Accordingly, in response to commenters, we have decided not to adopt
this requirement to include ownership percentages for covered portfolio
investments.
---------------------------------------------------------------------------

    \292\ See CFA Comment Letter I.
    \293\ See ATR Comment Letter.
    \294\ See PIFF Comment Letter.
    \295\ See Convergence Comment Letter.

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

(c) Calculations and Cross-References to Organizational and Offering
Documents
    As proposed, the quarterly statement rule requires each statement
to include prominent disclosure regarding the manner in which expenses,
payments, allocations, rebates, waivers, and offsets are
calculated.\296\ This disclosure should assist private fund investors
in understanding and evaluating the adviser's calculations. This
disclosure will generally require advisers to describe, among other
things, the structure of, and the method used to determine, any
performance-based compensation set forth in the quarterly statement
(such as the distribution waterfall, if applicable) and the criteria on
which each type of compensation is based (e.g., whether such
compensation is fixed, based on performance over a certain period, or
based on the value of the fund's assets). To facilitate an investor's
ability to seek additional information and understand the basis of any
expense, payment, allocation, rebate, waiver, or offset calculation,
the quarterly statement also must include cross-references to the
relevant sections of the private fund's organizational and offering
documents that set forth the applicable calculation methodology.\297\
---------------------------------------------------------------------------

    \296\ Final rule 211(h)(1)-2(d).
    \297\ Id.
---------------------------------------------------------------------------

    Some commenters supported this calculation and cross-reference
disclosure requirement, stating that it would help investors monitor
and understand fees and expenses.\298\ Other commenters suggested that
this calculation and cross-reference disclosure requirement would be
too costly or that it would clutter the statement and make it more
difficult for investors to read and digest the information contained
therein.\299\
---------------------------------------------------------------------------

    \298\ See, e.g., Comment Letter of Albourne Group (Apr. 22,
2022) (``Albourne Comment Letter''); TRS Comment Letter; Comment
Letter of the California Public Employees' Retirement System (May 3,
2022) (``CalPERS Comment Letter'').
    \299\ See, e.g., LSTA Comment Letter; AIMA/ACC Comment Letter;
IAA Comment Letter II.
---------------------------------------------------------------------------

    The required cross-references to the fund's documents will enable
investors to compare what the private fund's documents establish that
the fund (and indirectly the investors) will be obligated to pay to
what the fund (and indirectly the investors) actually paid during the
reporting period and thus to assess and monitor more effectively the
accuracy of the payments. Including this information in the quarterly
statement will better enable an investor to confirm that the adviser
calculated, for example, advisory fees in accordance with the fund's
organizational and offering documents and to identify whether the
adviser deducted or charged incorrect or unauthorized amounts.
2. Performance Disclosure
    As proposed, in addition to providing information regarding fees
and expenses, the rule requires advisers to include standardized fund
performance information in each quarterly statement provided to fund
investors. The rule requires advisers to liquid funds \300\ to show
performance based on net total return on an annual basis for the 10
fiscal years prior to the quarterly statement or since the fund's
inception (whichever is shorter), over one-, five-, and 10-fiscal year
periods, and on a cumulative basis for the current fiscal year as of
the end of the most recent fiscal quarter. For illiquid funds,\301\ the
rule requires advisers to show performance based on internal rates of
return and multiples of invested capital since inception and to present
a statement of contributions and distributions.\302\ The rule requires
advisers to display the different categories of required performance
information with equal prominence.\303\
---------------------------------------------------------------------------

    \300\ The definition of a liquid fund is discussed below in this
section II.B.2.
    \301\ The definition of an illiquid fund is discussed below in
this section II.B.2.
    \302\ As discussed below, we are adopting modifications to (i)
the proposed definition of illiquid fund and, by reference, the
proposed definition of liquid fund and (ii) certain aspects of the
required performance disclosure for illiquid funds.
    \303\ Final rule 211(h)(1)-2(e)(2). For example, the rule
requires an adviser to an illiquid fund to show gross internal rate
of return with the same prominence as net internal rate of return.
Similarly, the rule requires an adviser to a liquid fund to show the
annual net total return for each fiscal year with the same
prominence as the cumulative net total return for the current fiscal
year as of the end of the most recent fiscal quarter covered by the
quarterly statement.
---------------------------------------------------------------------------

    Many commenters supported the performance disclosure requirement
and generally suggested that it would better enable investors to
monitor, compare, or otherwise alter their private fund
investments.\304\ Other commenters did not support this requirement for
a number of reasons.\305\ In general, opponents of this requirement
stated that the required performance disclosure in the quarterly
statements would lead to increased costs that would ultimately be
passed down to private fund investors with potentially little or no
corresponding benefit, as many advisers already regularly provide
performance reporting that they assert investors deem adequate.\306\
These commenters stated that current market practices are typically
sufficient and can potentially be more effective in conveying relevant
and fund-tailored information regarding a private fund's performance
than a standardized disclosure approach would.\307\
---------------------------------------------------------------------------

    \304\ See, e.g., CII Comment Letter; NEA and AFT Comment Letter;
OPERS Comment Letter; Morningstar Comment Letter.
    \305\ See, e.g., IAA Comment Letter II; Comment Letter of
ApeVue, Inc. (Apr. 25, 2022); ICM Comment Letter.
    \306\ See, e.g., Ropes & Gray Comment Letter; NYC Bar Comment
Letter II. While we acknowledge that quarterly statements may
increase costs, we believe these costs are justified in light of the
benefits of the rule. As discussed above, investors will benefit
from mandatory timely updates regarding fund performance. See supra
the introductory discussion in section II.B.
    \307\ See, e.g., Schulte Comment Letter; PIFF Comment Letter;
NYC Bar Comment Letter II.
---------------------------------------------------------------------------

    While we acknowledge that quarterly statements may increase costs,
we believe these costs are justified in light of the benefits of the
rule.\308\ It is essential that quarterly statements include
performance in order to enable investors to compare private fund
investments, comprehensively understand their existing investments, and
determine what to do holistically with their overall investment
portfolio.\309\ A quarterly statement that includes fee, expense, and
performance information will allow investors to monitor their
investments better for market developments and potential fund-level
abnormalities (e.g., if performance varies drastically quarter to
quarter or differs extensively from relevant market trends or, if
applicable, comparable benchmarks), as well as to understand more
broadly the impact of fees and expenses on the performance of their
investments. Simple and clear disclosure of this information is
fundamental to the terms of an investor's relationship with an adviser
because it is critical to investors' abilities to make investment
decisions. For example, a quarterly statement that includes fee and
expense, but not performance, information would not allow an investor
to perform a cost-benefit analysis to determine whether to retain the
current investment or consider other options. Similarly, an investor
without fee, expense, and performance information would be unable to
determine whether to invest in other private funds managed by the same
adviser. In addition, investors may use fee, expense, and performance
information about their current investments to inform their overall
investment decisions (e.g., whether to diversify) and their view of the
market. The inclusion of performance disclosure

in the quarterly statement also helps prevent fraud, deception, and
manipulation because it requires advisers to provide timely and
consistent performance disclosures to enable and empower investors to
assess adviser performance. This disclosure will decrease the
likelihood that investors will be defrauded, deceived, or manipulated
by deceptive or manipulative representations of performance and it
increases the likelihood that any misconduct will be detected sooner.
---------------------------------------------------------------------------

    \308\ See infra section VI.D.2.
    \309\ See infra section II.B.2.a) and section II.B.2.b) for
discussion of the use of the particular performance metrics
obligations for liquid funds and illiquid funds, respectively, in
the final rule.
---------------------------------------------------------------------------

    One commenter stated that we should align the performance reporting
standards with the principles-based approach reflected in the marketing
rule.\310\ Although there are commonalities between the performance
reporting elements of the final rule and the performance elements of
our recently adopted marketing rule, the two rules have different
purposes that stem from the needs of the different types of clients and
investors they seek to protect. While the marketing rule is focused on
prospective clients and investors,\311\ the quarterly statement rule is
focused on current clients and investors. All clients and investors
should be protected against misleading, deceptive, and confusing
information, but current clients and investors have different needs
from those of prospective clients and investors. Current investors
should receive performance reporting that allows them to evaluate an
investment alongside corresponding fee and expense information. Current
investors also should receive performance reporting that is provided at
timely, predictable intervals so that an investor can monitor and
evaluate an investment's progress over time, remain abreast of changes,
compare information from quarter to quarter, and take action where
possible.\312\ Although the marketing rule requires net performance to
accompany gross performance, it does not prescribe a breakdown of fees
and expenses to accompany performance as is required under the
quarterly statement rule. The marketing rule also does not require
performance to be delivered at specified intervals as is required under
the quarterly statement rule. While these rules both promote investor
protection, the quarterly statement rule is specifically designed to
meet the needs of current investors to evaluate their current
portfolios.
---------------------------------------------------------------------------

    \310\ See AIMA/ACC Comment Letter.
    \311\ Advertisements to prospective clients and investors
include advertisements to current clients and investors about new or
additional advisory services with regard to securities. See
Marketing Release, supra footnote 127, at section II.A.2.a.iv
(noting that the definition of ``advertisement'' includes a
communication to a current investor that offers new or additional
advisory services with regard to securities, provided that the
communication otherwise satisfies the definition of
``advertisement'').
    \312\ The marketing rule and its specific protections generally
do not apply in the context of a quarterly statement. See Marketing
Release, supra footnote 127, at sections II.A.2.a.iv and II.A.4.
---------------------------------------------------------------------------

