisory services with regard to securities in the quarterly statement would need to consider whether such information is subject to the marketing rule.317 An adviser also needs to consider whether performance information
presented outside of the required quarterly statement, even if it contains some of the same information as the quarterly statement, is subject to, and meets the requirements of, the marketing rule. Regardless, the quarterly statement is subject to the antifraud provisions of the Federal securities laws.318 Some commenters suggested that we should also require a public market equivalent (‘‘PME’’) as part of the

319See, e.g., NEA and AFT Comment Letter; Comment Letter of the Interfaith Center on Corporate Responsibility (Apr. 25, 2022) (‘‘ICCR Comment Letter’’); AFL–CIO Comment Letter. 320See CFA Comment Letter I; Comment Letter of KPMG LLP (Apr. 25, 2022) (‘‘KPMG Comment Letter’’). 321See AIC Comment Letter II. 322Final rule 211(h)(1)–2(e)(1). The rule does not require the adviser to revisit the determination periodically; however, advisers should generally consider whether they are providing accurate information to investors and whether they need to revisit the liquid/illiquid determination based on changes in the fund. 323Final rule 211(h)(1)–1 (defining ‘‘illiquid fund’’). 324See Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 946–205–50–23. 325See, e.g., OFT Comment Letter; IST Comment Letter; CII Comment Letter. 326See, e.g., Morningstar Comment Letter; SIFMA–AMG Comment Letter I; SBAI Comment Letter. 327See, e.g., ILPA Comment Letter I; SIFMA– AMG Comment Letter I. 328Proposed prong (iv) states ‘‘. . . has as a predominant operating strategy the return of the proceeds from disposition of investments to investors.’’ 329See Proposing Release, supra footnote 3, at 62. 330See, e.g., PIFF Comment Letter; Comment Letter of Pricewaterhouse Coopers LLP (Apr. 25,
2022) (‘‘PWC Comment Letter’’).
331See ILPA Comment Letter I.
332See, e.g., SIFMA–AMG Comment Letter I; Morningstar Comment Letter; Convergence Comment Letter. quarterly statements.319 While a PME may be helpful in certain circumstances, it can also be misleading or confusing in others. Many private fund investment strategies may not have an appropriate PME. For example, it may be difficult to identify an effective PME for a private fund whose strategy is focused on turn￾around opportunities for private companies. Similarly, it may be challenging to identify appropriate PMEs for certain private funds with highly technical or niche strategies. A PME may also mislead investors to believe that their investment has a similar liquidity profile to the PME. For example, comparing the performance of a technology-focused buy-out fund to a public technology company index may obscure the reality that the former is illiquid while the latter is liquid and thus a reasonable investor would not necessarily expect them to have the same performance. Accordingly, the final rule does not require a PME as part of the quarterly statements. Certain commenters suggested that we should clarify that the adviser’s (and its affiliate’s) interests should be excluded when calculating performance because such interests are typically non-fee paying.320 We agree that the adviser’s (and its affiliate’s) interests should generally be excluded when calculating performance for the quarterly statements to prevent the performance from being misleading. A typical example would be the general partner’s interest in a private fund, which generally does not pay management fees or carried interest. Due to the lack of fees, the performance of such non-fee paying interests is not necessarily relevant for other investors and would serve to increase net returns in a way that could be misleading. One commenter suggested that we should not require performance metrics until the fund has at least four quarters of results.321 While some private funds may have limited investment activities during the first four quarters of their life, it is not always such the case. Many liquid funds are able to deploy capital quickly and, as a result, generate important performance information that investors should have access to. Because investors have the ability to redeem from liquid funds, it is also important that they begin receiving performance information as soon as practicable so that they can decide whether or not to remain invested in the fund. Many illiquid funds are also able to deploy capital and realize or partially realize investments on an accelerated basis and thus will have meaningful performance information in the early quarters of their life. Accordingly, we are requiring all private funds, whether liquid or illiquid, to provide quarterly statements containing these performance metrics after their first two full fiscal quarters of operating results. Liquid v. Illiquid Fund Determination The performance disclosure requirements of the quarterly statement
rule require an adviser first to determine whether its private fund client is an illiquid or liquid fund, as defined in the rule, no later than the time the adviser sends the initial quarterly statement.322 The adviser is then required to present certain performance information depending on this categorization. These definitions are intended to facilitate consistent portrayals of the fund returns over time as well as more standardized comparisons of the performance of similar funds. We are defining ‘‘illiquid fund’’ as a private fund that: (i) is not required to redeem interests upon an investor’s request and (ii) has limited opportunities, if any, for investors to withdraw before termination of the fund.323 At proposal, we had listed six factors used to identify an illiquid fund: a private fund that (i) has a limited life; (ii) does not continuously raise capital; (iii) is not required to redeem interests upon an investor’s request; (iv) has as a predominant operating strategy the return of the proceeds from disposition of investments to investors; (v) has limited opportunities, if any, for investors to withdraw before termination of the fund; and (vi) does not routinely acquire (directly or indirectly) as part of its investment strategy market-traded securities and derivative instruments. The proposed factors were aligned with the factors for determining how certain types of private funds should report performance under U.S. Generally Accepted Accounting Principles (‘‘U.S. GAAP’’).324 We requested comment on whether we should modify the illiquid fund definition by adding or removing factors. Many commenters supported the liquid and illiquid fund distinction as
part of the required performance
reporting,325 and many other commenters criticized it.326 Of these, a number of commenters suggested we modify the proposed definitions for liquid and illiquid funds.327 Certain commenters stated that the distinction between liquid and illiquid funds is overly technical and does not align with how sponsors typically market their private funds, particularly with respect to the proposed ‘‘disposition of investments’’ prong.328 We had requested comment specifically regarding whether the proposed ‘‘disposition of investments’’ prong could cause certain funds, such as real estate funds and credit funds, for which we generally believe internal rate of return and multiple of invested capital are the appropriate performance measures, to be treated as liquid funds under the proposed rule.329 Certain commenters responded with their view that the proposed rule would result in private funds that should report an internal rate of return and multiple of invested capital instead reporting a total net return metric (or vice versa).330 Similarly, a commenter stated that we should define ‘‘illiquid fund’’ more precisely to capture strategies such as private credit, e.g., income generating portion of assets, not just a focus on return of proceeds from the disposition of investments, as contemplated by prong four of the proposed definition.331 Some commenters stated that it may be unclear how certain kinds of private funds would be categorized under the proposed six factor definition.332 After considering responses from commenters, we have decided that the definition of an illiquid fund should focus only on number three and number five of the proposed six factors, i.e., a private fund that (i) is not required to

333See, e.g., OFT Comment Letter; IST Comment Letter; CII Comment Letter. 334See, e.g., Morningstar Comment Letter; SIFMA–AMG Comment Letter I; SBAI Comment Letter. 335See, e.g., Morningstar Comment Letter; Convergence Comment Letter. 336See, e.g., BVCA Comment Letter; SBAI Comment Letter; AIMA/ACC Comment Letter. redeem interests upon an investor’s request; and (ii) has limited opportunities, if any, for investors to withdraw before termination of the fund because we believe that redemption and withdrawal capability represents the distinguishing feature between illiquid and liquid funds. We also believe that, by narrowing the definition to this distinguishing feature, the rule provides a more targeted approach and will result in fewer funds being mischaracterized than under the proposed definition. Generally, if a private fund allows voluntary redemptions/withdrawals, then it is a liquid fund and must provide total returns. Similarly, if a private fund does not allow voluntary redemptions/withdrawals, then it is an illiquid fund and must provide internal rates of return and multiples of invested capital. Private funds that fall into the ‘‘illiquid fund’’ definition are generally closed-end funds that do not offer periodic redemption/withdrawal options other than in exceptional circumstances, such as in response to regulatory events. For example, most private equity and venture capital funds will likely fall under the illiquid fund definition, and the rule requires advisers to these types of funds to provide performance metrics that suit their particular characteristics, such as irregular cash flows, which otherwise make measuring performance difficult for both advisers and investors. We recognize, however, that even traditional, closed-end private equity funds have certain redemption or withdrawal rights for regulatory events (e.g., redemptions related to the Employee Retirement Income Security Act (‘‘ERISA’’) and the Bank Holding Company Act (‘‘BHCA’’)) and other extraordinary circumstances (e.g., redemptions related to a violation of a State pay-to-play law). Private equity and other similar closed-end funds would still be classified as illiquid funds, as defined in this rule, so long as such opportunities to redeem are limited. As proposed, we are defining a ‘‘liquid fund’’ as any private fund that is not an illiquid fund. Some commenters generally supported the liquid and illiquid fund distinction as noted above,333 while other commenters generally criticized the distinction.334 We continue to believe that the proposed definition is appropriate because it will capture any fund that does not fit within the definition of ‘‘illiquid fund’’ and ensure that liquid fund investors receive the same type of performance metrics. Private funds that fall into the ‘‘liquid fund’’ definition generally allow periodic investor redemptions, such as monthly, quarterly, or semi-annually. The rule will require advisers to these types of funds to provide
performance metrics that show the year-over-year return using the market value of the underlying assets. We continue to believe that the performance metrics for liquid funds— which are discussed in detail below— will allow investors to assess better these funds’ performance. We understand that liquid funds generally are able to determine their net asset value on a regular basis and compute the year-over-year return using the market-based value of the underlying assets. We have taken a similar approach with regard to registered funds, which invest a substantial amount of their assets in primarily liquid holdings (e.g., publicly traded securities) and, as a result, are also generally able to determine their net asset value on a regular basis and compute the year-over-year return using the market-based value of the underlying assets. Investors in a private fund that is a liquid fund would similarly find this information helpful. Most traditional hedge funds likely fall into the liquid bucket and will need to provide disclosures regarding the underlying assumptions of the performance (e.g., whether dividends or other distributions are reinvested). Some commenters suggested creating a third category to capture certain ‘‘hybrid’’ funds.335 A third category for hybrid funds would create confusion and increase the possibility of certain private funds not clearly belonging to a single category. A category of hybrid funds would encapsulate an enormous diversity of funds, many of which would be more different from one another than they would be from liquid or illiquid funds, as defined in the rule. Additionally, new structures for private funds are constantly being developed, and there will certainly be new approaches in the future as well that are difficult to anticipate. It would likely be impractical to attempt to define characteristics of hybrid funds and thus to determine what performance metrics are necessary for them. We believe it is more effective to crystallize the key difference between liquid and illiquid funds in the final rule, as discussed above. In this regard, and as stated above, we believe that our simplification of the definition of ‘‘illiquid fund’’ in the final rule will result in fewer funds being mischaracterized than under the proposed definition, and thus this change in the final rule will reduce the need to create an additional category of hybrid funds to facilitate the categorization of private funds for performance reporting purposes. Other commenters requested that we let advisers choose the most appropriate approach with respect to performance reporting instead of requiring these categories.336 A primary objective of the rule, however, is to provide the investors of a private fund with comparable performance information with respect to that fund and the investor’s other private fund investments. Accordingly, we believe that establishing standardization with respect to a minimum level of sufficient disclosure is necessary.
Currently, it may be difficult for certain investors to compare performance across their private fund investments if the investors are not large enough to negotiate for supplemental fund reporting or well￾resourced enough to analyze in a timely manner the potential nuances in how different private funds present their performance. We believe that establishing a level of standardized performance reporting should make it easier for investors to evaluate their private fund investments and make more informed investment decisions. The final rule requires advisers to provide performance reporting for each private fund as part of the fund’s quarterly statement. The determination of whether a fund is liquid or illiquid dictates the type of performance reporting that must be included and, because it will result in funds with similar liquidity characteristics presenting the same type of performance metrics, this approach will improve comparability of private fund performance reporting for fund investors. (a) Liquid Funds We are adopting the performance requirements for liquid funds as proposed, other than (i) the proposed requirement for an adviser to disclose annual net total returns since inception and (ii) the proposed use of calendar year reporting periods. Under the final rule, an adviser to a liquid fund is required to provide annual net total returns since inception or for each fiscal

337See section II.B.3.
338See, e.g., AIMA/ACC Comment Letter; ILPA Comment Letter I; SIFMA–AMG Comment Letter I (suggesting that the SEC require reporting only on an annual basis within 120 days of the fund’s fiscal year end); GPEVCA Comment Letter (suggesting that any periodic disclosure requirement be tied to the annual audit process). 339See, e.g., ATR Comment Letter; AIMA/ACC Comment Letter. 340See, e.g., PWC Comment Letter; AIMA/ACC Comment Letter. 341See CFA Comment Letter I. 342See CFA Comment Letter II; Ropes & Gray Comment Letter. 343Final rule 211(h)(1)–2(e)(2)(i)(B). 344See CFA Comment Letter I. 345See, e.g., GPEVCA Comment Letter; BVCA Comment Letter. 346See, e.g., IAA Comment Letter II; NYC Bar Comment Letter II; PIFF Comment Letter; Schulte Comment Letter. See also Marketing Release, supra footnote 127, at 182. year over the 10 years prior to the quarterly statement, whichever is shorter. As discussed in greater detail below, this change to the minimum number of years of required performance is responsive to commenters who stated that reporting since inception is overly broad and that many advisers would not have records going back to inception. Under the final rule, an adviser to a liquid fund must also provide performance metrics based on fiscal rather than calendar year reporting periods. As discussed in greater detail below,337 the adoption of fiscal reporting periods seeks to align the delivery of the fourth quarter statement with the time that private funds obtain their audited annual financials. The adoption of fiscal reporting periods is also responsive to commenters who stated that fiscal periods would more closely align with industry practice.338 While this modification may affect comparability for some investors across private funds with differing fiscal years, we understand that the majority of private funds’ fiscal years match the calendar year and thus do not expect comparability to be substantially affected in most cases. We discuss each performance reporting requirement for liquid funds in turn below. Annual Net Total Returns. The final rule requires advisers to liquid funds to disclose performance information in quarterly statements for specified periods. First, as noted above, an adviser to a liquid fund is required to disclose either the liquid fund’s annual net total returns since inception or for each fiscal year over the 10 years prior to the quarterly statement, whichever is shorter. For example, a liquid fund that commenced operations four fiscal years ago would show annual net total returns for each of the first four fiscal years since its inception. A liquid fund that commenced operations fourteen years ago, however, would be required to show annual net total returns only for each of the most recent 10 fiscal years. Some commenters stated that the proposed requirement of performance since inception is unworkable.339 In particular, certain commenters stated that certain longstanding funds may not have the necessary records to
calculate the requisite performance metrics on an inception-to-date basis, particularly those records outside of the record￾keeping requirements of the Advisers Act.340 Another commenter suggested that, instead of annual returns since inception for liquid funds, we should require annual returns for the past 10 years.341 We recognize that it may be difficult for certain longstanding liquid funds to calculate inception-to-date performance. Specifically, liquid funds that have been operating for decades might have to make significant estimations to be able to report inception-to-date performance if the relevant records have not been maintained over their entire life. While we believe there continues to be value in reporting inception-to-date performance even for longstanding funds, we also do not want liquid funds to be obligated to report inaccurate or misleading performance information based on estimates of performance from decades ago to investors. We agree with commenters that stated 10 years is an appropriate time period for liquid funds to report performance,342 as it will capture the salient performance history in most cases and generally align with market practice and investor preferences, based on staff experience. A 10-year period should also generally still capture recent, relevant market cycles that may have affected performance. Accordingly, we are requiring only a minimum of 10 years of performance for liquid funds that have been in operation for longer than that. Liquid funds are free, but not required, to report performance on a longer horizon than 10 years, if applicable. Annual net total returns will provide fund investors with a comprehensive overview of the fund’s performance over the life of the fund or the prior 10 years, whichever is shorter, and improve an investor’s ability to compare the fund’s performance with other similar funds. As noted above, investors can use performance information in connection with fee and expense information to analyze the value of their private fund investments. This requirement helps ensure that advisers do not present only recent performance results or only results for periods with strong performance. The rule also requires advisers to present each time period with equal prominence. Average Annual Net Total Returns. Second, advisers to liquid funds are required to show each liquid fund’s average annual net total returns over the one-, five-, and 10-year periods, as proposed.343 If the private fund did not exist for any of these prescribed time periods, then the adviser is not required to provide the corresponding information. Requiring performance over these time periods will provide investors with standardized performance metrics that reflect how the private fund performed during different market or economic conditions. These time periods provide reference points for private fund investors, particularly when comparing two or more private fund investments, and provide private fund investors
with aggregate performance information that can serve as a helpful summary of the fund’s performance. One commenter suggested that we should include a definition for ‘‘net total returns.’’ 344 To the contrary, other commenters suggested that we should not prescribe how performance is calculated.345 We think that defining ‘‘net total returns’’ for liquid funds in this rulemaking may not result in the best outcomes for investors. As used in the final rule, the liquid fund category captures a set of private funds that is unrestricted so long as they do not meet the definition of an illiquid fund and, as a result, is highly diverse. Some liquid funds target highly niche assets for which the calculation of net total returns is based on specialized industry norms and practices. Without further consideration and study, prescribing a single definition for ‘‘net total returns’’ could end up harming investors by distorting the reported performance of liquid funds that invest in less common asset classes from what investors have come to understand and expect. Consequently, we do not believe it is appropriate to prescribe a definition for ‘‘net total returns’’ at this time. Certain commenters stated that requiring liquid funds to report the one-, five-, and 10-year periods would provide data to investors that the Commission recently determined in the marketing rule was not useful information for private funds.346 One such commenter asserted that requiring the use of standardized reporting information to be presented alongside

347See PIFF Comment Letter. 348See Marketing Release, supra footnote 127, at 181–182. 349See id. 350For example, if performance suddenly and dramatically improves without explanation, then investors will be in a better position (especially where there are comparable benchmarks that did not experience the same sudden and dramatic change) to ask advisers to provide an explanation and assess whether fraud, deception or manipulation may be occurring. 351See, e.g., Item 4(b)(2) of Form N–1A. 352See supra the discussion of the definition of ‘‘liquid fund’’ in section II.B.2. 353See SIFMA–AMG Comment Letter I. 354See Morningstar Comment Letter. 355We also note that advisers are able to provide, and investors are free to request and negotiate for, average annual net returns over a three-year period, provided that such additional reporting complies with other regulations, such as the final marketing rule when applicable. See supra the introductory discussion in section II.B.2. 356One commenter recommended that we should clarify how distributions that are recalled by advisers for additional investments (often referred to as ‘‘recycling’’) should be treated for certain of these illiquid fund performance metrics. See CFA Comment Letter II. Advisers generally should treat any distributions that they recall for additional investments as additional contributions for purposes of calculating these illiquid fund performance metrics as we understand this is the expectation of investors. As a result, illiquid fund performance information that does not treat such Continued the more relevant data would result in multiple sets of performance data and metrics, creating additional confusion for investors and an overwhelming volume of information.347 While we acknowledge that the marketing rule excepted private funds from its one-, five-, and 10-year periods presentation requirement, the underlying concern with requiring these intervals was that it could be not useful or meaningful, and possibly confusing, for investors in a closed-end fund.348 Among our reasons for excepting all private funds from the requirement under the marketing rule, we stated that we did not believe the benefit of having advisers parse the rule’s requirements based on specific fund types would justify the complexity.349 Performance information in the quarterly statements serves a somewhat different purpose, however. As stated above, the needs of current clients and investors often differ in some respects from the needs of prospective clients and investors. Current investors generally need to receive performance reporting during different time periods to be able to evaluate properly an investment’s performance. Current investors also generally need to receive performance reporting that is provided at timely, predictable intervals to be able to compare information effectively from quarter to quarter and year to year, and thus be positioned to take action where possible. Requiring regular disclosure
of performance for liquid funds over these periods will help prevent fraud, deception, and manipulation because timely and consistent performance information will decrease the likelihood that investors will be defrauded, deceived, or manipulated by deceptive or misleading representations of performance, especially if such representations occur with respect to each time period.350 It also increases the likelihood that any misconduct will be detected sooner. Accordingly, the final rule will retain the one-, five- and 10- year periods for liquid funds because we believe they will assist investors with this process. Cumulative Net Total Returns. Third, the adviser is required to show the liquid fund’s cumulative net total return for the current fiscal year as of the end of the most recent fiscal quarter covered by the quarterly statement. For example, a liquid fund that has been in operation for four fiscal years (beginning on January 1) and seven months would show, pursuant to this requirement, the cumulative net total return for the current fiscal year through the end of the second quarter (i.e., year-to-date fund performance as of the end of the most recent fiscal quarter covered by the quarterly statement). This information will provide fund investors with insight into the fund’s most recent performance, which investors can use to assess the fund’s performance during recent market conditions. This quarterly performance information will also provide helpful context for reviewing and monitoring the fees and expenses borne by the fund during recent quarters, which the quarterly statement will disclose. These required performance metrics should allow investors to better assess these funds’ performance. Liquid funds generally should be able to determine their net asset value on a regular basis and compute the year-over-year return using the market-based value of the underlying assets. We have taken a similar approach with regard to registered open-end funds, which typically invest a substantial amount of their assets in primarily liquid underlying holdings (e.g., publicly traded securities).351 Liquid funds, like registered funds, currently generally report performance, at a minimum, on an annual and quarterly basis. Investors in a private fund that is a liquid fund would similarly find this information helpful. Most traditional hedge funds are likely liquid funds and will need to provide disclosures regarding the underlying assumptions of the performance (e.g., whether dividends or other distributions are reinvested).352 One commenter suggested that we should reevaluate the requirement for liquid funds to show both annualized and cumulative net performance and grant private funds flexibility in providing either annualized or cumulative net performance.353 We decided not to allow this flexibility to help ensure that investors receive standardized, comparable information for each private fund. Permitting advisers to pick and choose which return metrics
to use would be inconsistent with this goal. Accordingly, as proposed, the final rule will require advisers to show both annualized and cumulative net performance. Another commenter suggested that we should also require liquid funds to provide average annual net returns over a three-year period in addition to the one-, five- and 10-year periods to potentially provide additional transparency to private fund investors.354 Although we recognize that additional performance information may serve to enhance the overall amount of information available to investors, we believe that the presentation of standardized performance information for one-, five￾and 10-year periods will provide a sufficient level of minimum disclosure (which may be further supplemented) for private fund investors to monitor and gain insight into how a private fund performed during different market or economic conditions.355 (b) Illiquid Funds We are adopting the performance requirements for illiquid funds largely as proposed, other than the requirement for an adviser to disclose performance figures solely without the impact of fund-level subscription facilities. Under the final rule, an adviser is required to disclose performance figures with and without the impact of fund-level subscription facilities. As discussed in greater detail below, this change is responsive to commenters who stated that reporting both sets of performance figures would provide investors with a more complete picture of the fund’s performance. We discuss each performance reporting requirement for illiquid funds in turn below. The rule requires advisers to illiquid funds to disclose the following performance measures in the quarterly statement, shown since inception of the illiquid fund and computed with and without the impact of any fund-level subscription facilities: 356

recalled distributions as additional contributions may be misleading. 357Final rule 211(h)(1)–2I(2)(ii). 358Final rule 211(h)(1)–2(e)(2)(iii). 359See, e.g., Trine Comment Letter; AFREF Comment Letter I; IST Comment Letter. 360See, e.g., IAA Comment Letter II; PIFF Comment Letter; AIMA/ACC Comment Letter. 361See CFA Comment Letter II. 362 Investors that enter an illiquid fund in a closing subsequent to the fund’s initial closing are also generally subject to types of equalization payments or adjustments (e.g., ‘‘true-ups’’) that result in their treatment by the private fund as if they had entered the fund at its initial closing. 363Final rule 211(h)(1)–2(e)(2)(ii)(A). 364As discussed below, the rule also requires advisers to prominently disclose the criteria used and assumptions made in calculating performance. This includes the criteria and assumptions used to prepare an illiquid fund’s unlevered performance measures. 365See, e.g., ILPA Comment Letter I; Comment Letter of Predistribution Initiative (Apr. 25, 2022) (‘‘Predistribution Initiative Comment Letter II’’); IST Comment Letter. 366See Predistribution Initiative Comment Letter II. 367See CFA Comment Letter I. However, this commenter also stated that, in certain cases, the calculation of performance without the impact of subscription facilities could be challenging, particularly for historical periods. The commenter stated that advisers may need to make assumptions about which historical capital calls would have been impacted. Because the final rule requires advisers to disclose any assumptions used in calculating performance, we believe that investors will be able to analyze the assumptions made and weigh their impact on performance. Nonetheless, we recognize that, to the extent these assumptions by advisers are not accurate, the benefits of the information to investors may be reduced. See infra
section VI.D.2.
368See CFA Comment Letter I.
(i) Gross internal rate of return and gross multiple of invested capital for the illiquid fund; (ii) Net internal rate of return and net multiple of invested capital for the illiquid fund; and (iii) Gross internal rate of return and gross multiple of invested capital for the realized and unrealized portions of the illiquid fund’s portfolio, with the realized and unrealized performance shown separately. The rule also requires advisers to provide investors with a statement of contributions and distributions for the illiquid fund.357 Since Inception. The rule requires an adviser to disclose the illiquid fund’s performance measures since inception. This requirement will ensure that advisers are not providing investors with only recent performance results or presenting only results or periods with strong performance, which could mislead investors. We are requiring this for all illiquid fund performance measures under the rule, including the performance measures for the realized and unrealized portions of the illiquid fund’s portfolio. The rule requires an adviser to include performance measures for the illiquid fund through the end of the quarter covered by the quarterly statement. We recognize, however, that certain funds may need information from portfolio investments and other third parties to generate performance data and thus may not have the necessary information prior to the distribution of the quarterly statement. Accordingly, to the extent quarter-end numbers are not available at the time of distribution of the quarterly statement, an adviser is required to include performance measures through the most recent practicable date, which we generally believe would be through the end of the quarter immediately preceding the quarter covered by the quarterly statement. The rule requires the quarterly statement to reference the date the performance information is current through (e.g., December 31, 2023).358 Some commenters supported the since inception performance disclosure requirement for illiquid funds,359 while other commenters criticized it.360 One commenter commented specifically on the since inception requirement for illiquid fund performance, stating that we should retain this requirement because inception-to-date returns allow investors to understand the improvement or deterioration of returns over the most relevant period, especially for illiquid funds with long-hold periods.361 We believe that it is important for illiquid funds to provide performance information since inception so that investors are able to evaluate the full performance of their investment. For many illiquid funds, investors commit capital at or near the inception of the fund.362 These same investors generally also contribute the capital used to make the fund’s initial investments. Accordingly, anything less than performance since inception would misrepresent the performance of such investors’ investments in the illiquid fund. While there may be situations where investors
make capital commitments to an illiquid fund later on in its life, we understand that these circumstances are rare. Even in these scenarios, the illiquid fund may have already made most of the investments it will make over its life by the time this capital is committed later in its life. We also agree with this commenter that inception-to-date returns allow investors to better assess performance trends, particularly for illiquid funds, since inception performance will generally align with the typical investment holding period and the period for which the performance-based fee is generally calculated for many illiquid funds. Accordingly, we maintain that performance since inception is the best approach for representing the illiquid fund’s performance. Computed With and Without the Impact of Fund-Level Subscription Facilities. The rule requires advisers to calculate performance measures for each illiquid fund both with and without the impact of fund-level subscription facilities.363 For performance measures without the impact of fund-level subscription facilities (‘‘unlevered returns’’), the rule requires advisers to calculate performance measures as if the private fund called investor capital, rather than drawing down on fund-level subscription facilities, as proposed.364 For performance measures with the impact of fund-level subscription facilities (‘‘levered returns’’), the rule requires advisers to calculate performance measures reflecting the actual capital activity from both investors and fund-level subscription facilities, including, for the avoidance of doubt, any activity prior to investor capital contributions as a result of the fund drawing down on fund-level subscription facilities. In response to our requests for comment, a number of commenters suggested that we require performance measures for illiquid funds both with and without the impact of fund-level subscription facilities.365 Of these, one commenter stated that requiring performance measures for illiquid funds both with and without the impact of fund-level subscription facilities would provide a more complete picture of the effects of a fund’s financing strategies.366 Another commenter stated that this approach would allow investors to understand the impact of the adviser’s decision to use a subscription facility.367 In response to commenters, we are requiring advisers to calculate performance measures for each illiquid fund both with and without the impact of fund-level subscription facilities. As one commenter pointed out, an internal rate of return with the impact of the subscription facilities is typically used to calculate performance-based compensation, and this return also usually reflects the actual investor return.368 Accordingly, after considering comments, we think it is necessary for investors to be able to compare their illiquid fund performance both with and without the impact of fund-level subscription facilities to better

369See infra section VI.D.2. 370See, e.g., CFA Comment Letter I; AIC Comment Letter II; ILPA Comment Letter I. 371See, e.g., AIC Comment Letter II; ILPA Comment Letter I. 372See, e.g., CFA Comment Letter I; ILPA Comment Letter I. 373Final rule 211(h)(1)–1. The rule defines ‘‘unfunded capital commitments’’ as committed capital that has not yet been contributed to the private fund by investors, and ‘‘committed capital’’ as any commitment pursuant to which a person is obligated to acquire an interest in, or make capital contributions to, the private fund. See id. 374We recognize that a private fund may guarantee portfolio investment indebtedness. In such a situation, if the portfolio investment does not have sufficient cash flow to pay its debt obligations, the fund may be required to cover the shortfall to satisfy its guarantee. Even though investors’ unfunded commitments may indirectly support the fund’s guarantee, the definition would not cover such fund guarantees. Unlike fund-level subscription facilities, such guarantees generally are not put in place to enable the fund to delay the calling of investor capital. 375We recognize that fund-level subscription facilities can be an important cash management tool for both advisers and investors. For example, a fund may use a subscription facility to reduce the overall number of capital calls and to enhance its ability to execute deals quickly and efficiently. 376See CFA Comment Letter I. This commenter stated that it could be challenging to identify all activity related to these subscription facilities for those advisers that have not previously calculated internal rates of return without the impact of subscription facilities, particularly for funds with long histories. While we acknowledge these calculations could be challenging in certain instances, we believe these burdens are justified by the benefits of improved comparability and standardization across quarterly statements. Moreover, we also believe that these challenges will lessen as older funds wind down. 377See, e.g., ICCR Comment Letter; AFREF Comment Letter I; NEA and AFT Comment Letter. 378See, e.g., SBAI Comment Letter; PIFF Comment Letter; AIMA/ACC Comment Letter. understand how the use and costs of any fund-level subscription facilities are affecting their returns. Because most advisers with fund-level subscription facilities are already reporting performance with the impact of such facilities, we do not anticipate that this requirement will entail substantial additional burdens for most advisers.369 Some commenters suggested exempting advisers from the requirement to present unlevered returns to the extent they used subscription facilities on a short term basis to efficiently manage capital, rather than to increase returns.370 Of these, some stated that this exemption would be for advisers using facilities solely or primarily to streamline capital calls and not to enhance performance.371 Some commenters suggested that a ‘‘short-term’’
subscription facility is generally one for which the facility is repaid within 120 days using committed capital that is drawn down through a capital call.372 While we acknowledge that some short￾term subscription facilities may be less likely to cause the issues we discuss below, providing such an exemption could lead to certain undesirable outcomes. For instance, a fund may only repay each use of a subscription facility within 120 days for the first two years of the fund’s life but then start leaving such subscription facility unpaid for longer spans of time for the remaining eight years of its life. If we were to provide such an exemption, such a fund would not be required to show unlevered performance measures for the first two years but then would be required to do so in the third year. However, in year three and after, investors would only have past levered performance measures and may find it difficult to assess the newly received unlevered performance measures. Additionally, it is important that investors understand how costs associated with a subscription facility are affecting performance, and the unlevered performance measures will facilitate this understanding. As proposed, we are defining ‘‘fund￾level subscription facilities’’ as any subscription facilities, subscription line financing, capital call facilities, capital commitment facilities, bridge lines, or other indebtedness incurred by the private fund that is secured by the unfunded capital commitments of the private fund’s investors.373 This definition is designed to capture the various types of subscription facilities prevalent in the market that serve as temporary replacements or substitutes for investor capital.374 Such facilities enable the fund to use loan proceeds— rather than investor capital—to fund investments initially and pay expenses. This practice permits the fund to delay the calling of capital from investors, which has the potential to increase performance metrics artificially. Many advisers currently provide performance figures that reflect the impact of fund-level subscription facilities. We believe that these ‘‘levered’’ performance figures, alone, have the potential to mislead investors.375 For example, an investor could reasonably believe that levered performance results are similar to those that the investor has achieved from its investment in the fund. Unlevered performance figures, when presented alongside levered performance figures, will provide investors with more meaningful data and improve the comparability of returns. We stated in the proposal that we would generally interpret the phrase computed without the impact of fund￾level subscription facilities to require advisers to exclude fees and expenses associated with the subscription facility, such as the interest expense, when calculating net performance figures and preparing the statement of contributions and distributions. One commenter suggested that excluding subscription line fees and expenses
from net performance should be optional, rather than required.376 On the contrary, allowing such flexibility would degrade comparability and standardization. In addition, this approach is appropriate because it will result in returns that show what the fund would have achieved if there were no subscription facility, which will help investors understand the impact of the use of the subscription facility. While there may be certain circumstances under which including subscription line fees and expenses in unlevered performance metrics may have advantages, standardization is important. If we were to make the exclusion of subscription line fees and expenses from net performance for illiquid funds optional instead of required, some advisers might include such fees and expenses while others might exclude them. This variability could make it difficult for investors to assess unlevered performance metrics across illiquid funds that are managed by different advisers. Additionally, some advisers might start by including subscription line fees and expenses from unlevered performance metrics and then switch to excluding such fees and expenses if there was a downward trend in performance. This potential gamesmanship could mislead investors. Accordingly, we are not allowing such optionality. Fund-Level Performance. The rule requires an adviser to disclose an illiquid fund’s gross and net internal rate of return and gross and net multiple of invested capital for the illiquid fund. We are adopting the entirety of this portion of the rule, including all definitions discussed below, as proposed. Some commenters supported this performance disclosure requirement as providing a useful component in the totality of information that would be required to be provided to private fund investors under the rule.377 Other commenters criticized this performance disclosure requirement on a number of grounds.378 One commenter stated that we should prohibit the use of internal rates of return and multiples of invested capital because they can be flawed

