further estimate that these private funds would, on average, each have
a total of 67 investors.\405\ As a result, an average private fund
adviser would have, on average, a total of 603 investors across all
private funds it advises. As noted above, because the information
collected pursuant to proposed rule 211(h)(1)-2 requires disclosures to
private fund investors, these disclosures would not be kept
confidential.
---------------------------------------------------------------------------

    \403\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).
    \404\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).
    \405\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).A.,
#13.
---------------------------------------------------------------------------

    We have made certain estimates of this data solely for the purpose
of this PRA analysis. The table below summarizes the initial and
ongoing annual burden estimates associated with the proposed account
statement rule.

                                     Table 1--Rule 211(h)(1)-2 PRA Estimates
----------------------------------------------------------------------------------------------------------------
                               Internal
                                initial  Internal annual                         Internal time   Annual external
                                burden     burden hours       Wage rate \1\           cost         cost burden
                                 hours
----------------------------------------------------------------------------------------------------------------
                                               PROPOSED ESTIMATES
----------------------------------------------------------------------------------------------------------------
Preparation of account                9  11 hours \2\...  $382 (blended rate    $4,202.........  $4,030.\3\
 statements.                                               for compliance
                                                           attorney ($373),
                                                           assistant general
                                                           counsel ($476), and
                                                           financial reporting
                                                           manager ($297)).
Distribution of account             1.5  3.5 hours \4\..  $64 (rate for         $224...........  $930.\5\
 statements to existing                                    general clerk).
 investors.

Total new annual burden per    ........  14.5 hours.....  ....................  $4,426.........  $4,960.
 private fund.
Avg. number of private funds   ........  9 private funds  ....................  9 private funds  9 private
 per adviser.                                                                                funds.
Number of PF advisers........  ........  5,037 advisers.  ....................  5,037 advisers.  2,518.\6\
                                        ------------------------------------------------------------------------
    Total new annual burden..  ........  657,328.5 hours  ....................  $200,643,858...  $112,403,250.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ The Commission's estimates of the relevant wage rates are based on salary information for the securities
  industry compiled by the Securities Industry and Financial Markets Association's Office Salaries in the
  Securities Industry 2013. The estimated figures are modified by firm size, employee benefits, overhead, and
  adjusted to account for the effects of inflation. See Securities Industry and Financial Markets Association,
  Report on Management & Professional Earnings in the Securities Industry 2013 (``SIFMA Report'').
\2\ This includes the internal initial burden estimate annualized over a three-year period, plus 8 hours of
  ongoing annual burden hours and takes into account that there would be four statements prepared each year. The
  estimate of 11 hours is based on the following calculation: ((9 initial hours/3 years) + 8 hours of additional
  ongoing burden hours) = 11 hours.
\3\ This estimated burden is based on the sum of the estimated wage rate of $496/hour, for 5 hours, ($2,480) for
  outside legal services and the estimated wage rate of $310/hour, for 5 hours, ($1,550) for outside accountant
  assistance, and it assumes that there would be four statements prepared each year. The Commission's estimates
  of the relevant wage rates for external time costs, such as outside legal services, takes into account staff
  experience, a variety of sources including general information websites, and adjustments for inflation.
\4\ This includes the internal initial burden estimate annualized over a three-year period, plus 3 hours of
  ongoing annual burden hours that takes into account that there would be four statements prepared each year.
  The estimate of 3.5 hours is based on the following calculation: ((1.5 initial hours/3 years) + 3 hours of
  additional ongoing burden hours) = 3.5 hours.
\5\ This estimated burden is based on the estimated wage rate of $310/hour, for 3 hours, for outside accounting
  services, and it assumes that there would be four statements distributed each year. See supra footnote 409
  (regarding wage rates with respect to external cost estimates).
\6\ We estimate that 50% of advisers will use outside legal and accounting services for these collections of
  information. This estimate takes into account that advisers may elect to use outside these services (along
  with in-house counsel), based on factors such as adviser budget and the adviser's standard practices for using
  such outside services, as well as personnel availability and expertise.

C. Mandatory Private Fund Adviser Audits

    Proposed rule 206(4)-10 would require investment advisers that are
registered or required to be registered to cause each private fund they
advise, directly or indirectly, to undergo a financial statement audit
at least annually and upon liquidation that complies with the proposed
rule, unless the fund otherwise undergoes such an audit.\406\ We
believe that proposed new rule 206(4)-10 would protect the fund and its
investors against the misappropriation of fund assets and that an audit
performed by an independent public accountant would provide an
important check on the adviser's valuation of private fund assets,
which often serve as the basis for the calculation of the adviser's
fees. The collection of information is necessary to provide private
fund investors with information about their private fund investments
and the Commission uses this information in the context of its
examination and oversight program.
---------------------------------------------------------------------------

    \406\ See proposed rule 206(4)-10.
---------------------------------------------------------------------------

    Each requirement to disclose information, offer to provide
information, or adopt policies and procedures constitutes a
``collection of information'' requirement under the PRA. This
collection of information is found at 17 CFR 275.206(4)-10 and is
mandatory to the extent the adviser provides investment advice to a
private fund. The respondents to these collections of information
requirements would be investment advisers that are registered or
required to be registered with the Commission that advise one or more
private funds. All responses required by the proposed audit rule would
be mandatory. One response type (the audited financial statements)
would be distributed only to investors in the private fund and would
not be confidential, and the other (notifications to the Commission)
would be kept confidential subject to the provisions of applicable law.
    Based on IARD data, as of November 30, 2021, there were 14,832
investment advisers registered with the Commission. According to this
data, 5,037 registered advisers provide advice to private funds.\407\
We estimate that these advisers would, on average, each provide advice
to 9 private funds.\408\ We further estimate that these private funds
would, on average, each have a total of 67 investors.\409\ As a result,
an average private fund adviser would have, on average, a total of 603
investors across all private funds it advises.
---------------------------------------------------------------------------

    \407\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).
    \408\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).
    \409\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).A.,
#13.
---------------------------------------------------------------------------

    We have made certain estimates of this data, as discussed below,
solely for the purpose of this PRA analysis. The table below summarizes
the initial and ongoing annual burden estimates associated with the
proposed rule's reporting requirement.

                                      Table 2--Rule 206(4)-10 PRA Estimates
----------------------------------------------------------------------------------------------------------------
                               Internal
                                initial  Internal annual                         Internal time   Annual external
                                burden     burden hours       Wage rate\1\            cost         cost burden
                                 hours
----------------------------------------------------------------------------------------------------------------
                                               PROPOSED ESTIMATES
----------------------------------------------------------------------------------------------------------------
Distribution of audited               0  1.12 hours \3\.  $153.33 (blended      $171.73........  $60,000.\4\
 financial statements \2\.                                 rate for
                                                           intermediate
                                                           accountant ($175),
                                                           general accounting
                                                           supervisor ($221),
                                                           and general clerk
                                                           ($64)).
Preparation of the written     \6\ 1.25  0.92 hours \7\.  $476 (rate for        $437.92........  $0.
 agreement \5\.                                            assistant general
                                                           counsel).
Total new annual burden per    ........  2.04 hours.....  ....................  $609.65........  $60,000.\8\
 private fund.
Avg. number of private funds   ........  9 private funds  ....................  9 private funds  9 private
 per adviser.                                                                                funds.
Number of advisers...........  ........  5,037 advisers.  ....................  5,037 advisers.  5,037 advisers.
                              ----------------------------------------------------------------------------------
    Total new annual burden..  ........  92,479.32 hours  ....................  $27,637,263.40.  $2,719,980,000.
----------------------------------------------------------------------------------------------------------------
Notes:
1. See SIFMA Report supra Note 1 to Table 1 Rule 211(h)(1)-2 PRA Estimates.
2. The proposed audit provision would require an adviser to obtain an audit at least annually and upon an
  entity's liquidation. To the extent not prohibited, we anticipate that, in some cases, the fund will bear the
  audit expense, in other cases the adviser will bear it, and in other instances both the adviser and fund will
  share the expense. The liquidation audit would serve as the annual audit for the fiscal year in which it
  occurs. See proposed rule 206(4)-10.
3. This estimate takes into account that the financial statements must be distributed once annually under the
  proposed audit rule and that a liquidation audit would replace a final audit in a year. Based on our
  experience with similar requirements under the custody rule, we estimate the hour burden imposed on the
  adviser relating to the distribution of the audited financial statements with respect to the investors in each
  fund should be minimal, approximately one minute per investor. See Custody of Funds or Securities of Clients
  by Investment Advisers, Investment Advisers Act Release No. 2968 (Dec. 30, 2009) [75 FR 1455 (Jan. 11, 2010)]
  (``Custody Rule 2009 Adopting Release''), at 59-60. We estimate that the average private fund has 67
  investors.
4. Based on our experience, we estimate that the party (or parties) that bears the audit expense would pay an
  average audit fee of $60,000 per fund. We estimate that individual fund audit fees would tend to vary over an
  estimated range from $15,000 to $300,000, and that some fund audit fees would be higher or lower than this
  range. We understand that the price of the audit has many variables, such as whether it is a liquid fund or
  illiquid fund, the number of its holdings, availability of a PCAOB-registered and -inspected auditor,
  economies of scale, and the location and size of the auditor.
5. The proposed rule would require the adviser or the private fund to enter into an agreement with the
  independent public accountant. The agreement would require the independent public accountant that completes
  the audit to notify the Commission by electronic means directed to the Division of Examinations promptly upon
  certain events. See proposed rule 206(4)-10(e).
6. For purposes of this PRA we assume that, regardless of whether the adviser or the fund enters into the
  written agreement, the accountant would incur the hour burden of preparing the agreement. We also assume that,
  if the fund was party to the agreement, the fund would delegate the task of reviewing the agreement to the
  adviser. This estimate also assumes that the adviser would enter into a separate agreement for each private
  fund, even if multiple funds use the same auditor. We believe that written agreements are commonplace and
  reflect industry practice when a person retains the services of a professional such as an accountant, and they
  are typically prepared by the accountant in advance. We therefore estimate that each adviser would spend 1.25
  hours to add the required provisions to, or confirm that the required provisions are in, the written
  agreement.
7. This includes the internal initial burden estimate annualized over a three-year period, plus 0.5 hours of
  ongoing annual burden hours, and it assumes annual reassessment and execution: ((1.25 initial hours/3 years) +
  0.5 hours of additional ongoing burden hours) = 0.92 hours.
8. We assume the same frequency of these cost estimates as for the internal annual burden hours estimate.