    Without standardized performance metrics (and adequate disclosure
of the criteria used and assumptions made in calculating the
performance),\313\ it is more difficult for investors to compare their
private fund investments managed by the same adviser or gauge the value
of an adviser's investment management services by comparing the
performance of private funds advised by different advisers.\314\
Currently, there are various approaches to report private fund
performance to fund investors, often depending on the type of private
fund (e.g., the fund's strategy, structure, target asset class,
investment horizon, and liquidity profile). Certain of these approaches
to performance reporting may be misleading without the benefit of
adequately disclosed assumptions, and others may lead to investor
confusion. For example, an adviser showing internal rate of return with
the impact of fund-level subscription facilities could mislead
investors as fund-level subscription facilities can artificially
increase performance metrics.\315\ An adviser showing private fund
performance as compared to a public market equivalent (``PME'') in a
case where the private fund does not have an appropriate benchmark may
mislead investors to believe that the private fund performance is
comparable to the performance of the PME. Certain investors may also be
led to believe that their private fund investment has a liquidity
profile that is similar to an investment in the PME or an index that is
similar to the PME.
---------------------------------------------------------------------------

    \313\ Private funds can have various types of complicated
structures and involve complex financing mechanisms. As a result, an
adviser may need to make certain assumptions when calculating
performance for private funds.
    \314\ See David Snow, Private Equity: A Brief Overview: An
introduction to the fundamentals of an expanding, global industry,
PEI Media (2007), at 11 (discussing variations on private equity
performance metrics).
    \315\ See infra section II.B.2.b).
---------------------------------------------------------------------------

    Standardized performance information will help an investor decide
whether to continue to invest in the private fund or, if applicable,
redeem or withdraw from the private fund, as well as more holistically
to make decisions about other components of the investor's portfolio.
Furthermore, requiring advisers to show performance information
alongside fee and expense information in the quarterly statement will
provide a more complete picture of an investor's private fund
investment. This information will help investors understand the true
cost of investing in the private fund and be particularly valuable for
investors that are paying performance-based compensation. This
performance reporting will also provide greater transparency into how
private fund performance is calculated, improving an investor's ability
to understand performance.
    One commenter requested that we clarify that investors may
negotiate for performance and other reporting in addition to what is
required by this rule.\316\ The rule recognizes the need for different
performance metrics for private funds based on certain fund
characteristics, but also imposes a general framework to help ensure
there is sufficient standardization in order to provide useful,
comparable information to investors. An adviser remains free to include
additional performance metrics in the quarterly statement as long as
the quarterly statement presents the performance metrics prescribed by
the rule and complies with the other requirements in the rule. However,
advisers that choose to include additional information should consider
what other rules and regulations might apply. For example, although we
generally do not consider information in the quarterly statement
required by the rule to be an ``advertisement'' under the marketing
rule, an adviser that offers new or additional investment advisory
services with regard to securities in the quarterly statement would
need to consider whether such information is subject to the marketing
rule.\317\ An adviser also needs to consider whether performance
information presented outside of the required quarterly statement, even
if it contains some of the same information as the quarterly statement,
is subject to, and meets the requirements of, the marketing rule.
Regardless, the quarterly statement is subject to the antifraud
provisions of the Federal securities laws.\318\
---------------------------------------------------------------------------

    \316\ See NYC Comptroller Comment Letter.
    \317\ See rule 206(4)-1. A communication to a current investor
is an ``advertisement'' when it offers new or additional investment
advisory services with regard to securities.
    \318\ This includes the antifraud provisions of section 206 of
the Advisers Act, rule 206(4)-8 under the Advisers Act (rule 206(4)-
8), section 17(a) of the Securities Act, and section 10(b) of the
Exchange Act (and rule 10b-5 thereunder), to the extent relevant.
---------------------------------------------------------------------------

    Some commenters suggested that we should also require a public
market equivalent (``PME'') as part of the

quarterly statements.\319\ While a PME may be helpful in certain
circumstances, it can also be misleading or confusing in others. Many
private fund investment strategies may not have an appropriate PME. For
example, it may be difficult to identify an effective PME for a private
fund whose strategy is focused on turn-around opportunities for private
companies. Similarly, it may be challenging to identify appropriate
PMEs for certain private funds with highly technical or niche
strategies. A PME may also mislead investors to believe that their
investment has a similar liquidity profile to the PME. For example,
comparing the performance of a technology-focused buy-out fund to a
public technology company index may obscure the reality that the former
is illiquid while the latter is liquid and thus a reasonable investor
would not necessarily expect them to have the same performance.
Accordingly, the final rule does not require a PME as part of the
quarterly statements.
---------------------------------------------------------------------------

    \319\ See, e.g., NEA and AFT Comment Letter; Comment Letter of
the Interfaith Center on Corporate Responsibility (Apr. 25, 2022)
(``ICCR Comment Letter''); AFL-CIO Comment Letter.
---------------------------------------------------------------------------

    Certain commenters suggested that we should clarify that the
adviser's (and its affiliate's) interests should be excluded when
calculating performance because such interests are typically non-fee
paying.\320\ We agree that the adviser's (and its affiliate's)
interests should generally be excluded when calculating performance for
the quarterly statements to prevent the performance from being
misleading. A typical example would be the general partner's interest
in a private fund, which generally does not pay management fees or
carried interest. Due to the lack of fees, the performance of such non-
fee paying interests is not necessarily relevant for other investors
and would serve to increase net returns in a way that could be
misleading.
---------------------------------------------------------------------------

    \320\ See CFA Comment Letter I; Comment Letter of KPMG LLP (Apr.
25, 2022) (``KPMG Comment Letter'').
---------------------------------------------------------------------------

    One commenter suggested that we should not require performance
metrics until the fund has at least four quarters of results.\321\
While some private funds may have limited investment activities during
the first four quarters of their life, it is not always such the case.
Many liquid funds are able to deploy capital quickly and, as a result,
generate important performance information that investors should have
access to. Because investors have the ability to redeem from liquid
funds, it is also important that they begin receiving performance
information as soon as practicable so that they can decide whether or
not to remain invested in the fund. Many illiquid funds are also able
to deploy capital and realize or partially realize investments on an
accelerated basis and thus will have meaningful performance information
in the early quarters of their life. Accordingly, we are requiring all
private funds, whether liquid or illiquid, to provide quarterly
statements containing these performance metrics after their first two
full fiscal quarters of operating results.
---------------------------------------------------------------------------

    \321\ See AIC Comment Letter II.
---------------------------------------------------------------------------

Liquid v. Illiquid Fund Determination
    The performance disclosure requirements of the quarterly statement
rule require an adviser first to determine whether its private fund
client is an illiquid or liquid fund, as defined in the rule, no later
than the time the adviser sends the initial quarterly statement.\322\
The adviser is then required to present certain performance information
depending on this categorization. These definitions are intended to
facilitate consistent portrayals of the fund returns over time as well
as more standardized comparisons of the performance of similar funds.
---------------------------------------------------------------------------

    \322\ Final rule 211(h)(1)-2(e)(1). The rule does not require
the adviser to revisit the determination periodically; however,
advisers should generally consider whether they are providing
accurate information to investors and whether they need to revisit
the liquid/illiquid determination based on changes in the fund.
---------------------------------------------------------------------------

    We are defining ``illiquid fund'' as a private fund that: (i) is
not required to redeem interests upon an investor's request and (ii)
has limited opportunities, if any, for investors to withdraw before
termination of the fund.\323\
---------------------------------------------------------------------------

    \323\ Final rule 211(h)(1)-1 (defining ``illiquid fund'').
---------------------------------------------------------------------------

    At proposal, we had listed six factors used to identify an illiquid
fund: a private fund that (i) has a limited life; (ii) does not
continuously raise capital; (iii) is not required to redeem interests
upon an investor's request; (iv) has as a predominant operating
strategy the return of the proceeds from disposition of investments to
investors; (v) has limited opportunities, if any, for investors to
withdraw before termination of the fund; and (vi) does not routinely
acquire (directly or indirectly) as part of its investment strategy
market-traded securities and derivative instruments. The proposed
factors were aligned with the factors for determining how certain types
of private funds should report performance under U.S. Generally
Accepted Accounting Principles (``U.S. GAAP'').\324\ We requested
comment on whether we should modify the illiquid fund definition by
adding or removing factors.
---------------------------------------------------------------------------

    \324\ See Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 946-205-50-23.
---------------------------------------------------------------------------

    Many commenters supported the liquid and illiquid fund distinction
as part of the required performance reporting,\325\ and many other
commenters criticized it.\326\ Of these, a number of commenters
suggested we modify the proposed definitions for liquid and illiquid
funds.\327\ Certain commenters stated that the distinction between
liquid and illiquid funds is overly technical and does not align with
how sponsors typically market their private funds, particularly with
respect to the proposed ``disposition of investments'' prong.\328\ We
had requested comment specifically regarding whether the proposed
``disposition of investments'' prong could cause certain funds, such as
real estate funds and credit funds, for which we generally believe
internal rate of return and multiple of invested capital are the
appropriate performance measures, to be treated as liquid funds under
the proposed rule.\329\ Certain commenters responded with their view
that the proposed rule would result in private funds that should report
an internal rate of return and multiple of invested capital instead
reporting a total net return metric (or vice versa).\330\ Similarly, a
commenter stated that we should define ``illiquid fund'' more precisely
to capture strategies such as private credit, e.g., income generating
portion of assets, not just a focus on return of proceeds from the
disposition of investments, as contemplated by prong four of the
proposed definition.\331\ Some commenters stated that it may be unclear
how certain kinds of private funds would be categorized under the
proposed six factor definition.\332\
---------------------------------------------------------------------------

    \325\ See, e.g., OFT Comment Letter; IST Comment Letter; CII
Comment Letter.
    \326\ See, e.g., Morningstar Comment Letter; SIFMA-AMG Comment
Letter I; SBAI Comment Letter.
    \327\ See, e.g., ILPA Comment Letter I; SIFMA-AMG Comment Letter
I.
    \328\ Proposed prong (iv) states ``. . . has as a predominant
operating strategy the return of the proceeds from disposition of
investments to investors.''
    \329\ See Proposing Release, supra footnote 3, at 62.
    \330\ See, e.g., PIFF Comment Letter; Comment Letter of
Pricewaterhouse Coopers LLP (Apr. 25, 2022) (``PWC Comment
Letter'').
    \331\ See ILPA Comment Letter I.
    \332\ See, e.g., SIFMA-AMG Comment Letter I; Morningstar Comment
Letter; Convergence Comment Letter.
---------------------------------------------------------------------------