379See Comment Letter of SOC Investment Group (Apr. 25, 2022) (‘‘SOC Comment Letter’’). 380See AIC Comment Letter II. 381See, e.g., PIFF Comment Letter; SBAI Comment Letter. 382Primarily, multiple of invested capital does not factor in the amount of the time it takes for a fund to generate a return, and internal rate of return assumes early distributions will be reinvested at the same rate of return generated at the initial exit. 383By receiving both an internal rate of return and a multiple of invested capital, an investor will be able to use each performance metric to assess the limitations of the other. For example, a high multiple of invested capital but a low internal rate of return likely means that returns are low compared to the length of time the investment has been held. Similarly, a high internal rate of return but a low multiple of invested capital likely means that the investment was not held long enough to generate substantial returns for the fund. 384Final rule 211(h)(1)–1 (defining ‘‘gross IRR’’ and ‘‘net IRR’’). 385When calculating a fund’s internal rate of return, an adviser will need to take into account the specific date a cash flow occurred (or is deemed to occur). Certain electronic spreadsheet programs have ‘‘XIRR’’ or other similar formulas that require the user to input the applicable dates. 386Final rule 211(h)(1)–1 (defining ‘‘gross MOIC’’ and ‘‘net MOIC’’). 387See Comment Letter of XTAL Strategies (Feb. 28, 2022) (‘‘XTAL Comment Letter’’). As discussed in greater detail below in Section VI.C.3, this commenter provided examples where multiple funds with different distribution timings had the same internal rates of return. However, we were not persuaded by this commenter because the fact that it is possible to construct examples in which two funds with different timings of payments can have the same internal rates of return does not mean that such performance metric broadly fails to take into account the timing of transactions. 388See AIC Comment Letter II. 389Final rule 211(h)(1)–2(e)(2)(ii). 390See, e.g., NEA and AFT Comment Letter (noting ‘‘[s]tandardized reporting of the internal rate of return (IRR) and the multiple of capital (MoC) invested, both gross and net of fees and considering the use of subscription credit lines, would mark a leap forward in transparency.’’); see also AFL–CIO Comment Letter; ICM Comment Letter; ILPA Comment Letter I. 391At proposal, the statement of contributions and distributions requirement was listed as rule 211(h)(1)–2(e)(2)(ii)(A)(4). At adoption, we have changed the statement of contributions and distributions requirement to rule 211(h)(1)– 2(e)(2)(ii)(B). We have made this change for clarification as a statement of contributions and distributions is not a ‘‘performance measure’’ that can be ‘‘computed’’ as rule 211(h)(1)–2(e)(2)(ii)(A) is phrased. performance metrics,379 and another commenter indicated that these performance metrics may not be meaningful in the early stages of a fund
until it has had time to deploy its capital and generate returns.380 Finally, certain commenters stated that advisers and investors should retain discretion to determine appropriate performance metrics.381 We recognize that most illiquid funds have particular characteristics, such as irregular cash flows, that make measuring performance difficult for both advisers and investors. We also recognize that internal rate of return and multiple of invested capital have their drawbacks as performance metrics.382 Nonetheless, we continue to believe that, received together, these metrics complement one another.383 Moreover, these metrics, combined with a statement of contributions and distributions reflecting cash flows discussed below, will help investors holistically understand the fund’s performance, allow investors to diligence the fund’s performance, and calculate other performance metrics they may find helpful. When presented in accordance with the conditions and other disclosures required under the rule, such standardized reporting measures will provide meaningful performance information for investors, allowing them to compare returns among funds that they are invested in and make more-informed decisions with respect to, for example, other components of their portfolios or whether or not to invest with the same adviser in the future. Accordingly, we are adopting this aspect of the rule as proposed. As proposed, we are defining ‘‘internal rate of return’’ as the discount rate that causes the net present value of all cash flows throughout the life of the private fund to be equal to zero.384 Cash flows will be represented by capital contributions (i.e., cash inflows) and fund distributions (i.e., cash outflows), and the unrealized value of the fund will be represented by a fund distribution (i.e., a cash outflow). This definition will provide investors with a time-adjusted return that takes into account the size and timing of a fund’s cash flows and its unrealized value at the time of calculation.385 We are defining ‘‘multiple of invested capital’’ as (i) the sum of: (A) the unrealized value of the illiquid fund; and (B) the value of all distributions made by the illiquid fund; (ii) divided by the total capital contributed to the illiquid fund by its investors.386 This definition will provide investors with a measure of the fund’s aggregate value (i.e., the sum of clauses (i)(A) and (i)(B)) relative to the capital invested (i.e., clause (ii)) as of the end of the applicable reporting period, as proposed. Unlike the definition of internal rate of return, the multiple of invested capital definition does not take into account the amount of time it takes for a fund to generate a return (meaning that the multiple of invested capital measure focuses on ‘‘how much’’ rather than ‘‘when’’). We received few comments on the proposed definitions, with one commenter stating that neither definition takes into account the timing of fund transactions.387 Another
commenter argued that definitions were unnecessary because investors have their own methods for calculating internal rate of return and multiple of invested capital, and that advisers typically provide investors with sufficient information to calculate performance already.388 After considering comments, we believe that the proposed definitions of internal rate of return and multiple of invested capital are appropriate because they will promote comparability and standardization. As stated in the proposal, the definitions are generally consistent with how the industry currently calculates such performance metrics. By adopting definitions that are widely understood and accepted in the industry, the rule will decrease the risk of advisers presenting internal rate of return and multiple of invested capital performance figures that are not comparable. Furthermore, the rule will not prevent an adviser from providing information or performance metrics in addition to those required by the rule (subject to other requirements applicable to the adviser) or an investor from using such additional information or metrics for its own calculations. As proposed, the final rule requires advisers to present each performance metric on a gross and net basis.389 Commenters were generally supportive of this requirement.390 Presenting both gross and net performance measures will help prevent investors from being misled. Gross performance will provide insight into the profitability of underlying investments selected by the adviser. Solely presenting gross performance, however, may imply that investors have received the full amount of such returns. The net performance will assist investors in understanding the actual returns received and, when presented alongside gross performance, the negative effect fees, expenses, and performance-based compensation have had on past performance. Statement of Contributions and Distributions. The rule also requires an adviser to provide a statement of contributions and distributions for the illiquid fund reflecting the aggregate cash inflows from investors and the aggregate cash outflows from the fund to investors, along with the fund’s net asset value, as proposed.391 We are defining a statement of contributions and distributions as a document that presents:
(i) All capital inflows the private fund has received from investors and all

392Final rule 211(h)(1)–1.
393See, e.g., CFA Comment Letter I; OFT Comment Letter. 394See, e.g., IAA Comment Letter II; PIFF Comment Letter. 395See IAA Comment Letter II. 396See ILPA Comment Letter I. 397See CFA Comment Letter II. 398See, e.g., CFA Comment Letter I; AIC Comment Letter II. 399See XTAL Comment Letter. This commenter specifically suggested we require the inclusion of additional information such as uncalled commitment, cumulated distributions, and net of performance fee accruals. While they are helpful, we view these additional requirements as potentially overly burdensome relative to their benefits since they are not necessary for investors to diligence the performance measures presented in the quarterly statement. 400Final rule 211(h)(1)–2(e)(2)(ii)(A)(3). 401See, e.g., ILPA Comment Letter I; AFL–CIO Comment Letter; AFREF Comment Letter I; CFA Comment Letter I. 402See, e.g., AIC Comment Letter I; AIC Comment Letter II; IAA Comment Letter II; SBAI Comment Letter. 403See, e.g., AIC Comment Letter II; ATR Comment Letter. 404See NCREIF Comment Letter. 405See, e.g., AIC Comment Letter II; SBAI Comment Letter; CFA Comment Letter I. 406As stated in the proposal, the value of the unrealized portion of an illiquid fund’s portfolio typically is determined by the adviser and, given the lack of readily available market values, can be challenging. This creates a conflict of interest wherein the adviser may be evaluated and, in certain cases, compensated based on the fund’s unrealized performance. Further, investors often decide whether to invest in a successor fund based on a current fund’s performance as reported by the adviser. These factors create an incentive for the adviser to inflate the value of the unrealized portion of the illiquid fund’s portfolio. See Proposing Release supra footnote 3, at n.9, 74–75. capital outflows the private fund has distributed to investors since the private fund’s inception, with the value and date of each inflow and outflow; and (ii) The net asset value of the private fund as of the end of the reporting period covered by the quarterly statement.392 Some commenters supported the requirement to provide a statement of contributions and distributions.393 Other commenters criticized specific parts of this requirement.394 One commenter suggested that the statement of contributions and distributions would be of limited value to private fund investors and is not often currently requested by private fund investors,395 whereas another commenter conversely suggested that private fund investors typically already receive information beyond what we are requiring to be included in the statement of contributions and distributions.396 Another commenter suggested that we provide flexibility with respect to the requirement that the statement of contributions and distributions include the date of each cash inflow and outflow, in light of the possibility that older cash flow information may have been recorded by certain advisers using legacy systems that
assumed that all cash flows during a certain period occurred on the last day of such period.397 We believe that the statement of contributions and distributions will provide private fund investors with important information regarding the fund’s performance, because it will reflect the underlying data used by the adviser to generate the fund’s returns, which, in many cases, is not currently provided to private fund investors. Such data will allow investors to diligence the various performance measures presented in the quarterly statement. In addition, this data will allow the investors to calculate additional performance measures based on their own preferences. Some commenters suggested that subscription facility fees and expenses should be included in the statement of contributions and distributions.398 At proposal, we had required private fund advisers to exclude such fees and expenses because we had proposed to require only unlevered performance metrics for illiquid funds and believed that the statement of contributions and distributions should directly align with these unlevered performance metrics. As we are requiring both levered and unlevered performance to be included in the quarterly statement for illiquid funds under the final rule, advisers should consider including in the statement of contributions and distributions any fees and expenses related to a subscription facility. One commenter suggested that we should require additional detail in the statement of contributions and distributions.399 We believe that it is important that the statement of contributions and distributions provide sufficient information to enable investors to conduct due diligence on the various performance measures presented in the quarterly statement and to potentially perform their own additional performance calculations. Investors will need the dates and amounts of subscription facility drawdowns to be able to calculate unlevered returns. As such, we view these dates and amounts as providing investors critical information necessary to perform these calculations on their own. Although we are not prescribing additional particular information to be disclosed beyond what was included in the proposal, advisers may wish to consider also providing other details they believe investors would find relevant in the statement of contributions and distributions, such as information about how each contribution and distribution was used and the dates of drawdowns from fund￾level subscription facilities. Realized and Unrealized Performance. As proposed, the rule also requires an adviser to disclose a gross internal rate of return and gross multiple of invested capital for the realized and unrealized portions of the illiquid fund’s portfolio, with the realized and unrealized performance shown separately.400 Some commenters supported this requirement to disclose realized and unrealized performance metrics for illiquid funds as contributive to the policy goals of transparency and
comparability of private fund investments promoted by the rule.401 Other commenters suggested, however, that this requirement could serve to undermine these goals and prove unhelpful to private fund investors, because disaggregating an illiquid fund’s realized performance and its unrealized performance ultimately may involve subjective determinations 402 and will depend on the specific facts and circumstances.403 One commenter stated that, if we adopt this requirement, we should also provide a detailed methodology for calculating realized and unrealized performance.404 Other commenters suggested allowing advisers to take a flexible approach with respect to determining what investments are realized versus unrealized provided that their methodology is properly documented and disclosed.405 We recognize that it may be difficult to determine whether a partially realized investment has been realized under the final rule, for example, following a significant dividend recapitalization where the fund recoups all or a substantial portion of its initial investment. We continue to believe, however, that disclosure of realized and unrealized performance will provide investors with important context for analyzing the adviser’s valuations and for weighing their impact on the fund’s overall performance.406 As a result, we believe that the burden associated with determining whether a partially realized investment should be categorized as realized or unrealized is justified by the benefits that this performance data will provide to investors. We recognize that categorizing a partially realized investment as realized or unrealized for purposes of the rule will depend on the facts and circumstances and may not always be purely objective. We agree with

407The methodology used to determine whether an investment is realized or unrealized is an important criterion to calculate this required performance information. Accordingly, it must be prominently disclosed in the quarterly statement. Final rule 211(h)(1)–2(e)(2)(iii). 408For example, if we were to set an 100% threshold for determining when an investment has been fully realized, this may lead to reporting that is too high as compared to what investors have negotiated for or what they have come to expect for certain private funds (or too low if we set the percentage threshold lower). If we were to establish a realization test based on a different trigger (e.g., the sale of a portfolio investment) it might not be applicable for certain kinds of private funds (e.g., private credit funds that primarily make loans). 409These examples refer to private credit funds that issue equity interests to investors and invest in debt instruments privately issued by companies. 410Based on the experience of Commission staff, it is our understanding that investors generally do not seek to compare realization methodologies across different types of illiquid funds in the same way that they might for performance reporting. As a result, it is not as important to ensure comparability of realization methodologies across different types of illiquid funds as it is to ensure comparability of performance reporting. 411See CFA Comment Letter II. RVPI plus DPI equal total value to paid-in capital (‘‘TVPI’’), while unrealized MOIC and realized MOIC must be combined as a weighted average to yield total MOIC. For TVPI, the unrealized and realized analogues are RVPI and DPI ratios, and the denominator in both of these cases is the total called capital of the entire fund. For MOIC, unrealized and realized MOIC have as denominators just the portions of the called capital attributable to unrealized and realized investments in the portfolio. 412For example, if the performance of the unrealized portion of the fund’s portfolio is significantly higher than the performance of the realized portion, it may imply that the adviser’s valuations are overly optimistic or otherwise do not reflect the values that can be realized in a transaction or sale with an independent third party. 413 DPI is not effective at highlighting overly optimistic valuations because it focuses on distributions (and not residual value) relative to paid in capital. 414See, e.g., AIMA/ACC Comment Letter; AIC Comment Letter II. 415The inclusion of realized and unrealized performance information in the quarterly statement serves chiefly to provide a comparison between the two and provide a check against advisers’ exaggeration of unrealized performance at the fund￾level. We believe this is achieved by requiring only gross realized and unrealized performance without also requiring net performance and the associated assumptions, such as the allocation of organizational expenses, that are part of the calculation of net
performance for individual investments and can entail additional costs and subjectivity. commenters that it is valuable for advisers to have some discretion in determining whether an investment has been realized for purposes of the rule based on the specific facts and circumstances, provided that their methodology is properly documented.407 It is also important that advisers remain consistent in how they determine realized and unrealized investments and that they provide sufficient disclosure to investors about the methodology and criteria they use to achieve consistency in their determinations. We do not believe it is appropriate to set a bright-line standard or otherwise prescribe detailed methodology for making this determination because any such standard or methodology may lead to less useful reporting for investors.408 For example, it is our understanding that the methodologies used by private equity buy-out funds, private credit funds,409 and their respective investors to determine realization can vary considerably. A private equity buy-out fund and its investors may seek to analyze realization as it relates to the sale of a portfolio company (or return of a certain amount of proceeds relative to the amount invested or anticipated to be invested), whereas a private credit fund and its investors may seek to analyze realization as it relates to a paydown of a portion of the principal balance of a loan. If we were to prescribe one methodology for both of these funds and their investors, it may lead to scenarios in which there is a conflict between how the rule views realization and how these funds and their investors view realization. Such a result could lead to worse reporting outcomes for investors.410 One commenter suggested requiring reporting of distributions to paid-in capital (‘‘DPI’’) and residual value to paid-in capital (‘‘RVPI’’) instead of gross multiple of invested capital (‘‘MOIC’’) for realized and unrealized investments.411 As discussed in the proposal, some advisers have an incentive to inflate the value of the unrealized portion of an illiquid fund’s portfolio. Highlighting the performance of the fund’s unrealized investments assists investors in determining whether the aggregate, fund-level performance measures present an overly optimistic view of the fund’s overall performance.412 While we recognize that DPI and RVPI may provide some potentially beneficial, additional information, these metrics may not be as effective at highlighting potentially overly optimistic valuations. RVPI, for example, provides investors with information on the fund’s residual value relative to the amount of capital that has been paid in, including paid-in capital attributable to the realized portion of the portfolio.413 MOIC for unrealized portion of the portfolio, on the other hand, provides investors with information on the fund’s residual value relative to the capital that has been contributed in respect of the unrealized investments, which has
the effect of highlighting the adviser’s valuations of the remaining investments relative to those capital contributions only. Accordingly, we believe that gross MOIC for realized and unrealized investments provides more direct information on the differences between the actual distributions received by investors from the realized portfolio and the adviser’s valuations of the unrealized portfolio. This approach better addresses our concerns surrounding advisers’ incentive to inflate the value of the unrealized portion of an illiquid fund’s portfolio. The rule only requires an adviser to disclose gross performance measures for the realized and unrealized portions of the illiquid fund’s portfolio, as proposed. Commenters generally agreed with this approach.414 We continue to believe that calculating net figures for the realized and unrealized portions of the portfolio could involve complex and potentially subjective assumptions regarding the allocation of fund-level fees, expenses, and adviser compensation between the realized and unrealized portions.415 In our view, such assumptions have the potential to erase the benefits that net performance measures would provide. (c) Prominent Disclosure of Performance Calculation Information As proposed, the final rule will require advisers to include prominent disclosure of the criteria used and assumptions made in calculating the performance. This information will enable the private fund investor to understand how the performance is calculated and help provide useful context for the presented performance metrics. Additionally, while the rule includes detailed information about the type of performance an adviser must present for liquid and illiquid funds, it is still possible that advisers will make certain assumptions or rely on criteria that the rule’s requirements do not address specifically. This information is integral to the quarterly statement because it will enable the investor to understand and analyze the performance information better and better compare the performance of funds and advisers without having to access other ancillary documents. As a result, investors should receive this information as part of the quarterly statement itself. For example, the rule requires an adviser to display, for a liquid fund, the annual returns for each fiscal year over the past 10 years or since the fund’s inception, whichever is shorter. If the adviser makes any assumptions in performing that calculation, such as

416Final rule 211(h)(1)–2(e)(2)(iii). 417See also Marketing Release, supra footnote 127, at n.61 (discussing clear and prominent disclosures in the context of advertisements). 418See, e.g., United for Respect Comment Letter I; Comment Letter of CPD Action (Apr. 25, 2022) (‘‘CPD Comment Letter’’); ICCR Comment Letter. 419See, e.g., Schulte Comment Letter; MFA Comment Letter I; Comment Letter of National Society of Compliance Professionals (Apr. 19, 2022) (‘‘NSCP Comment Letter’’). 420One commenter suggested that private fund advisers should be required to provide supporting calculations to investors upon request. See CFA Comment Letter I. While advisers do not need to provide all supporting calculations as part of a quarterly statement, advisers generally should make them available upon request from an investor. While we believe it is important that investors have access to this information if requested, including all supporting calculations as a part of each quarterly statement could make each quarterly statement overly long and difficult to parse, thus undermining its utility. 421 In a change from the proposal, we are providing additional time for funds of funds to deliver quarterly statements in response to commenters that stated that many funds of funds will need to receive reporting from their private fund investments before they are able to prepare and distribute their own quarterly statements. For purposes of the final rule, one example of a fund of funds would be a private fund that invests substantially all of its assets in the equity of private funds that do not share its same adviser and, aside from such private fund investments, holds only cash and cash equivalents and instruments acquired to hedge currency exposure. 422By specifying that ‘‘such quarterly statement,’’ as opposed to more generally a quarterly statement, must be prepared and distributed, final rule 211(h)(1)–2 requires that a quarterly statement furnished by ‘‘another person’’ must still comply with paragraphs (a) through (g) of the rule, including with respect to the information otherwise required to be included in the quarterly statement by the investment adviser. For purposes of this
section, to the extent that some but not all of the
information that an investment adviser is required to include in the quarterly statement is included in a quarterly statement furnished by another person, the investment adviser generally would need to prepare and distribute separately the required information that is not included in the quarterly statement furnished by another person, as required under the final rule. 423See AIC Comment Letter II. 424See, e.g., Convergence Comment Letter; Predistribution Initiative Comment Letter II; Healthy Markets Comment Letter I. 425See, e.g., MFA Comment Letter I; AIMA/ACC Comment Letter; Comment Letter of Ullico Continued whether dividends were reinvested, the adviser must disclose those assumptions in the quarterly statement. As another example, for an illiquid fund, the rule requires an adviser to present the net internal rate of return and net multiple of invested capital. Correspondingly, the adviser must disclose the use of any assumed fee rates, including whether the adviser is using fee rates set forth in the fund documents, whether it is using a blended rate or weighted average that would factor in any discounts, or whether it is using a different method for calculating net performance. The rule requires the disclosure to be within the quarterly statement.416 Thus, an adviser may not provide the information only in a separate document, website hyperlink or QR code, or other separate disclosure.417 Some commenters supported this requirement to include prominent disclosure of the criteria used and assumptions made in calculating the performance.418 Other commenters stated that such a requirement is unnecessary.419 For legal, tax, and other reasons, advisers often use complex structures to set up private funds, which make it difficult, in certain circumstances, for advisers to calculate, and for investors to understand, fund performance as a whole. We recognize that, due to these complex structures, the criteria used and assumptions made in calculating performance can sometimes be nuanced and challenging to concisely include in the quarterly statement. Nonetheless, it is essential that advisers disclose assumptions, such as assumed fee rates, in the quarterly statement so that investors can readily understand the performance information being provided, despite these challenges. Without prominent disclosure of the criteria used and assumptions made in calculating performance, performance information is neither simple nor clear. Absent disclosure of the criteria used and assumptions made in the underlying calculations, performance information may not be simple to the extent it requires referencing multiple sources, such as capital call notices, distribution notices, and audited financials, to understand crucial criteria and assumptions. Such disclosure that is not prominent would also not be clear because it would obscure the extent and import of the adviser’s assumptions or discretion in making such calculations.420 To meet the prominence standard, the
disclosures should, at a minimum, be readily noticeable and included within the quarterly statement. Thus, an adviser may not provide these disclosures only in a separate document, website hyperlink or QR code, or other separate disclosure. We believe this prominently displayed information is vital in making these disclosures as simple and clear as possible for investors. Furthermore, permitting advisers to provide quarterly statements without prominent disclosure of the criteria used and assumptions made in calculating performance would not sufficiently prevent practices that may be fraudulent, deceptive, or manipulative. For instance, advisers may use a deceptive assumed fee rate to calculate performance and investors may not be aware of it if it is not prominently disclosed in the quarterly statement. Accordingly, it is crucial that private fund investors receive this prominent disclosure as part of the quarterly statement itself.
3. Preparation and Distribution of
Quarterly Statements
The rule requires quarterly statements to be prepared and distributed to investors in private funds that are not funds of funds within 45 days after the first three fiscal quarter ends of each fiscal year and 90 days after the end of each fiscal year. Advisers to funds of funds must prepare and distribute quarterly statements within 75 days after the first three fiscal quarter ends of each year and 120 days after the fiscal year end.421 In each instance, an adviser must prepare and distribute the required quarterly statement within the applicable period set forth in the rule, unless another person prepares and delivers such quarterly statement.422 The reporting period for the final quarterly statement covers the fiscal quarter in which the fund is wound up and dissolved. Under the proposed rule, quarterly statements would have been required to be prepared and distributed to investors for each private fund, including funds of funds, within 45 days of each calendar quarter end, including after the end of the fiscal year. For a newly formed private fund, the rule requires a quarterly statement to be prepared and distributed beginning after the fund’s second full quarter of generating operating results, as proposed. However, one commenter stated that the requirement to provide performance metrics should not be triggered until the private fund has four quarters of operating results, rather than two.423 We continue to believe, however, that two full quarters of operating results is an appropriate standard because it balances the needs of investors to receive performance information with the needs of advisers to have adequate time to generate results. We believe that the requirements for newly formed funds will help ensure that investors receive comprehensive information about the adviser’s management of the fund during the early stage of the fund’s life. Some commenters supported the proposed rule’s 45-day timing requirement.424 Other commenters suggested that additional time or flexibility should be provided, as discussed below.425 Based on our

Investment Advisors, Inc. (Apr. 22, 2022) (‘‘Ullico Comment Letter’’). 426See, e.g., ILPA Comment Letter I; SBAI Comment Letter; AIC Comment Letter I. 427See, e.g., CFA Comment Letter I; AIC Comment Letter I. 428Although the rule does not separately require an adviser to issue to investors a reconciled fourth quarterly statement reflecting information updated or corrected in the subsequently delivered audited financials, advisers should consider whether particular updates or corrections to this information under the facts and circumstances could be sufficiently material to implicate other applicable disclosure obligations, e.g., as under rule 206(4)–8. 429See, e.g., IAA Comment Letter II; Ropes & Gray Comment Letter; Comment Letter of Colmore (Apr. 25, 2022). 430See, e.g., Ullico Comment Letter; Segal Marco Comment Letter; SBAI Comment Letter. 431For example, an adviser may experience sudden departures of senior financial employees. 432See, e.g., AIMA/ACC Comment Letter; ILPA Comment Letter I; SIFMA–AMG Comment Letter I (suggesting that the SEC only require reporting on an annual basis within 120 days of the fund’s fiscal year end); GPEVCA Comment Letter (suggesting that any periodic disclosure requirement be tied to the annual audit process). experience, advisers generally should be in a position to prepare and deliver quarterly statements within this period. We believe that the timing requirement is important because quarterly statements will provide fund investors with timely and regular statements that contain meaningful and comprehensive information. Some commenters, however, suggested allowing for additional time for the fourth quarterly statement of the year as audited financials are also being prepared at this time.426 We recognize the value in providing additional time for the fourth quarterly statement in light of the increased burdens that advisers will concurrently face in preparing other end-of-year statements, such as audited financials. Some commenters suggested specifically extending the deadline for the fourth quarterly statement to 120 days to parallel the deadline for audited financials.427 Although we recognize the potential for some value in aligning the deadline for the fourth quarterly statement to 120 days to parallel the deadline for audited financials, it would delay the delivery of these quarterly statements too greatly. Assuming a December 31 fiscal year end, allowing 120 days would mean that an adviser would not have to deliver the fourth quarterly statement until April 30 of the following year (assuming it is not a leap year). However, the first quarterly statement for that following year would be due only 15 days later on May 15. It is important that investors receive quarterly statements on a timely basis so that they can effectively monitor the costs and performance of their investments. Additionally, requiring the preparation and delivery of the fourth quarterly statement before the deadline for audited
financials under the final rule should not in our view lead to undue burdens or investor confusion. Although we recognize the possibility that information reported in the fourth quarterly statement may ultimately be updated or corrected in the subsequently delivered audited financials, the final rule will not separately require an adviser to issue a reconciled fourth quarterly statement reflecting such updated or corrected information (which, however, generally should be reflected in subsequent quarterly reports).428 This approach balances the needs of investors to receive fee, expense, and performance information relatively quickly following the end of the fiscal year, with the needs of advisers to have sufficient time to collect the necessary information and distribute the statements to investors. Accordingly, in response to commenters, we are increasing the deadline for the fourth quarterly statement from 45 days to 90 days. We believe that 90 days is an appropriate approach to allow additional time to prepare the fourth quarterly statement while also preparing the annual audited financials without delaying this quarterly statement too greatly. Some commenters suggested allowing additional time for the first three quarterly statements of the year as well.429 Other commenters suggested allowing for a more flexible standard, such as ‘‘as soon as reasonably practical’’ or ‘‘promptly’’.430 We do not think it is necessary to extend the time allowed for the first three quarterly statements or adopt a more flexible standard for the deadline. It is important that investors are receiving these quarterly statements routinely, so that they can properly monitor the fees and expenses and performance of their investments. If investors receive these quarterly statements only 60 or more days after quarter-end for the first three quarterly statements, the statements may be too delayed to enable effective engagement and investment decision￾making as an investor (e.g., whether to redeem from the private fund (if applicable), to invest additional amounts with or divest other investments with the adviser, or to otherwise modify the investor’s portfolio). Moreover, a more flexible standard, such as ‘‘as soon as reasonably practical’’ or ‘‘promptly,’’ might lead to inconsistently delivered quarterly statements, which could impair their comparability and thus their value. However, we recognize there may be times when an adviser reasonably believes that a fund’s quarterly statement would be distributed within the required timeframe but fails to have it distributed in time because of certain unforeseeable circumstances.431 Accordingly, and in light of the fact that there is not an alternative method by which to satisfy the rule, the Commission would take the position that, if an adviser is unable to deliver the quarterly statement in the timeframe required under the rule due to reasonably unforeseeable circumstances, this would not provide a basis for enforcement
action so long as the adviser reasonably believed that the quarterly statement would be distributed by the applicable deadline and the adviser delivers the quarterly statement as promptly as practicable. We asked in the proposal whether advisers should be required to report based on the private fund’s fiscal periods, rather than calendar periods, as proposed. Because the proposed rule required advisers to distribute all four reports, including the fourth quarter report, within the same time period (i.e., 45 days), we did not believe the distinction between fiscal periods and calendar periods was as significant for purposes of the proposed rule. However, because we are modifying the final rule to provide additional time for fourth quarter statements, as discussed above, we believe it is important to revisit this question. Because certain private funds may have a fiscal year that is different from the calendar year, we believe it is appropriate to revise the rule text to reference fiscal periods, rather than calendar periods, to ensure that advisers and private funds receive the benefit of the additional time for the fourth quarter statement. Commenters generally agreed with this approach, stating that fiscal periods would more closely align with industry practice.432 We recognize that this modification may affect comparability for investors across different funds if their fiscal years differ, as funds with different fiscal years will have different reporting periods. However, we view this potential disadvantage as being justified by the benefit investors will obtain by receiving quarterly statements that align with fund fiscal years. This modification will additionally allow funds with fiscal years that do not match the calendar year more time to prepare their fiscal year-end quarterly statements alongside their annual audited financials. It is also our understanding that the majority of private funds’ fiscal years match the calendar year, and thus we do not