D. Adviser-Led Secondaries

    Proposed rule 211(h)(2)-2 would prohibit an adviser registered or
required to be registered from completing an adviser-led secondary
transaction with respect to any private fund, unless the adviser, prior
to the closing of the transaction, distributes to investors in the
private fund a fairness opinion from an independent opinion provider
and a summary of any material business relationships the adviser or any
of its related persons has, or has had within the past two years, with
the independent opinion provider.\410\ We believe that this proposed
requirement would provide an important check against an adviser's
conflicts of interest in structuring and leading a transaction from
which it may stand to profit at the expense of private fund investors
and would help ensure that private fund investors are offered a fair
price for their private fund interests. Specifically, this requirement
is designed to help ensure that investors receive the benefit of an
independent price assessment, which we believe will improve their
decision-making ability and their overall confidence in the
transaction. The collection of information is necessary to provide
investors with information about securities transactions in which they
may engage.
---------------------------------------------------------------------------

    \410\ See proposed rule 211(h)(2)-2.
---------------------------------------------------------------------------

    Each requirement to disclose information, offer to provide
information, or adopt policies and procedures constitutes a
``collection of information'' requirement under the PRA. This
collection of information is found at 17 CFR 275.211(h)(2)-2 and is
mandatory. The respondents to these collections of information
requirements would be investment advisers that are registered or
required to be registered with the Commission that advise one or more
private funds. Based on IARD data, as of November 30, 2021, there were
14,832 investment advisers registered with the Commission. According to
this data, 5,037 registered advisers provide advice to private

funds.\411\ Of these 5,037 advisers, we estimate that 10%, or
approximately 504 advisers, conduct an adviser-led secondary
transaction each year. Of these advisers, we further estimate that each
conducts one adviser-led secondary transaction each year. As a result,
an adviser would have obligations under the proposed rule with regard
to 67 investors.\412\ As noted above, because the information collected
pursuant to proposed rule 211(h)(2)-2 requires disclosures to private
fund investors, these disclosures would not be kept confidential.
---------------------------------------------------------------------------

    \411\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).
    \412\ See supra section V.B.
---------------------------------------------------------------------------

    We have made certain estimates of this data solely for the purpose
of this PRA analysis. The table below summarizes the annual burden
estimates associated with the proposed rule's requirements.

                                                         Table 3--Rule 211(h)(2)-2 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Internal
                                    initial burden   Internal annual burden        Wage rate \1\           Internal time cost      Annual external cost
                                         hours               hours                                                                        burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   PROPOSED ESTIMATES
--------------------------------------------------------------------------------------------------------------------------------------------------------
Preparation/Procurement of                       0  4 hours \2\............  $376.66 (blended rate for  $1,506.64..............  $40,000.\3\
 fairness opinion.                                                            compliance attorney
                                                                              ($373), assistant
                                                                              general counsel ($476),
                                                                              and senior business
                                                                              analyst ($281)).
Preparation of material business                 0  2 hours................  $424.50 (blended rate for  $849...................  $496.\4\
 relationship summary.                                                        compliance attorney
                                                                              ($373) and assistant
                                                                              general counsel ($476)).
Distribution of fairness opinion                 0  1 hour.................  $64 (rate for general      $64....................  $0.
 and material business                                                        clerk).
 relationship summary.
                                   ---------------------------------------------------------------------------------------------------------------------
Total new annual burden per         ..............  7 hours................  .........................  $2,419.64..............  $40,849.
 private fund.
Number of advisers................  ..............  504 advisers \5\.......  .........................  504 advisers...........  504 advisers.
                                   ---------------------------------------------------------------------------------------------------------------------
    Total new annual burden.......  ..............  3,528 hours............  .........................  $1,219,498.56..........  $20,587,896.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ See SIFMA Report supra Note 1 to Table 1 Rule 211(h)(1)-2 PRA Estimates.
\2\ Includes the time an adviser would spend gathering materials to provide to the independent opinion provider so that the latter can prepare the
  fairness opinion.
\3\ This estimated burden is based on our understanding of the general cost of a fairness opinion in the current market. The cost will vary based on,
  among other things, the complexity, terms, and size of the adviser-led secondary transaction, as well as the nature of the assets of the fund.
\4\ This estimated burden is based on the estimated wage rate of $496/hour, for 1 hours, for outside legal services at the same frequency as the
  internal burden hours estimate. The Commission's estimates of the relevant wage rates for external time costs, such as outside legal services, takes
  into account staff experience, a variety of sources including general information websites, and adjustments for inflation.
\5\ We estimate that 10% of all registered private fund advisers conduct in an adviser-led secondary transaction each year.

E. Disclosure of Preferential Treatment

    Proposed rule 211(h)(2)-3 would prohibit all private fund advisers
from providing preferential terms to certain investors regarding
redemption or information about portfolio holdings or exposures.\413\
The proposed rule would also prohibit these advisers from providing any
other preferential treatment to any investor in the private fund unless
the adviser provides written disclosures to prospective and current
investors in a private fund regarding all preferential treatment the
adviser or its related persons are providing to other investors in the
same fund. For prospective investors, the proposed new rule would
require advisers to provide the written notice prior to the investor's
investment in the fund.\414\ For current investors, the proposed new
rule would require advisers to distribute an annual update regarding
any preferential treatment provided since the last notice, if any.\415\
---------------------------------------------------------------------------

    \413\ See proposed rule 211(h)(2)-3(b).
    \414\ See proposed rule 211(h)(2)-3(b)(1).
    \415\ See proposed rule 211(h)(2)-3(b)(2).
---------------------------------------------------------------------------

    The proposed new rule is designed to protect investors and serve
the public interest by requiring disclosure of preferential treatment
afforded to certain investors. The proposed new rule would increase
transparency in order to better inform investors regarding the breadth
of preferential terms, the potential for those terms to affect their
investment in the private fund, and the potential costs (including
compliance costs) associated with these preferential terms. Also, this
disclosure would help investors shape the terms of their relationship
with the adviser of the private fund. The collection of information is
necessary to provide private fund investors with information about
their private fund investments.
    Each requirement to disclose information, offer to provide
information, or adopt policies and procedures constitutes a
``collection of information'' requirement under the PRA. This
collection of information is found at 17 CFR 275.211(h)(2)-3 and is
mandatory. The respondents to these collections of information
requirements would be all investment advisers that advise one or more
private funds. Based on IARD data, as of November 30, 2021, there were
12,500 investment advisers that provide advice to private funds.\416\
We estimate that these advisers would, on average, each provide advice
to 7 private funds. We further estimate that these private funds would,
on average, each have a total of 63 investors. As a result, an average
private fund adviser would have a total of 441 investors across all
private funds it advises. As noted above, because the information
collected pursuant to proposed rule 211(h)(2)-3 requires disclosures to
private fund investors and prospective investors, these disclosures
would not be kept confidential.
---------------------------------------------------------------------------

    \416\ The following types of private fund advisers, among
others, would be subject to the proposed rule: Unregistered advisers
(i.e., advisers that are not SEC registered but have a registration
obligation, and those that may be prohibited from registering with
us), foreign private advisers, and advisers that rely on the
intrastate exemption from SEC registration and/or the de minimis
exemption from SEC registration. However, we are unable to estimate
the number of advisers in each of these categories because these
advisers do not file reports or other information with the SEC and
we are unable to find reliable, public information. As a result, the
above estimate is based on information from SEC-registered advisers
to private funds, exempt reporting advisers (at the state and
Federal levels), and state-registered advisers to private funds.
These figures are approximate.
---------------------------------------------------------------------------

    We have made certain estimates of this data solely for the purpose
of this PRA analysis. The table below summarizes the initial and
ongoing annual burden estimates associated with

the proposed rule's policies and procedures and annual review
requirements.

                                                         Table 4--Rule 211(h)(2)-3 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Internal
                                    initial burden   Internal annual burden        Wage rate \1\           Internal time cost      Annual external cost
                                         hours               hours                                                                        burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   PROPOSED ESTIMATES
--------------------------------------------------------------------------------------------------------------------------------------------------------
Preparation of written notice.....               4  3.3 hours \2\..........  $424.50 (blended rate for  $1,400.85..............  $496.\3\
                                                                              compliance attorney
                                                                              ($373) and assistant
                                                                              general counsel ($476)).
--------------------------------------------------------------------------------------------------------------------------------------------------------
Provision/distribution of written             0.25  1.13 hours \4\.........  $64 (rate for general      $72.32.................
 notice.                                                                      clerk).
                                   ---------------------------------------------------------------------------------------------------------------------
    Total new annual burden per     ..............  4.43 hours.............  .........................  $1,473.17..............  $496.
     private fund.
Avg. number of private funds per    ..............  7 private funds........  .........................  7 private funds........  7 private funds.
 adviser.
Number of advisers................  ..............  12,500 advisers........  .........................  12,500 advisers........  9,375 advisers.\5\
                                   ---------------------------------------------------------------------------------------------------------------------
    Total new annual burden.......  ..............  387,625 hours..........  .........................  $128,902,375...........  $32,550,000.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ See SIFMA Report, supra Note 1 to Table 1 Rule 211(h)(1)-2 PRA Estimates.
\2\ This includes the internal initial burden estimate annualized over a three-year period, plus 2 hours of ongoing annual burden hours and assumes
  notices would be issued once annually to existing investors and once quarterly for prospective investors. The estimate of 3.3 hours is based on the
  following calculation: ((4 initial hours/3 years) + 2 hours of additional ongoing burden hours) = 3.3 hours. The burden hours associated with
  reviewing preferential treatment provided to other investors in the same fund and updating the written notice takes into account that (i) most closed-
  end funds would only raise new capital for a finite period of time and thus the burden hours would likely decrease after the fundraising period
  terminates for such funds since they would not continue to seek new investors and would not continue to agree to new preferential treatment for new
  investors and (ii) most open-end private funds continuously raise capital and thus the burden hours would likely remain the same year over year since
  they would continue to seek new investors and would continue to agree to preferential treatment for new investors.
\3\ This estimated burden is based on the estimated wage rate of $496/hour, for 1 hours, for outside legal services at the same frequency as the
  internal burden hours estimate. The Commission's estimates of the relevant wage rates for external time costs, such as outside legal services, takes
  into account staff experience, a variety of sources including general information websites, and adjustments for inflation.
\4\ This includes the internal initial burden estimate annualized over a three-year period, plus 1.05 hours of ongoing annual burden hours. The estimate
  of 1.13 hours is based on the following calculation: ((0.25 initial hours/3 years) + 1.05 hours of additional ongoing burden hours) = 1.13 hours.
\5\ We estimate that 75% of advisers will use outside legal services for these collections of information. This estimate takes into account that
  advisers may elect to use outside legal services (along with in-house counsel), based on factors such as adviser budget and the adviser's standard
  practices for using outside legal services, as well as personnel availability and expertise.