    After considering responses from commenters, we have decided that
the definition of an illiquid fund should focus only on number three
and number five of the proposed six factors, i.e., a private fund that
(i) is not required to

redeem interests upon an investor's request; and (ii) has limited
opportunities, if any, for investors to withdraw before termination of
the fund because we believe that redemption and withdrawal capability
represents the distinguishing feature between illiquid and liquid
funds. We also believe that, by narrowing the definition to this
distinguishing feature, the rule provides a more targeted approach and
will result in fewer funds being mischaracterized than under the
proposed definition.
    Generally, if a private fund allows voluntary redemptions/
withdrawals, then it is a liquid fund and must provide total returns.
Similarly, if a private fund does not allow voluntary redemptions/
withdrawals, then it is an illiquid fund and must provide internal
rates of return and multiples of invested capital. Private funds that
fall into the ``illiquid fund'' definition are generally closed-end
funds that do not offer periodic redemption/withdrawal options other
than in exceptional circumstances, such as in response to regulatory
events. For example, most private equity and venture capital funds will
likely fall under the illiquid fund definition, and the rule requires
advisers to these types of funds to provide performance metrics that
suit their particular characteristics, such as irregular cash flows,
which otherwise make measuring performance difficult for both advisers
and investors. We recognize, however, that even traditional, closed-end
private equity funds have certain redemption or withdrawal rights for
regulatory events (e.g., redemptions related to the Employee Retirement
Income Security Act (``ERISA'') and the Bank Holding Company Act
(``BHCA'')) and other extraordinary circumstances (e.g., redemptions
related to a violation of a State pay-to-play law). Private equity and
other similar closed-end funds would still be classified as illiquid
funds, as defined in this rule, so long as such opportunities to redeem
are limited.
    As proposed, we are defining a ``liquid fund'' as any private fund
that is not an illiquid fund. Some commenters generally supported the
liquid and illiquid fund distinction as noted above,\333\ while other
commenters generally criticized the distinction.\334\ We continue to
believe that the proposed definition is appropriate because it will
capture any fund that does not fit within the definition of ``illiquid
fund'' and ensure that liquid fund investors receive the same type of
performance metrics. Private funds that fall into the ``liquid fund''
definition generally allow periodic investor redemptions, such as
monthly, quarterly, or semi-annually. The rule will require advisers to
these types of funds to provide performance metrics that show the year-
over-year return using the market value of the underlying assets.
---------------------------------------------------------------------------

    \333\ See, e.g., OFT Comment Letter; IST Comment Letter; CII
Comment Letter.
    \334\ See, e.g., Morningstar Comment Letter; SIFMA-AMG Comment
Letter I; SBAI Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that the performance metrics for liquid
funds--which are discussed in detail below--will allow investors to
assess better these funds' performance. We understand that liquid funds
generally are able to determine their net asset value on a regular
basis and compute the year-over-year return using the market-based
value of the underlying assets. We have taken a similar approach with
regard to registered funds, which invest a substantial amount of their
assets in primarily liquid holdings (e.g., publicly traded securities)
and, as a result, are also generally able to determine their net asset
value on a regular basis and compute the year-over-year return using
the market-based value of the underlying assets. Investors in a private
fund that is a liquid fund would similarly find this information
helpful. Most traditional hedge funds likely fall into the liquid
bucket and will need to provide disclosures regarding the underlying
assumptions of the performance (e.g., whether dividends or other
distributions are reinvested).
    Some commenters suggested creating a third category to capture
certain ``hybrid'' funds.\335\ A third category for hybrid funds would
create confusion and increase the possibility of certain private funds
not clearly belonging to a single category. A category of hybrid funds
would encapsulate an enormous diversity of funds, many of which would
be more different from one another than they would be from liquid or
illiquid funds, as defined in the rule. Additionally, new structures
for private funds are constantly being developed, and there will
certainly be new approaches in the future as well that are difficult to
anticipate. It would likely be impractical to attempt to define
characteristics of hybrid funds and thus to determine what performance
metrics are necessary for them. We believe it is more effective to
crystallize the key difference between liquid and illiquid funds in the
final rule, as discussed above. In this regard, and as stated above, we
believe that our simplification of the definition of ``illiquid fund''
in the final rule will result in fewer funds being mischaracterized
than under the proposed definition, and thus this change in the final
rule will reduce the need to create an additional category of hybrid
funds to facilitate the categorization of private funds for performance
reporting purposes.
---------------------------------------------------------------------------

    \335\ See, e.g., Morningstar Comment Letter; Convergence Comment
Letter.
---------------------------------------------------------------------------

    Other commenters requested that we let advisers choose the most
appropriate approach with respect to performance reporting instead of
requiring these categories.\336\ A primary objective of the rule,
however, is to provide the investors of a private fund with comparable
performance information with respect to that fund and the investor's
other private fund investments. Accordingly, we believe that
establishing standardization with respect to a minimum level of
sufficient disclosure is necessary. Currently, it may be difficult for
certain investors to compare performance across their private fund
investments if the investors are not large enough to negotiate for
supplemental fund reporting or well-resourced enough to analyze in a
timely manner the potential nuances in how different private funds
present their performance. We believe that establishing a level of
standardized performance reporting should make it easier for investors
to evaluate their private fund investments and make more informed
investment decisions.
---------------------------------------------------------------------------

    \336\ See, e.g., BVCA Comment Letter; SBAI Comment Letter; AIMA/
ACC Comment Letter.
---------------------------------------------------------------------------

    The final rule requires advisers to provide performance reporting
for each private fund as part of the fund's quarterly statement. The
determination of whether a fund is liquid or illiquid dictates the type
of performance reporting that must be included and, because it will
result in funds with similar liquidity characteristics presenting the
same type of performance metrics, this approach will improve
comparability of private fund performance reporting for fund investors.
(a) Liquid Funds
    We are adopting the performance requirements for liquid funds as
proposed, other than (i) the proposed requirement for an adviser to
disclose annual net total returns since inception and (ii) the proposed
use of calendar year reporting periods. Under the final rule, an
adviser to a liquid fund is required to provide annual net total
returns since inception or for each fiscal

year over the 10 years prior to the quarterly statement, whichever is
shorter. As discussed in greater detail below, this change to the
minimum number of years of required performance is responsive to
commenters who stated that reporting since inception is overly broad
and that many advisers would not have records going back to inception.
Under the final rule, an adviser to a liquid fund must also provide
performance metrics based on fiscal rather than calendar year reporting
periods. As discussed in greater detail below,\337\ the adoption of
fiscal reporting periods seeks to align the delivery of the fourth
quarter statement with the time that private funds obtain their audited
annual financials. The adoption of fiscal reporting periods is also
responsive to commenters who stated that fiscal periods would more
closely align with industry practice.\338\ While this modification may
affect comparability for some investors across private funds with
differing fiscal years, we understand that the majority of private
funds' fiscal years match the calendar year and thus do not expect
comparability to be substantially affected in most cases. We discuss
each performance reporting requirement for liquid funds in turn below.
---------------------------------------------------------------------------

    \337\ See section II.B.3.
    \338\ See, e.g., AIMA/ACC Comment Letter; ILPA Comment Letter I;
SIFMA-AMG Comment Letter I (suggesting that the SEC require
reporting only on an annual basis within 120 days of the fund's
fiscal year end); GPEVCA Comment Letter (suggesting that any
periodic disclosure requirement be tied to the annual audit
process).
---------------------------------------------------------------------------

    Annual Net Total Returns. The final rule requires advisers to
liquid funds to disclose performance information in quarterly
statements for specified periods. First, as noted above, an adviser to
a liquid fund is required to disclose either the liquid fund's annual
net total returns since inception or for each fiscal year over the 10
years prior to the quarterly statement, whichever is shorter. For
example, a liquid fund that commenced operations four fiscal years ago
would show annual net total returns for each of the first four fiscal
years since its inception. A liquid fund that commenced operations
fourteen years ago, however, would be required to show annual net total
returns only for each of the most recent 10 fiscal years.
    Some commenters stated that the proposed requirement of performance
since inception is unworkable.\339\ In particular, certain commenters
stated that certain longstanding funds may not have the necessary
records to calculate the requisite performance metrics on an inception-
to-date basis, particularly those records outside of the record-keeping
requirements of the Advisers Act.\340\ Another commenter suggested
that, instead of annual returns since inception for liquid funds, we
should require annual returns for the past 10 years.\341\ We recognize
that it may be difficult for certain longstanding liquid funds to
calculate inception-to-date performance. Specifically, liquid funds
that have been operating for decades might have to make significant
estimations to be able to report inception-to-date performance if the
relevant records have not been maintained over their entire life. While
we believe there continues to be value in reporting inception-to-date
performance even for longstanding funds, we also do not want liquid
funds to be obligated to report inaccurate or misleading performance
information based on estimates of performance from decades ago to
investors. We agree with commenters that stated 10 years is an
appropriate time period for liquid funds to report performance,\342\ as
it will capture the salient performance history in most cases and
generally align with market practice and investor preferences, based on
staff experience. A 10-year period should also generally still capture
recent, relevant market cycles that may have affected performance.
Accordingly, we are requiring only a minimum of 10 years of performance
for liquid funds that have been in operation for longer than that.
Liquid funds are free, but not required, to report performance on a
longer horizon than 10 years, if applicable.
---------------------------------------------------------------------------