433See, e.g., ILPA Comment Letter I (suggesting additional time of 14 days to prevent the routine use of stale data); MFA Comment Letter I (suggesting additional time of 30 days); Comment Letter of Pathway Capital Management, LP (June 13,
2022) (‘‘Pathway Comment Letter’’) (suggesting that
funds of funds advisers will rely on reports from underlying investments and require additional time); CFA Comment Letter II (suggesting a deadline of 120 days for the first three quarterly statements and 180 days for the fourth quarterly statement). 434Some commenters suggested that we provide further additional time to funds of funds of funds, similar to staff views provided with respect to the audit provision of the custody rule, to permit these funds additional time to receive information from their underlying investments. See, e.g., CFA Comment Letter II. The Commission is not extending further additional time for quarterly statements with respect to funds of funds of funds, as doing so would delay the provision of quarterly statement information to investors too significantly, as discussed above. 435See final rule 211(h)(1)–1 (defining ‘‘distribute’’). For purposes of the rules, any ‘‘in writing’’ requirement can be satisfied either through paper or electronic means consistent with existing Commission guidance on electronic delivery of documents. See Marketing Release, supra footnote 127, at n.346. If any distribution is made electronically for purposes of these rules, it should be done in accordance with the Commission’s guidance regarding electronic delivery. See Use of Electronic Media by Broker Dealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940, Release No. 34–37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)] (‘‘Use of Electronic Media Release’’); see also Commission Interpretation: Use of Electronic Media, Release No. 34–42728 (Apr. 28,
2020) [65 FR 25843 (May 4, 2000)]. In
circumstances where an adviser is obligated to rely on a third party, such as a trustee, to deliver quarterly statements to investors, an adviser should use every reasonable effort to effect such delivery in compliance with the final rule. 436See final rule 211(h)(1)–1 (defining ‘‘control’’). 437See, e.g., Ropes & Gray Comment Letter; AIMA/ACC Comment Letter; AIC Comment Letter II. 438See Use of Electronic Media Release, supra footnote 435. 439See id. 440See final rule 211(h)(1)–2(f). The use of any consolidated reporting is an important criterion for the calculation of expenses, payments, allocations, rebates, waivers, and offsets as well as performance. See supra sections II.B.1.c) and II.B.2.c). Accordingly, advisers generally should disclose the basis of any consolidated reporting in the quarterly statement, including, e.g., if the statement includes multiple entities and, if so, which entities and the methods used to calculate the amounts on the statement allocated from each entity. Advisers generally should also disclose any important assumptions associated with consolidated reporting that affect performance reporting as part of the quarterly statement. An example might include how unequal tax expenses are factored into consolidated performance reporting where one fund has greater tax expenses than the other funds in a consolidated fund structure. See supra section II.B.2.c). expect comparability to be substantially affected in most cases. Accordingly, in a change from the proposal, advisers are required to distribute the required reporting based on a fund’s fiscal periods, rather than calendar periods. Some commenters suggested providing additional time for funds of funds because they would likely need to receive quarterly statements from their private fund investments before being able to prepare their own quarterly statements.433 We recognize that some funds of funds, which generally invest substantially all of their assets in the equity of private funds advised by third￾party advisers, will need to receive quarterly statements or other related information from their underlying investments to prepare their own quarterly statements. We also recognize that such underlying investments may not provide the quarterly statements until the last day of the deadline. Accordingly, we are providing an additional 30 days for funds of funds to deliver each quarterly statement and, as such, only requiring funds of funds to distribute the first three quarterly statements of the year within 75 days after quarter end and the fourth quarterly statement within 120 days after quarter end. We believe this approach strikes an appropriate balance between granting fund of funds advisers additional time to prepare and deliver quarterly statements and not overly delaying such quarterly statements for fund of funds and other private fund investors. Advisers to funds (including funds of funds and, similarly, funds of funds of funds) 434 that do not currently receive
information from their underlying investments in a sufficiently timely manner to enable them to prepare and deliver quarterly statements in compliance with the final rule’s deadlines will need to consider contractual or other types of arrangements with their underlying investments to attain this information in a timely manner. An adviser generally will satisfy the requirement to ‘‘distribute’’ the quarterly statements when the statements are sent to all investors in the private fund.435 However, the rule precludes advisers from using layers of pooled investment vehicles in a control relationship with the adviser to avoid meaningful application of the distribution requirement. In circumstances where an investor is itself a pooled vehicle that is controlling, controlled by, or under common control with (i.e., is in a ‘‘control relationship’’ with) the adviser or its related persons, the adviser must look through that pool (and any pools in a control relationship with the adviser or its related persons, such as in a master-feeder fund structure), in order to send the quarterly statements to investors in those pools. Additionally, advisers to private funds may from time to time establish special purpose vehicles (‘‘SPVs’’) or other pooled vehicles for a variety of reasons, including facilitating investments by one or more private funds that the advisers manage. Without such a control relationship requirement, the adviser could deliver the quarterly statement to itself rather than to the parties the quarterly statement is designed to inform.436 Outside of a control relationship, such as if the private fund investor is an unaffiliated fund of funds, this same concern is not present, and the adviser would not need to look through the structure to make meaningful delivery of the quarterly statement. The adviser should distribute the quarterly statement to the adviser or other designated party of the unaffiliated fund of funds. We believe that this approach will lead to meaningful delivery of the quarterly statement to the private fund’s investors. Some commenters suggested allowing distribution via a data room instead of requiring delivery to investors.437 It is important that advisers are effectively delivering quarterly statements to investors on a routine basis. If a quarterly statement is distributed electronically through a data room, this distribution, like other electronic deliveries, should be done in accordance with the Commission’s guidance regarding electronic delivery.438 Accordingly, if an adviser places the quarterly statements in a data room without any notice to investors, advisers would not meet the distribution requirement under the rule. However, if the adviser notifies investors when the quarterly statements are uploaded to the data room within the applicable time period under the rule for preparation and delivery of the quarterly statement and ensures that investors have access to the quarterly statement included therein, an adviser
would generally satisfy the distribution requirement.439
4. Consolidated Reporting for Certain
Fund Structures
The rule requires advisers to consolidate reporting for similar pools of assets to the extent doing so provides more meaningful information to the private fund’s investors and is not misleading, as proposed.440 For example, certain private funds employ master-feeder structures. Typically, investors in such funds invest in onshore and offshore feeder funds, which, in turn, invest all, or substantially all, of their investable capital in a single master fund. The

441See, e.g., GPEVCA Comment Letter; Convergence Comment Letter; CFA Comment Letter II. 442See, e.g., SIFMA–AMG Comment Letter I; SBAI Comment Letter; Ropes & Gray Comment Letter (describing, as an example, certain master￾feeder fund structures where some of the feeder funds do not invest in the master fund). 443See, e.g., Ropes & Gray Comment Letter; PWC Comment Letter (the consolidation requirement could create confusion in instances where U.S. GAAP does not require consolidation for financial reporting purposes); IAA Comment Letter II. 444See, e.g., KPMG Comment Letter; LSTA Comment Letter; AIMA/ACC Comment Letter. 445Final rule 211(h)(1)–2(g). 446See, e.g., CFA Comment Letter II; NYSIF Comment Letter; Consumer Federation of America Comment Letter. 447See, e.g., Morningstar Comment Letter; Albourne Comment Letter. 448See, e.g., SBAI Comment Letter; AIMA/ACC Comment Letter; Comment Letter of the Private Investment Funds Committee of the State Bar of Texas Business Law Section (Apr. 25, 2022) (‘‘State Bar of Texas Comment Letter’’). same adviser typically advises and controls all three funds, and the master fund typically makes and holds the investments. Because the feeder funds are conduits for investors to gain exposure to the master fund and its investments, the rule requires the adviser to provide feeder fund investors with a single quarterly statement covering the applicable feeder fund and the feeder fund’s proportionate interest in the master fund on a consolidated basis, so long as the consolidated statement provides more meaningful information to investors and is not misleading. Due to the complexity of private fund structures, the rule takes a principles￾based approach with respect to whether private fund advisers must consolidate reporting for a specific fund structure. Some commenters supported this principles-based approach to consolidated reporting for certain fund structures, arguing that it will provide more meaningful information to investors.441 Other commenters argued that this consolidation requirement could undermine the transparency goals of this rulemaking.442 Some commenters argued that consolidated reporting will confuse investors.443 We acknowledge that, in certain circumstances, requiring reporting by each private fund separately may result in more granular information. For example, in certain parallel fund structures, an investor would receive information specific to the parallel fund in which it is invested instead of the consolidated information for all parallel funds. However, in many of these circumstances, consolidated reporting of the cost and performance information by all private funds in the structure would provide a more comprehensive picture of the fees and expenses borne and performance achieved than reporting by each private fund separately. For instance, in a master￾feeder fund structure, a quarterly statement that only covers the feeder fund could provide fragmented information that does not reflect the
true costs and performance relevant to a feeder fund investor. For example, a feeder fund’s returns may be significantly impacted by costs at the master fund-level, but unconsolidated quarterly statements would mean these costs would not necessarily appear in the feeder fund’s quarterly statement. Additionally, absent a principles-based consolidation requirement, advisers may be incentivized to establish as many feeder or parallel funds in a particular fund structure as feasible to separate investors. Investors may then each be receiving different fee, expense, and performance information, which could make it difficult for them to communicate and address collective concerns with the adviser. For these reasons, we believe that a principles￾based approach to consolidated reporting is superior to a requirement to report by each private fund separately. Similarly, the absence of any consolidation requirement could lead to differing practices across advisers and result in greater investor confusion. Some advisers could choose to consolidate all fund structures, while other choose to do no consolidation, and still others choose to consolidate some fund structures—such as parallel funds—but not others—such as master￾feeder arrangements. Investors with minimal negotiating power may have a difficult time obtaining accurate information on an adviser’s approach to consolidation or requiring that an adviser take a consistent approach if the fund structure is expanded over the course of its life. By requiring a similar, principles-based approach to all fund structures, we believe the quarterly statement will be generally easier for investors to understand across advisers. Some commenters suggested that we should provide additional specific clarification on when consolidated reporting is and is not required.444 While we recognize that a principles￾based approach to consolidated reporting may require some additional consideration on the part of advisers, an overly prescriptive consolidation requirement would have a greater negative effect. The private fund space is diverse. There are many different fund structures, and it is reasonable to expect that more will be devised in the future. We understand that different segments of the private fund adviser industry tend to use some fund structures more than others and, correspondingly, tend to have different views on what kinds of related funds should be considered similar pools of assets for purposes of consolidation. The rule’s principles-based approach to consolidated reporting is designed to reflect this diversity by requiring advisers to consolidate when doing so will provide more meaningful information. We recognize that this may lead to some degree of difference across different segments of the private fund adviser industry, but it will ultimately result in more meaningful information for investors. Relatedly, private fund advisers generally should take into account any input received from investors on what
approach to consolidation that they view as most meaningful.
5. Format and Content Requirements
As proposed, the rule requires the adviser to use clear, concise, plain English in the quarterly statement.445 For example, to satisfy the requirement for ‘‘clear’’ disclosures, advisers should generally use a font size and type that are legible, and margins and paper size (if applicable) that are reasonable. Likewise, to meet this standard, any information that an adviser chooses to include in a quarterly statement, but is not required by the rule, must be as short as practicable, not more prominent than the required information, and not obscure or impede an investor’s understanding of the mandatory information. The rule also requires advisers to present information in the quarterly statement in a format that facilitates review from one quarterly statement to the next. Quarter-over￾quarter, an adviser generally should use consistent formats for fund quarterly statements, thereby allowing investors to easily compare fees, expenses, and performance over each quarterly period. We also encourage advisers to use a structured, machine-readable format if advisers believe this format will be useful to the investors in their funds. Some commenters supported this format and content requirement, stating that consistent formatting for quarterly statements will better enable investors to gauge adviser track records and appropriateness of costs.446 Some commenters argued that we should adopt more prescriptive formatting requirements.447 Conversely, certain commenters argued that we should not adopt prescriptive formatting requirements.448 Other commenters suggested that these format and content

449See, e.g., AIC Comment Letter I; Comment Letter of the American Securities Association (May 4, 2022) (‘‘ASA Comment Letter’’); State Bar of Texas Comment Letter. 450Final rule 211(h)(1)–2(d). 451We would generally anticipate the fee and expense line items of a private credit fund to be more associated with loans or other financing activities, and servicing activity related thereto, and the fee and expense line items of a private equity buyout fund to be more associated with the acquisitions and dispositions of portfolio companies. 452Final amended rule 204–2(a)(20). For all of the recordkeeping rule amendments in this rulemaking package, advisers are required to maintain and preserve the record in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment adviser. See rule 204–2(e)(1) under the Advisers Act. 453We asked in the proposal whether we should require advisers to retain a record of each addressee, the date(s) the statement was sent, address(es), and delivery method(s) for each quarterly statement, as proposed. In response to comments received and in a change from the proposal (as discussed further below in this
section), we are not requiring private fund advisers
to make and retain records of addresses or the delivery methods used to disseminate quarterly statements. If an adviser distributes a quarterly statement electronically through a data room (see discussion of data rooms in supra section II.B.3), such adviser must keep records of the notifications provided to investors that such quarterly statement has been made available in the data room. Such notification records must include each addressee and the date(s) the notification was sent. 454 In certain circumstances, an adviser may change its determination of whether a particular fund it advises is a liquid or illiquid fund pursuant to the quarterly statement rule. For example, an adviser may determine a fund it advises is a liquid fund in year one and then later determine it is an illiquid fund in year four because the nature of such fund’s redemption rights have changed. In such cases, advisers should also make and keep books and records substantiating the adviser’s determination of such change. 455See, e.g., Convergence Comment Letter; AFREF Comment Letter I; CPD Comment Letter. 456See Convergence Comment Letter. 457See, e.g., ATR Comment Letter; Chamber of Commerce Comment Letter; AIMA/ACC Comment Letter. requirements are not necessary because investors may already negotiate for specific format and content requirements for investor reporting.449 Although some investors may be able to negotiate for bespoke content and formatting for investor reporting, many investors may not have the bargaining power to do so. A goal of the quarterly statement requirement is to better enable all investors to effectively monitor and assess the costs and performance of their private fund investments with an investment adviser over time. The format and content requirements apply to all aspects of a quarterly statement, including the requirements to disclose the manner in which expenses, payments, allocations, rebates, waivers, and offsets are calculated and to cross-reference sections of the private fund’s organizational and offering documents.450 This approach will improve the utility of the quarterly statement by making it easier for investors to review and analyze. These requirements are intended to support every investor’s ability to understand better the context of the information provided in the quarterly statement regarding fees, expenses, and performance and monitor their private fund investments. For instance, providing investors with clear and easily accessible cross-references to the fund governing documents will make it easier for all investors to assess and monitor whether the fees and expenses in the quarterly statement comply with the fund’s governing documents. We believe the final rule strikes an appropriate balance in prescribing the baseline content of the tables and performance information that is required to be included in quarterly statements while also taking a generally principles-based approach with respect to the formatting of such
information. This approach will help provide investors with standardized baseline information about their private fund investments and advisers with flexibility in presenting the required information, without being overly prescriptive or sacrificing readability. Additionally, as stated above, advisers under the rule remain able to provide, and investors are free to request and negotiate for, additional information to supplement the required information in the quarterly statement, subject to applicable rules and other disclosure requirements. We are requiring a tabular format to ensure the information in the quarterly statements is presented in an organized fashion, but we view further prescriptive formatting as potentially more harmful than beneficial in many cases. We considered, but are not adopting, more prescriptive formatting because we recognize it might result in investor confusion if an adviser includes inapplicable line items to satisfy our form requirements, while omitting additional relevant information that might be unique to a particular fund. The private fund space is diverse, and specific reporting formats could be appropriate for certain types of funds but inappropriate for different types of funds. For instance, the fees and expenses associated with a private equity buyout fund will differ from those for a private credit fund.451 If we were to prescribe formatting that is effective for a buyout fund, such formatting may be misleading or confusing when applied to a private credit fund, a real estate fund or a hedge fund. Moreover, we were concerned that advisers would be unable to report on a consolidated basis if we further prescribed the format of the statements.
6. Recordkeeping for Quarterly
Statements
We are amending rule 204–2 (‘‘books and records rule’’) under the Advisers Act to require advisers to retain books and records related to the quarterly statement rule.452 First, we are requiring private fund advisers to make and retain a copy of any quarterly statement distributed to fund investors pursuant to the quarterly statement rule, as well as a record of each addressee and the date(s) the statement was sent.453 Second, we are requiring advisers to make and retain all records evidencing the calculation method for all expenses, payments, allocations, rebates, offsets, waivers, and performance listed on any quarterly statement delivered pursuant to the quarterly statement rule. Third, we are requiring advisers to make and keep books and records substantiating the adviser’s determination that a private fund client is a liquid fund or an illiquid fund pursuant to the quarterly statement rule.454 These requirements will facilitate our staff’s ability to assess an adviser’s compliance with the proposed rule and would similarly enhance an adviser’s compliance efforts. Some commenters supported this recordkeeping requirement 455 including one that stated that it would not be overly burdensome for advisers.456 Other commenters argued that this recordkeeping requirement will be burdensome and/or not beneficial for investors.457 We do not view this recordkeeping requirement as creating significant, additional burdens. As a practical matter, advisers will need to generate these records to comply with the quarterly statement rule, and we anticipate that they would only need to modify their existing recordkeeping procedures to properly maintain these records as well. Requiring recordkeeping for quarterly statements should also enhance advisers’ internal compliance efforts. Moreover, this recordkeeping will help facilitate the Commission’s inspection and enforcement capabilities by improving our staff’s ability to assess an adviser’s compliance with the final rule.

458See CFA Comment Letter II.
459Final rule 206(4)–10. The rule would apply to all investment advisers registered, or required to be registered, with the Commission. 460See American Institute of Certified Public Accountants’ (‘‘AICPA’’) auditing standards, AU–C
Section 550 and PCAOB auditing standards, AS
2410.
461See AICPA auditing standards, AU–C Section
240. Audits performed under PCAOB standards
provide similar benefits. See PCAOB auditing standards, AS 2401, which discusses consideration of fraud in a financial statement audit. 462See Proposing Release, supra footnote 3, at 101–103. 463See IAA Comment Letter II; NYC Bar Comment Letter II; AIC Comment Letter I. 464See Comment Letter of Ernst & Young (Apr. 25, 2022) (‘‘E&Y Comment Letter’’); Comment Letter of Deloitte & Touche LLP (Apr. 21, 2022) (‘‘Deloitte Comment Letter’’); KPMG Comment Letter; PWC Comment Letter; AIC Comment Letter I; TIAA Comment Letter; NSCP Comment Letter. See also Private Funds and Application of the Custody Rule to Special Purpose Vehicles and Escrows, Division of Investment Management Guidance Update No. 2014–07 (June 2014). 465See SIFMA–AMG Comment Letter I. See also Staff Responses to Questions about the Custody Rule (‘‘Custody Rule FAQs’’), available at https:// www.sec.gov/divisions/investment/custody_faq_ 030510.htm. 466See NYC Bar Comment Letter II. 467Rule 206(4)–2(b)(4) and (c). In a change from the proposal, defined terms in rule 206(4)–10 are as defined in the custody rule; they are not defined in rule 211(h)–1. See rule 206(4)–10(c). The SEC has proposed to amend and redesignate the custody rule. See Safeguarding Advisory Client Assets, Investment Advisers Act Release No. 6240 (Feb. 15,
2023) [88 FR 14672 (Mar. 9, 2023)] (‘‘Safeguarding
Release’’). We are continuing to consider comments received in response to that proposal. 468See rule 206(4)–2(b)(4)(ii) and 206(4)–2(d)(3) (defining ‘‘independent public accountant’’). 469See rule 206(4)–2(b)(4). The custody rule requires an accountant performing an audit of a pooled investment vehicle to be an ‘‘independent public accountant’’ complying with rule 2–01(b) and (c) of Regulation S–X. Rule 2–01(c) of Regulation S–X references the term ‘‘audit and professional engagement period,’’ which is defined in rule 2–01(f)(5) of Regulation S–X. 470The SEC has stated that certain financial statements must either be prepared in accordance with U.S. GAAP or prepared in accordance with some other comprehensive body of accounting standards if the information is substantially similar to financial statements prepared in accordance with U.S. GAAP and contain a footnote reconciling any material differences. See Custody of Funds or Securities of Clients by Investment Advisers, Investment Advisers Act Release No. 2176 (Sept. 25, 2003) [68 FR 56691 (Oct. 1, 2023)] (‘‘2003 Custody Rule Release’’) at n.41. Our staff has taken a similar view. See Custody Rule FAQs, supra footnote 465, at Question VI.5. 471See rule 206(4)–2(b)(4) and (c). One commenter suggested that, instead of requiring, for each quarterly statement, recordkeeping of each addressee, the date(s) sent, address(es) and delivery method(s), we should require only records necessary to demonstrate compliance with the quarterly statement distribution requirement.458 We agree that the addresses and delivery methods used to disseminate quarterly statements are not necessary to demonstrate compliance with the quarterly statement distribution requirement and have removed those obligations accordingly. However, we believe that recordkeeping of each addressee and the dates sent are necessary to demonstrate compliance with the final rule. Records of the distribution dates will demonstrate compliance with the various distribution deadlines set forth in the final rule. Records of the addressees are similarly necessary to demonstrate that each quarterly statement has been sent to each investor. These recordkeeping requirements will permit Commission staff to effectively assess an adviser’s compliance with the rule.
C. Mandatory Private Fund Adviser
Audits
We are requiring private fund advisers to obtain an annual financial statement audit of the private funds they advise, directly or indirectly.459 In addition to protecting the fund and its investors against the misappropriation of fund assets, we believe an audit by an independent public accountant provides an important check on the adviser’s valuation of private fund assets, which often serves as the basis for the calculation of the adviser’s fees. It also provides an important check on certain conflicts of interest between the adviser and the private fund investors, such as potentially problematic sales practices or compensation schemes. For example, during a financial statement audit, an auditor will inquire about related party relationships and transactions, including the identity of any related parties, the nature of the relationships, and the business purpose of entering into any transaction with a related party.460 Moreover, as part of the auditor’s substantive testing, an auditor may review the calculation and presentation of management fees paid to the adviser and may focus on capital allocations to review the adviser’s entitlement to performance-based compensation. While the auditor does not have primary responsibility to prevent and detect fraud, it does have a responsibility to obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error.461 We are adopting the substance of the mandatory private fund adviser audit rule largely as proposed. The proposed rule was primarily drawn from the Advisers Act custody rule but differed from that rule in several respects.462 Commenters explained that these differences could create confusion with, and be duplicative of, the custody rule.463 For example, commenters stated that a staff guidance update on the application to SPVs would apply under the custody rule but not here.464 Similarly, other commenters stated that staff guidance issued in frequently asked questions would apply under the custody rule but not here.465 One commenter asserted that the imposition of overlapping and inconsistent standards between the requirements of the custody rule and this rule would not serve to increase investor protection.466 After considering comments, we are adopting a final rule that addresses those differences. More specifically, we are requiring advisers registered with, or required to be registered with, the Commission to cause their private funds to undergo audits in accordance with the audit provision (and related requirements for delivery of audited financial statements) under the custody rule.467 The mandatory private fund adviser audit rule requires a registered investment adviser providing investment advice, directly or indirectly, to a private fund, to cause that fund to undergo a financial statement audit that meets the requirements set forth in paragraphs (b)(4)(i) through (b)(4)(iii) of the custody rule applicable to
pooled investment vehicles subject to annual audit and to cause audited financial statements to be delivered in accordance with paragraph (c) of that rule. As a result, each of the following is required under the final rule:
(1) The audit must be performed by an independent public accountant that meets the standards of independence in 17 CFR 210.2–01 (rule 2–01(b) and (c) of Regulation S–X) that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by the PCAOB in accordance with its rules; 468 (2) The audit must meet the definition of audit in 17 CFR 210.1–02(d) (rule 1– 02(d) of Regulation S–X); 469 (3) Audited financial statements must be prepared in accordance with generally accepted accounting principles; 470 and (4) Annually within 120 days of the private fund’s fiscal year-end and promptly upon liquidation, the private fund’s audited financial statements are delivered to investors in the private fund.471 Additionally, in recognition that a surprise examination under the custody rule does not satisfy the requirements of this rule, we are adopting the proposed

472See final rule 206(4)–10(b).
473See Public Citizen Comment Letter; Healthy Markets Comment Letter I; Trine Comment Letter; AFREF Comment Letter I; OPERS Comment Letter; ICM Comment Letter; NASAA Comment Letter; Better Markets Comment Letter; Albourne Comment Letter; ILPA Comment Letter I; Segal Marco Comment Letter; RFG Comment Letter II; Convergence Comment Letter; NCREIF Comment Letter. 474See PIFF Comment Letter; BVCA Comment Letter; Invest Europe Comment Letter; AIC Comment Letter I; Comment Letter of Steven Utke and Paul Mason (Feb. 26, 2022) (‘‘Utke and Mason Comment Letter’’); Dechert Comment Letter; AIMA/ ACC Comment Letter; Comment Letter of Canaras Capital Management LLC (Apr. 25, 2022) (‘‘Canaras Comment Letter’’); SBAI Comment Letter; Ropes & Gray Comment Letter; IAA Comment Letter II; NYC Bar Comment Letter II. 475See NASAA Comment Letter. 476See AIMA/ACC Comment Letter. 477See PIFF Comment Letter; BVCA Comment Letter; Invest Europe Comment Letter; Utke and Mason Comment Letter; Dechert Comment Letter; AIMA/ACC Comment Letter. 478See AIC Comment Letter I; BVCA Comment Letter. 479See Chamber of Commerce Comment Letter. 480See SBAI Comment Letter; AIMA/ACC Comment Letter; Comment Letter of LaSalle Investment Management, Inc. (Apr. 25, 2022) (‘‘LaSalle Comment Letter’’); CFA Comment Letter I; PWC Comment Letter; Ropes & Gray Comment Letter. 481Final rule 206(4)–10; see also rule 206(4)– 2(b)(4) and rule 206(4)–2(c). 482FASB ASC Topic 820, Fair Value Measurement. 483FASB ASC Topic 850, Related Party Disclosures. 484FASB ASC Topic 470, Debt and FASB ASC Subtopic 860–30, Secured Borrowing and Collateral. 485See OPERS Comment Letter; AFSCME Comment Letter; ILPA Comment Letter I; NYC Comptroller Comment Letter; see generally Seattle Retirement System Comment Letter; DC Retirement Board Comment Letter. 486NYC Comptroller Comment Letter. 487See OPERS Comment Letter. 488See ILPA Comment Letter I. 489See AFSCME Comment Letter. 490See AIC Comment Letter I; BVCA Comment Letter. 491See AICPA auditing standards, AU–C Section 240 and PCAOB auditing standards, AS 2401. exception to this rule for funds and advisers not in a control relationship. Specifically, for a fund that the adviser does not control and that is neither controlled by nor under common control with the adviser (e.g., an adviser to a fund of funds may select an unaffiliated sub-adviser to implement a portion of the underlying investment strategy), the adviser only needs to take all reasonable steps to cause the fund to undergo an audit that meets these elements.472 Some commenters supported the proposed rule,473 while others opposed it 474 and one commenter highlighted the importance of the proposed notification provision explaining that the issuance of a modified opinion or the auditor’s termination may be ‘‘serious red flags that warrant early notice to regulators.’’ 475 Commenters who opposed the proposed rule indicated that it: (i) would eliminate the surprise examination option under the custody rule without
evidence that surprise examinations have not adequately protected private fund investors; 476 (ii) might increase costs to investors and be unnecessary; 477 (iii) would not serve the stated policy goals of acting as a check on the adviser’s valuation of private fund assets; 478 (iv) may provide investors a false sense of security; 479 and (v) could increase the difficulty of finding an auditor in certain jurisdictions.480 While the mandatory private fund adviser audit rule would effectively eliminate the surprise examination option under the custody rule for private fund advisers and may increase costs to some investors, we believe that financial statement audits provide a critical set of additional protections for private fund investors. During a financial statement audit, independent public accountants not only typically verify the existence of pooled investment vehicle investments similar to a surprise examination, but they also test other assertions associated with the pooled investment vehicle investments and other significant accounts (e.g., valuation, presentation and disclosure, rights and obligations, completeness, and accuracy). Importantly, audited financial statements, including the related notes, schedules, and audit opinion, must be distributed to each investor in the pooled investment vehicle, providing investors with additional information about the operation of the private fund.481 For example, audited financial statements prepared in accordance with U.S. GAAP, which are the responsibility of the private fund adviser or its related person, include disclosures regarding the level of fair value hierarchy within which the fair value measurements are categorized in their entirety and a description of the valuation techniques and inputs used in the fair value measurement of the fund’s investments.482 These audited financial statements also include disclosures regarding material related party transactions.483 In addition, fund borrowings, such as margin borrowings or fund-level subscription facilities, are disclosed in the financial statements.484 These are just a few examples of the types of critical information provided to investors in audited financial statements to help them better understand the private fund’s operations and financial position. If, in lieu of audited financial statements, an investment adviser obtains a surprise examination of the funds and securities of its client (e.g., a private fund), an investor may not receive this additional important information. Comments from institutional investors generally acknowledged the benefits of annual financial statement audits as providing an important tool for monitoring their investments.485 These commenters explained that audits enhance investor protection 486 and the mandatory private fund adviser audit rule would introduce a degree of consistency across private funds.487 One commenter stated that audits are critical to protecting the fund’s assets from fraud and
malfeasance,488 while another commenter explained that annual audits provide investors more accurate valuations, which also often serve as the basis for calculation of fees.489 Accordingly, we continue to believe the benefits of a financial statement audit to private fund investors justify the elimination of the surprise examination option for private fund advisers and the associated costs. We disagree with commenters’ assertions that the audit requirement will not serve the stated policy goals of acting as a check on the adviser’s valuation of private fund assets.490 Financial statement audits provide meaningful protections to private fund investors by increasing the likelihood that fraudulent activity or problems with valuation are uncovered, thereby providing deterrence against fraudulent conduct by fund advisers or their related persons.491 For example, as noted above, a fund’s adviser may use a high level of discretion and subjectivity in valuing a private fund’s illiquid investments, which are difficult to value. This creates a conflict of interest if the adviser also calculates its fees as a percentage of the value of the fund’s investments and/or an increase in that value (net profit), as is typically the case. Moreover, private fund advisers often rely heavily on existing fund performance when engaging in sales practices: obtaining new investors (in the case of a private fund that makes continuous or periodic offerings), retaining existing investors (in the case of a private fund that offers periodic redemptions or transfer rights), soliciting investors for co-investment opportunities, or fundraising for a new fund. These factors raise the possibility that funds are valued opportunistically and that the adviser’s compensation may involve fraud or deception, resulting in an inappropriate