F. Written Documentation of Adviser's Annual Review of Compliance
Program

    The proposed amendment to rule 206(4)-7 would require investment
advisers that are registered or required to be registered to document
the annual review of their compliance policies and procedures in
writing.\417\ We believe that such a requirement would focus renewed
attention on the importance of the annual compliance review process and
would help ensure that advisers maintain records regarding their annual
compliance review that will allow our staff to determine whether an
adviser has complied with the compliance rule.
---------------------------------------------------------------------------

    \417\ See proposed rule 206(4)-7(b).
---------------------------------------------------------------------------

    This collection of information is found at 17 CFR 275.206(4)-7 and
is mandatory. The Commission staff uses the collection of information
in its examination and oversight program. As noted above, responses
provided to the Commission in the context of its examination and
oversight program concerning the proposed amendments to rule 206(4)-7
would be kept confidential subject to the provisions of applicable law.
    Based on IARD data, as of November 30, 2021, there were 14,832
investment advisers registered with the Commission. In our most recent
PRA submission for rule 206(4)-7, we estimated a total hour burden of
1,152,663 hours, and the total annual external cost burden is $0.
    The table below summarizes the initial and ongoing annual burden
estimates associated with the proposed amendments to rule 204-2.

                                                          Table 5--Rule 206(4)-7 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Internal annual burden
                                                 hours                    Wage rate \1\              Internal time cost      Annual external cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   PROPOSED ESTIMATES
--------------------------------------------------------------------------------------------------------------------------------------------------------
Written documentation of annual       3 hours \2\................  $424.50 (blended rate for    $1,273.50..................  $551.\3\
 review.                                                            compliance attorney ($373)
                                                                    and assistant general
                                                                    counsel ($476)).
Number of advisers..................  14,832 advisers............  ...........................  14,832 advisers............  7,416 advisers.\4\
                                     -------------------------------------------------------------------------------------------------------------------
    Total new annual burden.........  44,496 hours...............  ...........................  $18,888,552................  $4,086,216.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ See SIFMA Report, supra Note 1 to Table 1 Rule 211(h)(1)-2 PRA Estimates.
\2\ We estimate that these proposed amendments would increase each registered investment adviser's average annual collection burden under rule 206(4)-7
  by 3 hours.
\3\ This estimated burden is based on the sum of the estimated wage rate of $496/hour, for 0.5 hours, ($248) for outside legal services and the
  estimated wage rate of $310/hour, for 0.5 hours, ($155) for outside accountant assistance.
\4\ We estimate that 50% of advisers will use outside legal services for these collections of information. This estimate takes into account that
  advisers may elect to use outside legal services (along with in-house counsel), based on factors such as adviser budget and the adviser's standard
  practices for using outside legal services, as well as personnel availability and expertise.

G. Recordkeeping

    The proposed amendments to rule 204-2 would require advisers to
private funds to retain books and records related to the proposed
quarterly statement rule, the proposed audit rule, the proposed
adviser-led secondaries rule, and the proposed preferential treatment
rule.\418\ These proposed amendments would help facilitate the
Commission's inspection and enforcement capabilities.
---------------------------------------------------------------------------

    \418\ See proposed rule 204-2.
---------------------------------------------------------------------------

    Specifically, the proposed books and records amendments related to
the quarterly statement rule would require advisers to (i) retain a
copy of any quarterly statement distributed to fund investors as well
as a record of each addressee, the date(s) the statement was sent,
address(es), and delivery method(s); (ii) retain all records evidencing
the calculation method for all expenses, payments, allocations,
rebates, offsets, waivers, and performance listed on any statement
delivered pursuant to the proposed quarterly statement rule; and (iii)
make and keep books and records substantiating the adviser's
determination that the private fund it manages is a liquid fund or an
illiquid fund pursuant to the proposed quarterly statement rule.\419\
---------------------------------------------------------------------------

    \419\ See proposed rule 204-2(a)(20)(i) and (ii) and (a)(22).
---------------------------------------------------------------------------

    The proposed books and records amendments related to the proposed
audit rule would require advisers to keep a copy of any audited
financial statements along with a record of each addressee and the
corresponding date(s) sent, address(es), and delivery method(s) for
each such addressee.\420\ Additionally, the proposed rule would require
the adviser to keep a record documenting steps it took to cause a
private fund client with which it is not in a control relationship to
undergo a financial statement audit that would comply with the
rule.\421\
---------------------------------------------------------------------------

    \420\ See proposed rule 204-2(a)(21)(i).
    \421\ See proposed rule 204-2(a)(21)(ii).
---------------------------------------------------------------------------

    The proposed books and records amendments related to the proposed
adviser-led secondaries rule would require advisers to retain a copy of
any fairness opinion and summary of material business relationships
distributed pursuant to the proposed rule along with a record of each
addressee and the corresponding date(s) sent, address(es), and delivery
method(s) for each such addressee.\422\
---------------------------------------------------------------------------

    \422\ See proposed rule 204-2(a)(23).
---------------------------------------------------------------------------

    The proposed books and records amendments related to the proposed
preferential treatment rule would require advisers to retain copies of
all written notices sent to current and prospective investors in a
private fund pursuant to rule 211(h)(2)-3.\423\ In addition, advisers
would be required to retain copies of a record of each addressee and
the corresponding dates sent, addresses, and delivery method for each
addressee.\424\
---------------------------------------------------------------------------

    \423\ See proposed rule 204-2(a)(7)(v).
    \424\ Id.
---------------------------------------------------------------------------

    The respondents to these collections of information requirements
would be investment advisers that are registered or required to be
registered with the Commission that advise one or more private funds.
Based on IARD data, as of November 30, 2021, there were 14,832
investment advisers registered with the Commission. According to this
data, 5,037 registered advisers provide advice to private funds.\425\
We estimate that these advisers would, on average, each provide advice
to 9 private funds.\426\ We further estimate that these private funds
would, on average, each have a total of 67 investors.\427\ As a result,
an average private fund adviser would have, on average, a total of 603
investors across all private funds it advises.
---------------------------------------------------------------------------

    \425\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).
    \426\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).
    \427\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).A.,
#13.
---------------------------------------------------------------------------

    In our most recent PRA submission for rule 204-2,\428\ we estimated
for rule 204-2 a total hour burden of 2,764,563 hours, and the total
annual external cost burden is $175,980,426. This collection of
information is found at 17 CFR 275.204-2 and is mandatory. The
Commission staff uses the collection of information in its examination
and oversight program. As noted above, responses provided to the
Commission in the context of its examination and oversight program
concerning the proposed amendments to rule 204-2 would be kept
confidential subject to the provisions of applicable law.
---------------------------------------------------------------------------

    \428\ Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Revisions to Rule 204-2, OMB
Report, OMB 3235-0278 (Aug. 2021).
---------------------------------------------------------------------------

    The table below summarizes the initial and ongoing annual burden
estimates associated with the proposed amendments to rule 204-2.

                                        Table 6--Rule 204-2 PRA Estimates
----------------------------------------------------------------------------------------------------------------
                                                                                Annual
                                  Internal annual         Wage rate \2\      Internal time cost    external cost
                                  burden hours \1\                                                    burden
----------------------------------------------------------------------------------------------------------------
                                               PROPOSED ESTIMATES
----------------------------------------------------------------------------------------------------------------
Retention of account           0.25 hours...........  $68 (blended rate     $17.................              $0
 statement and calculation                             for general clerk
 information; making and                               ($64) and
 keeping records re liquid/                            compliance clerk
 illiquid fund determination.                          ($72)).
Avg. number of private funds   9 private funds......  ....................  9 private funds.....               0
 per adviser.
Number of advisers...........  5,037 advisers.......  ....................  5,037 advisers......               0
                              ----------------------------------------------------------------------------------
    Sub-total burden.........  11,333.25 hours......  ....................  $770,661............               0
Retention of written notices   0.5 hours............  $68 (blended rate     $34.................               0
 re preferential treatment.                            for general clerk
                                                       ($64) and
                                                       compliance clerk
                                                       ($72)).
Avg. number of private funds   7 private funds......  ....................  7 private funds.....               0
 per adviser.
Number of advisers...........  5,037 advisers.......  ....................  5,037 advisers......               0
                              ----------------------------------------------------------------------------------
    Sub-total burden.........  17,629.5 hours.......  ....................  $1,198,806..........               0
Retention and distribution of  0.25 hours...........  $68 (blended rate     $17.................               0
 audited financial statements.                         for general clerk
                                                       ($64) and
                                                       compliance clerk
                                                       ($72)).

Avg. number of private funds   9 private funds......  ....................  9 private funds.....               0
 per adviser.
Number of advisers...........  5,037 advisers.......  ....................  5,037 advisers......               0
                              ----------------------------------------------------------------------------------
    Sub-total burden.........  11,333.25 hours......  ....................  $770,661............               0
Retention and distribution of  1 hour...............  $68 (blended rate     $68.................               0
 fairness opinion and summary                          for general clerk
 of material business                                  ($64) and
 relationships.                                        compliance clerk
                                                       ($72)).
Avg. number of private funds   1 private fund.......  ....................  1 private fund......               0
 per adviser that conduct an
 adviser-led transaction.
Number of advisers...........  504 advisers \3\.....  ....................  504 advisers \4\....               0
                              ----------------------------------------------------------------------------------
    Sub-total burden.........  504 hours............  ....................  $34,272.............               0
                              ----------------------------------------------------------------------------------
        Total burden.........  40,800 hours.........  ....................  $ 2,774,400.........               0
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Hour burden and cost estimates for these proposed rule amendments assume the frequency of each collection of
  information for the substantive rule with which they are associated. For example, the hour burden estimate for
  recordkeeping obligations associated with the amendments to proposed rule 204-2(a)(20) and (22) would assume
  the same frequency of collection of information as under proposed rule 211(h)(1)-2.
\2\ See SIFMA Report, supra Note 1 to Table 1 Rule 211(h)(1)-2 PRA Estimates.
\3\ See supra section V.D.
\4\ Id.

H. Request for Comment

    We request comment on whether these estimates are reasonable.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
in order to: (1) Evaluate whether the proposed collection of
information is necessary for the proper performance of the functions of
the Commission, including whether the information will have practical
utility; (2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information; (3) determine whether
there are ways to enhance the quality, utility, and clarity of the
information to be collected; and (4) determine whether there are ways
to minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
    Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the OMB
Desk Officer for the Securities and Exchange Commission,
[email protected], and should send a copy to
Vanessa A. Countryman, Secretary, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-1090, with reference to File No.
S7-03-22. OMB is required to make a decision concerning the collections
of information between 30 and 60 days after publication of this
release; therefore a comment to OMB is best assured of having its full
effect if OMB receives it within 30 days after publication of this
release. Requests for materials submitted to OMB by the Commission with
regard to these collections of information should be in writing, refer
to File No. S7-03-22, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736.