    \339\ See, e.g., ATR Comment Letter; AIMA/ACC Comment Letter.
    \340\ See, e.g., PWC Comment Letter; AIMA/ACC Comment Letter.
    \341\ See CFA Comment Letter I.
    \342\ See CFA Comment Letter II; Ropes & Gray Comment Letter.
---------------------------------------------------------------------------

    Annual net total returns will provide fund investors with a
comprehensive overview of the fund's performance over the life of the
fund or the prior 10 years, whichever is shorter, and improve an
investor's ability to compare the fund's performance with other similar
funds. As noted above, investors can use performance information in
connection with fee and expense information to analyze the value of
their private fund investments. This requirement helps ensure that
advisers do not present only recent performance results or only results
for periods with strong performance. The rule also requires advisers to
present each time period with equal prominence.
    Average Annual Net Total Returns. Second, advisers to liquid funds
are required to show each liquid fund's average annual net total
returns over the one-, five-, and 10-year periods, as proposed.\343\ If
the private fund did not exist for any of these prescribed time
periods, then the adviser is not required to provide the corresponding
information. Requiring performance over these time periods will provide
investors with standardized performance metrics that reflect how the
private fund performed during different market or economic conditions.
These time periods provide reference points for private fund investors,
particularly when comparing two or more private fund investments, and
provide private fund investors with aggregate performance information
that can serve as a helpful summary of the fund's performance.
---------------------------------------------------------------------------

    \343\ Final rule 211(h)(1)-2(e)(2)(i)(B).
---------------------------------------------------------------------------

    One commenter suggested that we should include a definition for
``net total returns.'' \344\ To the contrary, other commenters
suggested that we should not prescribe how performance is
calculated.\345\ We think that defining ``net total returns'' for
liquid funds in this rulemaking may not result in the best outcomes for
investors. As used in the final rule, the liquid fund category captures
a set of private funds that is unrestricted so long as they do not meet
the definition of an illiquid fund and, as a result, is highly diverse.
Some liquid funds target highly niche assets for which the calculation
of net total returns is based on specialized industry norms and
practices. Without further consideration and study, prescribing a
single definition for ``net total returns'' could end up harming
investors by distorting the reported performance of liquid funds that
invest in less common asset classes from what investors have come to
understand and expect. Consequently, we do not believe it is
appropriate to prescribe a definition for ``net total returns'' at this
time.
---------------------------------------------------------------------------

    \344\ See CFA Comment Letter I.
    \345\ See, e.g., GPEVCA Comment Letter; BVCA Comment Letter.
---------------------------------------------------------------------------

    Certain commenters stated that requiring liquid funds to report the
one-, five-, and 10-year periods would provide data to investors that
the Commission recently determined in the marketing rule was not useful
information for private funds.\346\ One such commenter asserted that
requiring the use of standardized reporting information to be presented
alongside

the more relevant data would result in multiple sets of performance
data and metrics, creating additional confusion for investors and an
overwhelming volume of information.\347\ While we acknowledge that the
marketing rule excepted private funds from its one-, five-, and 10-year
periods presentation requirement, the underlying concern with requiring
these intervals was that it could be not useful or meaningful, and
possibly confusing, for investors in a closed-end fund.\348\ Among our
reasons for excepting all private funds from the requirement under the
marketing rule, we stated that we did not believe the benefit of having
advisers parse the rule's requirements based on specific fund types
would justify the complexity.\349\ Performance information in the
quarterly statements serves a somewhat different purpose, however. As
stated above, the needs of current clients and investors often differ
in some respects from the needs of prospective clients and investors.
Current investors generally need to receive performance reporting
during different time periods to be able to evaluate properly an
investment's performance. Current investors also generally need to
receive performance reporting that is provided at timely, predictable
intervals to be able to compare information effectively from quarter to
quarter and year to year, and thus be positioned to take action where
possible. Requiring regular disclosure of performance for liquid funds
over these periods will help prevent fraud, deception, and manipulation
because timely and consistent performance information will decrease the
likelihood that investors will be defrauded, deceived, or manipulated
by deceptive or misleading representations of performance, especially
if such representations occur with respect to each time period.\350\ It
also increases the likelihood that any misconduct will be detected
sooner. Accordingly, the final rule will retain the one-, five- and 10-
year periods for liquid funds because we believe they will assist
investors with this process.
---------------------------------------------------------------------------

    \346\ See, e.g., IAA Comment Letter II; NYC Bar Comment Letter
II; PIFF Comment Letter; Schulte Comment Letter. See also Marketing
Release, supra footnote 127, at 182.
    \347\ See PIFF Comment Letter.
    \348\ See Marketing Release, supra footnote 127, at 181-182.
    \349\ See id.
    \350\ For example, if performance suddenly and dramatically
improves without explanation, then investors will be in a better
position (especially where there are comparable benchmarks that did
not experience the same sudden and dramatic change) to ask advisers
to provide an explanation and assess whether fraud, deception or
manipulation may be occurring.
---------------------------------------------------------------------------

    Cumulative Net Total Returns. Third, the adviser is required to
show the liquid fund's cumulative net total return for the current
fiscal year as of the end of the most recent fiscal quarter covered by
the quarterly statement. For example, a liquid fund that has been in
operation for four fiscal years (beginning on January 1) and seven
months would show, pursuant to this requirement, the cumulative net
total return for the current fiscal year through the end of the second
quarter (i.e., year-to-date fund performance as of the end of the most
recent fiscal quarter covered by the quarterly statement). This
information will provide fund investors with insight into the fund's
most recent performance, which investors can use to assess the fund's
performance during recent market conditions. This quarterly performance
information will also provide helpful context for reviewing and
monitoring the fees and expenses borne by the fund during recent
quarters, which the quarterly statement will disclose.
    These required performance metrics should allow investors to better
assess these funds' performance. Liquid funds generally should be able
to determine their net asset value on a regular basis and compute the
year-over-year return using the market-based value of the underlying
assets. We have taken a similar approach with regard to registered
open-end funds, which typically invest a substantial amount of their
assets in primarily liquid underlying holdings (e.g., publicly traded
securities).\351\ Liquid funds, like registered funds, currently
generally report performance, at a minimum, on an annual and quarterly
basis. Investors in a private fund that is a liquid fund would
similarly find this information helpful. Most traditional hedge funds
are likely liquid funds and will need to provide disclosures regarding
the underlying assumptions of the performance (e.g., whether dividends
or other distributions are reinvested).\352\
---------------------------------------------------------------------------

    \351\ See, e.g., Item 4(b)(2) of Form N-1A.
    \352\ See supra the discussion of the definition of ``liquid
fund'' in section II.B.2.
---------------------------------------------------------------------------

    One commenter suggested that we should reevaluate the requirement
for liquid funds to show both annualized and cumulative net performance
and grant private funds flexibility in providing either annualized or
cumulative net performance.\353\ We decided not to allow this
flexibility to help ensure that investors receive standardized,
comparable information for each private fund. Permitting advisers to
pick and choose which return metrics to use would be inconsistent with
this goal. Accordingly, as proposed, the final rule will require
advisers to show both annualized and cumulative net performance.
---------------------------------------------------------------------------

    \353\ See SIFMA-AMG Comment Letter I.
---------------------------------------------------------------------------

    Another commenter suggested that we should also require liquid
funds to provide average annual net returns over a three-year period in
addition to the one-, five- and 10-year periods to potentially provide
additional transparency to private fund investors.\354\ Although we
recognize that additional performance information may serve to enhance
the overall amount of information available to investors, we believe
that the presentation of standardized performance information for one-,
five- and 10-year periods will provide a sufficient level of minimum
disclosure (which may be further supplemented) for private fund
investors to monitor and gain insight into how a private fund performed
during different market or economic conditions.\355\
---------------------------------------------------------------------------

    \354\ See Morningstar Comment Letter.
    \355\ We also note that advisers are able to provide, and
investors are free to request and negotiate for, average annual net
returns over a three-year period, provided that such additional
reporting complies with other regulations, such as the final
marketing rule when applicable. See supra the introductory
discussion in section II.B.2.
---------------------------------------------------------------------------

(b) Illiquid Funds
    We are adopting the performance requirements for illiquid funds
largely as proposed, other than the requirement for an adviser to
disclose performance figures solely without the impact of fund-level
subscription facilities. Under the final rule, an adviser is required
to disclose performance figures with and without the impact of fund-
level subscription facilities. As discussed in greater detail below,
this change is responsive to commenters who stated that reporting both
sets of performance figures would provide investors with a more
complete picture of the fund's performance. We discuss each performance
reporting requirement for illiquid funds in turn below.
    The rule requires advisers to illiquid funds to disclose the
following performance measures in the quarterly statement, shown since
inception of the illiquid fund and computed with and without the impact
of any fund-level subscription facilities: \356\
---------------------------------------------------------------------------

    \356\ One commenter recommended that we should clarify how
distributions that are recalled by advisers for additional
investments (often referred to as ``recycling'') should be treated
for certain of these illiquid fund performance metrics. See CFA
Comment Letter II. Advisers generally should treat any distributions
that they recall for additional investments as additional
contributions for purposes of calculating these illiquid fund
performance metrics as we understand this is the expectation of
investors. As a result, illiquid fund performance information that
does not treat such recalled distributions as additional
contributions may be misleading.