492See generally Jenkinson, Sousa, Stucke, How Fair are the Valuations of Private Equity Funds? (2013), available at https://www.psers.pa.gov/ About/Investment/Documents/PPMAIRC%202018/ 27%20How%20Fair%20are%20the%20 Valuations%20of%20Private%20Equity%20 Funds.pdf. See also In the Matter of Swapnil Rege, Investment Advisers Act Release No. 5303 (July 18,
2019) (settled action) (alleging that an employee of
a private fund adviser mispriced the private fund’s investments, which resulted in the adviser charging the fund excess management fees); SEC v. Southridge Capital Mgmt., LLC, Lit. Rel. No. 21709 (Oct. 25, 2010) (alleging that adviser overvalued the largest position held by the funds by fraudulently misstating the acquisition price of the assets); see docket for SEC v. Southridge Capital Mgmt., LLC, U.S. District Court, District of Connecticut (New Haven), case no. 3:10–CV–01685 (on Sept. 12, 2016 the court granted the SEC’s motion for summary judgment and entered a final judgment in favor of the SEC in 2018). 493See AICPA auditing standards AU–C Section 540A and PCAOB auditing standards, AS 2501. 494See AIC Comment Letter I. 495See In the Matter of EDG Management Company, LLC, supra footnote 30; see also In the Matter of Energy Capital Partners, supra footnote 30; Innovation Capital Management, LLC, Investment Advisers Act Release No. 6104 (Sept. 2,
2022) (settled order).
496See Chamber of Commerce Comment Letter. 497Public Company Accounting Oversight Board, Basics of Inspections, Inspections: An Overview (last visited Aug. 13, 2023), available at https:// pcaobus.org/oversight/inspections/basics-of￾inspections. 498See AIMA/ACC Comment Letter; AIC Comment Letter I. 499See, e.g., Exemptions Adopting Release, supra footnote 9. 500See, e.g., PCAOB Reports of Board Determinations Pursuant to Rule 6100, available at https://pcaobus.org/oversight/international/board￾determinations-holding-foreign-companies￾accountable-act-hfcaa. 501For example, more than 90% of the total number of hedge funds and private equity funds currently undergo a financial statement audit. See infra section VI.C.4. 502See LSTA Comment Letter; Canaras Comment Letter. 503See Fixed Income Investor Network Comment Letter. 504See supra section II.A (Scope) for additional information. The Commission is not applying all five private fund adviser rules to SAFs advised by SAF advisers. compensation scheme.492 A fund audit includes the evaluation of whether the fair value estimates and related disclosures are in conformity with the requirements of the financial reporting framework (e.g., U.S. GAAP), which may include evaluating the selection and application of methods, significant assumptions, and data used by the adviser in making the estimate.493 The Commission continues to believe that private fund audits are an important tool to provide a check on private fund valuations. One commenter expressed concerns that private equity fund audits are unnecessary because ‘‘[p]rivate equity funds typically charge management fees based on capital commitments, or sometimes invested capital, neither of which is affected by subjective valuation methods.’’ 494 We, however, have observed instances of advisers to private equity funds overcharging their management fee by failing to write down the value of fund investments.495 In these cases, the subjective valuation method is particularly important because the adviser may have to decrease invested capital by any permanent impairments or write-downs of portfolio investments in accordance with the fund documents, which, in turn, decreases the management fee paid to the adviser. Also, during an annual period in which a private equity fund has sold a portfolio investment, the auditor typically reviews the fund’s waterfall calculation including the calculations for return of invested capital, return of allocable expenses, the preferred return, the general partner catch-up, if applicable, and any incentive allocation, as part of the annual audit. Thus, the Commission continues to believe that the mandatory audit requirement should apply to private fund advisers, including advisers to private equity funds. One commenter expressed concern that the mandatory audit requirement may give investors a false sense of security because the PCAOB does not have the authority to inspect audit engagements that involve private fund financial
statements.496 Under the PCAOB’s current inspection program, we understand that the PCAOB selects audit engagements of audits performed involving U.S. public companies, other issuers, and broker-dealers, so private fund audit engagements would not be selected for review.497 Even though private fund engagements are not selected for review under the PCAOB’s current inspection program, we believe that many accounting firms registered with the PCAOB and subject to the PCAOB’s inspection program would implement their quality control systems throughout the accounting firm related to all their assurance engagements. Thus, we continue to believe that registration and regular inspection of an independent public accountant’s system of quality control by the PCAOB may provide higher quality audits, resulting in additional investor protection. Commenters also expressed concerns that advisers may have increased difficulty finding an auditor in certain jurisdictions because requiring independent public accountants conducting the audit to be registered with, and subject to inspection by, the PCAOB would greatly limit the pool of accountants available to conduct audits.498 As noted above, we do not apply substantive provisions of the Advisers Act and its rules, including the mandatory audit requirement, with respect to non-U.S. clients (including private funds) of an SEC registered offshore investment adviser.499 We believe that this clarification will reduce many of the concerns expressed by commenters regarding the difficulty for non-U.S. private fund advisers finding an auditor in certain jurisdictions. In addition, we do not believe that advisers will have significant difficulty in finding an accountant that is eligible under the rule in most jurisdictions because many PCAOB-registered independent public accountants who are subject to regular inspection currently have practices in various jurisdictions, which may ease concerns regarding offshore availability. An independent public accounting firm would not, however, be considered to be ‘‘subject to regular inspection’’ if it is included on the list of firms that is headquartered or has an office in a foreign jurisdiction that the PCAOB has determined, in accordance with PCAOB Rule 6100, it is unable to inspect or investigate completely because of a position taken by one or more authorities in that jurisdiction.500 Based on our experience with the custody rule, we believe registration and the regular inspection of an independent public accountant’s system of quality control by the PCAOB may lead to higher quality audits, resulting in additional investor protection. Further, most private funds are already undergoing a financial statement audit, so the increase in demand for these services may be limited.501 Thus, although we acknowledge commenters’ concerns, we still believe it important that the private fund auditors meet SEC independence requirements and be registered with, and subject to regular inspection,
by the PCAOB. Some industry commenters 502 and a commenter representing CLO investors 503 endorsed an alternative compliance option for CLOs, such as an agreed-upon-procedures engagement, instead of requiring such vehicles to undergo an annual audit. As stated above,504 we believe that SAFs, including CLOs, have certain distinguishing structural and operational features that warrant carving them out of the private fund rules entirely, including the audit rule. We also believe that an agreed-upon￾procedures engagement serves a different purpose than an audit. An agreed-upon procedures engagement is an attestation engagement in which a

505See AICPA AT–C 215.02.
506See id.
507See AICPA AT–C 215.03.
508See rule 1–02(d) of Regulation S–X. 509See E&Y Comment Letter; KPMG Comment Letter; PWC Comment Letter; AIC Comment Letter I; TIAA Comment Letter. 510See Custody of Funds or Securities of Clients by Investment Advisers, SEC Investment Advisers Act Release No. IA–2968 (Dec. 30, 2009) [75 FR 1455 (Jan. 11, 2010)] (‘‘2009 Custody Rule Release’’), at 41. 511See final rule 206(4)–10(a); see also infra
section II.C.7 (discussing that an adviser needs only
to take reasonable steps to cause the private fund, including an SPV, to undergo an audit if the adviser is not in a control relationship). 512See final rule 206(4)–10(a) and rule 206(4)– 2(d)(3) (defining ‘‘independent public accountant’’). 513 Id. 514See final rule 206(4)–10(a) and rule 206(4)– 2(b)(4)(ii). 515See Ropes & Gray Comment Letter; AIC Comment Letter II. 516See SOC Comment Letter. 517See rule 206(4)–2(b)(4); see also rule 206(4)– 2(d)(3) under the Advisers Act. 518See Revision of the Commission’s Auditor Independence Requirements, Release No. 33–7919 (Nov. 21, 2000) [65 FR 76008 (Dec. 5, 2000)]. The custody rule requires all accountants performing services to meet the standards of independence described in rule 2–01(b) and (c) of Regulation S–
X. See rule 206(4)–2(d)(3) under the Advisers Act.
519See Revision of the Commission’s Auditor Independence Requirements, Release No. 33–7919 (Nov. 21, 2000) [65 FR 76008 (Dec. 5, 2000)], at 5. 520Under the definition in rule 1–02(d) of Regulation S–X, an ‘‘audit’’ of an entity (such as a private fund) that is not an issuer as defined in
section 2(a)(7) of the Sarbanes-Oxley Act of 2002
means an audit performed in accordance with either U.S. GAAS or the standards of the PCAOB. See 2003 Custody Rule Release, supra footnote 470, at n.41. When conducting an audit of financial statements in accordance with the standards of the PCAOB, however, the auditor would also be required to conduct the audit in accordance with U.S. GAAS because the audit would not be within the jurisdiction of the PCAOB as defined by the Sarbanes-Oxley Act of 2002, as amended, (i.e., not an issuer, broker, or dealer). See AICPA auditing standards, AU–C Section 700.46. We believe most advisers will choose to perform the audit pursuant to U.S. GAAS only rather than both standards, though it will be permissible to perform the audit pursuant to both standards. 521See E&Y Comment Letter; SBAI Comment Letter; AIMA/ACC Comment Letter; Deloitte Comment Letter. 522Convergence Comment Letter. 523See AICPA auditing standards, AU–C Section
240. Audits performed under PCAOB standards
provide similar benefits. See PCAOB auditing Continued certified public accountant performs specific procedures agreed upon between the engaging party and the certified public accountant on subject matter and reports findings without providing an opinion or conclusion (i.e., an agreed-upon procedures engagement is not an examination or review engagement).505 Because the needs of an engaging party may vary widely, the nature, timing, and extent of the procedures may vary, as well.506 Moreover, the intended users assess for themselves the procedures and findings reported by the certified public accountant and draw their own conclusions from the work performed by the practitioner.507 An audit, on the other hand, is an examination of an entity’s financial statements by an independent public accountant in accordance with either the standards of the PCAOB or generally accepted auditing standards in the United States (‘‘U.S. GAAS’’) for purposes of expressing an opinion on those financial statements.508 Although the final approach we are adopting is not identical to commenters’ suggestions, we believe it is responsive to suggestions for the audit requirement not to apply to CLOs. Commenters also requested clarification about whether advisers would need to obtain a separate audit of an SPV to comply with the mandatory audit requirement.509 We understand that an adviser to a pooled investment vehicle client may utilize an SPV, organized as a limited liability company, trust, partnership, corporation or other similar vehicle, to facilitate investments for legal, tax, regulatory or other similar purposes. We believe an investment adviser could either treat an SPV as a separate client, in which case the adviser will be advising the SPV directly, or treat the SPV’s assets as assets of the pooled investment vehicles that it is advising indirectly through the SPV.510 If the adviser treats the SPV as a separate client, the mandatory private fund audit rule will require the adviser to comply with the rule’s audited financial statement distribution requirements.511 Accordingly, the adviser will distribute the SPV’s audited financial statements to the pooled investment vehicle’s beneficial owners. If, however, the adviser treats the SPV’s assets as the pooled investment vehicle’s assets that it is advising indirectly, the SPV’s assets will be required to be considered within the scope of the pooled investment vehicle’s financial statement audit.

1. Requirements for Accountants
   Performing Private Fund Audits Although there are substantive differences between the proposed rule and the final rule, we do not believe that these differences are significant. The mandatory private fund adviser audit rule includes certain requirements regarding the accountant performing a private fund audit, as currently required under the custody rule.512 First, the rule requires an accountant performing a private fund audit to meet the standards of independence described in Regulation S–X.513 Second, the rule requires the independent public accountant performing the audit to be registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the PCAOB in accordance with its rules.514 Some commenters suggested that we should allow auditors to meet AICPA standards of independence as opposed to the standards of independence described in rule 2–01(b) and (c) of Regulation S–X.515 Another commenter suggested that we should require advisers to rotate their auditors and prohibit auditors to private funds from providing any non-audit services.516 Under the current custody rule, advisers to pooled investment vehicles qualifying for the audit provision must meet the standards of independence described in Regulation S–X.517 Based on our experience with the audit provision in the custody rule, we continue to believe that an audit by an objective, impartial, and skilled professional contributes to both investor protection and investor confidence.518 We have long recognized the bedrock principle that an auditor must be independent in fact and appearance, and we believe that the independence standards described in Regulation S–X focus on those relationships or services, including certain non-audit services, that are more likely to threaten an auditor’s objectivity or impartiality.519
2. Auditing Standards for Financial
   Statements
   Under the mandatory private fund adviser audit rule, an audit must meet the definition in rule 1–02(d) of Regulation S–X, as proposed and as currently required under the custody rule. Pursuant to that definition, financial statement audits performed for purposes of the audit rule would generally be performed in accordance with U.S. GAAS.520 Some commenters suggested that we consider whether auditing standards other than U.S. GAAS or PCAOB standards may meet the requirements of the rule,521 while another commenter stated that ‘‘the rule should require advisers to obtain audits performed under rule 1–02(d) of Regulation S–X, as proposed.’’ 522 After considering these comments, we continue to believe that audits should be conducted in accordance with U.S. GAAS for the following reasons. First, U.S. GAAS requires that an auditor evaluate and respond to the risk of material misstatements of the financial statements due to fraud or error.523

standards, AS 2401, which discusses consideration of fraud in a financial statement audit. 524See supra footnote 520. 525See final rule 206(4)–10(a) and rule 206(4)– 2(b)(4). The SEC has stated that certain financial statements must either be prepared in accordance with U.S. GAAP or prepared in accordance with some other comprehensive body of accounting standards if the information is substantially similar to financial statements prepared in accordance with U.S. GAAP and contain a footnote reconciling any material differences. See 2003 Custody Rule Release, supra footnote 470, at n.41. 526See Albourne Comment Letter. 527See SBAI Comment Letter; Deloitte Comment Letter. 528See SIFMA–AMG Comment Letter I; AIC Comment Letter I. 529See Deloitte Comment Letter. 530See FASB ASC Topic 946, Financial Services—Investment Companies. 531See rule 206(4)–2(b)(4)(i) and rule 206(4)– 2(b)(4)(iii). 532See 2003 Custody Rule Release, supra footnote 470, at n.41. 533See final rule 206(4)–10(a) and rule 206(4)– 2(b)(4)(i). 534See NSCP Comment Letter; AIC Comment Letter I; ILPA Comment Letter I. 535See Convergence Comment Letter. 536See Segal Marco Comment Letter; SBAI Comment Letter. 537We similarly believe that a 180-day time period is appropriate in the context of a fund of funds and that a 260-day time period is appropriate in the context of a fund of funds of funds because advisers to these types of pooled investment vehicles may face practical difficulties completing their audits before the completion of audits for the underlying funds in which they invest. We note that our staff has expressed a similar view for certain fund of funds for purposes of the custody rule. See Custody Rule FAQs, supra footnote 465, at Question VI.7, VI.8A, and VI.8B. Second, audits performed in accordance with U.S. GAAS help detect valuation irregularities or errors, as well as an investment adviser’s loss, misappropriation, or misuse of client investments. Third, other standards may use different or more flexible rules and policies (e.g., the option to follow a standard, rather than an obligation to do so), which may be less effective than U.S. GAAS. Finally, we believe that U.S. investors are more familiar with the procedures performed during a financial statement audit conducted in accordance with U.S. GAAS. A financial statement audit conducted in accordance with U.S. GAAS commonly involves an accountant confirming bank account balances and securities holdings as of a point in time and regularly includes the testing of a sample of transactions, including investor subscriptions and redemptions, that have occurred throughout the year. We believe that the common types of audit evidence procedures performed by accountants during a financial statement audit—physical examination or inspection, confirmation, documentation, inquiry, recalculation, re-performance, observation, and analytical procedures—act as an important check to identify erroneous or unauthorized transactions or
withdrawals by the adviser. Thus, we continue to believe that audits should generally be conducted in accordance with U.S. GAAS under this rule.524
3. Preparation of Audited Financial
Statements
The mandatory private fund adviser audit rule also requires the audited financial statements to be prepared in accordance with generally accepted accounting principles as currently required under the custody rule and as proposed.525 Requiring that financial statements comply with U.S. GAAP or some other comprehensive body of accounting standards similar to U.S. GAAP if the differences are reconciled to U.S. GAAP is designed to help investors receive consistent and quality financial reporting on their investments from the fund’s adviser. We had proposed to require that financial statements of private funds organized under non-U.S. law or that have a general partner or other manager with a principal place of business outside the United States contain information substantially similar to statements prepared in accordance with U.S. GAAP and any material differences must be required to be reconciled to U.S. GAAP. While one commenter suggested that we continue to require audited financial statements prepared in accordance with U.S. GAAP,526 others suggested that we should recognize other accounting standards outside of the United States, such as International Financial Reporting Standards (IFRS),527 and not impose a U.S. GAAP requirement.528 Another commenter indicated that IFRS may be sufficient on their own without also requiring U.S. GAAP financial statements or financials with a reconciliation to U.S. GAAP.529 We continue to believe that U.S. GAAP is well understood by U.S. investors. U.S. GAAP also has important industry specific accounting principles for certain pooled vehicles, including private funds, and requires measurement of trades on trade date as opposed to settlement date, presentation of a schedule of investments, and certain financial highlights that may not be required under other accounting standards.530 Thus, we continue to believe that it is important for audited financial statements to be prepared in accordance with U.S. GAAP or some other comprehensive body of accounting standards similar to U.S. GAAP if the differences are reconciled to U.S. GAAP.531 Under the custody rule, financial statements of private funds organized under non-U.S. law or that have a general partner or other manager with a principal place of business outside the United States are required to contain information substantially similar to statements prepared in accordance with U.S. GAAP and any material differences are required to be reconciled to U.S. GAAP.532
4. Distribution of Audited Financial
Statements
The mandatory private fund adviser audit rule requires a fund’s audited financial statements to be distributed to current investors within 120 days of the end of a private fund’s fiscal year, as currently required under the custody rule.533 The audited financial statements consist of the applicable financial statements, related schedules, accompanying footnotes, and the audit report. We proposed that the audited financials be distributed ‘‘promptly’’ after the completion of the audit. Commenters requested that we clarify the ‘‘promptly’’ standard,534 with at least one commenter suggesting an outer limit of 120 days after a fund’s fiscal year end to distribute audited financial statements,535 while other commenters requested additional flexibility around the time to distribute audited financial statements.536 After considering these comments, as well as comments urging us not to create disparity between this rule and the audit provision of the custody rule, we are incorporating the custody rule’s timing requirement for the distribution of financial statements into the mandatory private fund adviser audit rule. We believe that, based on our experience with the custody rule, a 120- day time period is generally appropriate to allow the financial statements of a fund to be audited while also balancing the needs of investors to receive timely information.537 This change will help ensure investors receive the statements in a timely and consistent manner. In rare instances, an adviser may be unable to distribute a fund’s audited financial statements within the required timeframe because of reasonably unforeseeable circumstances. For example, during the COVID–19 pandemic, some advisers were unable to deliver audited financial statements in the timeframe required under the custody rule due to logistical disruptions. Accordingly, because there

538See rule 206(4)–2(b)(4)(i) and rule 206(4)– 2(b)(4)(iii). 539See final rule 206(4)–10(a) and rule 206(4)– 2(c). In a master-feeder structure, master fund financials may be attached to the feeder fund financials and delivered to investors in the feeder fund. See FASB ASC 946–205–45–6. 540See rule 206(4)–10(a) and rule 206(4)–2(c). 541Final rule 206(4)–10(a); see Proposing Release, supra footnote 3, at 109; see also rule 206(4)– 2(b)(4)(i). 542See rule 206(4)–2(b)(4)(iii). 543See final rule 206(4)–10(a) and rule 206(4)– 2(b)(4)(i). 544See AICPA auditing standards, AU Section 708. 545See KPMG Comment Letter; AIC Comment Letter II; NCREIF Comment Letter; SBAI Comment Letter. 546See KPMG Comment Letter; AIC Comment Letter II; Convergence Comment Letter; AIMA/ACC Comment Letter; SBAI Comment Letter. 547See Ropes & Gray Comment Letter. 548See Safeguarding Release, supra footnote 467; we have recently reopened the comment period on the Safeguarding rulemaking proposal. Safeguarding Advisory Client Assets; Reopening of Comment Period, Investment Advisers Act Release No. 6384 (August 23, 2023). is not an alternative method by which to satisfy the rule, the Commission would take the position that, if an adviser is unable to deliver audited financial statements in the timeframe required under the mandatory private fund adviser audit rule due to reasonably unforeseeable circumstances, this would not provide a basis for enforcement action so long as the adviser reasonably believed that the audited financial statements would be distributed by the deadline and the adviser delivers the financial statements as promptly as practicable. Under the mandatory private fund adviser audit rule, the audited financial statements must be sent to all of the private fund’s investors, as proposed and as currently required under the custody rule.538 We did not receive any comments on this aspect of the proposal. In circumstances where an investor is itself a limited partnership, limited liability company, or another type of pooled vehicle that is a related person of the adviser, it is necessary to look through that pool (and any pools in a control relationship with the adviser or its related persons, such as in a master-feeder fund structure), in order to send to investors in those pools.539 Without such a requirement, the audited financial statements would essentially be delivered to the adviser rather than to the parties the financial statements are designed to inform. Outside of a control relationship, such as if the private fund investor is an unaffiliated fund of funds, this same concern is not present, and it is not necessary to look through the structure to make meaningful delivery. It will be sufficient to distribute the audited financial statements to the adviser to, or other designated party of, the unaffiliated fund of funds. We believe that this approach will lead to meaningful delivery of the audited financial statements to the private fund’s investors.540
5. Annual Audit, Liquidation Audit, and
Audit Period Lengths
Key to the effectiveness of the audit in protecting investors is timely and regular administration and distribution. We are requiring that an audit be obtained at least annually, as proposed.541 The final mandatory private fund adviser audit rule incorporates the custody rule requirement that audits must be performed promptly upon liquidation.542 Requiring the audit on an annual basis will help alert investors within months, rather than years, as to whether the financial statements are free of material misstatements and will increase the likelihood of mitigating losses or reducing exposure to other investor harms. Similarly, a liquidation audit will help ensure the appropriate and prompt accounting of the proceeds of a liquidation so that investors can take timely steps to mitigate losses or protect their rights at a time when they may be vulnerable to misappropriation by the investment adviser. We believe that it becomes increasingly difficult to remediate losses or other investor harms resulting from a material misstatement the longer it goes undetected. The audit requirement addresses these concerns while also balancing the cost, burden, and utility of requiring frequent audits. Requiring the audit on an annual basis is consistent with current practices of private fund advisers that obtain an audit to comply with the custody rule under the Advisers Act, or to satisfy investor demand for an audit, and will provide investors with uniformity in the information they are receiving.543 Under U.S. GAAS, auditors have an obligation to evaluate whether the current-period financial statements are consistent with those of the preceding period, and any other periods presented and to communicate appropriately in the auditor’s report when the comparability of financial statements between periods has been materially affected by a change in accounting principle or by adjustments to correct a material misstatement in previously issued financial statements.544 When an investor receives audited financial statements each year from the same private fund, the investor can compare statements year-over-year. Additionally, the investor can analyze and compare audited financial statements across other private funds and similar investment vehicles each year. With respect to liquidation, we understand that the amount of time it takes to complete the liquidation of a private fund may vary. A number of years might elapse between the decision to liquidate an entity and the completion of the liquidation process. During this time, the fund may execute few transactions and the total amount of investments may represent a fraction of the investments that existed prior to the start of the liquidation process. We further understand that a lengthy liquidation period can lead to circumstances where the cost of an annual audit represents a sizeable portion of the fund’s remaining assets. Commenters suggested that we clarify how these requirements apply to stub period audits.545
Certain commenters suggested that we should consider a period other than annually for funds that are undergoing a plan of liquidation or a wind down,546 with at least one commenter expressing concern that the cost of a liquidation audit may outweigh the possible benefits.547 Although we appreciate commenters’ concerns, we are persuaded by commenters who urged us to align the requirements of this rule and the custody rule for several reasons. First, the two rules are substantially similar and have substantially similar policy objectives. Second, aligning this rule and the custody rule avoids confusion because most private fund advisers are already aware of what is required to satisfy the audit provision under the custody rule. Third, aligning this rule and the custody rule avoids additional costs and associated burdens due to the two rules’ potential differences. We, however, requested comment on how these requirements apply to stub periods when we recently proposed amendments to the custody rule.548
6. Commission Notification
The proposed mandatory private fund adviser audit rule would have required an adviser to enter into, or cause the private fund to enter into, a written agreement with the independent public accountant performing the audit to notify the Commission (i) promptly upon issuing an audit report to the private fund that contains a modified opinion and (ii) within four business days of resignation or dismissal from, or other termination of, the engagement, or

549See Proposing Release, supra footnote 3, at 111. 550See NYC Bar Comment Letter II; BVCA Comment Letter; Invest Europe Comment Letter. 551See NASAA Comment Letter. 552See RFG Comment Letter II. 553See Safeguarding Release, supra footnote 467. 554See SEC Charges Two Advisory Firms for Custody Rule Violations, One Firm for ADV Violations, and Six Firms for Both, (Sept. 9, 2022), available athttps://www.sec.gov/news/press-release/ 2022-156; see also Form ADV, Section 7.B.(1) Private Fund Reporting, Question 23(h). 555Final rule 206(4)–10(b). 556 Id. 557See Convergence Comment Letter. 558See BVCA Comment Letter; Invest Europe Comment Letter. 559See AIMA/ACC Comment Letter. 560Final amended rule 204–2(a)(21)(i). See also supra footnote 452 (describing the record creation and retention requirements under the books and records rule). 561See the discussion of recordkeeping requirements above in section II.B.6. 562Final amended rule 204–2(a)(21)(ii). 563Final rule 211(h)(2)–2. The rule does not apply to advisers that are not required to register as investment advisers with the Commission, such as State-registered advisers and ERAs. 564The Commission recently adopted certain new reporting requirements for private funds on Form PF. See Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, Investment Advisers Act Release No. 6297 (May 3, 2023) (‘‘Form PF Release’’) (17 CFR parts 275 and 279). Among these new reporting requirements is an obligation for certain private equity funds to report adviser-led secondary transactions on Form PF on a quarterly basis. While the adviser-led secondary transaction reporting requirement on Form PF and the adviser-led secondary transaction requirements in the final rule both serve, at least in part, to further investor protection, they do so through different means, entail different burdens, and employ modified definitions. The adviser-led secondary transaction reporting requirement on Form PF is confidential and thus does not provide investors with additional information. The adviser-led secondary transaction requirements in this rule, on the other hand, are designed to, among other things, make investors better informed about adviser-led secondary transactions in which they may be participating. upon removing itself or being removed from consideration for being reappointed.549 Some commenters asserted that the notification requirement would be of limited benefit to the Commission,550 while one commenter supported the notification requirement stating that a modified opinion or termination of an auditor constitute serious red flags that warrant early notice to regulators.551 Another commenter even suggested that we should require advisers to notify investors upon the occurrence of a significant event.552 After carefully considering these comments, we are not adopting the notification requirement at this time because we are
persuaded by commenters who urged us to align the requirements of this rule and the custody rule. However, the Commission recently proposed amendments to the custody rule. As part of the proposed rulemaking, the Commission proposed similar amendments that would require advisers to enter into a written agreement with the independent public accountant performing the audit to notify the Commission (i) within one business day upon issuing an audit report to the entity that contains a modified opinion and (ii) within four business days of resignation or dismissal from, or other termination of, the engagement, or upon removing itself or being removed from consideration for being reappointed.553 We are continuing to consider comments received regarding that proposal. Although we are not adopting a notification requirement as part of this rule, we remind advisers that per the instructions to Form ADV, Part 1A,
Schedule D, Section 7.B.23.(h), if a
private fund adviser has checked ‘‘Report Not Yet Received,’’ the adviser must promptly file an amendment to its Form ADV to update its records once the report is available.554
7. Taking All Reasonable Steps To
Cause an Audit
We recognize that some advisers may not have requisite control over a private fund client to cause its financial statements to undergo an audit in a manner that satisfies the mandatory private fund adviser rule. This could be the case, for instance, where a sub￾adviser is unaffiliated with the fund. In a minor change from proposal, we are clarifying that if a fund is already undergoing an audit, a non-control adviser does not have to take reasonable steps to cause its private fund client to undergo an audit.555 We made this change to final rule 206(4)–10(b) to be consistent with final rule 206(4)–10(a). Thus, we are requiring that an adviser take all reasonable steps to cause its private fund client to undergo an audit that satisfies the rule when the adviser does not control the private fund and is neither controlled by nor under common control with the fund, if the private fund does not otherwise undergo such an audit.556 One commenter suggested that the ‘‘all reasonable steps’’ standard is unclear.557 Commenters also suggested that we remove this requirement for sub-advisers 558 and that we apply the mandatory audit rule only to private funds controlled by the adviser.559 We recognize that what would constitute ‘‘all reasonable steps’’ depends on the facts and circumstances. We believe, however, that advisers are in the best position to evaluate their control relationships over private fund clients and should be in a position to determine the appropriate steps to satisfy such standard based on their relationship with the private fund and the relevant control person. For example, a sub￾adviser that has no affiliation to the general partner of a private fund could document the sub-adviser’s efforts by including (or seeking to include) the requirement in its sub-advisory agreement. Accordingly, we continue to believe that the ‘‘all reasonable steps’’ standard is appropriate.
8. Recordkeeping Provisions Related to
the Audit Rule
Finally, we are amending the Advisers Act books and records rule to require advisers to keep a copy of any audited financial statements, along with a record of each addressee and the corresponding date(s) sent.560 In a change from the proposal, we are not requiring private fund advisers to make and retain records of the addresses and delivery methods used to disseminate audited financial statements.561 Additionally, the adviser will be required to keep a record documenting steps taken by the adviser to cause a private fund client with which it is not in a control relationship to undergo a financial statement audit that complies with the rule.562 We did not receive comments on the recordkeeping provisions of the mandatory private fund adviser audit rule. This aspect of the rule is designed to facilitate our staff’s ability to assess an adviser’s compliance with the mandatory private fund adviser audit rule and to detect risks the proposed audit rule is designed to address. We believe it similarly will enhance an adviser’s compliance efforts as well. D. Adviser-Led Secondaries We are requiring SEC-registered advisers to satisfy certain requirements if they initiate a transaction that offers fund investors the option between selling all or a portion of their interests in the private fund and converting or exchanging them for new interests in another vehicle advised by the adviser or any of its related persons (an ‘‘adviser-led secondary transaction’’).563 First, the adviser must obtain a fairness opinion or a valuation opinion from an independent opinion provider and distribute the opinion to private fund investors prior to the due date of the election form. Second, the adviser must prepare and distribute a written summary of any material business relationships between the adviser or its related persons and the independent opinion provider.564 Advisers or their

565See, e.g., CFA Comment Letter I; ICM Comment Letter; Morningstar Comment Letter; NEBF Comment Letter; Segal Marco Comment Letter. 566See, e.g., Better Markets Comment Letter; Healthy Markets Comment Letter I; NY State Comptroller Comment Letter. 567See, e.g., Comment Letter of the National Association of College and University Business Officers (Apr. 25, 2022) (‘‘NACUBO Comment Letter’’); SIFMA–AMG Comment Letter I; ATR Letter; PIFF Comment Letter; NYC Bar Comment Letter II; Ropes & Gray Comment Letter. 568See, e.g., RFG Comment Letter II; OPERS Comment Letter (asking the Commission to provide additional relief, such as allowing investors to participate in the continuation fund on the same terms that applied to the investor’s investment in the initial fund). 569For example, one commenter suggested we should encourage private funds to appoint independent transfer administrators and create secondary transfer policies. See Comment Letter of NYPPEX Holdings, LLC (Feb. 25, 2022) (‘‘NYPPEX Comment Letter’’). Another commenter suggested that we should require advisers to carry forward relevant side letter provisions to any new investment vehicle when those provisions were already negotiated and accepted by an adviser in respect of the original investment fund. See NY State Comptroller Comment Letter. 570Several commenters stated that providing full and fair disclosure concerning the conflicts and material facts associated with an adviser-led secondary transaction and receiving informed consent from investors is the most effective method to address the associated conflicts. See, e.g., BVCA Comment Letter; Invest Europe Comment Letter. However, it is not possible for an investor to receive full and fair disclosure concerning the material facts associated with an adviser-led secondary transaction if the underlying valuation is determined only by the adviser without any third￾party check. We also discuss further economic considerations around the viability of disclosure or consent requirements in the case of adviser-led secondaries below. See infra sections VI.C.2, VI.C.4. 571See, e.g., ATR Comment Letter; Ropes & Gray Comment Letter; AIC Comment Letter I. 572See Ropes & Gray Comment Letter. related persons have a conflict of interest with the fund and its investors when they offer investors the option between selling their interests in the fund, and converting or exchanging their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons. This rule will provide an important check against an adviser’s conflicts of interest in structuring and leading such a transaction from which it may stand to profit at the expense of private fund investors. Some commenters supported the proposed rule,565 including some that stated it would help protect investors by providing them with better information.566 Other commenters generally opposed the proposed rule.567 Some commenters suggested that we expand the final
rule to offer additional protections to investors, such as requiring advisers to use reasonable efforts to allow investors to remain invested on their original terms without the adviser realizing any carried interest on the sale of underlying assets.568 While we understand that investors have other concerns surrounding these types of transactions,569 we remain focused on providing investors with information that will enable them to make educated and informed decisions about their investments, particularly when such decisions involve a conflicted transaction, and we believe fairness and valuation opinions address that concern.570 Fairness opinions and valuation opinions help investors make educated and informed investment decisions because they assist investors in gaining a more complete understanding of the financial aspects of the transaction. Moreover, we believe the opinion requirement is better suited to address the conflicts inherent within adviser-led secondary transactions because the presence of an independent third party reduces the possibility of fraudulent, deceptive, or manipulative activity. It also reduces the possibility that the subject asset may be valued opportunistically and that the adviser’s compensation may involve fraud or deception, resulting in an inappropriate compensation scheme. Some commenters argued that the SEC would exceed its authority if it were to require advisers to obtain a fairness opinion and that the proposed rule conflicts with SEC statements that advisers and clients can shape their relationships by agreement, provided that there is appropriate disclosure.571
Section 206(4) grants the SEC the
authority to prescribe means that are reasonably designed to prevent fraudulent, deceptive, or manipulative acts, practices, and courses of business. The final rule is reasonably designed to achieve this goal because it addresses an adviser’s conflicts of interest that arise when leading a secondary transaction. Generally, the adviser is incentivized to recommend for the private fund to participate in the transaction by selling the asset to a new vehicle that survives the transaction, often referred to as the ‘‘continuation vehicle,’’ because the adviser and its related persons will typically receive additional management fees and carried interest from managing the continuation vehicle. Specifically, the adviser will be incentivized to seek a lower sale price for the asset to benefit the continuation fund because a lower sale price will increase the potential for more carried interest out of the continuation fund in the future. Additionally, an adviser may seek to undervalue an asset subject to a secondary transaction if the adviser’s economics in the continuation fund are greater than its economics in the existing fund. This would harm investors in the existing fund because their cash-out offer would be based on an underlying valuation that is below market value. As another example, if the adviser-led secondary required a ‘‘stapled commitment’’ to another vehicle whereby secondary buyers were required to make contemporaneous capital commitments to another vehicle, the price offered to the fund’s investors could be adversely affected if the staple requirement reduces the amount prospective buyers are willing to pay. By ensuring that private fund investors that participate in a secondary transaction are offered an appropriate price and provided disclosures about the opinion provider’s relationship with the adviser, the rule will help prevent acts that are fraudulent, deceptive, or manipulative. If investors receive the benefit of a third-party check on valuation and are made aware of any conflicts of interest between the opinion provider and the adviser, investors are less likely to be defrauded, deceived, or manipulated by a mis-valuation by the adviser in its own interest. One commenter argued that the proposed rule would be contrary to
Section 211(h) of the Advisers Act
because the proposed rule would significantly and needlessly expand an adviser’s obligations and would disadvantage investors and the industry.572 Section 211(h)(2) authorizes the Commission to prohibit or restrict certain sales practices, conflicts of interest, or compensation schemes that the Commission deems contrary to the public interest and the protection of investors. As discussed above in this
section, an adviser-led secondary
transaction raises certain conflicts of interest because the adviser and its related persons typically are involved on both sides of the transaction. As a result, advisers may seek to undervalue or overvalue an underlying asset involved in the transaction, at the expense of the private funds they advise, depending on how the economics of the transaction most benefit them. The conflicts of interest associated with adviser-led secondary transactions are particularly harmful to investor protection because they are often not made transparent to investors. These conflicts can also harm investors that elect to roll into the new vehicle advised by the same adviser. For example, the conflicts may influence or alter the terms the adviser sets forth in the new vehicle’s governing agreement to the detriment of investors. Because investors typically do not have

573See NYC Bar Comment Letter II.
574See 17 CFR 229.1000.
575Final rule 211(h)(1)–1. In a change from the proposal and in response to commenters, we are modifying the definition of an ‘‘adviser-led secondary transaction’’ from the proposal to exclude tender offers generally by revising the definition to require a choice between clauses (i) and (ii). See the discussion of the change to this definition in this section below. 576One commenter stated that the proposed definition of an ‘‘adviser led secondary transaction’’ may inadvertently pick up certain types of routine cross-trades. See Ropes & Gray Comment Letter. We would not consider the rule to apply to cross trades (which, generally, include sales of assets from one fund managed by an adviser to another fund managed by the same adviser) where the adviser does not offer the private fund’s investors the choice to sell, convert, or exchange their fund interest. Although not subject to this rule, such cross trades may implicate other Federal securities laws, rules, and regulations, such as sections 206(1) and (2) of the Advisers Act. 577See, e.g., Ropes & Gray Comment Letter; SBAI Comment Letter. In a typical season and sell transaction, one entity originates a loan and then, after the conclusion of a ‘‘seasoning period,’’ sells the loan to an affiliated entity. See The Investment Lawyer, Covering Legal and Regulatory Issues of Asset Management, Jessica T. O’Mary (July 2019), at 3–4. withdrawal rights, they may be subject to those terms for an extended period of time. Adviser-led secondary transactions also involve compensation schemes as, typically, the adviser receives compensation as a result of the transaction. Advisers stand to profit from being on both sides of the transaction by earning additional compensation in the form of management fees or carried interest which is ultimately paid by fund investors. For example, in the continuation fund context, when an asset is sold from an existing fund to the continuation fund, the adviser has the potential to realize carried interest as
part of that sale, depending on the
performance of the existing fund.
Advisers are thus incentivized to over￾or undervalue the underlying asset depending on how they will receive the most compensation. This rule’s requirement that private fund investors receive a third-party check on price via a fairness or valuation opinion and are provided disclosures about the opinion provider’s relationship with the adviser will help protect them against such conflicted compensation schemes. One commenter stated that, if adopted, this rule would be the first and only Federal securities law requiring a fairness opinion.573 While the Federal securities laws generally do not require fairness opinions, they have required disclosure of fairness findings, including by independent parties, in other conflicted transactions. For example, in certain going-private transactions, Regulation M–A requires the filer to provide information regarding the substantive and procedural fairness of the transaction to address concerns related to self-dealing and unfair treatment, including whether the transaction is fair or unfair to unaffiliated security holders.574 We believe that, due to these and other requirements applicable to going-private transactions, companies (or their affiliates) often obtain fairness opinions from independent opinion providers as a matter of best practice. Thus, other Federal securities laws, such as Regulation M–A, have required, or otherwise have indirectly caused, fairness findings similar to those required in the opinion provision of the final rule. After considering comments, we are adopting this rule largely as proposed. In contrast to the proposal, we are providing advisers the option to obtain a valuation opinion or a fairness opinion, and we are requiring distribution of the opinion and the summary of material business relationships before the due date of the binding election form.