VII. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory
Flexibility Analysis (``IRFA'') in accordance with section 3(a) of the
Regulatory Flexibility Act (``RFA'').\429\ It relates to the following
proposed rules and rule amendments under the Advisers Act: (i) Proposed
rule 211(h)(1)-1; (ii) proposed rule 211(h)(1)-2; (iii) proposed rule
206(4)-10; (iv) proposed rule 211(h)(2)-1; (v) proposed rule 211(h)(2)-
2; (vi) proposed rule 211(h)(2)-3; (vii) proposed amendments to rule
204-2; and (viii) proposed amendments to rule 206(4)-7.
---------------------------------------------------------------------------

    \429\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Action

1. Proposed Rule 211(h)(1)-1
    We are proposing new rule 211(h)(1)-1 under the Advises Act (the
``definitions rule''), which would contain numerous definitions for
purposes of proposed rules 211(h)(1)-2, 206(4)-10, 211(h)(2)-1,
211(h)(2)-2, and 211(h)(2)-3.\430\ We chose to include these
definitions in a single rule for ease of reference, consistency, and
brevity.
---------------------------------------------------------------------------

    \430\ See proposed rule 211(h)(1)-1.
---------------------------------------------------------------------------

2. Proposed Rule 211(h)(1)-2
    We are proposing new rule 211(h)(1)-2 under the Advisers Act, which
requires any investment adviser registered or required to be registered
with the Commission that provides investment advice to a private fund
that has at least two full calendar quarters of operating results to
prepare and distribute a quarterly statement to private fund investors
that includes certain standardized disclosures regarding the cost of
investing in the private fund and the private fund's performance.\431\
We believe that providing this information to private fund investors in
a simple and clear format is appropriate and in the public interest and
will improve investor protection and investor decision making. The
reasons for, and objectives of, proposed rule 211(h)(1)-2 are discussed
in more detail in section II.A, above. The burdens of this requirement
on small advisers are discussed below as well as above in sections V
and VI, which discuss the burdens on all advisers. The professional
skills required to meet these specific burdens also are also discussed
in section VI.
---------------------------------------------------------------------------

    \431\ See proposed rule 211(h)(1)-2.

---------------------------------------------------------------------------

3. Proposed Rule 206(4)-10
    We are proposing new rule 206(4)-10 under the Advisers Act, which
would generally require all investment advisers that are registered or
required to be registered with the Commission to have their private
fund clients undergo a financial statement audit at least annually and
upon liquidation containing certain prescribed elements, which are
described above in section II.B. The proposed rule is designed to
provide protection for the fund and its investors against the
misappropriation of fund assets and to provide an important check on
the adviser's valuation of private fund assets, which often serve as
the basis for the calculation of the adviser's fees. The reasons for,
and objectives of, the proposed audit rule are discussed in more detail
in section II.B, above. The burdens of these requirements on small
advisers are discussed below as well as above in sections V and VI,
which discuss the burdens on all advisers. The professional skills
required to meet these specific burdens also are discussed in section
VI.
4. Proposed Rule 211(h)(2)-1
    Proposed rule 211(h)(2)-1 would prohibit all private fund advisers
from, directly or indirectly, engaging in certain sales practices,
conflicts of interest, and compensation schemes that are contrary to
the public interest and the protection of investors. Specifically, the
rule would prohibit an adviser from: (1) Charging certain fees and
expenses to a private fund or portfolio investment (including
accelerated monitoring fees, fees or expenses associated with an
examination or investigation of the adviser or its related persons by
governmental or regulatory authorities, regulatory or compliance
expenses or fees of the adviser or its related persons, or 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); (2)
reducing the amount of any adviser clawback by the amount of certain
taxes; (3) seeking reimbursement, indemnification, exculpation, or
limitation of its liability by the private fund or its investors for a
breach of fiduciary duty, willful misfeasance, bad faith, negligence,
or recklessness in providing services to the private fund; and (4)
borrowing money, securities, or other fund assets, or receiving a loan
or an extension of credit, from a private fund client.\432\ Each of
these prohibitions is described in more detail above in section II.D.
As discussed above, we believe that these sales practices, conflicts of
interest, and compensation schemes must be prohibited. The proposed
rule would prohibit these activities regardless of whether the private
fund documents permit such activities or the adviser otherwise
discloses the practices and regardless of whether the private fund
investors have consented to the activities. Also, the proposed rule
would prohibit these activities even if they are performed indirectly,
for example by an adviser's related persons, because the activities
have an equal potential to harm investors regardless of whether the
adviser engages in the activity directly or indirectly. The reasons
for, and objectives of, the proposed rule are discussed in more detail
in section II.D, above. The burdens of these requirements on small
advisers are discussed below as well as above in sections V and VI,
which discuss the burdens on all advisers. The professional skills
required to meet these specific burdens also are discussed in section
VI.
---------------------------------------------------------------------------

    \432\ See proposed rule 211(h)(2)-1(a).
---------------------------------------------------------------------------

5. Proposed Rule 211(h)(2)-2
    We are proposing new rule 211(h)(2)-2 under the Advisers Act, which
generally would make it unlawful for an adviser that is registered or
required to be registered with the Commission to complete an adviser-
led secondary transaction with respect to any private fund, where an
adviser (or its related persons) offers fund investors the option to
sell their interests in the private fund, or to convert or exchange
them for new interests in another vehicle advised by the adviser or its
related persons, unless the adviser, prior to the closing of the
transaction, distributes to investors in the private fund a fairness
opinion from an independent opinion provider and a summary of any
material business relationships the adviser or any of its related
persons has, or has had within the past two years, with the independent
opinion provider. The specific requirements of the proposed rule are
described above in section II.C. The proposed rule is designed to
provide an important check against an adviser's conflicts of interest
in structuring and leading a transaction from which it may stand to
profit at the expense of private fund investors. The reasons for, and
objectives of, the proposed rule are discussed in more detail in
section II.C above. The burdens of these requirements on small advisers
are discussed below as well as above in sections V and VI, which
discuss the burdens on all advisers. The professional skills required
to meet these specific burdens also are discussed in section VI.
6. Proposed Rule 211(h)(2)-3
    Proposed rule 211(h)(2)-3 would prohibit a private fund adviser,
directly or indirectly, from (1) granting an investor in a private fund
or in a substantially similar pool of assets the ability to redeem its
interest on terms that the adviser reasonably expects to have a
material, negative effect on other investors in that private fund or in
a substantially similar pool of assets; or (2) providing information
regarding the portfolio holdings or exposures of the private fund, or
of a substantially similar pool of assets, to any investor if the
adviser reasonably expects that providing the information would have a
material, negative effect on other investors in that private fund or in
a substantially similar pool of assets.\433\ The proposed rule would
also prohibit these advisers from providing any other preferential
treatment to any investor in a private fund unless the adviser provides
written disclosures to prospective and current investors in the private
fund regarding all preferential treatment the adviser or its related
persons provided to other investors in the same fund.\434\ These
requirements are described above in section II.E. The proposed rule is
designed to eliminate sales practices that present a conflict of
interest between the adviser and the private fund client that are
contrary to the public interest and protection of investors. The
disclosure elements of the proposed rule are designed to also help
investors shape the terms of their relationship with the adviser of the
private fund. The reasons for, and objectives of, the proposed rule are
discussed in more detail in section II.E, above. The burdens of these
requirements on small advisers are discussed below as well as above in
sections V and VI, which discuss the burdens on all advisers. The
professional skills required to meet these specific burdens also are
discussed in section VI.
---------------------------------------------------------------------------

    \433\ See proposed rule 211(h)(2)-3.
    \434\ See proposed rule 211(h)(2)-3(b).
---------------------------------------------------------------------------

7. Proposed Amendments to Rule 204-2
    We are also proposing related amendments to rule 204-2, the books
and records rule, which sets forth various recordkeeping requirements
for registered investment advisers. We are

proposing to amend the current rule to require investment advisers to
private funds to make and keep records relating to the quarterly
statements required under proposed rule 211(h)(1)-2, the financial
statement audits performed under proposed rule 206(4)-10, fairness
opinions required under proposed rule 211(h)(2)-2, and disclosure of
certain types of preferential treatment required under proposed rule
211(h)(2)-3. The reasons for, and objectives of, the proposed
amendments to the books and records rule are discussed in more detail
in sections II.A, II.B, II.C, II.E, V, above. The burdens of these
requirements on small advisers are discussed below as well as above in
sections V and VI, which discuss the burdens on all advisers. The
professional skills required to meet these specific burdens also are
discussed in section VI.
8. Proposed Amendments to Rule 206(4)-(7)
    We are proposing amendments to rule 206(4)-7 to require all SEC-
registered advisers to document the annual review of their compliance
policies and procedures in writing, as described above in section III.
The proposed amendments are designed to focus renewed attention on the
importance of the annual compliance review process and would better
enable our staff to determine whether an adviser has complied with the
review requirement of the compliance rule. The reasons for, and
objectives of, the proposed rule are discussed in more detail in
section III, above. The burdens of these requirements on small advisers
are discussed below as well as above in sections V and VI, which
discuss the burdens on all advisers. The professional skills required
to meet these specific burdens also are discussed in section VI.

B. Legal Basis

    The Commission is proposing new rules 211(h)(1)-2, 211(h)(2)-1,
211(h)(2)-2, 211(h)(2)-3, and 206(4)-10 under the Advisers Act under
the authority set forth in sections 203(d), 206(4), 211(a), and 211(h)
of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(d), 80b-6(4)
and 80b-11(a) and (h)). The Commission is proposing amendments to rule
204-2 under the Advisers Act under the authority set forth in sections
204 and 211 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-4 and
80b-11). The Commission is proposing amendments to rule 206(4)-7 under
the Advisers Act under the authority set forth in sections 203(d),
206(4), and 211(a) of the Investment Advisers Act of 1940 (15 U.S.C.
80b-3(d), 80b-6(4), and 80b-11(a)).