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

    (i) Gross internal rate of return and gross multiple of invested
capital for the illiquid fund;
    (ii) Net internal rate of return and net multiple of invested
capital for the illiquid fund; and
    (iii) Gross internal rate of return and gross multiple of invested
capital for the realized and unrealized portions of the illiquid fund's
portfolio, with the realized and unrealized performance shown
separately.
    The rule also requires advisers to provide investors with a
statement of contributions and distributions for the illiquid
fund.\357\
---------------------------------------------------------------------------

    \357\ Final rule 211(h)(1)-2I(2)(ii).
---------------------------------------------------------------------------

    Since Inception. The rule requires an adviser to disclose the
illiquid fund's performance measures since inception. This requirement
will ensure that advisers are not providing investors with only recent
performance results or presenting only results or periods with strong
performance, which could mislead investors. We are requiring this for
all illiquid fund performance measures under the rule, including the
performance measures for the realized and unrealized portions of the
illiquid fund's portfolio.
    The rule requires an adviser to include performance measures for
the illiquid fund through the end of the quarter covered by the
quarterly statement. We recognize, however, that certain funds may need
information from portfolio investments and other third parties to
generate performance data and thus may not have the necessary
information prior to the distribution of the quarterly statement.
Accordingly, to the extent quarter-end numbers are not available at the
time of distribution of the quarterly statement, an adviser is required
to include performance measures through the most recent practicable
date, which we generally believe would be through the end of the
quarter immediately preceding the quarter covered by the quarterly
statement. The rule requires the quarterly statement to reference the
date the performance information is current through (e.g., December 31,
2023).\358\
---------------------------------------------------------------------------

    \358\ Final rule 211(h)(1)-2(e)(2)(iii).
---------------------------------------------------------------------------

    Some commenters supported the since inception performance
disclosure requirement for illiquid funds,\359\ while other commenters
criticized it.\360\ One commenter commented specifically on the since
inception requirement for illiquid fund performance, stating that we
should retain this requirement because inception-to-date returns allow
investors to understand the improvement or deterioration of returns
over the most relevant period, especially for illiquid funds with long-
hold periods.\361\ We believe that it is important for illiquid funds
to provide performance information since inception so that investors
are able to evaluate the full performance of their investment. For many
illiquid funds, investors commit capital at or near the inception of
the fund.\362\ These same investors generally also contribute the
capital used to make the fund's initial investments. Accordingly,
anything less than performance since inception would misrepresent the
performance of such investors' investments in the illiquid fund. While
there may be situations where investors make capital commitments to an
illiquid fund later on in its life, we understand that these
circumstances are rare. Even in these scenarios, the illiquid fund may
have already made most of the investments it will make over its life by
the time this capital is committed later in its life. We also agree
with this commenter that inception-to-date returns allow investors to
better assess performance trends, particularly for illiquid funds,
since inception performance will generally align with the typical
investment holding period and the period for which the performance-
based fee is generally calculated for many illiquid funds. Accordingly,
we maintain that performance since inception is the best approach for
representing the illiquid fund's performance.
---------------------------------------------------------------------------

    \359\ See, e.g., Trine Comment Letter; AFREF Comment Letter I;
IST Comment Letter.
    \360\ See, e.g., IAA Comment Letter II; PIFF Comment Letter;
AIMA/ACC Comment Letter.
    \361\ See CFA Comment Letter II.
    \362\ Investors that enter an illiquid fund in a closing
subsequent to the fund's initial closing are also generally subject
to types of equalization payments or adjustments (e.g., ``true-
ups'') that result in their treatment by the private fund as if they
had entered the fund at its initial closing.
---------------------------------------------------------------------------

    Computed With and Without the Impact of Fund-Level Subscription
Facilities. The rule requires advisers to calculate performance
measures for each illiquid fund both with and without the impact of
fund-level subscription facilities.\363\ For performance measures
without the impact of fund-level subscription facilities (``unlevered
returns''), the rule requires advisers to calculate performance
measures as if the private fund called investor capital, rather than
drawing down on fund-level subscription facilities, as proposed.\364\
For performance measures with the impact of fund-level subscription
facilities (``levered returns''), the rule requires advisers to
calculate performance measures reflecting the actual capital activity
from both investors and fund-level subscription facilities, including,
for the avoidance of doubt, any activity prior to investor capital
contributions as a result of the fund drawing down on fund-level
subscription facilities.
---------------------------------------------------------------------------

    \363\ Final rule 211(h)(1)-2(e)(2)(ii)(A).
    \364\ As discussed below, the rule also requires advisers to
prominently disclose the criteria used and assumptions made in
calculating performance. This includes the criteria and assumptions
used to prepare an illiquid fund's unlevered performance measures.
---------------------------------------------------------------------------

    In response to our requests for comment, a number of commenters
suggested that we require performance measures for illiquid funds both
with and without the impact of fund-level subscription facilities.\365\
Of these, one commenter stated that requiring performance measures for
illiquid funds both with and without the impact of fund-level
subscription facilities would provide a more complete picture of the
effects of a fund's financing strategies.\366\ Another commenter stated
that this approach would allow investors to understand the impact of
the adviser's decision to use a subscription facility.\367\ In response
to commenters, we are requiring advisers to calculate performance
measures for each illiquid fund both with and without the impact of
fund-level subscription facilities. As one commenter pointed out, an
internal rate of return with the impact of the subscription facilities
is typically used to calculate performance-based compensation, and this
return also usually reflects the actual investor return.\368\
Accordingly, after considering comments, we think it is necessary for
investors to be able to compare their illiquid fund performance both
with and without the impact of fund-level subscription facilities to
better

understand how the use and costs of any fund-level subscription
facilities are affecting their returns. Because most advisers with
fund-level subscription facilities are already reporting performance
with the impact of such facilities, we do not anticipate that this
requirement will entail substantial additional burdens for most
advisers.\369\
---------------------------------------------------------------------------

    \365\ See, e.g., ILPA Comment Letter I; Comment Letter of
Predistribution Initiative (Apr. 25, 2022) (``Predistribution
Initiative Comment Letter II''); IST Comment Letter.
    \366\ See Predistribution Initiative Comment Letter II.
    \367\ See CFA Comment Letter I. However, this commenter also
stated that, in certain cases, the calculation of performance
without the impact of subscription facilities could be challenging,
particularly for historical periods. The commenter stated that
advisers may need to make assumptions about which historical capital
calls would have been impacted. Because the final rule requires
advisers to disclose any assumptions used in calculating
performance, we believe that investors will be able to analyze the
assumptions made and weigh their impact on performance. Nonetheless,
we recognize that, to the extent these assumptions by advisers are
not accurate, the benefits of the information to investors may be
reduced. See infra section VI.D.2.
    \368\ See CFA Comment Letter I.
    \369\ See infra section VI.D.2.
---------------------------------------------------------------------------

    Some commenters suggested exempting advisers from the requirement
to present unlevered returns to the extent they used subscription
facilities on a short term basis to efficiently manage capital, rather
than to increase returns.\370\ Of these, some stated that this
exemption would be for advisers using facilities solely or primarily to
streamline capital calls and not to enhance performance.\371\ Some
commenters suggested that a ``short-term'' subscription facility is
generally one for which the facility is repaid within 120 days using
committed capital that is drawn down through a capital call.\372\ While
we acknowledge that some short-term subscription facilities may be less
likely to cause the issues we discuss below, providing such an
exemption could lead to certain undesirable outcomes. For instance, a
fund may only repay each use of a subscription facility within 120 days
for the first two years of the fund's life but then start leaving such
subscription facility unpaid for longer spans of time for the remaining
eight years of its life. If we were to provide such an exemption, such
a fund would not be required to show unlevered performance measures for
the first two years but then would be required to do so in the third
year. However, in year three and after, investors would only have past
levered performance measures and may find it difficult to assess the
newly received unlevered performance measures. Additionally, it is
important that investors understand how costs associated with a
subscription facility are affecting performance, and the unlevered
performance measures will facilitate this understanding.
---------------------------------------------------------------------------

    \370\ See, e.g., CFA Comment Letter I; AIC Comment Letter II;
ILPA Comment Letter I.
    \371\ See, e.g., AIC Comment Letter II; ILPA Comment Letter I.
    \372\ See, e.g., CFA Comment Letter I; ILPA Comment Letter I.
---------------------------------------------------------------------------

    As proposed, we are defining ``fund-level subscription facilities''
as any subscription facilities, subscription line financing, capital
call facilities, capital commitment facilities, bridge lines, or other
indebtedness incurred by the private fund that is secured by the
unfunded capital commitments of the private fund's investors.\373\ This
definition is designed to capture the various types of subscription
facilities prevalent in the market that serve as temporary replacements
or substitutes for investor capital.\374\ Such facilities enable the
fund to use loan proceeds--rather than investor capital--to fund
investments initially and pay expenses. This practice permits the fund
to delay the calling of capital from investors, which has the potential
to increase performance metrics artificially.
---------------------------------------------------------------------------

    \373\ Final rule 211(h)(1)-1. The rule defines ``unfunded
capital commitments'' as committed capital that has not yet been
contributed to the private fund by investors, and ``committed
capital'' as any commitment pursuant to which a person is obligated
to acquire an interest in, or make capital contributions to, the
private fund. See id.
    \374\ We recognize that a private fund may guarantee portfolio
investment indebtedness. In such a situation, if the portfolio
investment does not have sufficient cash flow to pay its debt
obligations, the fund may be required to cover the shortfall to
satisfy its guarantee. Even though investors' unfunded commitments
may indirectly support the fund's guarantee, the definition would
not cover such fund guarantees. Unlike fund-level subscription
facilities, such guarantees generally are not put in place to enable
the fund to delay the calling of investor capital.
---------------------------------------------------------------------------

    Many advisers currently provide performance figures that reflect
the impact of fund-level subscription facilities. We believe that these
``levered'' performance figures, alone, have the potential to mislead
investors.\375\ For example, an investor could reasonably believe that
levered performance results are similar to those that the investor has
achieved from its investment in the fund. Unlevered performance
figures, when presented alongside levered performance figures, will
provide investors with more meaningful data and improve the
comparability of returns.
---------------------------------------------------------------------------

    \375\ We recognize that fund-level subscription facilities can
be an important cash management tool for both advisers and
investors. For example, a fund may use a subscription facility to
reduce the overall number of capital calls and to enhance its
ability to execute deals quickly and efficiently.
---------------------------------------------------------------------------