1. Definition of Adviser-Led Secondary
   Transaction
   Adviser-led secondary transactions are defined as transactions initiated by the investment adviser or any of its related persons that offer the private fund’s investors the choice between: (i) selling all or a portion of their interests in the private fund and (ii) converting or exchanging all or a portion of their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons.575 This definition generally includes secondary transactions where a fund is selling one or more assets to another vehicle managed by the adviser, if investors have the option between obtaining liquidity and rolling all or a portion of their interests into the other vehicle. Examples of such transactions may include single asset transactions (such as the fund selling a single asset to a new vehicle managed by the adviser), strip sale transactions (such as the fund selling a portion of multiple assets to a new vehicle managed by the adviser), and full fund restructurings (such as the fund selling all of its assets to a new vehicle managed by the adviser).576 We generally would consider a transaction to be initiated by the adviser if the adviser commences a process, or causes one or more other persons to commence a process, that is designed to offer private fund investors the option to obtain liquidity for their private fund interests. However, whether the adviser or its related person initiates a secondary transaction requires a facts and circumstances analysis. We generally would not view a transaction as initiated by the adviser if the adviser, at the unsolicited request of the investor, assists in the secondary sale of such investor’s fund interest. Adviser-led transactions raise certain conflicts of interest because the adviser and its related persons are involved on both sides of the transaction and have interests in the transaction that are different from, or in addition to, the interests of the private fund investors. For example, because the adviser may have the opportunity to earn economic and other benefits conditioned upon the closing of the secondary transaction, such as additional management fees or carried interest (including ‘‘premium’’ carry), the adviser generally has a conflict of interest in setting and negotiating the transaction terms. We believe that the definition is sufficiently broad to remain evergreen as secondary transactions continue to evolve and capture transactions that present these or other conflicts of interest. It also is sufficiently narrow to avoid capturing certain types of transactions that would not raise the same regulatory and conflict of interest concerns. For example, some commenters expressed concerns that the definition would capture rebalancing between parallel funds, ‘‘season and sell’’ transactions, and other scenarios where it may be unclear whether the adviser initiated the transaction.577 Rebalancing between parallel funds and season and sell transactions between
   parallel funds generally will not be captured by the ‘‘adviser-led secondary transaction’’ definition because the adviser is not offering investors the choice between selling and converting/exchanging their interests in the private fund. Instead, the adviser is moving or reallocating assets between private funds it advises for legal and/or tax reasons. Rebalancing and season and sell transactions are important tools that assist an adviser in managing a fund’s operations. For example, rebalancing allows an adviser to ensure that its fund clients have appropriate exposure to an investment to carry out the funds’ investment strategies. Also, season and sell transactions are primarily used to reduce taxes and may allow an adviser to accommodate investors with different tax needs. Advisers and investors will benefit from continuing to access these

578See, e.g., AIC Comment Letter II; NYC Bar Comment Letter II. 579See, e.g., Comment Letter of Cravath, Swaine & Moore LLP (Apr. 11, 2022) (‘‘Cravath Comment Letter’’); NYC Bar Comment Letter II. 580An attempt to avoid any of the rule’s requirements, depending on the facts and circumstances, could violate the Act’s general prohibition against doing anything indirectly which would be prohibited if done directly. Section 208(d) of the Advisers Act. 581See final rule 211(h)(1)–1 (defining ‘‘fairness opinion’’ and ‘‘valuation opinion’’). 582See, e.g., Segal Marco Comment Letter (stating that the fairness opinion requirement would ‘‘help investors receive independent price assessments’’); Better Markets Comment Letter; NY State Comptroller Comment Letter. 583See, e.g., AIC Comment Letter I; AIMA/ACC Comment Letter; PIFF Comment Letter. 584See, e.g., SBAI Comment Letter; Comment Letter of Houlihan Lokey, Inc. (Apr. 25, 2022) (‘‘Houlihan Comment Letter’’); IAA Comment Letter
II. 585As a fiduciary, the adviser is obligated to act
in the fund’s best interest and to make full and fair disclosure to the fund of all conflicts and material facts associated with the adviser-led transaction. 586See, e.g., AIMA/ACC Comment Letter; Houlihan Comment Letter. 587See Houlihan Comment Letter. 588We believe that any fairness or valuation opinions provided pursuant to the final rule should nonetheless be in line with market practices and methodologies. For example, we understand that, currently, many fairness and valuation opinions rely on discounted cash flow, similar transaction, similar company, and/or other comparable analyses. We recognize, however, that each of these types of analyses may not be possible in all circumstances or otherwise applicable to the transaction type, and that other types of analysis may be appropriate. 589See, e.g., Cravath Comment Letter; Comment Letter of Carta, Inc. (Apr. 25, 2022) (‘‘Carta Comment Letter’’); Albourne Comment Letter; Pathway Comment Letter; ILPA Comment Letter I; IAA Comment Letter II; AIC Comment Letter I. 590Some commenters suggested that valuations obtained within 12 months of the adviser’s solicitation of investor interest in the adviser-led secondary transaction would provide acceptable valuation information. See Cravath Comment Letter (suggesting that the final rule exempt from the fairness opinion requirement transactions where an asset was the subject of a liquidity event within the last 12 months, among other requirements); ILPA Comment Letter I. However, we believe that 12 months is too long a period of time and would not allow the price to reflect the market’s more recent pricing changes. Significant market changes (for instance, the global spread and response to COVID–
19) can occur in a substantially shorter time period
than 12 months. tools, without the need for a fairness opinion. In the Proposing Release, we classified ‘‘tender offers’’ as falling within the definition of ‘‘adviser-led secondary transactions’’ and we requested comment on this treatment and asked whether the rule should treat tender offers differently. Some commenters responded that the definition should not capture tender offers where the adviser or its related person is not acting as the purchaser.578 These commenters stated that a fairness opinion would not add value for these types of transactions because investors typically have discretion to determine whether to remain in the fund on their existing terms or sell their interests for the price offered and that the default in a tender offer is for the investor to maintain its ‘‘status quo’’ interest in the fund. One commenter suggested that we revise the definition of adviser-led secondaries to more appropriately narrow its scope by clarifying that the definition requires that investors must choose between selling their interest in a private fund and converting or exchanging their interest for an interest in another vehicle advised by the same adviser.579 We found commenters’ statements on this point persuasive in the context of this rule and, in a change from the proposal, are revising the rule text to exclude tender offers generally from the definition of ‘‘adviser-led secondary transactions.’’ We have modified the definition from the proposal to establish that the definition contemplates a choice between clauses (i) and (ii) of the definition. Accordingly, tender offers will not be captured by the definition if an investor is not faced with the decision between (1) selling all or a portion of its interest and (2) converting or exchanging all or a portion of its interest. Generally, if an investor is allowed to retain its interest in the same fund with respect to the asset subject to the transaction on the same terms (i.e., the investor is not required to either sell or convert/exchange), as many tender offers permit investors to do, then the transaction would not qualify as an adviser-led secondary transaction.580
2. Fairness Opinion or Valuation
Opinion
To complete an adviser-led secondary transaction, advisers must either (i) obtain a written opinion stating that the price being offered to the private fund for any assets being sold as part of an adviser-led secondary transaction is fair (a ‘‘fairness opinion’’), or (ii) obtain a written opinion stating the value (as a single amount or a range) of any assets being sold (a ‘‘valuation opinion’’).581 In a change from the proposal, and in response to comments, we are allowing advisers to have the option to obtain and distribute to investors a valuation opinion instead of a fairness opinion. Many commenters supported the proposed requirement that advisers obtain a fairness opinion in part because they believed it would provide investors with important information to inform their decisions.582 Others stated that requiring fairness opinions would be overly burdensome because they would increase transaction costs.583 Several commenters suggested that we offer alternatives to the fairness opinion requirement, and some commenters suggested we allow advisers to obtain valuation opinions in lieu of a fairness opinion.584 We continue to believe that requiring a third-party check on valuation is a critical component of preventing the type of harm that might result from the adviser’s conflict of interest in structuring and leading a secondary transaction.585 Requiring advisers to obtain an independent opinion would provide private fund investors assurance that the price being offered is based on an appropriate valuation. We are receptive to commenters’ concerns, however, that requiring a fairness opinion could result in increased costs to investors and that there may be other mechanisms to provide investors with unconflicted, objective data about the value of assets that are the subject to an adviser-led secondary transaction.586 We understand that, in some cases, the cost of a valuation opinion would be lower than a fairness opinion, but that a valuation opinion would still provide investors with a strong basis to make an informed decision.587 Namely, a valuation opinion would also provide a third-party check on valuation which is critical to addressing the conflicts of interest inherent in adviser-led secondary transactions.588 Under the final rule, advisers and investors will have the ability to negotiate whether a fairness opinion or valuation opinion is more appropriate. Several commenters suggested that we exempt adviser-led transactions where price can otherwise be determined through a market-driven discovery process independent of the adviser, such as when a recent sale of a minority stake in the relevant portfolio investment has occurred or shares of an underlying asset are publicly traded.589 Although such transactions can provide helpful data that can inform a valuation opinion or fairness opinion, the valuation ascribed to the asset in such a transaction may not represent an accurate value. For example, valuations obtained through a minority stake
sale may become stale relatively quickly.590 In the context of an underlying asset that is publicly traded, the market price may be highly volatile or the publicly traded security may have limited trading volume. In addition to timing, each transaction is unique, and factors such as size of the asset being sold and whether the purchaser is obtaining a controlling interest could result in a

591See, e.g., Healthy Markets Comment Letter I; Better Markets Comment Letter; OPERS Comment Letter. 592We recognize, however, that most adviser-led transactions do not involve publicly traded securities and typically involve financial assets that are valued using unobservable inputs as described in FASB ASC Topic 820, Fair Value Measurement, i.e., level 3 inputs. 593See supra the discussion of appropriate methodologies in footnote 588. 594See, e.g., NYPPEX Comment Letter; Segal Marco Comment Letter. 595See, e.g., Houlihan Comment Letter (stating that the final rule should not require the fairness opinion to state that the private fund and/or its investors may rely on the fairness opinion); AIMA/ ACC Comment Letter; Cravath Comment Letter. 596See final rule 211(h)(1)–1 (defining ‘‘independent opinion provider’’). See supra section II.B.1 for a discussion of the definition of ‘‘related person.’’ 597See Ropes & Gray Comment Letter. 598 In a minor change from the proposed definition of ‘‘independent opinion provider,’’ we are replacing ‘‘an entity’’ with ‘‘a person.’’ ‘‘Person,’’ as defined under the Advisers Act includes natural persons as well as entities. Section 202(a)(16) of the Act [15 U.S.C. 80b–2(a)(16)]. valuation that is not as relevant to an adviser-led secondary transaction involving the same asset, depending on the facts and circumstances. Another example of a distinct transaction is a scenario where a strategic purchaser may be willing to pay more because the purchaser has a plan for realizing synergies with the target company after the acquisition (e.g., reduced costs). In contrast, a purchaser that does not have immediate plans for the target company might only be willing to pay a reduced amount. Some commenters supported the fairness opinion requirement as a guard against suspect valuations, especially when such valuations determine the carried interest, management fees, and/ or other transaction fees an adviser may receive from the transaction.591 We share these concerns and decline to provide an exemption from the fairness/ valuation opinion requirement for market-driven discovery processes. We do not believe that relying solely on market-driven transactions is sufficient to address the policy concerns that motivated this rule. Although commenters argued that a fairness opinion is unnecessary in certain market-driven transactions, such as a minority stake sale, we believe that some of the same conflicts of interest, compensation scheme concerns, and potential for fraud or manipulation that motivated this rulemaking may persist in such market-driven transactions because the adviser is still involved in deciding whether to engage in the transaction and still sets and negotiates the terms of that sale. For example, if a recent sale improperly valued an asset, an adviser could be incentivized to initiate a transaction with the same valuation, which, depending on the terms of the transaction, may benefit the adviser at the expense of
the investors. Similarly, if the market price of shares in a publicly traded underlying asset is volatile and drops suddenly or is depressed for an extended period of time, an adviser may be incentivized to seek to execute an adviser-led secondary with respect to such asset as soon as possible to lock in the lower price to the detriment of investors.592 As a result, our concerns about an adviser’s conflicts of interest are not fully addressed by relying on such valuations for such transactions. Instead, we believe that a methodological process performed by a third party (such as that used to produce a fairness/valuation opinion) that takes into account factors when analyzing value, including but not limited to recent market transactions, will provide investors with reliable data to inform their decision-making process.593 This rule will also serve as a deterrent to harmful conflicts of interest, compensation schemes and fraudulent or manipulative behavior because any valuation proposed by an adviser would need to be checked by an opinion provider. Thus, we believe that advisers will be less likely to propose such valuations if they anticipate that an opinion provider may not support them. Some commenters suggested that we expand the fairness opinion requirement to cover information in addition to pricing/valuation of the asset (e.g., data and pricing information for the remaining assets in the fund).594 In contrast, other commenters did not support an expansion in scope on the grounds that requiring transaction terms in an opinion would require the opinion provider to make subjective judgments, and adding other provisions, such as allowing the private fund and/or its investors to rely on the opinion, would increase the cost of fairness opinions.595 We agree with these commenters that an expansion in scope is not necessary to address the conflict of interest that underlies the need for this rule: concern that an adviser’s conflicts of interest (due to being on both sides of the transaction) will result in a price/ valuation that does not reflect the true value of the asset. As noted above, an adviser’s economic entitlements will likely be based on the asset value and the fairness/valuation opinion requirement is intended to guard against the adviser’s incentive to value an asset in a manner that maximizes the adviser’s profit. The final rule requires an adviser to obtain the opinion from an independent opinion provider, which is defined as a person that provides fairness opinions or valuation opinions in the ordinary course of its business and is not a related person of the adviser.596 The requirement that the opinion provider not be a related person of the adviser reduces the risk that certain affiliations could result in a biased opinion and would further mitigate the potential influence of the adviser’s conflicts of interest. The ordinary course of business requirement is intended to capture persons with the experience to value illiquid,
esoteric, and other types of assets based on relevant criteria. One commenter suggested expanding the proposed definition of ‘‘independent opinion provider’’ to allow a broader group of opinion providers to satisfy the definition (i.e., beyond entities that provide opinions about assets sold as
part of adviser-led secondary
transactions in the ordinary course of their business).597 We decline to broaden the types of entities that can serve as independent opinion providers because it is important that opinion providers have the necessary experience to value assets in connection with adviser-led secondary transactions. We are adopting the definition of ‘‘independent opinion provider’’ largely as proposed.598
3. Summary of Material Business
Relationships
We also are requiring advisers to prepare a written summary of any material business relationships the adviser or any of its related persons has, or has had, with the independent opinion provider within the two-year period immediately prior to the issuance date of the fairness opinion or valuation opinion. We are adopting this requirement largely as proposed, but we are specifying that the lookback period for which disclosures must be provided for material business relationships that existed during the two-year period is measured from immediately prior to the issuance of the fairness opinion or valuation opinion. We believe that specifying how the lookback period is measured will facilitate the effective operation of the rule and will ensure that investors receive relevant information about an adviser’s conflicts at the time the opinion was issued by the independent opinion provider. Moreover, we believe it is important to measure this two-year period from immediately prior to the issuance of the fairness opinion or valuation opinion to

599See, e.g., PIFF Comment Letter; Ropes & Gray Comment Letter. 600Advisers may distribute the fairness opinion or valuation opinion as well as the summary of material business relationships to private fund investors electronically, including through a data room, provided that such distribution is done in accordance with the Commission’s views regarding electronic delivery. See Use of Electronic Media Release, supra footnote 435; see also t supra section II.B.3- for a discussion of the distribution requirements. 601We also have added the defined term ‘‘election form’’ which means a written solicitation distributed by, or on behalf of, the adviser or any related person requesting private fund investors to make a binding election to participate in an adviser￾led secondary transaction. See final rule 211(h)(1)– 1. 602See Proposing Release, supra footnote 3, at 130. 603See, e.g., Predistribution Initiative Comment Letter II; ILPA Comment Letter I. 604See Ropes & Gray Comment Letter. 605Final amended rule 204–2(a)(23). 606See the discussion of recordkeeping requirements above in section II.B.6. 607See, e.g., ILPA Comment Letter I; Convergence Comment Letter. 608See AIMA/ACC Comment Letter. capture any new material business relationships that may have developed only shortly before the issuance of such opinion. We are adopting this requirement because other business relationships may have the potential to result, or appear to result, in a biased opinion, particularly if such relationships are not disclosed to private fund investors. For example, an opinion provider that receives an income stream from an adviser for performing services unrelated to the issuance of the opinion might not want to jeopardize its business relationship with the adviser by alerting the private fund investors that the price being offered is unfair (or by otherwise refusing to issue the opinion). By requiring disclosure of such material relationships, the rule puts private fund investors in a position to evaluate whether any conflicts associated with such relationships may cause the opinion provider to deliver a biased opinion. This required disclosure would also deter advisers from seeking opinions from highly conflicted opinion providers as it may raise objections from investors. Whether a business relationship is material requires a facts and circumstances analysis; however, for purposes of the rule, audit, consulting, capital raising, investment banking, and other similar services would typically meet this standard. Some commenters stated that this requirement is unnecessary because advisers are already required to disclose material conflicts of interest to private fund investors.599 We recognize that an adviser has an obligation to comply with rule 206(4)–8 under the Advisers Act and avoid omitting material facts, but that rule does not impose an affirmative obligation on advisers to provide specific disclosure on their conflicts of interest. In contrast, the final rule
would mandate disclosure that covers a discrete time period and that must be provided to investors at a time when investors can use the information to make investment decisions. These specific requirements are necessary to address the conflicts of interest that adviser-led secondary transactions present.
4. Distribution of the Opinion and
Summary of Material Business Relationships Under the final rule, an adviser must distribute 600 the fairness opinion or valuation opinion as well as the summary of material business relationships to private fund investors. In a change from the proposal, and in response to comments, we are requiring that the adviser distribute both the opinion and summary of material business relationships to private fund investors prior to the due date of the election form for the transaction instead of prior to the closing of the transaction.601 We requested comment on the distribution of the fairness opinion and summary of material business relationships.602 Several commenters suggested that the final rule specify the timing required for delivery of the opinion to ensure that investors have sufficient time to use the information to inform their investment decisions.603 One commenter stated that it is common for advisers to obtain the opinion well in advance of the closing of the transaction because the adviser delivers it to the investors or the LPAC at an earlier stage of a transaction to provide such persons with the relevant information to make a determination as to whether to waive conflicts and allow the transaction to proceed.604 We agree that specifying the timing for delivery will ensure that investors receive the benefit of an independent price assessment at the time they make an investment decision with respect to the transaction, which will make them better informed about the transaction. Moreover, this will make the rule a more effective deterrent to conflicts and excessive compensation and help prevent fraud, deception, and manipulation than our proposed approach because it will better ensure that investors have access to important information regarding valuation and conflicts at the time they make a binding decision to participate in the transaction, rather than after this decision has been made.
5. Recordkeeping for Adviser-Led
Secondaries
We are amending rule 204–2 under the Advisers Act to require advisers to make and retain books and records to support their compliance with the adviser-led secondaries rule and facilitate the Commission’s inspection and enforcement capabilities.605 Advisers must make and retain a copy of the fairness opinion or valuation opinion and material business relationship summary distributed to investors, as well as a record of each addressee and the date(s) the opinion and summary was sent. In a change from the proposal, we are adding a reference to the valuation opinion consistent with the change discussed above allowing an adviser to obtain a valuation opinion in lieu of a fairness opinion. In another change from the proposal, we are not requiring private fund advisers to make and retain records of the addresses or delivery methods used to disseminate fairness opinions, valuation opinions, or material business relationship summaries.606 Some commenters supported the recordkeeping requirement.607 Another commenter stated that the requirement would be overly burdensome for advisers to funds with a significant number of investors.608 While we understand that the rule imposes an additional recordkeeping obligation on advisers, ultimately advisers are not obligated to engage in adviser-led secondary transactions. Because these transactions are optional and up to the adviser’s discretion, an adviser can consider the associated recordkeeping requirements when deciding whether to initiate such a transaction. Also, as noted above, we are not adopting the proposed address and delivery method recordkeeping requirements; thus, the final rule lessens the recordkeeping burden on advisers compared to the proposal. Further, we view these requirements as necessary to facilitate our staff’s ability to assess an adviser’s compliance with the final rule and enhance an adviser’s compliance efforts. E. Restricted Activities In a modification from the proposal, final rule 211(h)(2)–1 restricts advisers to a private fund from engaging in the following activities, unless they satisfy

609See proposed rule 211(h)(2)–1.
610Any attempt to evade any of the rules’ restrictions, depending on the facts and circumstances, would violate the Act’s general prohibitions against doing anything indirectly which would be prohibited if done directly. Section 208(d) of the Advisers Act. 611See Proposing Release, supra footnote 3, at 135 and 161. 612See, e.g., Comment Letter of Joseph A. Grundfest, Professor of Law and Business, Stanford Law School Commissioner (Apr. 22, 2022) (‘‘Grundfest Comment Letter’’) (stating the Commission has traditionally a disclosure-based philosophy); Cartwright et al. Comment Letter (discussing the SEC’s ability to address activity that is the subject of the proposal through its existing antifraud authority); AIMA/ACC Comment Letter (stating its preference for an ‘‘implied consent’’ framework but also that ‘‘disclosure to and more explicit consent—whether by the relevant governing body . . . or by investors individually . . . or collectively (e.g., through an investor consent obtained in the manner prescribed by, and subject to the terms of, a private funds’ governing documents)—to be significantly better (and more in line with the best interests of investors) than an outright ban on such activities’’ and that ‘‘such a disclosure and express consent model would eliminate any residual confusion regarding what is or is not permissible’’); MFA Comment Letter I (stating that the Commission has departed from its longstanding approach which was to allow advisers and clients/investors to shape their relationships through disclosure and informed consent); IAA Comment Letter II; AIC Comment Letter II (stating that ‘‘requiring separate consent (let alone an outright prohibition) with respect to such activities [in addition to the existing consent framework] would be unnecessary and duplicative’’). 613See, e.g., NEBF Comment Letter; Predistribution Initiative Comment Letter II; NY State Comptroller Comment Letter; Take Medicine Back Comment Letter; IFT Comment Letter. 614See, e.g., Comment Letter of Canada Pension Plan Investment Board (June 22, 2022) (‘‘Canada Pension Comment Letter’’) (suggesting that the SEC require disclosure of certain activities rather than prohibiting them outright); SBAI Comment Letter; MFA Comment Letter I. 615See, e.g., Schulte Comment Letter; ILPA Comment Letter I. 616See MFA Comment Letter I. 617See Convergence Comment Letter; Invest Europe Comment Letter. 618See supra section I (discussing ‘‘reimbursements’’ as a form of ‘‘compensation’’). 619See Healthy Markets Comment Letter I (stating that information is often unavailable or incomplete regarding these activities that may simply serve to enrich persons related to their investment advisers); ILPA Comment Letter I (stating that itemized disclosure of compliance costs is currently insufficient); NEBF Comment Letter (stating that it is difficult for investors to observe, track, and evaluate the costs and expenses that advisers shift to private funds); IFT Comment Letter (stating
that some fund advisers have ignored requests for baseline information about fees and expenses). 620See supra section I.A. certain disclosure and, in some cases, consent requirements:

• Charging or allocating to the private
  fund fees or expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority; however, regardless of any disclosure or consent, an adviser may not charge or allocate fees and expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for violating the Investment Advisers Act of 1940 or the rules promulgated thereunder;
• Charging the private fund for any
  regulatory, examination, or compliance fees or expenses of the adviser or its related persons;
• Reducing the amount of any adviser
  clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders;
• Charging or allocating fees and
  expenses related to a portfolio investment on a non-pro rata basis when more than one private fund or other client advised by the adviser or its related persons have invested in the same portfolio company; and
• Borrowing money, securities, or
  other private fund assets, or receiving a loan or extension of credit, from a private fund client. We proposed to prohibit these activities without disclosure or consent exceptions.609 Like the proposal, the final rule applies even if the activities are performed indirectly, for example by an adviser’s related persons, because the activities have an equal potential to harm the fund and its investors when performed indirectly without the specified disclosure, and in some cases, consent.610 We requested comment on the proposed prohibitions, including on whether the final rule should prohibit these activities unless the adviser satisfies certain governance or other conditions, such as disclosures to the private fund’s investors, approval by an independent representative of the fund, or approval by a majority (by number and/or in interest) of investors.611 Many commenters disagreed with our proposed approach of prohibiting certain activities as per se unlawful, and some commenters suggested that the existing full and fair disclosure and informed consent framework for conflicts of interest with advisory clients under the Advisers Act was sufficient to address the Commission’s concerns with these activities.612 Other commenters generally supported the proposed prohibitions, stating that they would prevent advisers from engaging in activities that generally disadvantage and shift costs to funds and their investors.613 Some commenters who supported the Commission’s concerns with these activities suggested that enhanced disclosure or consent requirements would be sufficient to address them and would help avoid some of the unintended consequences that could result from strictly prohibiting the activities (e.g., potentially discouraging advisers from engaging in complex strategies which, according to commenters, would result in decreased competition and diversification).614 For example, some commenters supported, as an alternative to the proposed prohibition on advisers’ charging regulatory and compliance expenses, requiring advisers to disclose all compliance costs and whether the adviser or fund pays them.615 Other commenters suggested that we should not prohibit advisers from charging fully disclosed, and consented to, fees and expenses to their private fund clients 616 and that we should provide an exception for non-pro rata fee and expense charges or allocations if they were appropriately disclosed to investors.617 We continue to believe that these activities involve conflicts of interest (e.g., borrowing directly from a private fund client may benefit the adviser while not being in the best interest of the fund) and compensation schemes (e.g., passing certain expenses 618 on to funds, which increases the adviser’s revenue and decreases the fund’s profits) that are contrary to the public interest and the protection of investors. In addition, adopting protective restrictions on these activities is reasonably designed to prevent fraud and deception. Many
  of our concerns with these activities have persisted despite our related enforcement actions, and we believe therefore that further regulation is required. Investors often lack sufficient insight into the nature, scope, and impact of these activities, given that advisers do not frequently or consistently provide investors with sufficiently detailed information about them. In this regard, some commenters stated that many advisers do not provide disclosure of the activities covered by the restrictions and, when disclosure is provided about those activities, it is often incomplete or includes unhelpful information.619 In addition, the limitations of private fund governance structures, discussed in detail above, warrant enhanced investor protection with respect to these activities.620 For example, current private fund governance mechanisms, such as the LPAC, may not have sufficient independence, authority, or accountability to effectively oversee and consent to conflicts or other harmful practices. After considering comments, and for the reasons discussed below in

621However, the exception for the investigation restriction does not apply to fees and expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for a violation of the Act or the rules promulgated thereunder. 622With respect to a private fund whose investors are solely related persons of the fund’s adviser, such as an internal fund whose investors are limited to the adviser’s employees, the requirement in the consent-based exceptions to seek and obtain consent from non-related person investors will not apply. 623For instance, the terms of a fund’s governing documents may provide for the issuance of both voting and non-voting interests, where the non￾voting interests are generally excluded for purposes of constituting a majority in interest (or a higher threshold) of investors. The fund’s governing documents may also provide for the exclusion of defaulting investors for voting purposes. 624See supra section I.A. 625See final amended rule 204–2(a)(24). 626See the discussion of recordkeeping requirements above in section II.B.6. 627See supra footnote 435 (discussing electronic delivery). 628See final rule 211(h)(1)–1. See supra section II.B.3 (‘‘Preparation and Distribution of Quarterly Statements’’) for a discussion of the ‘‘distribution’’ requirement generally. 629 In a change from the proposal, we are revising this requirement to capture not only amounts ‘‘charged’’ to the private fund but also fees and expenses ‘‘allocated to’’ the private fund. We believe that this clarification is necessary in light of the various ways that a private fund may be caused to bear fees and expenses. 630Such a written notice should generally include a detailed accounting of each category of such fees and expenses. Advisers should generally list each specific category of fee or expense as a separate line item and the dollar amount thereof, rather than Continued connection with each restricted activity, we have determined that investors will be better informed and receive enhanced protection, while still potentially benefiting from these activities when they are carried out in the best interests of the fund, if investors are provided with disclosures and, in some cases, consent rights regarding these activities. Accordingly, the final rule generally will provide either a disclosure-based exception or a disclosure- and consent-based exception for each restricted activity. The non-pro rata restriction will be subject to a before-the-fact disclosure-based exception (in addition to the requirement that the allocation be fair and reasonable), while the certain fees and expenses restrictions and the post￾tax clawback restriction will be subject to after-the-fact disclosure-based exceptions. The borrowing restriction and the investigation restriction will be subject to a consent-based exception, which will require an adviser to receive advance consent from at least a majority in interest of a fund’s investors
in order to engage in these activities.621 Specifically, each consent-based exception will require an adviser to seek consent for the restricted activity from all of the fund’s investors and obtain consent from at least a majority in interest of investors that are not related persons of the adviser.622 A fund’s governing documents may establish that a higher threshold of investor consent is necessary in order for the adviser to engage in these restricted activities and may generally prescribe the manner and process by which the applicable threshold of investor consent is obtained.623 However, in light of the limitations posed by fund governance bodies, such as LPACs, advisory boards, or boards of directors, which do not generally have a fiduciary obligation to the private fund investors, as discussed above,624 the consent-based exceptions will require that the relevant consent be sought and obtained specifically from fund investors. In light of this change from the proposal to allow an adviser to satisfy disclosure and, in some cases, consent requirements, as applicable, instead of being prohibited from certain activities, we are amending rule 204–2 under the Advisers Act to require SEC-registered investment advisers to retain books and records to document their compliance with the disclosure and consent aspects, as applicable of the restricted activities rule. This will help facilitate the Commission’s inspection and enforcement capabilities. Accordingly, we are requiring SEC-registered investment advisers to retain a copy of any notification, consent, or other document distributed to or received from private fund investors pursuant to this rule, along with a record of each addressee and the corresponding date(s) sent for each such document distributed by the adviser.625 Similarly, in a change from the proposal, we are not requiring private fund advisers to make and retain records of the addresses or delivery methods used to disseminate any such notifications or other documents distributed to private fund investors pursuant to this rule.626 The exceptions require advisers to ‘‘distribute’’ certain written notices or consent requests to investors.627 An adviser generally will satisfy the requirement to ‘‘distribute’’ a written notice or consent request when it has been sent to all investors in the private fund. However, the definition of ‘‘distribute,’’ ‘‘distributes,’’ and ‘‘distributed’’ precludes advisers from using layers of pooled investment vehicles in a control relationship with the adviser to avoid meaningful application of the distribution requirement.628 In circumstances where an investor is itself a pooled vehicle that is controlling, controlled by, or under common control (a ‘‘control relationship’’) with the adviser or its related persons, the adviser must look through that pool (and any pools in a control relationship with the adviser or its related persons, such as in a master￾feeder fund structure) and send the written notice or
consent request to investors in those pools. Outside of a control relationship, such as if the private fund investor is an unaffiliated fund of funds, this same concern is not present, and the adviser would not need to look through the structure to make delivery that satisfies the definition of ‘‘distribute.’’ This approach will lead to meaningful distribution of the written notices and consent requests to the private fund’s investors. In addition, the disclosure-based exceptions to the restrictions on certain regulatory, compliance, and examination fees and expenses and post-tax clawbacks require advisers to distribute written notices to investors within 45 days after the end of the fiscal quarter in which the relevant activity occurs. This disclosure timeline is appropriate because it emphasizes the need for the notices to be distributed to investors within a reasonable period of time to help ensure their timeliness, while affording advisers a limited degree of flexibility. The 45-day timeline generally matches the timeline required for advisers to distribute quarterly statements under the quarterly statement rule, except for quarterly statements distributed at fiscal year-end or quarterly statements prepared for a fund of funds. This will allow advisers that are subject to the quarterly statement rule to include disclosures related to the restricted activities rule in their quarterly reports, subject to those exceptions.