C. Small Entities Subject to Rules

    In developing these proposals, we have considered their potential
impact on small entities that would be subject to the proposed rules
and amendments. Some of the proposed rules and amendments would affect
many, but not all, investment advisers registered with the Commission,
including some small entities, the proposed amendments to rule 206(4)-7
would affect all investment advisers that are registered, or required
to be registered, with the Commission, including some small entities,
and proposed rules 211(h)(2)-1 and 211(h)(2)-3 would apply to all
advisers to private funds (even if not registered), including some
small entities. Proposed rule 211(h)(1)-1 would affect all advisers,
including all that are small entities, regardless of whether they are
registered or advise private funds. Under Commission rules, for the
purposes of the Advisers Act and the RFA, an investment adviser
generally is a small entity if it: (1) Has assets under management
having a total value of less than $25 million; (2) did not have total
assets of $5 million or more on the last day of the most recent fiscal
year; and (3) does not control, is not controlled by, and is not under
common control with another investment adviser that has assets under
management of $25 million or more, or any person (other than a natural
person) that had total assets of $5 million or more on the last day of
its most recent fiscal year.\435\
---------------------------------------------------------------------------

    \435\ 17 CFR 275.0-7(a) (Advisers Act rule 0-7(a)).
---------------------------------------------------------------------------

    Other than the proposed definitions rule, prohibitions rule and
preferential treatment rule, our proposed rules and amendments would
not affect most investment advisers that are small entities (``small
advisers'') because those rules apply only to registered advisers, and
small registered advisers are generally registered with one or more
state securities authorities and not with the Commission. Under section
203A of the Advisers Act, most small advisers are prohibited from
registering with the Commission and are regulated by state regulators.
Based on IARD data, we estimate that as of November 30, 2021,
approximately 594 SEC-registered advisers are small entities under the
RFA.\436\ All of these advisers would be affected by the proposed
amendments to the compliance rule, and we estimate that approximately
29 advise one or more private funds and would, therefore, be affected
by the proposed quarterly statement rule, audit rule, and secondaries
rule.
---------------------------------------------------------------------------

    \436\ Based on SEC-registered investment adviser responses to
Items 5.F. and 12 of Form ADV.
---------------------------------------------------------------------------

    The proposed prohibited activities rule and the proposed
preferential treatment rule, however, would have an impact on all
investment advisers to private funds, regardless of whether they are
registered with the Commission, one or more state securities
authorities, or are unregistered. It is difficult for us to estimate
the number of advisers not registered with us that have private fund
clients. However, we are able to provide the following estimates based
on IARD data. As of November 30, 2021, there are 5,022 ERAs, all of
whom advise private funds, by definition.\437\ All ERAs would,
therefore, be subject to the rules that would apply to all private fund
advisers. We estimate that there are no ERAs that would meet the
definition of ``small entity.'' \438\ We do not have a method for
estimating the number of state-registered advisers to private funds
that would meet the definition of ``small entity.''
---------------------------------------------------------------------------

    \437\ See section 203(l) of the Advisers Act and 17 CFR
275.203(m)-1 (rule 203(m)-1 thereunder).
    \438\ In order for an adviser to be an SEC ERA it would first
need to have an SEC registration obligation, and an adviser with
that little in assets under management (i.e., assets under
management that is low enough to allow the adviser to qualify as a
small entity) would not have an SEC registration obligation.
---------------------------------------------------------------------------

    Additionally, the proposed prohibited activities rule and the
proposed preferential treatment rule would apply to other advisers that
are not registered with the SEC or with the states and that do not make
filings with either the SEC or states. This includes foreign private
advisers,\439\ advisers that are entirely unregistered, and advisers
that rely on the intrastate exemption from SEC registration and/or the
de minimis exemption from SEC registration. We are unable to estimate
the number of advisers in each of these categories because these
advisers do not file reports or other information with the SEC and we
are unable to find reliable, public information. As a result, our
estimates are based on information from SEC-registered advisers to
private funds, exempt reporting advisers (at the state and Federal
levels), and state-registered advisers to private funds.
---------------------------------------------------------------------------

    \439\ See section 202(a)(30) of the Advisers Act (defining
``foreign private adviser'').
---------------------------------------------------------------------------

    The proposed definitions rule would affect all advisers, but not
unless the adviser is also affected by one of the rules discussed
above. It has no independent substantive requirements or economic
impacts. Therefore, the number of small advisers affected by this rule
is accounted for in those

discussions and not separately and additionally delineated.

D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

1. Proposed Rule 211(h)(1)-1
    Proposed rule 211(h)(1)-1 would not impose any reporting,
recordkeeping, or other compliance requirements on investment advisers
because it has no independent substantive requirements or economic
impacts. The rule would not affect an adviser unless it was complying
with proposed rule 211(h)(1)-2, 206(4)-10, 211(h)(2)-1, 211(h)(2)-2, or
211(h)(2)-3, each of which is discussed below.
2. Proposed Rule 211(h)(1)-2
    Proposed rule 211(h)(1)-2 would impose certain compliance
requirements on investment advisers, including those that are small
entities. It would require any investment adviser registered or
required to be registered with the Commission that provides investment
advice to a private fund that has at least two full calendar quarters
of operating results to prepare and distribute quarterly statements
with certain fee and expense and performance disclosure to private fund
investors. The proposed requirements, including compliance and related
recordkeeping requirements that would be required under the proposed
amendments to rule 204-2 and rule 206(4)-7, are summarized in this IRFA
(section VII above). All of these proposed requirements are also
discussed in detail, above, in section II, and these requirements and
the burdens on respondents, including those that are small entities,
are discussed above in sections V and VI (the Economic Analysis and
Paperwork Reduction Act Analysis, respectively) and below. The
professional skills required to meet these specific burdens are also
discussed in section VI.
    As discussed above, there are approximately 29 small advisers to
private funds currently registered with us, and we estimate that 100
percent of these advisers would be subject to the proposed rule
211(h)(1)-2. As discussed in our Paperwork Reduction Act Analysis in
section V above, the proposed rule 211(h)(1)-2 under the Advisers Act,
which would require advisers to prepare and distribute quarterly
statements, would create a new annual burden of approximately 130.5
hours per adviser, or 3,784.5 hours in aggregate for small advisers. We
therefore expect the annual monetized aggregate cost to small advisers
associated with our proposed amendments would be $1,802,466.\440\
---------------------------------------------------------------------------

    \440\ This includes the internal time cost and the annual
external cost burden and assumes that, for purposes of the annual
external cost burden, 50% of small advisers will use outside legal
services, as set forth in the PRA estimates table.
---------------------------------------------------------------------------

3. Proposed Rule 206(4)-10
    Proposed rule 206(4)-10 would impose certain compliance
requirements on investment advisers, including those that are small
entities. All registered investment advisers that provide investment
advice, including small entity advisers, would be required to comply
with the proposed rule's requirements to have their private fund
clients undergo a financial statement audit (at least annually and upon
liquidation) and distribute audited financial statements to private
fund investors. The proposed requirements, including compliance and
related recordkeeping requirements that would be imposed under proposed
amendments to rule 204-2 and rule 206(4)-7, are summarized in this IRFA
(section VII.A. above). All of these proposed requirements are also
discussed in detail, above, in section II, and these requirements and
the burdens on respondents, including those that are small entities,
are discussed above in sections V and VI (the Economic Analysis and
Paperwork Reduction Act Analysis, respectively) and below. The
professional skills required to meet these specific burdens are also
discussed in section VI.
    As discussed above, there are approximately 29 small advisers to
private funds currently registered with us, and we estimate that 100
percent of these advisers would be subject to the proposed rule 206(4)-
10. As discussed above in our Paperwork Reduction Act Analysis in
section V above, proposed rule 206(4)-10 under the Advisers Act would
create a new annual burden of approximately 18.36 hours per adviser, or
532.44 hours in aggregate for small advisers. We therefore expect the
annual monetized aggregate cost to small advisers associated with our
proposed amendments would be $15,819,118.65.\441\
---------------------------------------------------------------------------

    \441\ This includes the internal time cost and the annual
external cost burden, as set forth in the PRA estimates table.
---------------------------------------------------------------------------

4. Proposed Rule 211(h)(2)-1
    Proposed rule 211(h)(2)-1 would impose certain compliance
requirements on investment advisers, including those that are small
entities. Proposed rule 211(h)(2)-1 would prohibit all private fund
advisers from engaging in certain sales practices, conflicts of
interest, and compensation schemes that are contrary to the public
interest and the protection of investors. Specifically, the rule would
prohibit an adviser from: (1) Charging certain fees and expenses to a
private fund or portfolio investment (including accelerated monitoring
fees, fees or expenses associated with an examination or investigation
of the adviser or its related persons by governmental or regulatory
authorities, regulatory or compliance expenses or fees of the adviser
or its related persons, or 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); (2) reducing the amount of any adviser clawback
by the amount of certain taxes; (3) seeking reimbursement,
indemnification, exculpation, or limitation of its liability by the
private fund or its investors for a breach of fiduciary duty, willful
misfeasance, bad faith, negligence, or recklessness in providing
services to the private fund; and (4) borrowing money, securities, or
other fund assets, or receiving a loan or an extension of credit from a
private fund client. All of these proposed requirements are also
discussed in detail, above, in section II, and these requirements and
the burdens on respondents, including those that are small entities,
are discussed above in section V (the Economic Analysis) and below.
    As discussed above, there are approximately 29 small advisers to
private funds currently registered with us, and we estimate that 100
percent of these advisers would be subject to the proposed rule
211(h)(2)-1. As discussed above, we estimate that there are no ERAs
that would meet the definition of ``small entity'' and we do not have a
method for estimating the number of state-registered advisers to
private funds that would meet the definition of ``small entity.'' \442\
---------------------------------------------------------------------------

    \442\ See supra section VI.C.
---------------------------------------------------------------------------

5. Proposed Rule 211(h)(2)-2
    Proposed rule 211(h)(2)-2 would impose certain compliance
requirements on investment advisers, including those that are small
entities. The rule generally would make it unlawful for an adviser that
is registered or required to be registered with the Commission to
complete an adviser-led secondary transaction with respect to any
private fund, where an adviser (or its related persons) offers fund
investors

the option to sell their interests in the private fund, or to convert
or exchange them for new interests in another vehicle advised by the
adviser or its related persons, unless the adviser, prior to the
closing of the transaction, distributes to investors in the private
fund a fairness opinion from an independent opinion provider and a
summary of any material business relationships the adviser or any of
its related persons has, or has had within the past two years, with the
independent opinion provider . The proposed requirements, including
compliance and related recordkeeping requirements that would be imposed
under proposed amendments to rule 204-2 and 206(4)-7, are summarized in
this IRFA (section VII above). All of these proposed requirements are
also discussed in detail, above, in section II, and these requirements
and the burdens on respondents, including those that are small
entities, are discussed above in sections V and VI (the Economic
Analysis and Paperwork Reduction Act Analysis, respectively) and below.
The professional skills required to meet these specific burdens also
are discussed in section VI.
    As discussed above, there are approximately 29 small advisers to
private funds currently registered with us, and we estimate that 100
percent of these advisers would be subject to proposed rule 211(h)(2)-
2. As discussed above in our Paperwork Reduction Act Analysis in
section V above, proposed rule 211(h)(2)-2 under the Advisers Act would
create a new annual burden of approximately 7 hours per adviser, or 21
hours in aggregate for small advisers.\443\ We therefore expect the
annual monetized aggregate cost to small advisers associated with our
proposed amendments would be $129,805.92.\444\
---------------------------------------------------------------------------

