[Federal Register Volume 88, Number 177 (Thursday, September 14, 2023)]
[Rules and Regulations]
[Pages 63206-63390]
[FR Doc No: 2023-18660]

Vol. 88

Thursday,

No. 177

September 14, 2023

Part II

Securities and Exchange Commission

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17 CFR Part 275

Private Fund Advisers; Documentation of Registered Investment Adviser
Compliance Reviews; Final Rule

Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 /
Rules and Regulations

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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.

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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<PHONE_NUMBER> or
[email protected], 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.
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    \1\ Unless 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.
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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

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\
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    \2\ See infra section I.C.
    \3\ See 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.
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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.
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    \4\ Section 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.
    \5\ See, 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'').
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    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.
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    \6\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, Sec.  403, 404, 124 Stat, 1378, 1571-72 (Jul.
2010), codified at 15 U.S.C. 80b-4(b).
    \7\ Private equity funds, hedge funds, and venture capital funds
are further described below.
    \8\ See Dodd-Frank Act, section 403.
    \9\ See 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.
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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

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\
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    \10\ See Form ADV data (inclusive of assets attributable to
securitized asset funds).
    \11\ Id. (inclusive of securitized asset funds).
    \12\ See 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).
    \13\ See 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.
    \14\ States 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.
    \15\ See, 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).
    \16\ See National Data, Public Plans Data, available at https://
publicplansdata.org/quick-facts/national/
#:~:text;=Collectively%2C%20these%20plans%20have%3A,members%20and%201
1.7%20million%20retirees.
    \17\ See infra section VI.C.1.
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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.
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    \18\ Including the private fund operating agreement to which the
adviser or its affiliate and the private fund investors are
typically both parties.
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    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).
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    \19\ Compensation 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.
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    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\
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    \20\ See 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).
    \21\ See id.
    \22\ See 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.

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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.
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    \23\ Form ADV has also increased transparency to investors.
    \24\ See 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.
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    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.
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    \25\ To 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'').
    \26\ See, 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.
    \28\ See 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.'').
    \29\ See In re NB Alternatives Advisers LLC, Investment Advisers
Act Release No. 5079 (Dec. 17, 2018) (settled action) (``In the
Matter of NB Alternatives Advisers'').
    \30\ See, 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'').
    \31\ See In the Matter of Mitchell J. Friedman, Investment
Advisers Act Release No. 5338 (Sept. 4, 2019) (settled action).
    \32\ See In the Matter of Diastole Wealth Management, Inc.,
Investment Advisers Act Release No. 5855 (Sept. 10, 2021) (settled
action).
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    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.
---------------------------------------------------------------------------

    \33\ See Proposing Release, supra footnote 3.
---------------------------------------------------------------------------

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'

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\
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    \34\ See, 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).
    \35\ See infra section II.B.
    \36\ See, 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'').
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    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\
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    \37\ See, 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).
    \38\ See infra sections VI.B, VI.C.1.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \39\ Emerging 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \40\ A 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.
---------------------------------------------------------------------------

    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

heightens the need for specific rulemaking to address these concerns.
---------------------------------------------------------------------------

    \41\ See infra section VI.B.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \42\ See Proposing Release, supra footnote 3.
    \43\ See, 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'').
    \44\ See, 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.
    \45\ See, 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'').
    \46\ See, 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.
    \47\ See Better Markets Comment Letter.
    \48\ See Comment Letter of District of Columbia Retirement Board
(Apr. 22, 2022) (``DC Retirement Board Comment Letter'').
    \49\ See, 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'').
    \50\ See, 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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \51\ See infra section II.B for a discussion of the comments on
this aspect of the rule.
    \52\ The 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).
---------------------------------------------------------------------------

    [cir] Advisers to illiquid funds are required to calculate
performance information with and without the impact of subscription
facilities, rather than only without;
    [cir] We have refined the definition of illiquid fund to be based
primarily on withdrawal and redemption capability;
    [cir] Instead of requiring advisers to present liquid fund
performance since inception, we are only requiring a 10-year lookback;
and
    [cir] 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.
---------------------------------------------------------------------------

    \53\ See Proposing Release, supra footnote 3, at section I.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \54\ See infra section II.C for a discussion of the comments on
this part of the rule.
    \55\ See infra section II.C.
---------------------------------------------------------------------------

    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

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.
---------------------------------------------------------------------------

    \56\ See infra section II.C.8 for a discussion of the comments
on this part of the rule.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \57\ See infra sections II.E and II.F for a discussion of the
comments on this part of the rule.
    \58\ As 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.
---------------------------------------------------------------------------

    [cir] 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;
    [cir] 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;
    [cir] 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;
    [cir] 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
    [cir] 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.
---------------------------------------------------------------------------

    \59\ See infra section II.G for a discussion of the comments on
this part of the rule.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \60\ See, 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \61\ See infra section III for a discussion of the comments on
this part of the rule.
---------------------------------------------------------------------------

    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\

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.
---------------------------------------------------------------------------