1. Restricted Activities With Disclosure￾Based Exceptions
   (a) Regulatory, Compliance, and Examination Expenses We proposed to prohibit advisers from charging their private fund clients for (i) regulatory or compliance fees and expenses of the adviser or its related persons and (ii) fees and expenses associated with an examination of the adviser or its related persons by any governmental or regulatory authority. We are adopting these provisions 629 but, after considering comments, are providing an exception from the proposed prohibitions if an adviser distributes a written notice of any such fees or expenses, and the dollar amount thereof,630 to investors in a private fund

group such fees and expenses into broad categories such as ‘‘compliance expenses.’’ 631Final rule 211(h)(2)–1(a)(2). We are also reiterating that charging these expenses without authority in the governing documents is inconsistent with an adviser’s fiduciary duty. See the introduction of this section II.E above for a discussion of the distribution requirement. Advisers may, but are not required to, provide such disclosure in the statements they must deliver to investors under the quarterly statement rule, if they are subject to that rule. Although we generally do not consider information in the quarterly statement required by the rule to be an ‘‘advertisement’’ under the marketing rule, an adviser that offers new or additional investment advisory services with regard to securities in the quarterly statement would need to consider whether such information is subject to the marketing rule. A communication to a current investor is an ‘‘advertisement’’ when it offers new or additional investment advisory services with regard to securities. See rule 206(4)–1. 632See, e.g., AFR Comment Letter I; OPERS Comment Letter; NY State Comptroller Comment Letter. 633See, e.g., Sullivan and Cromwell LLP Comment Letter (Apr. 25, 2022) (‘‘Sullivan & Cromwell Comment Letter’’); NYC Bar Comment Letter II; ASA Comment Letter. One commenter stated that this prohibition is unnecessary because there is strong alignment of interests between advisers and investors with respect to regulatory, compliance, and examination-related expenses. This commenter noted that investments from principals and employees of its adviser account for over 20% of total assets under management and that these principals and employees pay the same fees and expenses as third-party investors. See Citadel Comment Letter. However, this is just one example and we understand that different private fund advisers have different alignments of interests with their investors depending on the amount of proprietary capital invested in the funds, fee arrangements, and other factors. Moreover, this commenter’s argument does not address whether the private fund should be charged for the fees and expenses in the first place; rather, it focuses on the fact that certain advisers, especially advisers with significant investments in their private funds, have an incentive to limit such fees and expenses because they have the potential to reduce the adviser’s returns alongside the investors’ returns. 634See, e.g., Schulte Comment Letter; AIMA/ACC Comment Letter; SBAI Comment Letter. One commenter suggested that, to the extent no management fees are charged, disclosure and approval by the governing body for that private fund may be a more appropriate avenue in ensuring the expenses passed on are appropriate. See Albourne Comment Letter. We believe it is more appropriate to require disclosure to investors as private fund governing bodies can vary considerably in structure, representation and legal responsibility. 635See
SBAI Comment Letter. 636See NYC Bar Comment Letter II. 637See, e.g., NVCA Comment Letter; Chamber of Commerce Comment Letter; Comment Letter of Andrew M. Weiss, Professor Emeritus, Boston University, Chief Executive Officer, Weiss Asset Management (Apr. 23, 2022) (‘‘Weiss Comment Letter’’). 638Comment Letter of Eric S. Maskin, Professor of Economics, Harvard University (Apr. 21, 2022) (‘‘Maskin Comment Letter’’). 639See, e.g., Dechert Comment Letter; Haynes & Boone Comment Letter; Chamber of Commerce Comment Letter. 640See supra section I for a discussion of the definition of ‘‘compensation scheme’’. 641See, e.g., In the Matter of NB Alternatives Advisers, supra footnote 29 (alleging private fund adviser allocated employee compensation-related expenses to three private equity funds it advised in violation of their organizational documents). 642For example, if an adviser charges a fund for fees and expenses associated with the preparation and filing of the adviser’s Form ADV but only identifies such charges broadly as ‘‘legal expenses.’’ in writing on at least a quarterly basis.631 Some commenters supported the proposed prohibition, stating that advisers should not be charging examination, regulatory, and compliance fees and expenses to the fund.632 Other commenters stated that this prohibition is unnecessary, at least in part because investors already negotiate what fees may or may not be charged to funds.633 A number of commenters suggested that we should require disclosure of these expenses instead of prohibiting these practices.634 In particular, as an alternative to the proposed prohibition, one commenter recommended that any such expenses should be fully disclosed to investors as separate line items 635 while another commenter recommended that we should require clear empirical disclosure of such expenses.636 Some commenters argued that the proposed prohibition would harm investors because it would disincentivize advisers from investing in compliance.637 Another commenter argued that compliance costs increase with diversification of an adviser’s portfolio, and that requiring advisers to bear costs of compliance would therefore discourage portfolio diversification (and remove the ability for investors to decide for themselves whether they are willing to pay extra compliance costs to achieve better diversification).638 Others predicted that advisers would assess higher management fees if they could not allocate these fees and expenses to funds.639 It is in investors’ best interest for advisers to develop robust regulatory and compliance programs that enable advisers to comply with their legal and regulatory obligations. Regulatory, compliance, and examination fees and expenses are customary costs of doing business that enable advisers to operate and attract clients as well as investors. For example, advisers may incur filing and other fees associated with SEC filings, such as Form ADV and Form PF, as well as certain state filings. Advisers may
also pay fees and expenses for a compliance consultant to help them with mock or real examinations. Most private fund advisers charge management fees, in part, to pay for costs incurred as a result of legal and regulatory obligations imposed on them in connection with providing advisory services. These and other costs of doing business are integral to managing a private fund and are generally considered overhead payable by the adviser out of its own resources. Charging investors separately for regulatory or compliance fees and expenses of the adviser or its related persons, or fees and expenses associated with an examination of the adviser or its related persons by any governmental or regulatory authority, is therefore a compensation scheme contrary to the public interest and protection of investors because an investment adviser, despite the management fees, is taking additional compensation for these fees and expenses.640 Moreover, such allocations create a conflict of interest because they provide an incentive for an adviser to place its own interests ahead of the private fund’s interests and allocate expenses away from the adviser to the fund.641 We also believe that allocation of these types of fees and expenses to private fund clients can be deceptive in current market practice. For example, investors may generally expect an adviser to bear fees and expenses directly related to its advisory business, similar to how investors typically bear fees and expenses directly related to their own investment activity. Further, while certain investors may contractually agree, with appropriate initial disclosure, to bear an adviser’s specified fees and expenses, they may be deceived to the extent the adviser does not disclose the total dollar amount of such fees and expenses after the fact. Investors may also be deceived if advisers describe such fees and expenses so generically as to conceal their true nature and extent.642 Restrictions on the charging of these fees and expenses are, therefore, merited. The requirement to disclose these charges for regulatory, compliance, and examination fees and expenses within 45 days after the end of the fiscal quarter is also appropriate. This timeline emphasizes the need for the notices to be distributed to investors within a reasonable period of time to help ensure their timeliness, while affording advisers a limited degree of flexibility. The 45-day timeline generally matches the timeline required for advisers to distribute quarterly statements under the quarterly statement rule, except for quarterly statements distributed at fiscal year-end or quarterly statements prepared for a fund of funds. This structure will allow advisers that are subject to the quarterly statement rule to generally include disclosures related to the restricted

643See, e.g., Chamber of Commerce Comment Letter; Weiss Comment Letter; Maskin Comment Letter. 644See, e.g., Dechert Comment Letter; Haynes & Boone Comment Letter; Chamber of Commerce Comment Letter. 645However, even in such circumstances where fee and expense allocation provisions are highly negotiated, we believe such negotiation is only effective if investors are receiving timely and detailed disclosure of any such allocations when they occur. 646Some commenters also stated that the proposed prohibition would put underrepresented private fund advisers, such as those advisers that are minority-owned, at a disadvantage when competing with more established firms that can waive fees for services. See, e.g., Blended Impact Comment Letter; CozDev LLC Comment Letter; BAM Ventures Comment Letter. 647Certain private fund advisers utilize a pass￾through expense model where the private fund pays for most, if not all, expenses, including the adviser’s expenses, but the adviser does not charge a management, advisory, or similar fee. See, e.g., BVCA Comment Letter; Sullivan & Cromwell Comment Letter; SBAI Comment Letter. 648See, e.g., NSCP Comment Letter; NYC Bar Comment Letter II; Ropes & Gray Comment Letter. 649The proposed rule defined: (i) ‘‘adviser clawback’’ as any obligation of the adviser, its related persons, or their respective owners or interest holders to restore or otherwise return performance-based compensation to the private fund pursuant to the private fund’s governing agreements, and (ii) ‘‘performance-based compensation’’ as allocations, payments, or distributions of capital based on the private fund’s (or its portfolio investments’) capital gains and/or capital appreciation. Commenters generally did not provide comments with respect to the proposed definitions of ‘‘adviser clawback’’ and ‘‘performance-based compensation.’’ We are adopting the definition of ‘‘adviser clawback’’ as proposed. However, in a change from the proposed rule, we are making a technical revision to the ‘‘performance-based compensation’’ definition to include allocations, payments, or distributions of profit. See supra section II.B.1.a. See also final rule 211(h)(1)–1. 650See Proposing Release, supra footnote 3, at 146–147. 651For the avoidance of doubt, the rule does not change the applicability to the adviser of any other applicable disclosure and consent obligation, whether they exist under law, rule, regulation, contract, or otherwise. 652See, e.g., AFL–CIO Comment Letter; Albourne Comment Letter; Better Markets Comment Letter; Convergence Comment Letter; NASAA Comment Letter; NYC Comptroller Comment Letter; OPERS Comment Letter; Predistribution Initiative Comment Letter II; Comment Letter of Reinhart Boerner Van Deuren (Apr. 12, 2022) (‘‘Reinhart Comment Letter’’); RFG Comment Letter II. Because many entities that receive performance-based compensation are fiscally transparent for U.S. Federal income tax purposes and thus not subject to entity-level taxes,
determining the actual taxes paid on ‘‘excess’’ performance-based compensation can be challenging, particularly for larger advisers that have not only a significant number of participants that receive such compensation but also have participants subject to non-U.S. tax regimes. Moreover, investors may be in different U.S. States as well, each with their State tax nuances. To address these considerations, advisers typically use a ‘‘hypothetical marginal tax rate’’ to determine the tax reduction amount, which is usually based on the highest marginal U.S. Federal, State, and local tax rates. 653See NACUBO Comment Letter; Reinhart Comment Letter. activities rule in their quarterly reports, subject to those exceptions. After reviewing responses from commenters, we acknowledge that a prohibition of certain of these charges without an exception for instances in which the adviser provides effective disclosure could result in unfavorable outcomes for investors. For example, as some commenters also suggested,643 we anticipate that some advisers may be disincentivized from diversifying their portfolios to the extent that compliance costs (that will now be borne by the adviser) increase with portfolio diversification. As other commenters also stated,644 some advisers may attempt to increase management or other fees if they were no longer able to charge such fees and expenses to fund clients, and the increase in management fees may have been more than the increase in any fees or expenses already being passed through to the private fund. We also recognize that whether such fees and expenses can be charged to the private fund can be highly negotiated by investors in certain instances 645 (e.g., investors may be more receptive to bearing registration and other compliance expenses for a first-time manager).646 As a result, we believe it is necessary to prohibit these practices unless advisers distribute written notice of any such fees or expenses, and the dollar amount thereof, to investors in any such private funds in writing on at least a quarterly basis. In short, advisers must notify investors of such actual allocation practices on a regular, ongoing basis to help ensure that investors are able to negotiate effectively for their own interests and avoid the compensation schemes that are contrary to the public interest and the protection of investors. To illustrate, an adviser may charge a private fund client for fees it pays to a compliance consultant to assess the adviser’s compliance program, provided the adviser discloses those fees pursuant to this rule. An adviser may also charge a private fund client for fees and expenses associated with an examination of the adviser or its related persons, such as by staff from our Division of Examinations, provided those fees and expenses are adequately disclosed pursuant to this rule. Some commenters expressed concerns about how the proposed prohibition would adversely impact funds with ‘‘pass-through’’ expense
models.647 Since we are providing a disclosure￾based exception from this prohibition, we no longer anticipate that this aspect of the proposed prohibited activities rule will cause a significant disruption in practice for funds with pass-through expense models. We understand that most pass-through funds already provide ongoing, regular disclosure of the fees and expenses that are being ‘‘passed through’’ to investors. Some commenters suggested that we should explicitly clarify which compliance fees and expenses are related to the adviser’s activities or the fund’s activities.648 As we are not flatly prohibiting advisers from passing on compliance, regulatory, and examination expenses, we do not believe it is necessary to describe which fees and expenses are related to the adviser’s activities or the fund’s activities. Advisers and investors may negotiate whether certain compliance, regulatory, or examination fees and expenses are charged to a fund, provided that the disclosure of such fees and expenses satisfies the requirements of the rule. (b) Reducing Adviser Clawbacks for Taxes We proposed to prohibit an adviser from reducing the amount of any adviser clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders.649 This proposed provision was designed to protect investors by ensuring that they receive their share of fund profits, without any reduction for tax obligations of the adviser or its related persons.650 However, as discussed further below, the final rule will not prohibit advisers from engaging in after￾tax adviser clawback reductions, if advisers satisfy certain disclosure requirements designed to better inform private fund investors of the impact of after-tax adviser clawback reductions.651 Some commenters supported the proposal to prohibit advisers from reducing the amount of any adviser clawback by actual, potential, or hypothetical taxes.652 Some also encouraged the Commission to expand the scope of the rule to require advisers to provide affirmatively, whether in the governing agreement or otherwise, a clawback mechanism to restore excess performance-based compensation, rather than only prohibiting advisers from reducing clawbacks by taxes applicable to the adviser.653 The majority of commenters, however, opposed this aspect of the proposal. Many commenters suggested that our proposal was unnecessary to ensure that private fund investors receive their full share of fund profits, because clawback mechanisms are structured to restore private funds with

654See, e.g., AIC Comment Letter I; Dechert Comment Letter; Ropes & Gray Comment Letter. 655See, e.g., AIC Comment Letter I; AIMA/ACC Comment Letter; ASA Comment Letter; Comment Letter of Baird Capital (Apr. 25, 2022) (‘‘Baird Comment Letter’’); Carta Comment Letter; IAA Comment Letter II; Comment Letter of PROOF Management, LLC (May 25, 2022) (‘‘Proof Comment Letter’’); Ropes & Gray Comment Letter. 656See, e.g., AIC Comment Letter I; Baird Comment Letter; GPEVCA Comment Letter; IAA Comment Letter II; Invest Europe Comment Letter; Comment Letter of National Association of Private Fund Managers (Apr. 25, 2022); Proof Comment Letter; Ropes & Gray Comment Letter. 657See, e.g., AIC Comment Letter I; GPEVCA Comment Letter; Dechert Comment Letter; IAA Comment Letter II; Invest Europe Comment Letter; Proof Comment Letter; Ropes & Gray Comment Letter; SIFMA–AMG Comment Letter I. 658The after-tax reduction of an adviser clawback constitutes a compensation scheme within the meaning of section 211(h) of the Advisers Act because it is a method by which an investment adviser may take additional compensation indirectly that otherwise its private fund clients would be entitled to as investment proceeds. 659Cf. Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, Investment Advisers Act Release No. 6279 (May 3, 2023) [88 FR 38146 (June 12, 2023)], at 73–74 (discussing conflicts of interest that may arise from general and limited partner clawbacks and noting that ‘‘clawbacks are negotiated early on in a fund’s life, long before the inciting event occurs’’). 660See, e.g., AIC Comment Letter I; AIC Comment Letter II; AIMA/ACC Comment Letter; ATR Comment Letter; CCMR Comment Letter I; Comment Letter of Correlation Ventures (June 13,
2022) (‘‘Correlation Ventures Comment Letter’’);
Comment Letter of Canadian Venture Capital and Private Equity Association (Apr. 25, 2022) (‘‘CVCA Comment Letter’’); Comment Letter of Landspire Group (Apr. 25, 2022); Lockstep Ventures Comment Letter; Comment Letter of the National Association of Investment Companies (Apr. 25, 2022) (‘‘NAIC Comment Letter’’); PIFF Comment Letter; Proof Comment Letter; Ropes & Gray Comment Letter; SBAI Comment Letter; Schulte Comment Letter; SIFMA–AMG Comment Letter I; Comment Letter of Top Tier Capital Partners, LLC (June 13, 2022) (‘‘Top Tier Comment Letter’’). 661See NVCA Comment Letter (stating that the Commission should consider the alternative of using enhanced disclosures instead of banning clawback reduction provisions); Comment Letter of OPSEU Pension Plan Trust (Aug. 18, 2022) (stating that investment terms are a negotiation between advisers and institutional investors and that the final rules should generally focus on disclosure rather than prohibitions); SIFMA–AMG Comment Letter I (stating that, if adopted, the final rule should require advisers to include estimated clawback calculations reflecting any adjustments for taxes as part of the quarterly statement reporting requirements, which would enable investors to assess a potential clawback situation and any potential reductions for taxes, that may arise); AIC Comment Letter I (stating that, if adopted, the final rule should require only quarterly disclosures to private fund investors of the potential clawback payable and the amount of carried interest distributions that have been reserved against the potential clawback). the full amount of any excess performance-based compensation received by the adviser (or its related persons), except in the rare circumstances where such excess amount is so significant as to be greater than the total amount of performance￾based compensation retained by the adviser (or its related persons) on an after-tax basis.654 These commenters suggested that post-tax clawbacks reflect a widely accepted and negotiated position between advisers and their private fund clients (and, indirectly, their private fund investors).655 They stated that the prevailing market practice is to allocate the economic risk of a post-tax clawback to private fund clients, rather than to advisers, because if this economic risk were allocated to advisers, it could leave them worse off than if they had not received any performance-based compensation at all.656 These commenters stated that advisers could be worse off because taxes paid in respect of excess performance-based compensation generally cannot be recouped by amending prior tax returns, and the ability to realize a tax benefit from subsequent losses is in practice limited. Additionally, these commenters indicated that both applicable tax rules and portfolio management considerations (such as determining at what time the disposal of a portfolio investment would be in a private fund client’s best economic interest) limit the actual discretion
that advisers otherwise might have to defer or delay payments of performance-based compensation to prevent the need for a clawback.657 For example, because U.S. tax laws require a partner of a partnership to pay annual tax based on the amount of partnership income allocated to the partner, rather than based on the amount of actual partnership distributions received by the partner in the applicable year, an adviser may not necessarily be in a position to delay or defer payments or allocations of performance-based compensation to prevent the need for a clawback. We believe that reducing the amount of any adviser clawback by taxes applicable to the adviser presents an opportunity for an adviser to put its own interests ahead of its clients’ interests by allocating to the client (and indirectly, to fund investors) the risk of a tax liability otherwise attributable to and borne by the adviser, which reduces its client’s (and indirectly, fund investors’) returns. We therefore believe that, unless this practice is adequately disclosed to investors, it creates a compensation scheme that is contrary to the public interest and the protection of investors.658 Furthermore, although investors may contractually agree, per a fund’s governing documents and with appropriate initial disclosure, to an adviser’s ability to reduce an adviser clawback by applicable taxes, investors may be deceived to the extent that an adviser does not disclose information relating to the total dollar amount of the adviser clawback and its reduction after the fact.659 To the extent that their private fund investments are opaque, investors can lack insight into this potentially conflicted practice by advisers and its impact on the returns of their private fund investments. We appreciate commenters’ concerns that the proposed rule could ultimately result in unintended consequences that would be inconsistent with our proposal’s purpose, such as, among others, the following: fewer advisers choosing to offer clawback mechanisms in their private funds when such mechanisms benefit investors; restructuring performance-based compensation arrangements in a way that would be less favorable for investors (e.g., adopting incentive fee structures that reduce or eliminate the potential for a clawback but are less favorable to certain investors from a tax treatment perspective, or implementing higher carried interest rates); offsetting changes to other economic terms applicable to investors (e.g., implementing higher management fees); adjusting the timing of portfolio management decisions to avoid potential clawback liabilities (i.e., potentially incentivizing advisers to make portfolio management decisions for reasons other than a private fund client’s best interests); and disproportionate burdens on smaller investment advisers that may be more reliant on the receipt of performance￾based compensation on a deal-by-deal basis to remunerate their employees and fund their operations.660 In view of these
potential unintended consequences, several commenters suggested that the Commission adopt disclosure requirements relating to the use of after-tax adviser clawbacks rather than an outright prohibition of the practice,661 and we agree, as described below. Many investors lack information regarding adviser clawbacks and their impact on fund profits. For example, many fund agreements only require advisers to restore the excess performance-based compensation (less taxes) to the fund, without requiring them to provide investors with any information regarding the adviser’s related determinations and calculations, such as whether a clawback was triggered and the aggregate amount of the clawback. Without adequate disclosure, investors are unable to

662For the avoidance of doubt, this does not change the applicability to the adviser of any other applicable disclosure and consent obligations, whether they exist under law, rule, regulation, contract, or otherwise. 663See final rule 211(h)(2)–1(a)(3). 664One commenter stated that, if adopted, the final rule should require advisers to include estimated clawback calculations reflecting any adjustments for taxes as part of the quarterly statement reporting requirements, which would enable investors to assess a potential clawback situation, and any potential reductions for taxes, that may arise. See SIFMA–AMG Comment Letter
I. Including such information in the quarterly
statement is not necessary to satisfy the specific disclosure requirements and transparency objectives of the final restrictions rule. 665Proposed rule 211(h)(2)–1(a)(6). 666 In the Matter of Energy Capital Partners, supra footnote 30; In the Matter of Rialto Capital Management, LLC, supra footnote 222; In the Matter of Lightyear Capital, LLC, Investment Advisers Release No. 5096 (Dec. 26, 2018) (settled action); In the Matter of WL Ross & Co. LLC, Investment Advisers Act Release No. 4494 (Aug. 24, 2016) (settled action); In the Matter of Kohlberg Kravis Roberts & Co., supra footnote 28; In the Matter of Lincolnshire, supra footnote 26; see In the Matter of Platinum Equity Advisors, LLC, Investment Advisers Release No. 4772 (Sept. 21, 2017) (settled action). Our staff has also observed instances of advisers charging or allocating fees and expenses related to a portfolio investment on a non-pro rata basis when multiple private funds and other clients advised by the adviser or its related persons have invested (or propose to invest) in the same portfolio investment during examinations. See EXAMS Private Funds Risk Alert 2020, supra footnote 188. 667See, e.g., In the Matter of Platinum Equity Advisors, LLC, supra footnote 666. 668See, e.g., In the Matter of Energy Capital Partners, supra footnote 30; see also Healthy Markets Comment Letter I (stating that investors are very unlikely to be willing or able to negotiate on their own the end of these practices, such as charging certain non-pro-rata fees and expenses). 669Final rule 211(h)(2)–1(a)(4). In a change from the proposal, we are making a revision to the rule text to clarify that the prohibition is against charging either fees, or expenses, or both. understand and assess the magnitude and scope of the clawback, as well as its impact on fund performance and investor returns. Further, not all investors may be able to ask questions successfully or seek more information about a clawback on a voluntary basis from their private fund’s adviser. We believe that disclosure will achieve the rule’s policy goal of protecting investors, while preventing unintended consequences that may have resulted from a flat prohibition. Accordingly, the final rule will not prohibit advisers from engaging in after￾tax adviser clawback reductions, if advisers satisfy certain disclosure requirements designed to better inform private fund investors of the impact of after-tax adviser clawback reductions.662 Specifically, the final rule restricts advisers from reducing the amount of an adviser clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders, unless the adviser distributes a written notice to the investors of the impacted private fund client that sets forth the aggregate dollar amounts of the adviser clawback both before and after any such reduction of the clawback for actual, potential, or hypothetical taxes within 45 days after
the end of the fiscal quarter in which the adviser clawback occurs.663 In order to satisfy the disclosure requirement, within 45 days after the end of the fiscal quarter in which the clawback occurs, an adviser must distribute a written notice to the investors of the affected private fund client that sets forth the aggregate dollar amounts of the adviser clawback both before and after the application of any tax reduction. These aggregate dollar amounts should reflect the gross amount of excess compensation received by the adviser (or its related persons) that is being clawed back. The aggregate dollar amount of the clawback before the application of any tax reductions must not be reduced by taxes paid, or deemed paid, by the recipients or other persons on their behalf, whereas the aggregate dollar amount of the clawback after the application of any tax reduction needs to be so reduced. As an example of disclosure that an adviser can make to satisfy this requirement, an adviser that is subject to a clawback could at the end of a private fund’s term include disclosure in the fund’s quarterly statement regarding the aggregate dollar amounts of the adviser clawback before and after the application of any tax reduction (if the adviser is subject to the quarterly statement requirement and to the extent that the quarterly statement is delivered within 45 days following the end of the relevant fiscal quarter). An investor will be able to compare these reported aggregate dollar amounts of the adviser clawback both before and after any tax reduction to evaluate the actual impact of a tax reduction on the clawback. An investment adviser may wish to consider providing private fund client investors with, and investors may request and negotiate for, additional information that is not specifically required by the final rule. For example, advisers that routinely monitor their potential clawback liability could provide their private fund client investors with information regarding their currently estimated clawback amounts.664 Additionally, in situations where an adviser’s tax reduction serves to reduce the clawback amount received by a private fund client, an adviser could consider providing investors in such fund with information clarifying their respective shares of the reduction. (c) Certain Non-Pro Rata Fee and Expense Allocations We proposed to prohibit an adviser from directly or indirectly charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis when multiple private funds and other clients advised by the adviser or its related persons have invested (or propose to invest) in the same portfolio investment.665 Charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis when multiple private funds and other clients advised by the adviser or its related persons have invested (or propose to invest) in the same
portfolio investment presents an opportunity for an adviser to put its interests ahead of its clients’ interests (and, by extension, their investors’), and can result in private funds and their investors, particularly smaller investors that may not have as much influence with the adviser or its related persons, being misled, deceived, or otherwise harmed. As discussed in greater detail below, any such non-pro rata charge or allocation can create a conflict of interest and operate as a compensation scheme, both of which we deem contrary to the public interest and the protection of investors.666 This practice may also violate antifraud provisions if an adviser contravenes representations within the fund governing documents, and the adviser, faced with a conflict of interest, may seek to charge or allocate fees and expenses to one fund client as opposed to another client in a manner that benefits the adviser.667 Despite the number of enforcement actions brought by the Commission, we believe that this practice still exists among private fund advisers. Accordingly, we believe it is appropriate to promulgate a rule that restricts it.668 The adopted rule therefore restricts this practice unless (i) the non-pro rata charge or allocation is fair and equitable under the circumstances and (ii) prior to charging or allocating such fees or expenses to a private fund client, the investment adviser distributes to each investor of the private fund a written notice of the non-pro rata charge or allocation and a description of how it is fair and equitable under the circumstances.669 Charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis presents a conflict of interest because advisers have economic and/or other

670 In some instances, a fund may not have the resources to bear its pro rata share of expenses related to a portfolio investment (whether due to insufficient reserves, the inability to call capital to cover such expenses, or otherwise). 671The final rule does not prohibit an adviser from paying a fund’s pro rata portion of any fee or expense with its own capital. In addition, to the extent a fund does not have resources to pay for its share, the final rule does not prohibit an adviser from diluting such fund’s interest in the portfolio investment in a manner that is fair and equitable, subject to applicable laws, rules, or regulations and applicable provisions of the fund’s governing documents. 672See, e.g., In the Matter of Rialto Capital Management, LLC, supra footnote 222. 673 Id. 674Although the adviser’s interest (or its affiliate’s interest, such as the general partner’s interest) may not be charged a management fee or an incentive allocation, they are often allocated or charged fund expenses, directly or indirectly, in a manner that is similar to a third party investor’s interest in the fund. 675See, e.g., In the Matter of Kohlberg Kravis Roberts & Co, supra footnote 28. 676See Healthy Markets Comment Letter I; NY State Comptroller Comment Letter; AFL–CIO Comment Letter; ILPA Comment Letter I; ICCR Comment Letter; RFG Comment Letter II. See also IAA Comment Letter II. 677See SBAI Comment Letter; IAA Comment Letter II; Ropes & Gray Comment Letter. 678See Dechert Comment Letter; AIC Comment Letter I; MFA Comment Letter I; NYC Bar Comment Letter II. 679See Dechert Comment Letter (discussing scenarios where a particular investment structure, tax structure and/or regulatory position or status for an investment exists solely to benefit one or more particular investors); Ropes & Gray Comment Letter. 680See Dechert Comment Letter. 681See Dechert Comment Letter; OPERS Comment Letter. business reasons to charge or allocate fees and expenses to one fund client as opposed to another client (e.g., differences in a private fund’s fee structure, ownership structure, lifecycle, and investor base).670 For example, when determining how to charge or allocate fees and expenses related to a portfolio investment where multiple private fund clients have invested (or propose to invest), the adviser may choose to charge or allocate less fees and expenses to its higher fee-paying client to the detriment of its lower fee￾paying client because the higher fee￾paying client pays more to the adviser. Not only would this decision to charge or allocate less fees and expenses to its higher fee-paying client benefit the adviser but it could also disadvantage the lower fee-paying client and its investors who bear more than a pro rata share of expenses while supporting the value of the higher fee-paying client’s investment.671 We have observed these considerations leading advisers to favor one private fund client (and its investors) over another private fund client (and its
investors) because of the fund’s investor base. For example, as
part of their strategy, some advisers
agree to perform certain services, e.g., asset-level due diligence, accounting, valuation, legal, either in-house or through a captive consulting firm, for portfolio investments at costs that are at or below market rates rather than hire a third party to perform these services.672 To facilitate a portfolio investment, the adviser may set up a co-investment vehicle that invests alongside the adviser’s main fund.673 If the main fund and the co-investment vehicle have both invested (or propose to invest) in the same portfolio investment that engages the adviser for these services, the adviser may decide not to allocate the costs of these services to the co￾investment vehicle, which is often made up of favored or larger investors and may have specific fee and expense limits, and may instead allocate the costs of these services to the main fund, causing the main fund to pay more in expenses than it otherwise would under a pro-rata allocation. Charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis when multiple private funds and other clients advised by the adviser or its related persons have invested (or propose to invest) in the same portfolio investment is a conflict of interest for the adviser and can also lead, and in our experience often does lead, to a compensation scheme that we deem contrary to the public interest and protection of investors, unless this practice is fair and equitable and is adequately disclosed to investors in advance. It also may be fraudulent or deceptive, and result in investor harm. For instance, if two funds invest in the same portfolio investment but only one fund pays an incentive allocation, the adviser may have an incentive to avoid charging or allocating fees and expenses to the fund paying an incentive allocation in an effort to increase the adviser’s incentive allocation. Similarly, if the adviser’s ownership interests vary from fund to fund, the adviser may have an incentive to charge or allocate fees and expenses away from the fund in which the adviser holds a greater interest.674 Because of these differences in ownership or compensation structures, an adviser may have an incentive to charge or allocate fees and expenses in a way that maximizes its economic entitlements at the expense of its fund client’s (and investors’) economic entitlements. Moreover, this practice can result in a conflict of interest and compensation scheme contrary to the protection of investors by favoring not only the adviser but also the adviser’s related persons. For example, an adviser may set up co-investment vehicles for related persons, such as executives, family members, and certain consultants, that invest alongside the adviser’s main fund.675 These co-investment vehicles may receive a set percentage of each portfolio investment made by the adviser’s main fund without having to share in any research expenses, travel costs, professional fees, and other
expenses incurred in deal sourcing activities related to portfolio investments that never materialize. For the adviser to allow its related persons, such as executives, family, and certain consultants, to participate in consummated portfolio investments without having to bear the cost of these expenses may be an undisclosed form of compensation to the adviser and its related persons. It also may defraud, deceive, or harm the fund that bore the co-investment vehicle’s share of expenses. Some commenters supported the proposed prohibition and stated it would protect investors, including those who do not benefit from co-investment opportunities.676 In contrast, other commenters opposed the proposed prohibition and stated that it could result in inequitable outcomes 677 and would be disruptive.678 Commenters stated that allowing advisers to allocate expenses on a non-pro rata basis is essential for the fair treatment of investors because it allows advisers to allocate expenses appropriately to the relevant investors that generated the additional cost.679 Commenters asserted that the prescriptive nature of the proposed rule would result in unintended consequences, indicating there may be circumstances, whether due to tax, regulatory, accounting, or other reasons, where a pro rata expense allocation would lead to inequitable results.680 For example, they questioned whether the proposed rule would prevent an adviser from fairly allocating tax liabilities that are attributable to a specific investor in the private fund (e.g., withholding taxes and partnership￾level assessments resulting from a tax audit) and whether the adviser absorbing certain expenses of a specific investor where that investor is unable to pay for the expense in the private fund would be seen as non-pro rata allocation under the proposed rule.681 Many commenters suggested that we instead allow advisers to allocate fees and expenses related to portfolio expenses in a fair and equitable manner.