    \443\ Similar to the PRA analysis, we assume that 10% (~3) of
all small advisers will conduct an adviser-led secondary transaction
on an annual basis.
    \444\ This includes the internal time cost and the annual
external cost burden, as set forth in the PRA estimates table.
---------------------------------------------------------------------------

6. Proposed Rule 211(h)(2)-3
    Proposed rule 211(h)(2)-3 would impose certain compliance
requirements on investment advisers, including those that are small
entities. Proposed rule 211(h)(2)-3 would prohibit a private fund
adviser, including indirectly through its related persons, from (1)
granting an investor in the private fund or in a substantially similar
pool of assets the ability to redeem its interest on terms that the
adviser reasonably expects to have a material, negative effect on other
investors in that private fund or in a substantially similar pool of
assets; and (2) providing information regarding the private fund's
portfolio holdings or exposures of the private fund or of a
substantially similar pool of assets to any investor if the adviser
reasonably expects that providing the information would have a
material, negative effect on other investors in that private fund or in
a substantially similar pool of assets. The rule would also prohibit
these advisers from providing any other preferential treatment to any
investor in the private fund unless the adviser provides written
disclosures to prospective and current investors in the private fund
regarding all preferential treatment the adviser or its related persons
provided to other investors in the same fund. The proposed
requirements, including compliance and related recordkeeping
requirements that would be imposed under proposed amendments to rule
204-2 and 206(4)-7, are summarized in this IRFA (section VII above).
All of these proposed requirements are also discussed in detail, above,
in section II, and these requirements and the burdens on respondents,
including those that are small entities, are discussed above in
sections V and VI (the Economic Analysis and Paperwork Reduction Act
Analysis, respectively) and below. The professional skills required to
meet these specific burdens also are discussed in section VI.
    As discussed above, there are approximately 29 small advisers to
private funds currently registered with us, and we estimate that 100
percent of these advisers would be subject to the proposed rule
211(h)(2)-3. As discussed above, we estimate that there are no ERAs
that would meet the definition of ``small entity'' and we do not have a
method for estimating the number of state-registered advisers to
private funds that would meet the definition of ``small entity.'' \445\
As discussed above in our Paperwork Reduction Act Analysis in section
VI above, proposed rule 211(h)(2)-3 under the Advisers Act would create
a new annual burden of approximately 31.01 hours per adviser, or 899.29
hours in aggregate for small advisers.\446\ We therefore expect the
annual monetized aggregate cost to small advisers associated with our
proposed amendments would be $374,569.51.\447\
---------------------------------------------------------------------------

    \445\ See supra section VI.C.
    \446\ The following types of private fund advisers, among
others, would be subject to the proposed rule: Unregistered advisers
(i.e., advisers that are not SEC registered but have a registration
obligation), foreign private advisers, and advisers that rely on the
intrastate exemption from SEC registration and/or the de minimis
exemption from SEC registration. However, we are unable to estimate
the number of advisers in each of these categories because these
advisers do not file reports or other information with the SEC and
we are unable to find reliable, public information. As a result, the
above estimate is based on information from SEC-registered advisers
to private funds, exempt reporting advisers (at the state and
Federal levels), and state-registered advisers to private funds.
These figures are approximate.
    \447\ This includes the internal time cost and the annual
external cost burden and assumes that, for purposes of the annual
external cost burden, 75% of small advisers will use outside legal
services, as set forth in the PRA estimates table.
---------------------------------------------------------------------------

7. Proposed Amendments to Rule 204-2
    The proposed amendments to rule 204-2 would impose certain
recordkeeping requirements on investment advisers to private funds,
including those that are small entities. All registered investment
advisers to private funds, including small entity advisers, would be
required to comply with recordkeeping amendments. While all SEC-
registered investment advisers, and advisers that are required to be
registered, are subject to rule 204-2 under the Advisers Act, our
proposed amendments to rule 204-2 would only impact private fund
advisers that are SEC registered. The proposed amendments are
summarized in this IRFA (section VII above). The proposed amendments
are also discussed in detail, above, in section II, and the
requirements and the burdens on respondents, including those that are
small entities, are discussed above in sections V and VI (the Economic
Analysis and Paperwork Reduction Act Analysis, respectively) and below.
The professional skills required to meet these specific burdens also
are discussed in section VI.
    As discussed above, there are approximately 29 small advisers to
private funds currently registered with us, and we estimate that 100
percent of advisers registered with us would be subject to the proposed
amendments to rule 204-2. As discussed above in our Paperwork Reduction
Act Analysis in section VI above, the proposed amendments to rule 204-2
under the Advisers Act, which would require advisers to retain certain
copies of documents required under proposed rules 206(4)-10, 211(h)(1)-
2, 211(h)(2)-2, and 211(h)(2)-3 would create a new annual burden of
approximately 9 hours per adviser, or 261 hours in aggregate for small
advisers. We therefore expect the annual monetized aggregate cost to
small advisers associated with our

proposed amendments would be $17,748.\448\
---------------------------------------------------------------------------

    \448\ This includes the internal time cost and the annual
external cost burden, as set forth in the PRA estimates table.
---------------------------------------------------------------------------

8. Proposed Amendments to Rule 206(4)-7
    Proposed amendments to rule 206(4)-7 would impose certain
compliance requirements on investment advisers, including those that
are small entities. All registered investment advisers, and advisers
that are required to be registered, would be required to document the
annual review of their compliance policies and procedures in writing.
The proposed requirements are summarized in this IRFA (section VII
above). All of these proposed requirements are also discussed in
detail, above, in section III, and these requirements and the burdens
on respondents, including those that are small entities, are discussed
above in sections V and VI (the Economic Analysis and Paperwork
Reduction Act Analysis, respectively) and below. The professional
skills required to meet these specific burdens also are discussed in
section VI.
    As discussed above, there are approximately 29 small advisers
currently registered with us, and we estimate that 100 percent of these
advisers would be subject to the proposed amendments to rule 206(4)-7.
As discussed above in our Paperwork Reduction Act Analysis in section
VI above, these amendments would create a new annual burden of
approximately 3 hour per adviser, or 87 hours in aggregate for small
advisers. We therefore expect the annual monetized aggregate cost to
small advisers associated with our proposed amendments would be
$44,921.\449\
---------------------------------------------------------------------------

    \449\ This includes the internal time cost and the annual
external cost burden and assumes that, for purposes of the annual
external cost burden, 50% of small advisers will use outside legal
services, as set forth in the PRA estimates table.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    There are no duplicative, overlapping, or conflicting Federal rules
with respect to the specific requirements of proposed rule 211(h)(1)-1,
211(h)(1)-2, 211(h)(2)-1, 211(h)(2)-2, 211(h)(2)-3, or the proposed
amendments to rule 204-2 or rule 206(4)-7. We recognize that private
fund advisers are prohibited from making misstatements or materially
misleading statements to investors under rule 206(4)-8. To the extent
there is any overlap between the proposed rules and rule 206(4)-8, we
believe that any additional costs to advisers to private funds would be
minimal, as they can assume that conduct that would raise issues under
any of the specific provisions of the proposed rules would also be
prohibited under rule 206(4)-8. To the extent there is any overlap
between the requirements of proposed rule 211(h)(1)-2 and Form ADV Part
2, it is minimal, and it is complementary, not contradictory. For
example, Form ADV Part 2 requires advisers to disclose what fees the
adviser charges, such as a 2% management fee based on its clients'
assets that it manages. The proposed rule would require advisers to
disclose what amount was actually charged to a private fund client
(e.g., $200,000).
    There is significant duplication and overlap of the requirements of
proposed rule 206(4)-10 and rule 206(4)-2 because proposed rule 206(4)-
10 is drawn from the option to comply with rule 206(4)-2's account
statement and surprise examination requirements by having pooled
investment vehicle clients undergo a financial statement audit and
distribute the financial statements to the investors in the pools.
Similarities between these rules should result in minimal new
compliance burdens for private fund advisers that have chosen to comply
with the audit provision of rule 206(4)-2, however. For private fund
advisers that have not chosen to comply with the audit provision of
rule 206(4)-2, proposed rule 206(4)-10 will result in new compliance
burdens, but not ones that contradict rule 206(4)-2. These advisers can
choose to mitigate, as much as possible, their compliance burdens by
electing to comply with rule 206(4)-2's audit provision in lieu of the
account statement and surprise examination requirements, though this
option may be limited for some advisers if they also have clients for
which the adviser is unable to choose to rely on the audit provision of
the custody rule. We believe these additional compliance burdens are
justified because an audit by an independent public accountant would
provide an important check on the adviser's valuation of private fund
assets, which often serve as the basis for calculating the adviser's
fees.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives
that would accomplish the stated objective, while minimizing any
significant adverse impact on small entities. In connection with the
proposed rules and rule amendments, the Commission considered the
following alternatives: (i) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the proposed rules and rule amendments for such
small entities; (iii) the use of performance rather than design
standards; and (iv) an exemption from coverage of the proposed rules
and rule amendments, or any part thereof, for such small entities.
    Regarding the first and fourth alternatives, we do not believe that
differing compliance or reporting requirements or an exemption from
coverage of the proposed rules and rule amendments, or any part
thereof, for small entities, would be appropriate or consistent with
investor protection. Because the protections of the Advisers Act are
intended to apply equally to clients of both large and small advisory
firms, it would be inconsistent with the purposes of the Act to specify
different requirements for small entities under the proposed rules and
rule amendments.
    Regarding the second alternative, the proposed prohibited
activities rule and the proposed preferential treatment rule are
particularly intended to provide clarification to all private fund
advisers, not just small advisers, as to what the Commission considers
to be conduct that would be prohibited under section 206 of the Act and
contrary to the public interest and protection of investors under
section 211 of the Act. Despite our examination and enforcement
efforts, this type of inappropriate conduct persists; these proposed
rules will provide clarity of our views of this conduct to all private
fund advisers. Similarly, we also have endeavored to consolidate and
simplify the compliance with both proposed rules, as well as disclosure
requirements under the proposed preferential treatment rule, for all
private fund advisers.
    Regarding the third alternative, we do not consider using
performance rather than design standards to be consistent with our
statutory mandate of investor protection with respect to preventing
fraudulent, deceptive, or manipulative acts, or inappropriate sales
practices, conflicts of interest or compensation schemes, by investment
advisers.