    We stated in the proposal that we would generally interpret the
phrase computed without the impact of fund-level subscription
facilities to require advisers to exclude fees and expenses associated
with the subscription facility, such as the interest expense, when
calculating net performance figures and preparing the statement of
contributions and distributions. One commenter suggested that excluding
subscription line fees and expenses from net performance should be
optional, rather than required.\376\ On the contrary, allowing such
flexibility would degrade comparability and standardization. In
addition, this approach is appropriate because it will result in
returns that show what the fund would have achieved if there were no
subscription facility, which will help investors understand the impact
of the use of the subscription facility.
---------------------------------------------------------------------------

    \376\ See CFA Comment Letter I. This commenter stated that it
could be challenging to identify all activity related to these
subscription facilities for those advisers that have not previously
calculated internal rates of return without the impact of
subscription facilities, particularly for funds with long histories.
While we acknowledge these calculations could be challenging in
certain instances, we believe these burdens are justified by the
benefits of improved comparability and standardization across
quarterly statements. Moreover, we also believe that these
challenges will lessen as older funds wind down.
---------------------------------------------------------------------------

    While there may be certain circumstances under which including
subscription line fees and expenses in unlevered performance metrics
may have advantages, standardization is important. If we were to make
the exclusion of subscription line fees and expenses from net
performance for illiquid funds optional instead of required, some
advisers might include such fees and expenses while others might
exclude them. This variability could make it difficult for investors to
assess unlevered performance metrics across illiquid funds that are
managed by different advisers. Additionally, some advisers might start
by including subscription line fees and expenses from unlevered
performance metrics and then switch to excluding such fees and expenses
if there was a downward trend in performance. This potential
gamesmanship could mislead investors. Accordingly, we are not allowing
such optionality.
    Fund-Level Performance. The rule requires an adviser to disclose an
illiquid fund's gross and net internal rate of return and gross and net
multiple of invested capital for the illiquid fund. We are adopting the
entirety of this portion of the rule, including all definitions
discussed below, as proposed.
    Some commenters supported this performance disclosure requirement
as providing a useful component in the totality of information that
would be required to be provided to private fund investors under the
rule.\377\ Other commenters criticized this performance disclosure
requirement on a number of grounds.\378\ One commenter stated that we
should prohibit the use of internal rates of return and multiples of
invested capital because they can be flawed

performance metrics,\379\ and another commenter indicated that these
performance metrics may not be meaningful in the early stages of a fund
until it has had time to deploy its capital and generate returns.\380\
Finally, certain commenters stated that advisers and investors should
retain discretion to determine appropriate performance metrics.\381\
---------------------------------------------------------------------------

    \377\ See, e.g., ICCR Comment Letter; AFREF Comment Letter I;
NEA and AFT Comment Letter.
    \378\ See, e.g., SBAI Comment Letter; PIFF Comment Letter; AIMA/
ACC Comment Letter.
    \379\ See Comment Letter of SOC Investment Group (Apr. 25, 2022)
(``SOC Comment Letter'').
    \380\ See AIC Comment Letter II.
    \381\ See, e.g., PIFF Comment Letter; SBAI Comment Letter.
---------------------------------------------------------------------------

    We recognize that most illiquid funds have particular
characteristics, such as irregular cash flows, that make measuring
performance difficult for both advisers and investors. We also
recognize that internal rate of return and multiple of invested capital
have their drawbacks as performance metrics.\382\ Nonetheless, we
continue to believe that, received together, these metrics complement
one another.\383\ Moreover, these metrics, combined with a statement of
contributions and distributions reflecting cash flows discussed below,
will help investors holistically understand the fund's performance,
allow investors to diligence the fund's performance, and calculate
other performance metrics they may find helpful. When presented in
accordance with the conditions and other disclosures required under the
rule, such standardized reporting measures will provide meaningful
performance information for investors, allowing them to compare returns
among funds that they are invested in and make more-informed decisions
with respect to, for example, other components of their portfolios or
whether or not to invest with the same adviser in the future.
Accordingly, we are adopting this aspect of the rule as proposed.
---------------------------------------------------------------------------

    \382\ Primarily, multiple of invested capital does not factor in
the amount of the time it takes for a fund to generate a return, and
internal rate of return assumes early distributions will be
reinvested at the same rate of return generated at the initial exit.
    \383\ By receiving both an internal rate of return and a
multiple of invested capital, an investor will be able to use each
performance metric to assess the limitations of the other. For
example, a high multiple of invested capital but a low internal rate
of return likely means that returns are low compared to the length
of time the investment has been held. Similarly, a high internal
rate of return but a low multiple of invested capital likely means
that the investment was not held long enough to generate substantial
returns for the fund.
---------------------------------------------------------------------------

    As proposed, we are defining ``internal rate of return'' as the
discount rate that causes the net present value of all cash flows
throughout the life of the private fund to be equal to zero.\384\ Cash
flows will be represented by capital contributions (i.e., cash inflows)
and fund distributions (i.e., cash outflows), and the unrealized value
of the fund will be represented by a fund distribution (i.e., a cash
outflow). This definition will provide investors with a time-adjusted
return that takes into account the size and timing of a fund's cash
flows and its unrealized value at the time of calculation.\385\
---------------------------------------------------------------------------

    \384\ Final rule 211(h)(1)-1 (defining ``gross IRR'' and ``net
IRR'').
    \385\ When calculating a fund's internal rate of return, an
adviser will need to take into account the specific date a cash flow
occurred (or is deemed to occur). Certain electronic spreadsheet
programs have ``XIRR'' or other similar formulas that require the
user to input the applicable dates.
---------------------------------------------------------------------------

    We are defining ``multiple of invested capital'' as (i) the sum of:
(A) the unrealized value of the illiquid fund; and (B) the value of all
distributions made by the illiquid fund; (ii) divided by the total
capital contributed to the illiquid fund by its investors.\386\ This
definition will provide investors with a measure of the fund's
aggregate value (i.e., the sum of clauses (i)(A) and (i)(B)) relative
to the capital invested (i.e., clause (ii)) as of the end of the
applicable reporting period, as proposed. Unlike the definition of
internal rate of return, the multiple of invested capital definition
does not take into account the amount of time it takes for a fund to
generate a return (meaning that the multiple of invested capital
measure focuses on ``how much'' rather than ``when'').
---------------------------------------------------------------------------

    \386\ Final rule 211(h)(1)-1 (defining ``gross MOIC'' and ``net
MOIC'').
---------------------------------------------------------------------------

    We received few comments on the proposed definitions, with one
commenter stating that neither definition takes into account the timing
of fund transactions.\387\ Another commenter argued that definitions
were unnecessary because investors have their own methods for
calculating internal rate of return and multiple of invested capital,
and that advisers typically provide investors with sufficient
information to calculate performance already.\388\ After considering
comments, we believe that the proposed definitions of internal rate of
return and multiple of invested capital are appropriate because they
will promote comparability and standardization. As stated in the
proposal, the definitions are generally consistent with how the
industry currently calculates such performance metrics. By adopting
definitions that are widely understood and accepted in the industry,
the rule will decrease the risk of advisers presenting internal rate of
return and multiple of invested capital performance figures that are
not comparable. Furthermore, the rule will not prevent an adviser from
providing information or performance metrics in addition to those
required by the rule (subject to other requirements applicable to the
adviser) or an investor from using such additional information or
metrics for its own calculations.
---------------------------------------------------------------------------

    \387\ See Comment Letter of XTAL Strategies (Feb. 28, 2022)
(``XTAL Comment Letter''). As discussed in greater detail below in
Section VI.C.3, this commenter provided examples where multiple
funds with different distribution timings had the same internal
rates of return. However, we were not persuaded by this commenter
because the fact that it is possible to construct examples in which
two funds with different timings of payments can have the same
internal rates of return does not mean that such performance metric
broadly fails to take into account the timing of transactions.
    \388\ See AIC Comment Letter II.
---------------------------------------------------------------------------

    As proposed, the final rule requires advisers to present each
performance metric on a gross and net basis.\389\ Commenters were
generally supportive of this requirement.\390\ Presenting both gross
and net performance measures will help prevent investors from being
misled. Gross performance will provide insight into the profitability
of underlying investments selected by the adviser. Solely presenting
gross performance, however, may imply that investors have received the
full amount of such returns. The net performance will assist investors
in understanding the actual returns received and, when presented
alongside gross performance, the negative effect fees, expenses, and
performance-based compensation have had on past performance.
---------------------------------------------------------------------------

    \389\ Final rule 211(h)(1)-2(e)(2)(ii).
    \390\ See, e.g., NEA and AFT Comment Letter (noting
``[s]tandardized reporting of the internal rate of return (IRR) and
the multiple of capital (MoC) invested, both gross and net of fees
and considering the use of subscription credit lines, would mark a
leap forward in transparency.''); see also AFL-CIO Comment Letter;
ICM Comment Letter; ILPA Comment Letter I.
---------------------------------------------------------------------------

    Statement of Contributions and Distributions. The rule also
requires an adviser to provide a statement of contributions and
distributions for the illiquid fund reflecting the aggregate cash
inflows from investors and the aggregate cash outflows from the fund to
investors, along with the fund's net asset value, as proposed.\391\
---------------------------------------------------------------------------

    \391\ At proposal, the statement of contributions and
distributions requirement was listed as rule 211(h)(1)-
2(e)(2)(ii)(A)(4). At adoption, we have changed the statement of
contributions and distributions requirement to rule 211(h)(1)-
2(e)(2)(ii)(B). We have made this change for clarification as a
statement of contributions and distributions is not a ``performance
measure'' that can be ``computed'' as rule 211(h)(1)-2(e)(2)(ii)(A)
is phrased.
---------------------------------------------------------------------------

    We are defining a statement of contributions and distributions as a
document that presents:
    (i) All capital inflows the private fund has received from
investors and all

capital outflows the private fund has distributed to investors since
the private fund's inception, with the value and date of each inflow
and outflow; and
    (ii) The net asset value of the private fund as of the end of the
reporting period covered by the quarterly statement.\392\
---------------------------------------------------------------------------