682See NYC Bar Comment Letter II; MFA Comment Letter I; Comment Letter of the Managed Funds Association (June 13, 2022) (‘‘MFA Comment Letter II’’). 683See Convergence Comment Letter; Invest Europe Comment Letter. 684See Comment Letter of the Securities Industry and Financial Markets Association Asset Management Group (June 13, 2022); GPEVCA Comment Letter; SIFMA–AMG Comment Letter I; SBAI Comment Letter; Ropes & Gray Comment Letter; AIMA/ACC Comment Letter. 685See IAA Comment Letter II; see generally NY State Comptroller Comment Letter (suggesting the disclosure of written expense allocation and control policies to investors). 686See SBAI Comment Letter. 687See GPEVCA Comment Letter. 688Final rule 211(h)(2)–1(a)(4). 689 GPEVCA Comment Letter; NYC Bar Comment Letter II; MFA Comment Letter I; MFA Comment Letter II. 690See SIFMA–AMG Comment Letter I; GPEVCA Comment Letter; SBAI Comment Letter. See generally IAA Comment Letter II (suggesting the disclosure of written fee and expense allocation policies to investors); NY State Comptroller Comment Letter (suggesting the disclosure of written expense allocation and control policies to investors). 691See Schulte Comment Letter; OPERS Comment Letter; PIFF Comment Letter; AIC Comment Letter I; Ropes & Gray Comment Letter; Continued Some suggested that we refrain from rulemaking on this issue because advisers are already required to allocate fees and expenses on a fair and equitable basis,682 while others urged the Commission to adopt an exception for non-pro rata fee and expense charges or allocations that are appropriately disclosed and consented to by investors 683 or an alternative approach that involves disclosure to investors to avoid unfair outcomes.684 For example, some commenters suggested that, as an alternative to the proposed prohibition, advisers disclose their policies and procedures regarding the allocation of fees and expenses among private funds to each fund investor.685 In another example, a commenter suggested that we should require disclosure only where fees and expenses are not split on a pro-rata basis.686 One commenter stated that advisers typically allocate expenses on a pro rata basis, unless it would otherwise be fair and equitable to allocate non-pro rata under the circumstances.687 This commenter suggested that a disclosure-based approach would afford more flexibility and accommodate the diversity of investment structures used by advisers for private funds. After considering comments, we are adopting a rule that focuses on ensuring that clients are treated fairly and equitably, which we recognize may not always mean clients must be treated identically. Accordingly, in a change from the proposal, the final rule prohibits a private fund adviser from charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis, unless the adviser meets two requirements.688 First, the adviser’s non-pro rata allocation must be
fair and equitable under the circumstances. Whether it is fair and equitable will depend on factors relevant for the specific expense. For example, it would be relevant whether the expense relates to a specific type of security that one private fund client holds. In another example, a factor could be whether the expense relates to a bespoke structuring arrangement for one private fund client to participate in the portfolio investment. As yet another example, another factor could be that one private fund client may receive a greater benefit from the expense relative to other private fund clients, such as the potential benefit of certain insurance policies. Second, before charging or allocating such fees or expenses to a private fund client, the adviser must distribute to each investor a written notice of the non-pro rata charge or allocation and a description of how it is fair and equitable under the circumstances. The written notice will allow an investor to understand better how the adviser is treating the private fund relative to other private funds or clients advised by the adviser. For instance, the written notice may help the investor understand whether the adviser’s allocation approach creates any conflicts of interest, results in any additional direct or indirect compensation to the adviser or its related parties, creates the risk of potential harms, or results in other disadvantages related to such activity. In this notice, advisers should consider addressing relevant factors, which might include the adviser’s allocation approach and the reason(s) why the adviser believes that its non-pro rata allocation approach is fair and equitable under the circumstances. This change is responsive to comments that we received suggesting that adviser’s allocations are or should be fair and equitable 689 and that a more disclosure￾based approach in certain instances rather than a strict requirement to charge or allocate fees and expenses solely on a pro rata basis.690 This disclosure setting forth how the adviser’s allocation is fair and equitable must be distributed to all investors in the private fund. We believe that it is important for all investors in the private fund to receive this disclosure before the adviser charges or allocates non-pro rata fees or expenses to a private fund client. Private fund investors generally do not have insight into (and the quarterly statement rule will not require advisers to disclose) the amounts of joint fees or expenses that the adviser allocated to its other clients, and investors are unable to compare amounts borne by their fund with amounts borne by the adviser’s other clients to assess whether the adviser allocated joint costs consistently with the fund’s terms and other disclosures and representations made by the adviser. To make this assessment, an investor would need access to information regarding the terms of the adviser’s relationships with its clients other than the fund, as well as certain information
(including potentially accounting information) about those other clients. This advance disclosure timeline therefore is appropriate because it provides investors with access to important fee and expense information to enable investors to discuss the non-pro rata allocation with the adviser before being charged. As explained above, we believe it is important to restrict the practice of charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis because this practice presents a conflict of interest and can result in a compensation scheme that is contrary to the public interest and the protection of investors. We have not, however, prohibited this practice where an adviser’s non-pro rata allocation would be fair and equitable under the circumstances. We recognize that private fund advisers may structure investments for specific tax, regulatory, accounting, or other reasons for the benefit of certain investors, creating a diversity of investment structures. We believe this framework offers investors additional protections while simultaneously offering advisers the flexibility to execute investment strategies and offer a diversity of investment structures in a way that may benefit investors. This framework will also encourage advisers, as fiduciaries, to review their approach to allocating fees and expenses to their clients, particularly if advisers must disclose to investors why an allocation is fair and equitable. This framework provides more comprehensive information for investors so that investors can evaluate the adviser’s allocation approach. Several commenters, including a commenter that generally supported this rule, expressed concern that the proposed rule could impair co￾investment opportunities.691 They

BVCA Comment Letter; Invest Europe Comment Letter; Dechert Comment Letter; GPEVCA Comment Letter. See also ILPA Comment Letter I. 692See Schulte Comment Letter; OPERS Comment Letter. 693See Schulte Comment Letter; PIFF Comment Letter. 694See AIC Comment Letter I; Ropes & Gray Comment Letter. 695See infra section VI.E.3 (where we discuss several factors that may mitigate these potentially negative effects, including reasons why the disclosure requirements could promote capital formation). 696See In the Matter of Energy Capital Partners, supra footnote 30; In the Matter of Platinum Equity Advisors, LLC, supra footnote 666; In the Matter of WL Ross & Co. LLC, supra footnote 666. 697See In the Matter of Energy Capital Partners, supra footnote 30. 698See In the Matter of Platinum Equity Advisors, LLC, supra footnote 666. 699See id. 700See In the Matter of WL Ross & Co. LLC, supra footnote 666 (the adviser retained for itself the portion of transaction fees attributable to the co￾investors’ ownership of the portfolio company, without subjecting such fees to any management fee offsets). 701See IAA Comment Letter II; AIC Comment Letter I. But see Ropes & Gray Comment Letter (suggesting that we define the concept of ‘‘pro rata’’ to make the rule easier to apply in certain circumstances). 702 In a change from the proposal, we are revising this requirement to capture not only amounts ‘‘charged’’ to the private fund but also fees and expenses ‘‘allocated to’’ the private fund. We believe that this clarification is necessary in light of the various ways that a private fund may be caused to bear fees and expenses. 703Final rule 211(h)(2)–1(a)(1). We are also reiterating that charging these expenses without authority in the governing documents is inconsistent with an adviser’s fiduciary duty and may violate the antifraud provisions of the Act. For purposes of requesting consent under this rule, advisers generally should list each category of fee or expense as a separate line item, rather than group fund expenses into broad categories, and describe how each such fee or expense is related to the relevant investigation. stated that co-investment opportunities benefit the fund and its investors, and that such transactions are critical to enabling the fund to execute its investment strategy.692 Commenters suggested that the proposed rule would severely impact the availability of co￾investment opportunities because these are time-sensitive opportunities and increasing the regulatory burden on advisers would only heighten the chance that private funds would miss out on an opportunity to participate.693 They also stated that the rule would interrupt the commercial speed of co￾investment transactions because potential co-investors would wait until a transaction is certain before committing to the transaction to avoid broken deal expenses.694 Also, these commenters expressed concern that advisers could lack the leverage necessary to require co-investors to share in fees
and expenses on a pro rata basis and that some co-investors may decline to participate in the transaction rather than bear additional fees and expenses. These commenters asserted that the rule would inhibit capital formation by preventing funds from completing larger deals because they would not be able to find co-investment capital to invest alongside the fund. Because the final rule restricts (rather than prohibits) this practice if the adviser makes certain disclosures, we believe the final rule generally addresses these concerns. For example, although we acknowledge that many co￾investments are executed on short notice, co-investors typically review and negotiate co-investment documentation, such as fund agreements, side letters, and subscription agreements, prior to the closing of the transaction. We believe that the final rule’s requirements can generally be completed during this period (and prior to the adviser completing the non-pro rata charge or allocation). We believe restricting this practice while requiring disclosure and that it be fair and equitable balances the burdens on the adviser with the interests of investors to be treated fairly and receive timely access to important information about non-pro rata fee and expense allocations. While we acknowledge that this approach imposes some incremental burden on co￾investment deals, we do not believe the burdens created by these requirements will significantly deter investor appetite for co-investments or inhibit capital formation.695 We requested comment on whether we should define ‘‘pro rata.’’ In the past, we have generally observed that advisers implement pro rata allocations based on ownership percentages.696 For example, one adviser allocated a fund more than its pro rata share of bridge facility commitment fees relative to its ownership of a portfolio investment.697 In another example, a co-investment vehicle’s governing documents provided that the co-investment vehicle would pay its pro rata share of expenses for any portfolio company investments made by the co-investment vehicle.698 Although the co-investment vehicle agreed to pay its pro rata share of expenses of any consummated portfolio company investment and the co￾investment vehicle invested on a predetermined amount in each consummated portfolio company investment, the adviser did not allocate broken deal expenses to the co￾investment vehicles.699 We have alleged in settled enforcement actions that an adviser has allocated transaction fees in a way that benefited the adviser rather than pro rata among the adviser’s funds and co-investors invested in the portfolio company investment.700 A commenter specifically suggested that we refrain from defining ‘‘pro rata’’ to allow advisers flexibility because there are multiple methods that can be used to allocate pro rata.701 We agree that there may be multiple methods to determine pro rata allocations, and we have therefore declined to define ‘‘pro rata.’’ We recognize that the
framework we are adopting could result in some subjectivity regarding how advisers calculate pro rata and when an allocation is fair and equitable. Nonetheless, we believe that this framework offers additional protection to investors in situations where an adviser may have an incentive to favor one client (or a group of investors) over another client (or another group of investors). This framework requires an adviser to evaluate its conflicts of interest when multiple private funds and other clients advised by the adviser or its related persons have invested (or propose to invest) in the same portfolio investment and enhances protections and disclosures made to investors when an adviser allocates or charges fees and expenses in a non-pro rata manner.
2. Restricted Activities With Certain
Investor Consent Exceptions (a) Investigation Expenses We proposed to prohibit advisers from charging their private fund clients for fees and expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority. We are adopting this provision 702 but, after considering comments, we are providing an exception from the proposed prohibition if an adviser seeks consent from all investors of a private fund, and obtains written consent from at least a majority in interest of the fund’s investors that are not related persons of the adviser, for charging the private fund for such investigation fees or expenses.703 However, the exception does not apply to fees or expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for a violation of the Act or the rules promulgated thereunder. The heightened protection of investor consent is particularly appropriate with respect to the investigation restriction because such investigations are focused on the adviser’s own potential or actual wrongdoing. If an adviser is able to pass on expenses associated with an investigation related to its own misfeasance, without providing

704See infra sections VI.C.2 and VI.D.3. 705See, e.g., AFR Comment Letter I; United for Respect Comment Letter I; NYC Comptroller Comment Letter. 706See, e.g., Sullivan & Cromwell Comment Letter; NYC Bar Comment Letter II; ASA Comment Letter. 707See, e.g., AIMA/ACC Comment Letter; SBAI Comment Letter. 708See SBAI Comment Letter. 709See NYC Bar Comment Letter II. 710See, e.g., Dechert Comment Letter; Haynes & Boone Comment Letter; Chamber of Commerce Comment Letter. 711See, e.g., CalPERS Comment Letter; NYC Comptroller Comment Letter; ILPA Comment Letter I. 712See supra section I for a discussion of the definition of ‘‘compensation scheme’’. 713See, e.g., See, e.g., In the Matter of Cherokee Investment Partners, LLC and Cherokee Advisers, LLC, supra footnote 26 (alleging that the adviser improperly shifted expenses related to an examination and an investigation away from itself). 714One commenter stated that the proposed prohibition on advisers charging their private fund clients for these expenses is unnecessary because the Commission has the authority, as a condition of the settlement, to require advisers to bear the costs associated with a settlement or penalty. See Citadel Comment Letter. We view this authority as supporting the need for a broader rule in this area rather than relying on invocations of this authority in each separate instance. In addition, relying on imposing this condition as a condition of settlement, by which point an adviser who has committed fraud may have dissipated its money and be unable to reimburse investors for the investigation expenses already charged, provides inadequate and lesser protection to investors compared to the rule’s consent requirement. 715See, e.g., Dechert Comment Letter; Haynes & Boone Comment Letter; Chamber of Commerce Comment Letter. 716However, even in such circumstances where investigation fee and expense allocation provisions are highly negotiated, we believe such negotiation is only effective if investors explicitly consent to any such allocations in each specific instance. 717See section 215(a) of the Advisers Act. See also section 215(b) of the Advisers Act (stating that any contract made in violation of the Act or rules thereunder is void). disclosure of the specific fees and expenses actually being passed through to funds relating to a particular investigation and securing consent from investors, such adviser has adverse incentives to engage in conduct likely to trigger an investigation and may not be adequately incentivized to limit the legal fees incurred on its own behalf.704 An adviser faces a conflict of interest when charging investors for fees and expenses associated with an investigation of the adviser by any governmental or regulatory authority because these fees and expenses are related to the adviser’s potential or actual wrongdoing. We recognize that governmental or regulatory bodies may not formally notify an adviser that it is under investigation. In such a circumstance,
whether an adviser is under investigation would be determined based on the information available. Some commenters supported the proposed prohibition, stating that advisers should not be charging investigation fees and expenses to the fund.705 Other commenters stated that this prohibition is unnecessary, at least in part because investors are already able to agree on what fees may or may not be charged to funds.706 Several commenters suggested that we should require disclosure of these expenses instead of prohibiting these practices.707 In particular, as an alternative to the proposed prohibition, one commenter recommended that any such expenses should be fully disclosed to investors as separate line items 708 while another commenter recommended that we should require clear empirical disclosure of such expenses.709 Others predicted that advisers would assess higher management fees if they could not allocate these fees and expenses to funds.710 Some commenters suggested that we should clarify that certain costs and expenses resulting from settlements and judgments with governmental authorities are not indemnifiable.711 Charging investors separately for fees and expenses associated with an investigation of the adviser or its related persons by any governmental or regulatory authority is a compensation scheme contrary to the public interest, unless this practice is consented to, in writing, by investors who are not related persons of the adviser. Such fees and expenses are related to the adviser’s potential or actual wrongdoing and should be borne by the adviser unless investors consent in writing to paying them for each specific investigation. Accordingly, the allocation or charging of these types of expenses to private fund clients constitutes a compensation scheme within the meaning of section 211(h) of the Advisers Act because it is a method by which an investment adviser may take additional compensation in the form of reimbursement for expenses that the adviser should bear.712 Moreover, such allocations create a conflict of interest because they provide an incentive for an adviser to place its own interests ahead of the private fund’s interests and allocate expenses away from the adviser to the fund.713 In such a case where an adviser incurs expenses as a result of an investigation into the adviser’s conduct, then uses investor assets to pay the expenses associated thereto, investors have the potential to be doubly harmed if the adviser’s alleged misconduct harms investors.714 We also believe that allocation of these types of fees and expenses to private fund clients can be deceptive in current market practice. For example, investors may generally expect an adviser to bear fees and expenses directly related to its own wrongdoing. Regarding fees and expenses associated with investigation of the adviser or its related persons, we do not believe it is appropriate for an adviser to enrich itself by charging for investigation fees and expenses
related to its own actual or potential wrongdoing, unless investors consent to such fees and expenses. Thus, we believe that, unless this practice is consented to, in writing, by investors, it creates a compensation scheme that is contrary to the public interest and the protection of investors. After reviewing responses from commenters, however, we acknowledge that a prohibition of certain of these charges without an exception for instances in which the adviser obtains investor consent could result in unfavorable outcomes for investors. For example, as some commenters suggested,715 some advisers may attempt to increase management or other fees if they were no longer able to charge such fees and expenses to fund clients, and the increase in management fees might have been more than the increase in any fees or expenses already being passed through to the private fund. We also recognize that whether such fees and expenses can be charged to the private fund can be highly negotiated by investors in certain instances.716 As a result, we believe it is necessary to prohibit these practices unless advisers get requisite written consent from investors. The final rule, however, does not contain a consent-based exception for an adviser to charge a fund for fees or expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for a violation of the Act or the rules promulgated thereunder. Such charges will be outright prohibited. If an adviser were to charge a client for such fees and expenses, we would view that adviser as requiring its client to acquiesce to the adviser’s violation of the Act. Advisers must comply with all applicable provisions of the Act, and the SEC would view a waiver of any provision of the Act as invalid under
section 215(a) of the Act. Section 215(a)
of the Act provides that any condition, stipulation, or provision binding any person to waive compliance with any provision of the Act shall be void.717 An adviser that charges its private fund client for fees and expenses related to the adviser’s violation of the Act, or the

718For example, if the Commission sanctioned an adviser pursuant to a settled order finding that the adviser violated the Act or the rules promulgated thereunder, including an order to which the adviser consented without admitting or denying the Commission’s findings, the adviser would not be permitted to seek investor consent to charge any fees and expenses related to the Commission’s investigation to the fund, including any penalties or disgorgement. 719See, e.g., BVCA Comment Letter; Sullivan & Cromwell Comment Letter; SBAI Comment Letter. 720The obligation of an adviser to a pass-through fund to pay fees or expenses associated with a sanction under the Act is attenuated to the extent such adviser has other assets (e.g., balance sheet capital), sources of revenue (e.g., performance-based compensation), or access to capital (e.g., loans) to pay any such fees or expenses. As the Commission may already require advisers to pass-through funds to pay penalties associated with a sanction under the Act, we anticipate that this rule will not cause a significant disruption from current practice for advisers to pass-through funds. 721Proposed rule 211(h)(2)–1(a)(7). 722See SIFMA–AMG Comment Letter I; NYC Bar Comment Letter II; IAA Comment Letter II. 723See OPERS Comment Letter; Convergence Comment Letter; AFL–CIO Comment Letter; ILPA Comment Letter I; RFG Comment Letter II; American Association for Justice Comment Letter. 724See Convergence Comment Letter. 725See NYC Bar Comment Letter II. 726Tax advances occur when the private fund pays or distributes amounts to the general partner to allow the general partner to cover tax obligations. 727See SBAI Comment Letter; CFA Comment Letter I; AIC Comment Letter I. 728See IAA Comment Letter II. 729See, e.g., SIFMA–AMG Comment Letter I (stating that borrowing securities can be structured as a purchase subject to section 206(3) of the Advisers Act); NYC Bar Comment Letter II. To the extent that a borrowing under the final rule involves a purchase under section 206(3) of the Advisers Act, the requirements of that section will continue to apply to the adviser. 730See Convergence Comment Letter. 731See, e.g., IAA Comment Letter II; AIC Comment Letter I. rules promulgated thereunder, would operate as a waiver of its liability for such violation. While other types of investigations may involve a great variety of potential or actual wrongdoing that may differ in nature and severity, compliance with the Act is core to the existence and activities of investment advisers. Accordingly, an adviser charging its private fund client for fees and expenses related to an investigation that results or has resulted in a court or governmental authority imposing a sanction for a violation of the Act, or the rules promulgated thereunder, is impermissible.718 To illustrate, an adviser may charge a private fund client for fees and expenses associated with an investigation by the SEC of the adviser or its related persons for a potential
violation of Section 206 of the Act or the rules thereunder, provided those fees and expenses are consented to by investors pursuant to this rule. However, if the investigation results in a court or governmental authority imposing a sanction on the adviser for a violation of the Act or the rules promulgated thereunder, then the adviser must refund the fund for the fees and expenses associated with the investigation, such as lawyer’s fees. Some commenters also expressed concerns about how the proposed prohibition related to investigation expenses would adversely impact funds with ‘‘pass-through’’ expense models.719 First, investigations of advisers by governmental authorities are uncommon, and thus we do not expect expenses related to investigations to pose a threat to the majority of advisers using pass-through expense models. Second, since we are providing a consent-based exception from this prohibition, advisers with pass-through expense models are still able to charge investigation expenses to the funds they advise, provided they obtain investor consent pursuant to this rule (subject to compliance with other applicable disclosure and consent requirements). Thus, the final rule generally does not prohibit advisers from continuing to utilize such models. Such advisers, like any other private fund adviser, would nonetheless be prohibited from allocating to such funds fees or expenses related an investigation that results or has resulted in a court or governmental authority imposing a sanction for a violation of the Act, or the rules promulgated thereunder.720 (b) Borrowing We proposed to prohibit an adviser directly or indirectly from borrowing money, securities, or other fund assets, or receiving a loan or an extension of credit, from a private fund client (collectively, a ‘‘borrowing’’).721 Some commenters opposed the prohibition,722 while others supported it.723 One commenter encouraged the Commission to expand the scope of the proposed prohibition by preventing an adviser from borrowing from co￾investment vehicles or other accounts.724 Another commenter that opposed the proposed prohibition stated that the prohibition was unnecessary because advisers and their related persons rarely borrow from fund clients.725 These commenters asserted that the proposed prohibition could inadvertently prohibit activity that could benefit investors, such as tax advances,726 borrowing arrangements outside of the fund structure,727 and the activity of service providers that are affiliates of the adviser, especially with large financial institutions that play many roles in a private fund complex.728 Commenters also stated that the rule could prohibit certain types of transactions that are permitted (e.g., an adviser purchasing securities from a client), with appropriate disclosure and consent, under section 206(3) of the Advisers Act.729 One commenter stated that we should instead require disclosure of adviser borrowings on Form PF and Form ADV,730 while other
commenters stated that we should provide exemptions for borrowings disclosed to investors or LPACs to ensure that these arrangements are entered into on arm’s length terms.731 Under section 211(h)(2) of the Advisers Act, the Commission has the authority to promulgate rules to prohibit or restrict certain conflicts of interest that the Commission deems contrary to the public interest and the protection of investors. We believe it is important to restrict the practice of borrowing from a private fund client because it presents a conflict of interest that is contrary to the public interest and the protection of investors. When an adviser borrows from a private fund, that adviser has a conflict of interest because it is on both sides of the transaction (i.e., the adviser benefits from the loan and manages the client lender). As discussed above, a private fund rarely has employees of its own. The fund typically relies on the investment adviser (and, in certain cases, affiliated entities) to provide management, investment, and other services, and such persons usually have general authority to take actions on behalf of the private fund without further consent or approval of any other person. This structure causes a conflict of interest between the private fund (and, by extension, its investors) and the investment adviser because the interests of the fund are not necessarily aligned with the interests of the adviser. For example, when determining the interest rate for the borrowing, an investment adviser’s interest in maximizing its own profit by negotiating (or setting) a low rate may conflict with the private fund’s (and, by extension, its investors’) interest in seeking to maximize the profits of the fund. As another example, if the adviser becomes insolvent or suffers financial distress, the interests of the fund in seeking to protect its interests (whether through enforcing a default against, or renegotiating the terms of the loan with, the adviser) may conflict with the interests of the adviser in seeking to discharge the liability or otherwise renegotiate more favorable terms for itself. Additionally, this practice may prevent the fund client from using those assets to further the fund’s investment strategy. Even where disclosed to

732See SEC v. Philip A. Falcone, et al., Civil Action 12–CV–5027 (S.D.N.Y) (Aug. 16, 2013) (consent of defendants) (admitting that a hedge fund adviser borrowed from a hedge fund client, at an interest rate lower than the fund’s borrowing rate, in order to repay the adviser’s personal taxes, and that the adviser failed to disclose the loan to investors for five months); In the Matter of Wave Equity Partners LLC, Investment Advisers Act Release No. 6146 (Sept. 23, 2022) (settled action) (alleging that the adviser (i) borrowed money from a private equity fund that it managed in order to pay placement agent fees to a third-party vendor; and (ii) without adequate disclosure, failed promptly to repay the fund through an offset of quarterly management fees as required by fund documents); In the Matter of SparkLabs Global Ventures Management, LLC, et al., Investment Advisers Act Release No. 6121 (Sept. 12, 2022) (settled action) (alleging that exempt reporting advisers and their owner (i) directed certain funds they managed to make more than 50 unauthorized loans totaling over $4.4 million, at below-market interest rates, to other funds under their management and certain affiliates of the adviser and/or its related persons; (ii) failed to enforce the terms of the loans when they were due; and (iii) failed to disclose to their clients or investors the conflicts of interest associated with the loans and to seek approval for them). 733See In the Matter of Monsoon Capital, LLC, Investment Advisers Act Release No. 5490 (Apr. 30,
2020) (settled action).
734See In the Matter of Resilience Management, LLC, et al., Investment Advisers Act Release No. 4721 (June 29, 2017) (settled action). 735Final rule 211(h)(2)–1(a)(5). See supra section II.E. (Restricted Activities) for discussions of the ‘‘distribution’’ requirement and of the type and manner of investor consent required under the final rule. 736Advisers may also consider providing additional information, including, to the extent relevant, updated post-borrowing disclosure to reflect increases, decreases, or other changes in the borrowing, to help investors understand the nature of the conflict of interest and its potential influence on the adviser. 737See, e.g., ILPA Comment Letter I. investors (or to an advisory board of the private fund, such as an LPAC), this practice presents a conflict of interest that can be harmful to investors because, as a result of the unique structure of private funds, only certain investors with specific information or governance rights (such as representation on the LPAC) may be in a position to discuss, diligence, negotiate, consent to, or monitor the borrowing with the adviser, rather than all of the private fund’s investors, depending on the facts and circumstances. Further, section 206(4) of the Advisers Act permits the Commission to prescribe a means to prevent acts, practices, and courses of business that are fraudulent, deceptive, or manipulative. Restricting the ability of an adviser to borrow from a private fund client would help prevent fraud, deception, and manipulation that can occur when an adviser engages in this practice. The Commission has previously settled enforcement actions against advisers that directly or indirectly borrowed from private fund clients without providing appropriate disclosure or obtaining approval.732 For example, the Commission brought charges against a private fund adviser and its owner for, among other things, improperly borrowing money from a private fund.733 Specifically, the Commission order alleged that the owner breached his fiduciary duty when he borrowed from the fund to settle a personal trade. In another example, the Commission found that an investment adviser, through its owner, improperly borrowed money from private funds to pay the adviser’s expenses.734 In both instances, the advisers did not timely disclose or obtain approval for the borrowings. The advisers also defrauded the private funds and their investors by illegally using the private funds’ assets to serve their personal interests. Despite the Commission’s enforcement efforts, adviser borrowing practices continue to pose harmful risks to private funds (and, by extension, their investors) in light of the conflicts of interests that arise between a fund and its adviser when the adviser has a direct or indirect interest on both sides of a borrowing arrangement. After considering comments and in a change from the proposal, the final rule prohibits advisers from engaging in borrowings from a private fund
client unless the adviser distributes a written notice and description of the material terms of the borrowing to the investors of the private fund, seeks their consent for the borrowing, and obtains written consent from at least a majority in interest of the fund’s investors that are not related persons of the adviser (as described above).735 The final rule does not enumerate specific terms of the borrowing that must be disclosed in connection with an adviser’s consent request; rather, it requires advisers to disclose the prospective borrowing and the material terms related thereto. This could include, for example, the amount of money to be borrowed, the interest rate, and the repayment schedule, depending on the facts and circumstances. We believe that this approach will help prevent activity that is potentially harmful unless accompanied by specific and timely disclosure that can be meaningfully evaluated and acted upon by investors. By not enumerating specific terms that must be disclosed and instead incorporating a materiality standard, the final rule will also afford investors and advisers the flexibility to negotiate for disclosures and terms that are tailored to their unique needs and relationships.736 The heightened protection of investor consent is particularly appropriate with respect to the borrowing restriction. Borrowing from a private fund creates a conflict of interest where the adviser is incentivized to favor its own interest over the interest of the fund. Additionally, there are other potential conflicts that arise in the event that the adviser is unable to repay the borrowing, or it has to choose whether to repay the borrowing among other uses of the capital when funds are limited. This restriction will not apply to borrowings from a third party on the fund’s behalf or to the adviser’s borrowings from individual investors outside of the fund, such as a bank that is invested in the fund; instead the restriction focuses on the types of borrowings that, based on our experience, present the greatest opportunities for an adviser to abuse its control over a client’s assets; namely, when an adviser borrows its client’s assets, directly or indirectly, for its own use. However, we recognize that, in certain instances, such as in connection with enabling a smaller adviser to satisfy a sponsor commitment to the fund, investors may under certain terms be willing to accept a borrowing from the fund by the adviser.737 Rather than prescribe these terms, the final rule will require that advisers disclose and obtain advance written consent for them from investors, as discussed above. In this way, the rule will enable investors to have an opportunity to evaluate whether a proposed borrowing would be favorable for the fund (as opposed to only for the adviser) and, relatedly, to negotiate for changes to the terms of the borrowing as appropriate. Because we are providing a consent￾based exception from this prohibition, the revised approach is
responsive to commenters who stated that the rule should be based on more express disclosure to, and consent from, investors rather than prohibition-based. We were not persuaded, however, by comments suggesting that the manner of disclosure about adviser borrowings should be through Form ADV or Form PF. We believe that disclosure directly to investors, in the format contemplated by the final rule and in connection with an adviser’s consent request, will better ensure that existing investors have timely access to information that will assist those investors in determining the conflicts related to such borrowings and how they impact the adviser’s relationship with the private fund, whether the borrowing would be in the fund’s or the adviser’s interest, and