G. Solicitation of Comments

    We encourage written comments on matters discussed in this IRFA. In
particular, the Commission seeks comment on:
     The number of small entities that would be affected by the
proposed rule; and

     whether the effect of the proposed rule on small entities
would be economically significant.
    Commenters are asked to describe the nature of any effect and
provide empirical data supporting the extent of the effect.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \450\ we must advise OMB whether a proposed
regulation constitutes a ``major'' rule. Under SBREFA, a rule is
considered ``major'' where, if adopted, it results in or is likely to
result in (1) an annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices for consumers or individual
industries; or (3) significant adverse effects on competition,
investment or innovation.
---------------------------------------------------------------------------

    \450\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on the potential impact of the proposed rules
and amendments on the economy on an annual basis. Commenters are
requested to provide empirical data and other factual support for their
views to the extent possible.

IX. Statutory Authority

    The Commission is proposing new rules 211(h)(1)-1, 211(h)(1)-2,
211(h)(2)-1, 211(h)(2)-2, 211(h)(2)-3, and 206(4)-10 under the Advisers
Act under the authority set forth in sections 203(d), 206(4), 211(a),
and 211(h) of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(d),
80b-6(4) and 80b-11(a) and (h)]. The Commission is proposing amendments
to rule 204-2 under the Advisers Act under the authority set forth in
sections 204 and 211 of the Investment Advisers Act of 1940 [15 U.S.C.
80b-4 and 80b-11]. The Commission is proposing amendments to rule
206(4)-7 under the Advisers Act under the authority set forth in
sections 203(d), 206(4), and 211(a) of the Investment Advisers Act of
1940 [15 U.S.C. 80b-3(d), 80b-6(4), and 80b-11(a)].

List of Subjects in 17 CFR Part 275

    Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.

Text of Proposed Rules

    For the reasons set forth in the preamble, the Commission is
proposing to amend title 17, chapter II of the Code of Federal
Regulations as follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
1. The authority citation for part 275 continues to read in part as
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.

* * * * *
Section 275.204-2 is also issued under 15 U.S.C. 80b-6.
* * * * *

0
2. Amend Sec.  275.204-2 by:
0
a. Removing the period at the end of paragraph (a)(7)(iv)(B) and adding
``; and'' in its place; and
0
b. Adding paragraphs (a)(7)(v) and (a)(20) through (23).
    The additions read as follows:

Sec.  275.204-2   Books and records to be maintained by investment
advisers.

    (a) * * *
    (7) * * *
    (v) Any notice required pursuant to Sec.  275.211(h)(2)-3 as well
as a record of each addressee and the corresponding date(s) sent,
address(es), and delivery method(s) for each such addressee.
* * * * *
    (20)(i) A copy of any quarterly statement distributed pursuant to
Sec.  275.211(h)(1)-2, along with a record of each addressee and the
corresponding date(s) sent, address(es), and delivery method(s) for
each such addressee; and
    (ii) All records evidencing the calculation method for all
expenses, payments, allocations, rebates, offsets, waivers, and
performance listed on any statement delivered pursuant to Sec.  275.
211(h)(1)-2.
    (21) For each private fund client:
    (i) A copy of any audited financial statements prepared and
distributed pursuant to Sec.  275.206(4)-10, along with a record of
each addressee and the corresponding date(s) sent, address(es), and
delivery method(s) for each such addressee; or
    (ii) A record documenting steps taken by the adviser to cause a
private fund client that the adviser does not control, is not
controlled by, and with which it is not under common control to undergo
a financial statement audit pursuant to Sec.  275.206(4)-10.
    (22) Documentation substantiating the adviser's determination that
a private fund client is a liquid fund or an illiquid fund pursuant to
Sec.  275. 211(h)(1)-2.
    (23) A copy of any fairness opinion and material business
relationship summary distributed pursuant to Sec.  275.211(h)(2)-2,
along with a record of each addressee and the corresponding date(s)
sent, address(es), and delivery method(s) for each such addressee.
* * * * *
0
3. Amend Sec.  275.206(4)-7 by revising paragraph (b) to read as
follows:

Sec.  275.206(4)-7  Compliance procedures and practices.

* * * * *
    (b) Annual review. Review and document in writing, no less
frequently than annually, the adequacy of the policies and procedures
established pursuant to this section and the effectiveness of their
implementation; and
* * * * *
0
4. Section 275.206(4)-10 is added to read as follows:

Sec.  275.206(4)-10  Private fund adviser audits.

    As a means reasonably designed to prevent such acts, practices, and
courses of business as are fraudulent, deceptive, or manipulative, an
investment adviser that is registered or required to be registered
under section 203 of the Investment Advisers Act of 1940 shall cause
each private fund that it advises, directly or indirectly, to undergo a
financial statement audit as follows at least annually and upon
liquidation, if the private fund does not otherwise undergo such an
audit:

    (a) The audit is performed by an independent public accountant
that meets the standards of independence described in 17 CFR 210.2-
01(b) and (c) [Rule 2-01(b) and (c) of Regulation S-X] and that is
registered with, and subject to regular inspection as of the
commencement of the professional engagement period, and as of each
calendar year-end, by, the Public Company Accounting Oversight Board
in accordance with its rules;
    (b) The audit meets the definition in 17 CFR 210.1-02(d) [Rule
1-02(d) of Regulation S-X], the professional engagement period of
which shall begin and end as indicated in Rule 2-01(f)(5) of
Regulation S-X;
    (c) Audited financial statements are prepared in accordance with
U.S. Generally Accepted Accounting Principles (``U.S. GAAP'') or, in
the case of financial statements of private funds organized under
non-U.S. law or that have a general partner or other manager with a
principal place of business outside the United States (``foreign
private funds''), contain information substantially similar to
statements prepared in accordance with U.S. GAAP and material
differences with U.S. GAAP are reconciled;
    (d) Promptly after the completion of the audit, the private
fund's audited financial statements, which includes any
reconciliation to U.S. GAAP prepared for a foreign private fund,
including supplementary U.S. GAAP disclosures, as applicable, are
distributed;
    (e) Pursuant to a written agreement between the independent
public accountant

and the adviser or the private fund, the independent public
accountant that completes the audit notifies the Commission by
electronic means directed to the Division of Examinations:
    (1) Promptly upon issuing an audit report to the private fund
that contains a modified opinion; and
    (2) Within four business days of resignation or dismissal from,
or other termination of, the engagement, or upon removing itself or
being removed from consideration for being reappointed;
    (f) For a private fund that the adviser does not control and is
neither controlled by nor under common control with, the adviser is
prohibited from providing investment advice, directly or indirectly,
to the private fund if the adviser fails to take all reasonable
steps to cause the private fund to undergo a financial statement
audit that meets the requirements of paragraphs (a) through (e) of
this section; and
    (g) For purposes of this section, defined terms shall have the
meanings set forth in Sec.  275.211(h)(1)-1.

0
5. Section 275.211(h)(1)-1 is added to read as follows:

Sec.  275.211(h)(1)-1   Definitions.

    For purposes of Sec. Sec.  275.206(4)-10, 275.211(h)(1)-2,
275.211(h)(2)-3, 275.211(h)(2)-1, and 275.211(h)(2)-2:
    Adviser clawback means any obligation of the adviser, its related
persons, or their respective owners or interest holders to restore or
otherwise return performance-based compensation to the private fund
pursuant to the private fund's governing agreements.
    Adviser-led secondary transaction means any transaction initiated
by the investment adviser or any of its related persons that offers
private fund investors the choice to:
    (1) Sell all or a portion of their interests in the private fund;
or
    (2) Convert or exchange all or a portion of their interests in the
private fund for interests in another vehicle advised by the adviser or
any of its related persons.
    Committed capital means any commitment pursuant to which a person
is obligated to acquire an interest in, or make capital contributions
to, the private fund.
    Control means the power, directly or indirectly, to direct the
management or policies of a person, whether through ownership of
securities, by contract, or otherwise. For the purposes of this
definition, control includes:
    (1) Each of an investment adviser's officers, partners, or
directors exercising executive responsibility (or persons having
similar status or functions) is presumed to control the investment
adviser;
    (2) A person is presumed to control a corporation if the person:
    (i) Directly or indirectly has the right to vote 25% or more of a
class of the corporation's voting securities; or
    (ii) Has the power to sell or direct the sale of 25% or more of a
class of the corporation's voting securities;
    (3) A person is presumed to control a partnership if the person has
the right to receive upon dissolution, or has contributed, 25% or more
of the capital of the partnership;
    (4) A person is presumed to control a limited liability company if
the person:
    (i) Directly or indirectly has the right to vote 25% or more of a
class of the interests of the limited liability company;
    (ii) Has the right to receive upon dissolution, or has contributed,
25% or more of the capital of the limited liability company; or
    (iii) Is an elected manager of the limited liability company; or
    (5) A person is presumed to control a trust if the person is a
trustee or managing agent of the trust.
    Covered portfolio investment means a portfolio investment that
allocated or paid the investment adviser or its related persons
portfolio investment compensation during the reporting period.
    Distribute, distributes, or distributed means send or sent to all
of the private fund's investors; provided that, if an investor is a
pooled investment vehicle that is controlling, controlled by, or under
common control with (a ``control relationship'') the adviser or its
related persons, the adviser must look through that pool (and any pools
in a control relationship with the adviser or its related persons) in
order to send to investors in those pools.
    Fairness opinion means a written opinion stating that the price
being offered to the private fund for any assets being sold as part of
an adviser-led secondary transaction is fair.
    Fund-level subscription facilities means any subscription
facilities, subscription line financing, capital call facilities,
capital commitment facilities, bridge lines, or other indebtedness
incurred by the private fund that is secured by the unfunded capital
commitments of the private fund's investors.
    Gross IRR means an internal rate of return that is calculated gross
of all fees, expenses, and performance-based compensation borne by the
private fund.
    Gross MOIC means a multiple of invested capital that is calculated
gross of all fees, expenses, and performance-based compensation borne
by the private fund.
    Illiquid fund means a private fund that:
    (1) Has a limited life;
    (2) Does not continuously raise capital;
    (3) Is not required to redeem interests upon an investor's request;
    (4) Has as a predominant operating strategy the return of the
proceeds from disposition of investments to investors;
    (5) Has limited opportunities, if any, for investors to withdraw
before termination of the fund; and
    (6) Does not routinely acquire (directly or indirectly) as part of
its investment strategy market-traded securities and derivative
instruments.
    Independent opinion provider means an entity that:
    (1) Provides fairness opinions in the ordinary course of its
business; and
    (2) Is not a related person of the adviser.
    Internal rate of return means the discount rate that causes the net
present value of all cash flows throughout the life of the fund to be
equal to zero.
    Liquid fund means a private fund that is not an illiquid fund.
    Multiple of invested capital means, as of the end of the applicable
calendar quarter:
    (1) The sum of:
    (i) The unrealized value of the illiquid fund; and
    (ii) The value of all distributions made by the illiquid fund;
    (2) Divided by the total capital contributed to the illiquid fund
by its investors.
    Net IRR means an internal rate of return that is calculated net of
all fees, expenses, and performance-based compensation borne by the
private fund.
    Net MOIC means a multiple of invested capital that is calculated
net of all fees, expenses, and performance-based compensation borne by
the private fund.
    Performance-based compensation means allocations, payments, or
distributions of capital based on the private fund's (or its portfolio
investments') capital gains and/or capital appreciation.
    Portfolio investment means any entity or issuer in which the
private fund has directly or indirectly invested.
    Portfolio investment compensation means any compensation, fees, and
other amounts allocated or paid to the investment adviser or any of its
related persons by the portfolio investment attributable to the private
fund's interest in such portfolio investment, including, but not
limited to, origination, management, consulting, monitoring, servicing,
transaction, administrative,