    \392\ Final rule 211(h)(1)-1.
---------------------------------------------------------------------------

    Some commenters supported the requirement to provide a statement of
contributions and distributions.\393\ Other commenters criticized
specific parts of this requirement.\394\ One commenter suggested that
the statement of contributions and distributions would be of limited
value to private fund investors and is not often currently requested by
private fund investors,\395\ whereas another commenter conversely
suggested that private fund investors typically already receive
information beyond what we are requiring to be included in the
statement of contributions and distributions.\396\ Another commenter
suggested that we provide flexibility with respect to the requirement
that the statement of contributions and distributions include the date
of each cash inflow and outflow, in light of the possibility that older
cash flow information may have been recorded by certain advisers using
legacy systems that assumed that all cash flows during a certain period
occurred on the last day of such period.\397\
---------------------------------------------------------------------------

    \393\ See, e.g., CFA Comment Letter I; OFT Comment Letter.
    \394\ See, e.g., IAA Comment Letter II; PIFF Comment Letter.
    \395\ See IAA Comment Letter II.
    \396\ See ILPA Comment Letter I.
    \397\ See CFA Comment Letter II.
---------------------------------------------------------------------------

    We believe that the statement of contributions and distributions
will provide private fund investors with important information
regarding the fund's performance, because it will reflect the
underlying data used by the adviser to generate the fund's returns,
which, in many cases, is not currently provided to private fund
investors. Such data will allow investors to diligence the various
performance measures presented in the quarterly statement. In addition,
this data will allow the investors to calculate additional performance
measures based on their own preferences.
    Some commenters suggested that subscription facility fees and
expenses should be included in the statement of contributions and
distributions.\398\ At proposal, we had required private fund advisers
to exclude such fees and expenses because we had proposed to require
only unlevered performance metrics for illiquid funds and believed that
the statement of contributions and distributions should directly align
with these unlevered performance metrics. As we are requiring both
levered and unlevered performance to be included in the quarterly
statement for illiquid funds under the final rule, advisers should
consider including in the statement of contributions and distributions
any fees and expenses related to a subscription facility.
---------------------------------------------------------------------------

    \398\ See, e.g., CFA Comment Letter I; AIC Comment Letter II.
---------------------------------------------------------------------------

    One commenter suggested that we should require additional detail in
the statement of contributions and distributions.\399\ We believe that
it is important that the statement of contributions and distributions
provide sufficient information to enable investors to conduct due
diligence on the various performance measures presented in the
quarterly statement and to potentially perform their own additional
performance calculations. Investors will need the dates and amounts of
subscription facility drawdowns to be able to calculate unlevered
returns. As such, we view these dates and amounts as providing
investors critical information necessary to perform these calculations
on their own. Although we are not prescribing additional particular
information to be disclosed beyond what was included in the proposal,
advisers may wish to consider also providing other details they believe
investors would find relevant in the statement of contributions and
distributions, such as information about how each contribution and
distribution was used and the dates of drawdowns from fund-level
subscription facilities.
---------------------------------------------------------------------------

    \399\ See XTAL Comment Letter. This commenter specifically
suggested we require the inclusion of additional information such as
uncalled commitment, cumulated distributions, and net of performance
fee accruals. While they are helpful, we view these additional
requirements as potentially overly burdensome relative to their
benefits since they are not necessary for investors to diligence the
performance measures presented in the quarterly statement.
---------------------------------------------------------------------------

    Realized and Unrealized Performance. As proposed, the rule also
requires an adviser to disclose a gross internal rate of return and
gross multiple of invested capital for the realized and unrealized
portions of the illiquid fund's portfolio, with the realized and
unrealized performance shown separately.\400\
---------------------------------------------------------------------------

    \400\ Final rule 211(h)(1)-2(e)(2)(ii)(A)(3).
---------------------------------------------------------------------------

    Some commenters supported this requirement to disclose realized and
unrealized performance metrics for illiquid funds as contributive to
the policy goals of transparency and comparability of private fund
investments promoted by the rule.\401\ Other commenters suggested,
however, that this requirement could serve to undermine these goals and
prove unhelpful to private fund investors, because disaggregating an
illiquid fund's realized performance and its unrealized performance
ultimately may involve subjective determinations \402\ and will depend
on the specific facts and circumstances.\403\ One commenter stated
that, if we adopt this requirement, we should also provide a detailed
methodology for calculating realized and unrealized performance.\404\
Other commenters suggested allowing advisers to take a flexible
approach with respect to determining what investments are realized
versus unrealized provided that their methodology is properly
documented and disclosed.\405\
---------------------------------------------------------------------------

    \401\ See, e.g., ILPA Comment Letter I; AFL-CIO Comment Letter;
AFREF Comment Letter I; CFA Comment Letter I.
    \402\ See, e.g., AIC Comment Letter I; AIC Comment Letter II;
IAA Comment Letter II; SBAI Comment Letter.
    \403\ See, e.g., AIC Comment Letter II; ATR Comment Letter.
    \404\ See NCREIF Comment Letter.
    \405\ See, e.g., AIC Comment Letter II; SBAI Comment Letter; CFA
Comment Letter I.
---------------------------------------------------------------------------

    We recognize that it may be difficult to determine whether a
partially realized investment has been realized under the final rule,
for example, following a significant dividend recapitalization where
the fund recoups all or a substantial portion of its initial
investment. We continue to believe, however, that disclosure of
realized and unrealized performance will provide investors with
important context for analyzing the adviser's valuations and for
weighing their impact on the fund's overall performance.\406\ As a
result, we believe that the burden associated with determining whether
a partially realized investment should be categorized as realized or
unrealized is justified by the benefits that this performance data will
provide to investors.
---------------------------------------------------------------------------

    \406\ As stated in the proposal, the value of the unrealized
portion of an illiquid fund's portfolio typically is determined by
the adviser and, given the lack of readily available market values,
can be challenging. This creates a conflict of interest wherein the
adviser may be evaluated and, in certain cases, compensated based on
the fund's unrealized performance. Further, investors often decide
whether to invest in a successor fund based on a current fund's
performance as reported by the adviser. These factors create an
incentive for the adviser to inflate the value of the unrealized
portion of the illiquid fund's portfolio. See Proposing Release
supra footnote 3, at n.9, 74-75.
---------------------------------------------------------------------------

    We recognize that categorizing a partially realized investment as
realized or unrealized for purposes of the rule will depend on the
facts and circumstances and may not always be purely objective. We
agree with

commenters that it is valuable for advisers to have some discretion in
determining whether an investment has been realized for purposes of the
rule based on the specific facts and circumstances, provided that their
methodology is properly documented.\407\ It is also important that
advisers remain consistent in how they determine realized and
unrealized investments and that they provide sufficient disclosure to
investors about the methodology and criteria they use to achieve
consistency in their determinations. We do not believe it is
appropriate to set a bright-line standard or otherwise prescribe
detailed methodology for making this determination because any such
standard or methodology may lead to less useful reporting for
investors.\408\ For example, it is our understanding that the
methodologies used by private equity buy-out funds, private credit
funds,\409\ and their respective investors to determine realization can
vary considerably. A private equity buy-out fund and its investors may
seek to analyze realization as it relates to the sale of a portfolio
company (or return of a certain amount of proceeds relative to the
amount invested or anticipated to be invested), whereas a private
credit fund and its investors may seek to analyze realization as it
relates to a paydown of a portion of the principal balance of a loan.
If we were to prescribe one methodology for both of these funds and
their investors, it may lead to scenarios in which there is a conflict
between how the rule views realization and how these funds and their
investors view realization. Such a result could lead to worse reporting
outcomes for investors.\410\
---------------------------------------------------------------------------

    \407\ The methodology used to determine whether an investment is
realized or unrealized is an important criterion to calculate this
required performance information. Accordingly, it must be
prominently disclosed in the quarterly statement. Final rule
211(h)(1)-2(e)(2)(iii).
    \408\ For example, if we were to set an 100% threshold for
determining when an investment has been fully realized, this may
lead to reporting that is too high as compared to what investors
have negotiated for or what they have come to expect for certain
private funds (or too low if we set the percentage threshold lower).
If we were to establish a realization test based on a different
trigger (e.g., the sale of a portfolio investment) it might not be
applicable for certain kinds of private funds (e.g., private credit
funds that primarily make loans).
    \409\ These examples refer to private credit funds that issue
equity interests to investors and invest in debt instruments
privately issued by companies.
    \410\ Based on the experience of Commission staff, it is our
understanding that investors generally do not seek to compare
realization methodologies across different types of illiquid funds
in the same way that they might for performance reporting. As a
result, it is not as important to ensure comparability of
realization methodologies across different types of illiquid funds
as it is to ensure comparability of performance reporting.
---------------------------------------------------------------------------

    One commenter suggested requiring reporting of distributions to
paid-in capital (``DPI'') and residual value to paid-in capital
(``RVPI'') instead of gross multiple of invested capital (``MOIC'') for
realized and unrealized investments.\411\ As discussed in the proposal,
some advisers have an incentive to inflate the value of the unrealized
portion of an illiquid fund's portfolio. Highlighting the performance
of the fund's unrealized investments assists investors in determining
whether the aggregate, fund-level performance measures present an
overly optimistic view of the fund's overall performance.\412\ While we
recognize that DPI and RVPI may provide some potentially beneficial,
additional information, these metrics may not be as effective at
highlighting potentially overly optimistic valuations. RVPI, for
example, provides investors with information on the fund's residual
value relative to the amount of capital that has been paid in,
including paid-in capital attributable to the realized portion of the
portfolio.\413\ MOIC for unrealized portion of the portfolio, on the
other hand, provides investors with information on the fund's residual
value relative to the capital that has been contributed in respect of
the unrealized investments, which has the effect of highlighting the
adviser's valuations of the remaining investments relative to those
capital contributions only. Accordingly, we believe that gross MOIC for
realized and unrealized investments provides more direct information on
the differences between the actual distributions received by investors
from the realized portfolio and the adviser's valuations of the
unrealized portfolio. This approach better addresses our concerns
surrounding advisers' incentive to inflate the value of the unrealized
portion of an illiquid fund's portfolio.
---------------------------------------------------------------------------