738Commenters state that prohibiting this practice would harm smaller advisers and raise barriers to entry because such advisers would not be able to fund such tax payments. See SBAI Comment Letter; AIMA/ACC Comment Letter; AIC Comment Letter III. 739See, e.g., MFA Comment Letter II; SBAI Comment Letter; AIMA/ACC Comment Letter; AIC Comment Letter I; AIC Comment Letter II. 740See 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at 23. 741See id. 742See id., at 25–26. 743Proposing Release, supra footnote at 3, at 136. 744Comment Letter of Eileen Appelbaum and Jeffrey Hooke (Mar. 17, 2022); Comment Letter of Senators Sherrod Brown and Jack Reed (Aug. 4,
2022) (‘‘Senators Brown and Reed Comment
Letter’’); Trine Comment Letter; AFREF Comment Letter I; OPERS Comment Letter; Morningstar Comment Letter; ILPA Comment Letter I; For The Long Term Comment Letter; Healthy Markets Comment Letter I; Predistribution Initiative Comment Letter II; NYSIF Comment Letter. 745Morningstar Comment Letter; Healthy Markets Comment Letter I. 746Senators Brown and Reed Comment Letter. 747 ILPA Comment Letter I. 748See generally AFREF Comment Letter I. whether to ultimately approve or disapprove of the borrowing. Additionally, the related books and records requirement in final rule 204– 2(a)(24) will require advisers to maintain this information in a manner that permits easy location, access, and retrieval of any particular record. Finally, in response to commenters, we are clarifying that we did not intend for the proposed rule to prohibit certain practices that have the potential to benefit investors, and we would not interpret ordinary course tax advances and management fee offsets as borrowings that are subject to this final rule, as discussed below. A tax advance occurs when a fund provides an adviser or its affiliate an advance of money against the adviser’s actual or expected future share of the fund’s assets (e.g., the adviser’s accrued performance fees or carried interest) to allow the adviser or its affiliate to meet certain of its tax obligations (or its investment professionals’ tax obligations) as they are due. Such advances are used to enable an adviser, its affiliates, and its investment professionals to pay taxes derived from their interest in a fund (e.g., taxes associated with performance fees or carried interest that have been allocated to the affiliated general partner), because such tax liabilities frequently arise and are due before these parties are actually entitled to a cash distribution from the fund. This practice can benefit investors because it allows advisers to pay their tax liabilities while continuing to manage the fund and, accordingly, to avoid the potential misalignment of interests that can occur if advisers were instead to seek higher amounts of compensation from a fund (or from fund portfolio investments) to create a reserve amount covering their potential tax liabilities or to begin timing portfolio investment transactions in consideration of the resulting tax impacts on the adviser and its affiliates and their personnel (as opposed to managing the fund with a focus solely on the best interests of the fund).738 Some commenters suggested that such arrangements are widely disclosed to and understood by investors.739 We do not interpret the final rule to apply to tax advances as a type of restricted borrowing because they are tax payments that are attributable to and made against the unrealized income (or other amounts) allocated to in respect of the private fund. As such, they are not structured to include the repayment of advanced amounts to the fund, but rather only the reduction of the future income to be received by the
adviser. However, to the extent that a tax advance is structured to contemplate amounts that will be repaid to the fund, as opposed to amounts that only reduce an adviser’s future income, it would generally be a restricted borrowing under the final rule, subject to the rule’s consent requirement. Similarly, management fee offsets are not borrowings subject to the final rule because they do not involve the adviser or its affiliates taking fund assets and promising to repay such assets at a later date. Management fee offsets typically occur when an adviser reduces the management fee owed by the fund by other amounts that the fund has already paid to, or on behalf of, the adviser, its affiliates, or certain other persons. For example, fund governing documents may require an adviser to reduce the management fee by any amounts the adviser’s affiliates receive for providing services to a portfolio company that the fund invests in. Also, some private fund governing documents limit organizational expenses and provide that any amount of organizational expenses paid by the fund above the expense cap may be offset against the adviser’s management fee. Management fee offsets benefit investors because they reduce the fees and expenses the fund pays to the adviser and its affiliates, typically on a dollar-for-dollar basis with the amount initially paid, directly or indirectly, by the fund. We therefore consider a management fee offset to be a calculation methodology that reduces the amount a fund pays the adviser and its affiliates in the future. We also remind advisers of their fiduciary obligations when engaging in transactions with private fund clients and of their antifraud obligations when engaging with private fund investors. To satisfy its fiduciary duty, an adviser must eliminate or at least expose through full and fair disclosure all conflicts of interest which might incline an investment adviser to provide advice that is not disinterested.740 Full and fair disclosure should be sufficiently specific so that a client is able to understand the material fact or conflict of interest and make an informed decision whether to provide consent.741 The disclosure must be clear and detailed enough for the client to make an informed decision to consent to the conflict of interest or reject it.742 When making disclosures to private fund investors, advisers should also be mindful of their antifraud responsibilities per rule 206(4)-8 under the Advisers Act. F. Certain Adviser Misconduct

1. Fees for Unperformed Services
   We are not adopting the proposed prohibition on charging a portfolio investment for monitoring, servicing, consulting, or other fees in respect of any services the investment adviser does not, or does not reasonably expect to, provide to the portfolio investment.743 As discussed below, we believe that it is unnecessary for the final rule to prohibit an adviser from charging fees without providing a corresponding service to its private fund client because such activity already is inconsistent with the adviser’s fiduciary duty. Some commenters supported this prohibition.744 Commenters generally stated that charging fees for unperformed services to the fund is against the public interest and inconsistent with the Advisers Act by placing the interests of the advisers ahead of those of investors.745 A commenter suggested that because of the substantial conflicts of interest faced by advisers charging fees for unperformed services no amount of disclosure should be enough to enable an investor to provide informed consent to these practices.746 Another commenter indicated that an adviser should refund prepaid amounts attributable to unperformed services where an adviser is paid in advance for services that it reasonably expects to perform but ultimately does not provide.747 A commenter expressed concern that advisers have not historically provided enough transparency into certain payments, such as monitoring fees.748

749See SIFMA–AMG Comment Letter I; Invest Europe Comment Letter; see generally Dechert Comment Letter. 750AIC Comment Letter I. 751 Dechert Comment Letter. 752See Proposing Release, supra footnote 3, at 137. 753We proposed to adopt this rule under sections 206 and 211 of the Advisers Act. Proposing Release, supra footnote 3, at 134. See also 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at 1 and n.2– 3 (discussing an adviser’s fiduciary duty under Federal law). 754See 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at 7–8. 755See 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at n.58. 756Section 206(1) and section 206(2) of the Advisers Act. Depending on the facts and circumstances, we believe that this conduct may also violate other Federal securities laws, rules, and regulations, such as rule 206(4)–8, which prohibits advisers to pooled investment vehicles from, among other things, defrauding investors or prospective investors. 757See, e.g., In the Matter of THL Managers V, LLC and THL Managers VI, LLC, Investment Advisers Act Release No. 4952 (June 29, 2018) (settled action); In the Matter of TPG Capital Advisors, LLC, Investment Advisers Act Release No. 4830 (Dec. 21, 2017) (settled action); In the Matter of Apollo Management V, L.P., et al., Investment Advisers Act Release No. 3392 (Aug. 23, 2016) (settled action); In the Matter of Blackstone, supra footnote 26. 758Advisers that are subject to the quarterly statement rule discussed above will also need to disclose these amounts in the quarterly statement provided to investors, to the extent such compensation meets the definition of portfolio￾investment compensation. 759See Jason Baker Tuttle, Sr., Initial Decision Release No. 13 (Jan. 8, 1990); Monitored Assets Corp., Investment Advisers Act Release No. 1195 (Aug. 28, 1989) (settled order); In the Matter of Beverly Hills Wealth Mgmt., LLC, Investment Advisers Act Release No. 4975 (July 20, 2018) (settled order). 760Section 208(d) of the Advisers Act. 761See AIC Comment Letter I (stating that ‘‘[i]f monitoring fees are charged based on the deal size, periodic payments instead of a lump sum payment can provide the portfolio company with liquidity management by spreading the costs over time, even though the services and resulting value creation may not correspond to the same time period of payments.’’). Other commenters opposed this prohibition for several reasons. First, commenters stated that this prohibition may be unnecessary because it is generally market practice for fund documents to prohibit advisers from charging fees for unperformed services or, less commonly, to disclose such practices.749 Second, a commenter indicated that certain advisers may structure fee arrangements based on the value expected to be created, rather than based on a time-worked model.750 Third, a commenter expressed concerns that the ‘‘reasonably expect’’ standard is inappropriate because of the risk that advisers would be
second-guessed afterwards.751 Fees for unperformed services may incentivize an adviser to cause a private fund to exit a portfolio investment earlier than anticipated. We stated in the proposal that such fees may cause an adviser to seek portfolio investments for its own benefit rather than for the private fund’s benefit.752 In addition, we noted that such fees have the potential to distort the economic relationship between the private fund and the adviser because the adviser receives the benefit of such fees, at the expense of the fund, without incurring any costs associated with having to provide any services. We believe that charging a client fees for unperformed services (including indirectly by charging fees to a portfolio investment held by the fund) where the adviser does not, or does not reasonably expect to, provide such services is inconsistent with an adviser’s fiduciary duty.753 Typically by its nature charging a client fees for unperformed services, directly or indirectly, involves a misrepresentation or an omission of a material fact, whether in the private fund’s offering memorandum or otherwise, regarding the amount being charged to the client, directly or indirectly, by the adviser or the adviser’s related person, the nature of the services being provided by the adviser or the adviser’s related person, or both. An adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. This fiduciary duty requires an adviser ‘‘to adopt the principal’s goals, objectives, or ends.’’ 754 This means the adviser must, at all times, serve the best interest of its client and not subordinate its client’s interest to its own.755 In other words, the adviser cannot place its own interests ahead of its client’s interests. Because charging fees without providing or reasonably expecting to provide a corresponding service to its private fund client, in our view, would cause the adviser to place its own interests ahead of its client’s interests, as more fully described in the paragraph below, we have determined that it is unnecessary to prohibit activity that is already indirectly inconsistent with the adviser’s fiduciary duty.756 Thus, we are not adopting the rule as originally proposed. Commenters’ statements that it is generally market practice for fund documents to prohibit advisers from charging fees for unperformed services may suggest that market participants are acting consistent with the adviser’s fiduciary duty and that private fund advisers do not engage in these compensation practices. Previously, we have charged advisers for violating section 206(2) of the Advisers Act when improperly charging monitoring, servicing, consulting, or other fees, which may accelerate upon the occurrence of certain events, to a portfolio investment.757 These fees reduce the value of the fund’s portfolio investment, which, in turn, reduces the amount available for distribution to the fund’s investors. Because the adviser or its
related person receives these fees, it faces a significant conflict of interest and cannot effectively consent on behalf of the fund. The conflict of interest from these fee arrangements can lead an adviser in other ways to act to serve its interest over its client’s interest, in breach of its fiduciary duty. For example, fees for unperformed services may incentivize an adviser to cause a private fund to exit a portfolio investment earlier than anticipated or cause an adviser to seek portfolio investments for its own benefit rather than for the private fund’s benefit. If the adviser reasonably expects to provide services to a portfolio investment, the adviser may attempt to provide full and fair disclosure to all investors or a group representing all investors, such as a fund board or an LPAC.758 But, in some instances, disclosure may be insufficient. We have long brought enforcement actions based on the view that an adviser, as a fiduciary, may not keep prepaid advisory fees for services that it does not, or does not reasonably expect to, provide to a client.759 And an adviser cannot do indirectly what it is not permitted to do directly.760 Thus, where the adviser does not, or does not reasonably expect to, provide services to the portfolio investment, the adviser would be violating its fiduciary duty by using its position to extract payments indirectly from a fund, through a portfolio investment. Under our interpretation, an adviser could receive payment for services actually provided. An adviser could also receive payments in advance for services that it reasonably expects to provide to the portfolio investment in the future, whether such arrangements are based on a time-worked model (i.e., where fees are determined based on a fixed dollar amount and the amount of time worked) or a value-add model (i.e., where the fees are determined based on the value contributed by the adviser’s services).761 For example, if an adviser expects to provide monitoring services to a portfolio investment, the adviser is not prohibited from charging for those services. Rather, an adviser is not permitted to charge for services that it does not reasonably expect to provide. Further, to the extent that the adviser ultimately does not provide the services, the adviser would need to refund any

762Proposed rule 211(h)(2)–1(a)(5).
763See, e.g., Comment Letter of Phil Thompson (Mar. 8, 2022) (‘‘Thompson Comment Letter’’); OPERS Comment Letter; CalPERS Comment Letter; Morningstar Comment Letter. 764See, e.g., NYC Comptroller Comment Letter; OPERS Comment Letter; Thompson Comment Letter; Better Markets Comment Letter. 765See NACUBO Comment Letter. 766See ILPA Letter to Chairman Gensler (Apr. 21, 2021). 767See ILPA Comment Letter I. 768See Invest Europe Comment Letter; MFA Comment Letter I. 769See, e.g., SBAI Comment Letter; Thin Line Capital Comment Letter; ATR Comment Letter; ILPA Comment Letter I; Chamber of Commerce Comment Letter; Comment Letter of Real Estate Roundtable Comment Letter (Apr. 25, 2022); CVCA Comment Letter; AIMA/ACC Comment Letter. 770See, e.g., Chamber of Commerce Comment Letter; MFA Comment Letter I. 771See, e.g., Schulte Comment Letter; Comment Letter of Real Estate Board of New York (Apr. 21,
2022) (‘‘REBNY Comment Letter’’); CVCA Comment
Letter.
772See, e.g., Invest Europe Comment Letter; Schulte Comment Letter; MFA Comment Letter I. 773See, e.g., TIAA Comment Letter; SIFMA–AMG Comment Letter I; ILPA Comment Letter I; AIC Comment Letter I; NYC Bar Comment Letter II. 774See, e.g., Invest Europe Comment Letter; Schulte Comment Letter; SBAI Comment Letter; SIFMA–AMG Comment Letter I; AIC Comment Letter I; MFA Comment Letter I; AIMA/ACC Comment Letter. 775See 2019 IA Fiduciary Duty Interpretation, supra footnote 5; section 206 of the Advisers Act. 776See section 215(a) of the Advisers Act; 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at n.29 (stating that an adviser’s Federal fiduciary obligations are enforceable through section 206 of the Advisers Act and that the SEC would view a waiver of enforcement of section 206 as implicating
section 215(a) of the Advisers Act. Section 215(a)
of the Advisers Act provides that any condition, stipulation or provision binding any person to waive compliance with any provision of the title shall be void.). See section 215(b) of the Advisers Act (stating that any contract made in violation of the Act or rules thereunder is void). 777See 2019 IA Fiduciary Duty Interpretation, supra footnote 558, at section I (reaffirming and clarifying the fiduciary duty that an adviser owes to its clients under section 206 of the Advisers Act). 778See id. and accompanying text. 779See 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at n.87. See also In the Matter of Comprehensive Capital Management, Inc., Investment Advisers Act Release No. 5943 (Jan. 11,
2022) (settled action) (alleging adviser included in
its investment advisory agreement liability disclaimer language (i.e., a hedge clause), which could lead a client to believe incorrectly that the client had waived a non-waivable cause of action against the adviser provided by State or Federal law. Most, if not all, of the adviser’s clients were retail investors.). 780See 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at n.31 (discussing the now￾withdrawn Heitman no-action letter that analyzed an indemnification provision in an institutional client’s investment management agreement). prepaid amounts attributable to unperformed services.
2. Limiting or Eliminating Liability
We proposed to prohibit an adviser to a private fund, directly or indirectly, from seeking reimbursement, indemnification, exculpation, or limitation of its liability by the private fund or its investors for a breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness in providing services to the private fund (‘‘waiver or indemnification prohibition’’).762 As discussed further below, we are not adopting this prohibition, in part, because we believe that it is not necessary to achieve our goal to address this problematic practice. Rather, we discuss below our views on how an adviser’s fiduciary duty applies to its private fund clients and how the antifraud provisions apply to the adviser’s dealings with clients and fund investors. Some commenters supported this prohibition 763 stating that the prohibition is necessary to protect private fund investors, address the increasing erosion of private fund advisers’ fiduciary duties,764 and save investors time and legal fees when negotiating fund documents.765 One commenter that represents several limited partners and historically advocated for increased protections regarding fiduciary terms 766 supported allowing indemnification for an adviser’s simple negligence but maintaining the proposed prohibition on indemnification for simple negligence in scenarios where there is a material breach of the limited partnership agreement and side letters.767 Some commenters suggested narrowing this provision to align with the Commission’s statement in the 2019 IA Fiduciary Duty Interpretation, instead of adopting a broader prohibition that, according to commenters, would implicate State and local law.768 In contrast, most commenters opposed it.769 Some commenters stated that the proposed prohibition would increase costs for investors 770 (including through insurance premiums, higher management fees, and revising existing agreements),771 increase the threat of private litigation,772 and cause advisers to take less risk, which could result in lower investor returns and fewer available strategies.773 Many commenters stated that the proposed prohibition would result in more onerous liability standards for sophisticated investors than for retail investors and that such a difference would result in better protection for institutional investors than for investors in retail products.774 After considering comments, we are not adopting this prohibition, in part, because we believe that it is not needed to address this problematic practice. Rather, we are reaffirming and clarifying our views on how an adviser’s fiduciary duty applies to its private fund clients and how the antifraud provisions apply to the adviser’s dealings with clients and fund investors. We remind advisers of their obligation to act consistently with their Federal fiduciary duty and their legal obligations under the Advisers Act, including the antifraud provisions.775 A waiver of an adviser’s compliance with its Federal antifraud
liability for breach of its fiduciary duty to the private fund or otherwise, or of any other provision of the Advisers Act, or rules thereunder, is invalid under the Act.776 An adviser’s Federal fiduciary duty is to its clients and the obligations that flow from the adviser’s fiduciary duty depend upon what functions the adviser, as agent, has agreed to assume for the client, its principal.777 In addition, full and fair disclosure for an institutional client (including the specificity, level of detail, and explanation of terminology) can differ, in some cases significantly, from full and fair disclosure for a retail client because institutional clients generally have a greater capacity and more resources than retail clients to analyze and understand complex conflicts and their ramifications.778 Regardless of the nature of the client, the disclosure must be clear and detailed enough for the client to make an informed decision to consent to the conflict of interest or reject it. Accordingly, while the fiduciary duty itself applies to all clients of an adviser, the application of the fiduciary duty of an adviser to a retail client can be different from the specific application of the fiduciary duty of an adviser to a registered investment company or private fund.779 Whether contractual clauses that purport to limit an adviser’s liability (also known as ‘‘hedge clauses’’ or ‘‘waiver clauses’’) in an agreement with an institutional client (e.g., private fund) would violate the Advisers Act’s antifraud provisions will be determined based on the particular facts and circumstances.780 To the extent that a hedge clause creates a conflict of interest between an adviser and its client, the adviser must address the conflict as required by its duty of loyalty. After considering comments on the waiver or indemnification prohibition, we provide the following examples, partly based on staff observations, of how this interpretation applies to certain facts and circumstances. We have taken the position that an adviser violates the antifraud provisions of the

781 In the Matter of Comprehensive Capital Management., Investment Advisers Act Release No. 5943 (Jan. 11, 2022) (settled action). Also, we note that our staff has expressed the view that it would violate the antifraud provisions of the Advisers Act for an adviser to enter into a limited partnership agreement stating that the adviser to the private fund or its related person, which is the general partner of the fund, to the maximum extent permitted by applicable law, will not be subject to any duties or standards (including fiduciary or similar duties or standards) existing under the Advisers Act or that the adviser can receive indemnification or exculpation for breaching its Federal fiduciary duty. See, e.g., EXAMS Risk Alert:
Observations from Examinations of Private Fund Advisers (Jan. 27, 2022), at 5 (discussing hedge clauses).), available at https://www.sec.gov/files/ private-fund-risk-alert-pt-2.pdf. See also Comment Letter of the Institutional Limited Partners Association on the Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation (Aug. 6,
2018) at 6, available at https://ilpa.org/wp-content/
uploads/2018/08/ILPA-Comment-Letter-on-SEC￾Proposed-Fiduciary-Duty-Interpretation-August-6- 2018.pdf. 782See, e.g., 2019 IA Fiduciary Duty Interpretation, supra footnote 5, at n.20 (explaining that claims arising under Section 206(1) of the Advisers Act require a showing of scienter but claims under Section 206(2) of the Advisers Act are not scienter based and can be adequately pled with only a showing of negligence). 783See supra section II.E.2.a) (Investigation Expenses) (stating that charging fees and expenses related to a breach of an adviser’s Federal fiduciary duty to a private fund would effectively operate as a waiver of such duty, which would be invalid under the Act). 784See 2019 IA Fiduciary Duty Interpretation, supra footnote 558. 785Proposed rules 211(h)(2)–3(a)(1) and (2). 786Proposed rule 211(h)(2)–3(b). 787See, e.g., Meketa Comment Letter; Albourne Comment Letter; NEBF Comment Letter; ILPA Comment Letter I; American Association for Justice Comment Letter; AFSCME Comment Letter; Segal Marco Comment Letter; Pathway Comment Letter. 788See AFSCME Comment Letter; American Association for Justice Comment Letter. 789See United for Respect Comment Letter I; Healthy Markets Comment Letter I. 790See AIC Comment Letter I; CCMR Comment Letter II; NYC Bar Comment Letter II; IAA Comment Letter II; ICM Comment Letter; Dechert Comment Letter; Comment Letter of Tech Council Ventures (June 14, 2022); Proof Comment Letter; NVCA Comment Letter; Canada Pension Comment Letter. 791See NYC Comptroller Comment Letter; NY State Comptroller Comment Letter; Thin Line Capital Comment Letter; OPERS Comment Letter. 792See Ropes & Gray Comment Letter. 793See NY State Comptroller Comment Letter; OPERS Comment Letter; SIFMA–AMG Comment Letter I. 794Final rule 211(h)(2)–3. Advisers Act, for example, when (i) there is a contract provision waiving any and all of the adviser’s fiduciary duties or (ii) there is a contract provision explicitly or generically waiving the adviser’s Federal fiduciary duty, and in each case there is no language clarifying that the adviser is not waiving its Federal fiduciary duty or that the client retains certain non￾waivable rights (also known as a ‘‘savings clause’’).781 A breach of the Federal fiduciary duty may involve conduct that is intentional, reckless, or negligent.782 Finally, we believe that an adviser may not seek reimbursement, indemnification, or exculpation for breaching its Federal fiduciary duty because such reimbursement, indemnification, or exculpation would operate effectively as a waiver, which would be invalid under the Act.783 We continue to not take a position on the scope or substance of any fiduciary duty that applies to an adviser under applicable State law.784 However, to the extent that a waiver clause is unclear as to whether it applies to the Federal fiduciary duty, State fiduciary duties, or both, we will interpret the clause as waiving the Federal fiduciary duty. G. Preferential Treatment We proposed to
prohibit all private fund advisers, regardless of whether they are registered with the Commission, from: (i) granting an investor in a private fund or in a substantially similar pool of assets the ability to redeem its interest on terms that the adviser reasonably expects to have a material, negative effect on other investors in that private fund or in a substantially similar pool of assets and (ii) providing information regarding portfolio holdings or exposures of a private fund or of a substantially similar pool of assets to any investor if the adviser reasonably expects that providing the information would have a material, negative effect on other investors in that private fund or in a substantially similar pool of assets.785 We also proposed to prohibit these advisers from providing any other preferential treatment to any investor in the private fund unless the adviser delivers certain written disclosures to prospective and current investors regarding all preferential treatment the adviser or its related persons provide to other investors in the same fund.786 The timing of the proposed rule’s delivery requirements differed depending on whether the recipient is a prospective or existing investor in the private fund. For a prospective investor, the proposed rule required the adviser to deliver the notice prior to the investor’s investment. For an existing investor, the notice was required to be delivered annually, to the extent the adviser provided preferential treatment to other investors since the last notice. Some commenters supported the proposed rule.787 Some of these commenters stated that the rule would benefit investors by increasing transparency for all investors about the terms offered to other investors 788 and by ensuring that investors have the requisite information to determine whether they are being harmed by agreements between the adviser and other investors.789 Some commenters opposed the proposed rule.790 Some commenters, including fund investors, expressed concern that it would curtail their ability to enter into side letters because advisers may refuse to offer certain provisions.791 One commenter noted that this could negatively impact smaller investors because they would not be able to ‘‘piggy back’’ off of certain provisions negotiated by larger investors.792 Some commenters also expressed concern that requiring advisers to determine whether a provision has a material, negative effect on other investors may cause advisers to assert regulatory risk as a way to justify the adviser’s rejection of fund terms required by applicable law, rule, or regulation for public pension funds.793 After considering comments, we are adopting the preferential treatment rule in a modified form.794 First, we are adopting the prohibition on certain preferential redemption rights partly as proposed, but with two exceptions: (i) for redemptions required by applicable law, rule, regulation, or order of certain governmental authorities and (ii) if
the adviser has offered the same redemption ability to all existing investors and will continue to offer the same redemption ability to all future investors in the private fund or similar pool of assets. These exceptions are designed to address commenters’ concerns that the rule would curtail their ability to secure important side letter provisions, especially ones required by applicable law. We also believe that the exception for terms offered to all investors will continue to allow smaller investors to benefit from rights negotiated by larger investors, such as different share classes offering different redemption terms. Second, we are adopting the prohibition on preferential information rights about portfolio holdings or exposures, but with an exception where the adviser offers such information to all other existing investors in the private fund and any similar pool of assets at the same time or substantially the same time. In response to commenters, this exception should allow advisers to discuss their portfolio holdings during investor meetings so long as all investors have access to the same information. Third, we are limiting the advance written notice requirement to prospective investors to apply only to

material economic terms. We are still requiring advisers to provide to current investors comprehensive, annual disclosure of all preferential treatment provided by the adviser or its related persons since the last annual notice. However, in a change from the proposal, the final rule requires the adviser to distribute to current investors a written notice of all preferential treatment the adviser or its related persons has provided to other investors in the same private fund (i) for an illiquid fund, as soon as reasonably practicable following the end of the fund’s fundraising period and (ii) for a liquid fund, as soon as reasonably practicable following the investor’s investment in the private fund. Fourth, we are changing the defined term ‘‘substantially similar pool of assets’’ to ‘‘similar pool of assets’’ as used throughout the preferential treatment rule so that the term better reflects the breadth of the definition. Fifth, we are revising the rule text to apply the disclosure obligations in final rule 211(h)(2)–3(b) to all preferential treatment, including any preferential treatment granted in accordance with final rule 211(h)(2)–3(a). We discuss each of these changes and provisions below. Under section 211(h)(2) of the Advisers Act, the Commission shall examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for investment advisers that the Commission deems contrary to the public interest and the protection of investors. Our staff has examined private fund advisers to assess both the investor protection risks presented by their business models in terms of compensation schemes, conflicts of interest, and sales practices and the firms’ compliance with their existing legal obligations. As discussed below, the Commission deems granting preferential treatment a sales practice and conflict of interest under section 211(h)(2), that is contrary to the public interest and the protection of investors and is restricting the practice and conflict by (i) prohibiting investment advisers from providing certain preferential treatment that the adviser reasonably expects to have a material negative effect on other investors and (ii) requiring investment advisers to disclose any other preferential treatment to prospective and current investors. We believe these activities give advisers an incentive to place their interests ahead of their clients’ (and, by extension, their investors’), and can result in private funds and their investors, particularly smaller investors that are not able to negotiate preferential deals with the adviser and its related persons, being misled, deceived, or otherwise harmed. Granting preferential treatment is a conflict of interest because advisers have economic and/or other business incentives to provide preferential terms to one or more investors (e.g., based on the size of the investor’s investment, the ability of the investor to provide
services to the adviser, or the potential to establish or cultivate relationships that have the potential to provide benefits to the adviser). These incentives have the potential to cause the adviser to provide preferential terms to one or more investors that harm other investors or otherwise put the other investors at a disadvantage. For example, an adviser may agree to waive all or part of the confidentiality obligation set forth in the private fund’s governing agreement for one investor. Such a waiver has the potential to harm other investors because proprietary information may be made available to third parties, such as competitors of the private fund, which could negatively affect the fund’s competitive advantage in, for example, seeking and securing investments. There may be cases where preferential information may be reasonably expected to have a material, negative effect on other investors in the fund even when the preferred investor does not have the ability to redeem its interest in the fund, and so whether preferential information violates the final rule requires a facts and circumstances analysis. For example, a private fund may make an investment into an asset with certain trading restrictions, and then later receive notice that the investment is underperforming. If the private fund gives that information to a preferred investor before others, the preferred investor could front-run other investors in taking a (possibly synthetic) short position against the asset, driving its price down, and causing losses to other investors in the fund. An adviser could also operate multiple funds with overlapping investments but offer redemption rights only for one fund containing its preferred investors. An adviser granting preferential information to certain investors in its less liquid fund, which those preferred investors could use to redeem their interests in the more liquid fund, could harm the investors in the less liquid fund even though the preferred investors do not have redemption rights in the less liquid fund. Granting preferential treatment also involves a sales practice under section 211(h)(2) of the Advisers Act. Advisers typically attract preferred, strategic, or large investors to invest in the fund by offering preferential terms as part of negotiating with those investors. The adviser typically enters into a separate agreement, commonly referred to as a ‘‘side letter,’’ with the particular investor in connection with such investor’s admission to a fund. Side letters have the effect of establishing rights, benefits, or privileges under, or altering the terms of, the private fund’s governing agreement, which advisers offer to certain prospective investors to secure their investments in the private fund. Because advisers induce investors to invest in the private fund based on those rights, benefits, or privileges, the practice of granting preferential treatment is a sales practice under
section 211(h)(2).
The practice of granting certain preferential treatment (or, in some cases, granting preferential treatment without sufficient disclosure) is contrary to the public interest and the protection of investors because it can harm, mislead, or deceive other investors. For example, to the extent an investor has negotiated limitations on its indemnification obligations, other investors may be required to bear an increased portion of indemnification costs. As another example, to the extent an investor negotiates to limit its participation in a particular investment, the aggregate returns realized by other investors could be more adversely affected than otherwise by the unfavorable performance of such investment. Moreover, other investors will have a larger position in such investment and, as a result, their holdings will be less diversified. Like the proposed rule, the final rule includes a prohibitions component and a disclosure component that address activity across the spectrum of preferential treatment. We recognize that advisers provide a range of preferential treatment, some of which does not necessarily have a material, negative effect on other fund investors. In this case, we believe that disclosure effectively addresses our concerns related to this practice because transparency will provide investors with helpful information they otherwise may not receive. Investors can use this information to protect their interests, including through negotiations regarding new investments and re￾negotiations regarding existing investments, and make more informed business decisions. For example, an investor could seek to limit its liability or otherwise negotiate an expense cap if it knows that other investors have been granted similar rights by the adviser. In