advisory, closing, disposition, directors, trustees or similar fees or
payments.
    Related person means:
    (1) All officers, partners, or directors (or any person performing
similar functions) of the adviser;
    (2) All persons directly or indirectly controlling or controlled by
the adviser;
    (3) All current employees (other than employees performing only
clerical, administrative, support or similar functions) of the adviser;
and
    (4) Any person under common control with the adviser.
    Reporting period means the private fund's calendar quarter covered
by the quarterly statement or, for the initial quarterly statement of a
newly formed private fund, the period covering the private fund's first
two full calendar quarters of operating results.
    Statement of Contributions and Distributions means a document that
presents:
    (1) All capital inflows the private fund has received from
investors and all capital outflows the private fund has distributed to
investors since the private fund's inception, with the value and date
of each inflow and outflow; and
    (2) The net asset value of the private fund as of the end of the
reporting period.
    Substantially similar pool of assets means a pooled investment
vehicle (other than an investment company registered under the
Investment Company Act of 1940 or a company that elects to be regulated
as such) with substantially similar investment policies, objectives, or
strategies to those of the private fund managed by the investment
adviser or its related persons.
    Unfunded capital commitments means committed capital that has not
yet been contributed to the private fund by investors.
0
6. Section 275.211(h)(1)-2 is added to read as follows:

Sec.  275. 211(h)(1)-2  Private fund quarterly statements.

    (a) Quarterly statements. As a means reasonably designed to prevent
such acts, practices, and courses of business as are fraudulent,
deceptive, or manipulative, an investment adviser that is registered or
required to be registered under section 203 of the Investment Advisers
Act of 1940 shall prepare a quarterly statement that complies with
paragraphs (a) through (g) of this section for any private fund that it
advises, directly or indirectly, that has at least two full calendar
quarters of operating results, and distribute the quarterly statement
to the private fund's investors within 45 days after each calendar
quarter end, unless such a quarterly statement is prepared and
distributed by another person.
    (b) Fund table. The quarterly statement must include a table for
the private fund that discloses, at a minimum, the following
information, presented both before and after the application of any
offsets, rebates, or waivers for the information required by paragraphs
(b)(1) and (2) of this section:
    (1) A detailed accounting of all compensation, fees, and other
amounts allocated or paid to the investment adviser or any of its
related persons by the fund during the reporting period, with separate
line items for each category of allocation or payment reflecting the
total dollar amount, including, but not limited to, management,
advisory, sub-advisory, or similar fees or payments, and performance-
based compensation;
    (2) A detailed accounting of all fees and expenses paid by the
private fund during the reporting period (other than those listed in
paragraph (b)(1) of this section), with separate line items for each
category of fee or expense reflecting the total dollar amount,
including, but not limited to, organizational, accounting, legal,
administration, audit, tax, due diligence, and travel fees and
expenses; and
    (3) The amount of any offsets or rebates carried forward during the
reporting period to subsequent periods to reduce future payments or
allocations to the adviser or its related persons.
    (c) Portfolio investment table. The quarterly statement must
include a separate table for the private fund's covered portfolio
investments that discloses, at a minimum, the following information for
each covered portfolio investment:
    (1) A detailed accounting of all portfolio investment compensation
allocated or paid to the investment adviser or any of its related
persons by the covered portfolio investment during the reporting
period, with separate line items for each category of allocation or
payment reflecting the total dollar amount, presented both before and
after the application of any offsets, rebates, or waivers; and
    (2) The fund's ownership percentage of each such covered portfolio
investment as of the end of the reporting period, or zero, if the fund
does not have an ownership interest in the covered portfolio
investment, along with a brief description of the fund's investment.
    (d) Calculations and cross references. The quarterly statement must
include prominent disclosure regarding the manner in which all
expenses, payments, allocations, rebates, waivers, and offsets are
calculated and include cross references to the sections of the private
fund's organizational and offering documents that set forth the
applicable calculation methodology.
    (e) Performance. (1) No later than the time the adviser sends the
initial quarterly statement, the adviser must determine that the
private fund is an illiquid fund or a liquid fund.
    (2) The quarterly statement must present the following with equal
prominence:
    (i) Liquid funds. For a liquid fund:
    (A) Annual net total returns for each calendar year since
inception;
    (B) Average annual net total returns over the one-, five-, and ten-
calendar year periods; and
    (C) The cumulative net total return for the current calendar year
as of the end of the most recent calendar quarter covered by the
quarterly statement.
    (ii) Illiquid funds. For an illiquid fund:
    (A) The following performance measures, shown since inception of
the illiquid fund through the end of the quarter covered by the
quarterly statement (or, to the extent quarter-end numbers are not
available at the time the adviser distributes the quarterly statement,
through the most recent practicable date) and computed without the
impact of any fund-level subscription facilities:
    (1) Gross IRR and gross MOIC for the illiquid fund;
    (2) Net IRR and net MOIC for the illiquid fund;
    (3) Gross IRR and gross MOIC for the realized and unrealized
portions of the illiquid fund's portfolio, with the realized and
unrealized performance shown separately; and
    (4) A statement of contributions and distributions for the illiquid
fund.
    (B) [Reserved]
    (iii) The quarterly statement must include the date as of which the
performance information is current through and prominent disclosure of
the criteria used and assumptions made in calculating the performance.
    (f) Consolidated reporting. To the extent doing so would provide
more meaningful information to the private fund's investors and would
not be misleading, the adviser must consolidate the reporting required
by paragraphs (a) through (e) of this section to cover substantially
similar pools of assets.
    (g) Format and content. The quarterly statement must use clear,
concise, plain English and be presented in a format that facilitates
review from one quarterly statement to the next.

    (h) Definitions. For purposes of this section, defined terms shall
have the meanings set forth in Sec.  275.211(h)(1)-1.
0
7. Section 275.211(h)(2)-1 is added to read as follows:

Sec.  275.211(h)(2)-1  Private fund adviser prohibited activities.

    (a) An investment adviser to a private fund may not, directly or
indirectly, do the following with respect to the private fund, or any
investor in that private fund:
    (1) Charge a portfolio investment for monitoring, servicing,
consulting, or other fees in respect of any services that the
investment adviser does not, or does not reasonably expect to, provide
to the portfolio investment;
    (2) Charge the private fund for fees or expenses associated with an
examination or investigation of the adviser or its related persons by
any governmental or regulatory authority;
    (3) Charge the private fund for any regulatory or compliance fees
or expenses of the adviser or its related persons;
    (4) Reduce the amount of any adviser clawback by actual, potential,
or hypothetical taxes applicable to the adviser, its related persons,
or their respective owners or interest holders;
    (5) Seek reimbursement, indemnification, exculpation, or limitation
of its liability by the private fund or its investors for a breach of
fiduciary duty, willful misfeasance, bad faith, negligence, or
recklessness in providing services to the private fund;
    (6) Charge or allocate 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; and
    (7) Borrow money, securities, or other private fund assets, or
receive a loan or an extension of credit, from a private fund client.
    (b) For purposes of this section, defined terms shall have the
meanings set forth in Sec.  275.211(h)(1)-1.
0
8. Section 275.211(h)(2)-2 is added to read as follows:

Sec.  275.211(h)(2)-2   Adviser-led secondaries.

    (a) As a means reasonably designed to prevent fraudulent,
deceptive, or manipulative acts, practices, or courses of business
within the meaning of section 206(4) of the Act (15 U.S.C. 80b-6(4)),
it is unlawful for any investment adviser that is registered or
required to be registered under section 203 of the Act to complete an
adviser-led secondary transaction with respect to any private fund,
unless the adviser:
    (1) Obtains, and distributes to investors in the private fund, a
fairness opinion from an independent opinion provider; and
    (2) Prepares, and distributes to investors in the private fund, a
written summary of any material business relationships the adviser or
any of its related persons has, or has had within the past two years,
with the independent opinion provider, in each case, prior to the
closing of the adviser-led secondary transaction.
    (b) For purposes of this section, defined terms shall have the
meanings set forth in Sec.  275.211(h)(1)-1.
0
9. Section 275.211(h)(2)-3 is added to read as follows:

Sec.  275.211(h)(2)-3   Preferential treatment.

    (a) An investment adviser to a private fund may not, directly or
indirectly, do the following with respect to the private fund, or any
investor in that private fund:
    (1) Grant an investor in the private fund or in a substantially
similar pool of assets the ability to redeem its interest on terms that
the adviser reasonably expects to have a material, negative effect on
other investors in that private fund or in a substantially similar pool
of assets; or
    (2) Provide information regarding the portfolio holdings or
exposures of the private fund, or of a substantially similar pool of
assets, to any investor if the adviser reasonably expects that
providing the information would have a material, negative effect on
other investors in that private fund or in a substantially similar pool
of assets.
    (b) An investment adviser to a private fund may not, directly or
indirectly, provide any other preferential treatment to any investor in
the private fund unless the adviser provides written notices as
follows:
    (1) Advance written notice for prospective investors in a private
fund. The investment adviser shall provide to each prospective investor
in the private fund, prior to the investor's investment in the private
fund, a written notice that provides specific information regarding any
preferential treatment the adviser or its related persons provide to
other investors in the same private fund.
    (2) Annual written notice for current investors in a private fund.
The investment adviser shall distribute to current investors, on at
least an annual basis, a written notice that provides specific
information regarding any preferential treatment provided by the
adviser or its related persons to other investors in the same private
fund since the last written notice provided in accordance with this
section, if any.
    (c) For purposes of this section, defined terms shall have the
meanings set forth in Sec.  275.211(h)(1)-1.

    By the Commission.

    Dated: February 9, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-03212 Filed 3-23-22; 8:45 am]
BILLING CODE 8011-01-P