    \62\ See 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.
    \63\ The 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \64\ Under 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.
    \65\ See Advisers Act, sections 206 and 211(h).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 80b-6(4).
    \67\ S. 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.'').
    \68\ See the discussion of the Dodd-Frank Act above in the
introductory portion of section I.
    \69\ Dodd-Frank Act, section 913(g).
    \70\ See 2019 IA Fiduciary Duty Interpretation, supra footnote
5, at 23.
    \71\ See id., at 26.
---------------------------------------------------------------------------

    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

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\
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    \72\ See, e.g., Consumer Federation of America Comment Letter;
Better Markets Comment Letter.
    \73\ See Better Markets Comment Letter.
    \74\ See Consumer Federation of America Comment Letter.
    \75\ See, 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'').
    \76\ See, 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).
    \77\ Section 913(g)(2) of the Dodd-Frank Act added section
211(h) to the Advisers Act.
    \78\ See, 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'').
    \79\ See, 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.
    \80\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \81\ Dodd-Frank Act, Section 913(a).
    \82\ Dodd-Frank Act, Section 913(g)(2).
    \83\ Id.
    \84\ Id.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \85\ See Stuart Kaswell Comment Letter II.
    \86\ See NYC Bar Comment Letter II.
    \87\ For 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \88\ See, 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'').
    \89\ See 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.
    \90\ See 15 U.S.C. 80a-22 and 17 CFR 270.22e-4 under the
Investment Company Act.
    \91\ See 15 U.S.C. 80a-12.
    \92\ See 15 U.S.C. 80a-13.
    \93\ See 15 U.S.C. 80a-10 (independence of directors) and 15
U.S.C. 80a-16 (election of directors).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \94\ See Stuart Kaswell Comment Letter.
    \95\ See, 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).
    \96\ For 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.'')
---------------------------------------------------------------------------

    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

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.
---------------------------------------------------------------------------

    \97\ See, e.g., Comment Letter of American Investment Council
(June 13, 2022) (``AIC Comment Letter II''); SIFMA-AMG Comment
Letter I.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \98\ See, e.g., Citadel Comment Letter (discussing
indemnification clauses); NYC Bar Comment Letter II.
    \99\ The 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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \100\ See, e.g., Comment Letter of American Investment Council
(Apr. 25, 2022) (``AIC Comment Letter I''); Citadel Comment Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \101\ See, 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.
    \102\ See AIC Comment Letter I.
    \103\ See CCMR Comment Letter II.
    \104\ See, e.g., AIC Comment Letter I; Citadel Comment Letter.
    \105\ See Haynes & Boone Comment Letter.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \106\ Applicability 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).
    \107\ See United for Respect Comment Letter I.
    \108\ See Haynes & Boone Comment Letter.
    \109\ See Release 1092, supra footnote 106, at 10.
    \110\ CFS 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'').
    \111\ See Release 1092, supra footnote 106, at 10.
    \112\ One 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \113\ See, e.g., MFA Comment Letter I; AIC Comment Letter I;
Goldstein v. SEC, 451 F.3d 873 (DC Cir. 2006) (``Goldstein v.
SEC'').
    \114\ See 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).
    \115\ Further, 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).
    \116\ See rule 206(4)-8 under the Advisers Act.
    \117\ See supra section I.A.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \118\ See, e.g., Stuart Kaswell Comment Letter; AIC Comment
Letter II.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \119\ See, 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.
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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

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\
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    \120\ The 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.
    \121\ Compare 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).
---------------------------------------------------------------------------

    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\
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    \122\ See, 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).
    \123\ An 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.
    \124\ Comment Letter of the North American Securities
Administrators Association, Inc. (Apr. 25, 2022) (``NASAA Comment
Letter'').
    \125\ See, 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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \126\ See, 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.
    \127\ See, e.g., Investment Adviser Marketing, Investment
Advisers Act Release No. 5653 (Dec. 22, 2021), at n.200 (``Marketing
Release'').
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    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.
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    \128\ See Proposing Release, supra footnote 3, at section II.D.
    \129\ See Proposing Release, supra footnote 3, at section II.D.
    \130\ See, 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.
    \131\ See, e.g., Healthy Markets Comment Letter I; Consumer
Federation of America Comment Letter.
---------------------------------------------------------------------------

    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

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\
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    \132\ AIMA/ACC Comment Letter. See also SIFMA-AMG Comment Letter
I.
    \133\ AIMA/ACC Comment Letter.
    \134\ See, e.g., BVCA Comment Letter; Invest Europe Comment
Letter.
    \135\ See 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).
    \136\ Section 402 of the Dodd-Frank Act; section 202(a)(30) of
the Advisers Act.
    \137\ BVCA Comment Letter.
    \138\ BVCA Comment Letter, See Hedge Fund Adviser Release, supra
footnote 126, at section II.D.4.c.
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    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\
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    \139\ See 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.
    \140\ See 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).
---------------------------------------------------------------------------

    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\
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    \141\ See, 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.
    \143\ Moreover, 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.
    \144\ Rule 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.'').
    \145\ See, 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \146\ See, 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