    \411\ See CFA Comment Letter II. RVPI plus DPI equal total value
to paid-in capital (``TVPI''), while unrealized MOIC and realized
MOIC must be combined as a weighted average to yield total MOIC. For
TVPI, the unrealized and realized analogues are RVPI and DPI ratios,
and the denominator in both of these cases is the total called
capital of the entire fund. For MOIC, unrealized and realized MOIC
have as denominators just the portions of the called capital
attributable to unrealized and realized investments in the
portfolio.
    \412\ For example, if the performance of the unrealized portion
of the fund's portfolio is significantly higher than the performance
of the realized portion, it may imply that the adviser's valuations
are overly optimistic or otherwise do not reflect the values that
can be realized in a transaction or sale with an independent third
party.
    \413\ DPI is not effective at highlighting overly optimistic
valuations because it focuses on distributions (and not residual
value) relative to paid in capital.
---------------------------------------------------------------------------

    The rule only requires an adviser to disclose gross performance
measures for the realized and unrealized portions of the illiquid
fund's portfolio, as proposed. Commenters generally agreed with this
approach.\414\ We continue to believe that calculating net figures for
the realized and unrealized portions of the portfolio could involve
complex and potentially subjective assumptions regarding the allocation
of fund-level fees, expenses, and adviser compensation between the
realized and unrealized portions.\415\ In our view, such assumptions
have the potential to erase the benefits that net performance measures
would provide.
---------------------------------------------------------------------------

    \414\ See, e.g., AIMA/ACC Comment Letter; AIC Comment Letter II.
    \415\ The inclusion of realized and unrealized performance
information in the quarterly statement serves chiefly to provide a
comparison between the two and provide a check against advisers'
exaggeration of unrealized performance at the fund-level. We believe
this is achieved by requiring only gross realized and unrealized
performance without also requiring net performance and the
associated assumptions, such as the allocation of organizational
expenses, that are part of the calculation of net performance for
individual investments and can entail additional costs and
subjectivity.
---------------------------------------------------------------------------

(c) Prominent Disclosure of Performance Calculation Information
    As proposed, the final rule will require advisers to include
prominent disclosure of the criteria used and assumptions made in
calculating the performance. This information will enable the private
fund investor to understand how the performance is calculated and help
provide useful context for the presented performance metrics.
Additionally, while the rule includes detailed information about the
type of performance an adviser must present for liquid and illiquid
funds, it is still possible that advisers will make certain assumptions
or rely on criteria that the rule's requirements do not address
specifically. This information is integral to the quarterly statement
because it will enable the investor to understand and analyze the
performance information better and better compare the performance of
funds and advisers without having to access other ancillary documents.
As a result, investors should receive this information as part of the
quarterly statement itself.
    For example, the rule requires an adviser to display, for a liquid
fund, the annual returns for each fiscal year over the past 10 years or
since the fund's inception, whichever is shorter. If the adviser makes
any assumptions in performing that calculation, such as

whether dividends were reinvested, the adviser must disclose those
assumptions in the quarterly statement. As another example, for an
illiquid fund, the rule requires an adviser to present the net internal
rate of return and net multiple of invested capital. Correspondingly,
the adviser must disclose the use of any assumed fee rates, including
whether the adviser is using fee rates set forth in the fund documents,
whether it is using a blended rate or weighted average that would
factor in any discounts, or whether it is using a different method for
calculating net performance. The rule requires the disclosure to be
within the quarterly statement.\416\ Thus, an adviser may not provide
the information only in a separate document, website hyperlink or QR
code, or other separate disclosure.\417\
---------------------------------------------------------------------------

    \416\ Final rule 211(h)(1)-2(e)(2)(iii).
    \417\ See also Marketing Release, supra footnote 127, at n.61
(discussing clear and prominent disclosures in the context of
advertisements).
---------------------------------------------------------------------------

    Some commenters supported this requirement to include prominent
disclosure of the criteria used and assumptions made in calculating the
performance.\418\ Other commenters stated that such a requirement is
unnecessary.\419\ For legal, tax, and other reasons, advisers often use
complex structures to set up private funds, which make it difficult, in
certain circumstances, for advisers to calculate, and for investors to
understand, fund performance as a whole. We recognize that, due to
these complex structures, the criteria used and assumptions made in
calculating performance can sometimes be nuanced and challenging to
concisely include in the quarterly statement. Nonetheless, it is
essential that advisers disclose assumptions, such as assumed fee
rates, in the quarterly statement so that investors can readily
understand the performance information being provided, despite these
challenges. Without prominent disclosure of the criteria used and
assumptions made in calculating performance, performance information is
neither simple nor clear. Absent disclosure of the criteria used and
assumptions made in the underlying calculations, performance
information may not be simple to the extent it requires referencing
multiple sources, such as capital call notices, distribution notices,
and audited financials, to understand crucial criteria and assumptions.
Such disclosure that is not prominent would also not be clear because
it would obscure the extent and import of the adviser's assumptions or
discretion in making such calculations.\420\ To meet the prominence
standard, the disclosures should, at a minimum, be readily noticeable
and included within the quarterly statement. Thus, an adviser may not
provide these disclosures only in a separate document, website
hyperlink or QR code, or other separate disclosure.
---------------------------------------------------------------------------

    \418\ See, e.g., United for Respect Comment Letter I; Comment
Letter of CPD Action (Apr. 25, 2022) (``CPD Comment Letter''); ICCR
Comment Letter.
    \419\ See, e.g., Schulte Comment Letter; MFA Comment Letter I;
Comment Letter of National Society of Compliance Professionals (Apr.
19, 2022) (``NSCP Comment Letter'').
    \420\ One commenter suggested that private fund advisers should
be required to provide supporting calculations to investors upon
request. See CFA Comment Letter I. While advisers do not need to
provide all supporting calculations as part of a quarterly
statement, advisers generally should make them available upon
request from an investor. While we believe it is important that
investors have access to this information if requested, including
all supporting calculations as a part of each quarterly statement
could make each quarterly statement overly long and difficult to
parse, thus undermining its utility.
---------------------------------------------------------------------------

    We believe this prominently displayed information is vital in
making these disclosures as simple and clear as possible for investors.
Furthermore, permitting advisers to provide quarterly statements
without prominent disclosure of the criteria used and assumptions made
in calculating performance would not sufficiently prevent practices
that may be fraudulent, deceptive, or manipulative. For instance,
advisers may use a deceptive assumed fee rate to calculate performance
and investors may not be aware of it if it is not prominently disclosed
in the quarterly statement. Accordingly, it is crucial that private
fund investors receive this prominent disclosure as part of the
quarterly statement itself.
3. Preparation and Distribution of Quarterly Statements
    The rule requires quarterly statements to be prepared and
distributed to investors in private funds that are not funds of funds
within 45 days after the first three fiscal quarter ends of each fiscal
year and 90 days after the end of each fiscal year. Advisers to funds
of funds must prepare and distribute quarterly statements within 75
days after the first three fiscal quarter ends of each year and 120
days after the fiscal year end.\421\ In each instance, an adviser must
prepare and distribute the required quarterly statement within the
applicable period set forth in the rule, unless another person prepares
and delivers such quarterly statement.\422\ The reporting period for
the final quarterly statement covers the fiscal quarter in which the
fund is wound up and dissolved. Under the proposed rule, quarterly
statements would have been required to be prepared and distributed to
investors for each private fund, including funds of funds, within 45
days of each calendar quarter end, including after the end of the
fiscal year.
---------------------------------------------------------------------------

    \421\ In a change from the proposal, we are providing additional
time for funds of funds to deliver quarterly statements in response
to commenters that stated that many funds of funds will need to
receive reporting from their private fund investments before they
are able to prepare and distribute their own quarterly statements.
For purposes of the final rule, one example of a fund of funds would
be a private fund that invests substantially all of its assets in
the equity of private funds that do not share its same adviser and,
aside from such private fund investments, holds only cash and cash
equivalents and instruments acquired to hedge currency exposure.
    \422\ By specifying that ``such quarterly statement,'' as
opposed to more generally a quarterly statement, must be prepared
and distributed, final rule 211(h)(1)-2 requires that a quarterly
statement furnished by ``another person'' must still comply with
paragraphs (a) through (g) of the rule, including with respect to
the information otherwise required to be included in the quarterly
statement by the investment adviser. For purposes of this section,
to the extent that some but not all of the information that an
investment adviser is required to include in the quarterly statement
is included in a quarterly statement furnished by another person,
the investment adviser generally would need to prepare and
distribute separately the required information that is not included
in the quarterly statement furnished by another person, as required
under the final rule.
---------------------------------------------------------------------------

    For a newly formed private fund, the rule requires a quarterly
statement to be prepared and distributed beginning after the fund's
second full quarter of generating operating results, as proposed.
However, one commenter stated that the requirement to provide
performance metrics should not be triggered until the private fund has
four quarters of operating results, rather than two.\423\ We continue
to believe, however, that two full quarters of operating results is an
appropriate standard because it balances the needs of investors to
receive performance information with the needs of advisers to have
adequate time to generate results. We believe that the requirements for
newly formed funds will help ensure that investors receive
comprehensive information about the adviser's management of the fund
during the early stage of the fund's life.
---------------------------------------------------------------------------

    \423\ See AIC Comment Letter II.
---------------------------------------------------------------------------

    Some commenters supported the proposed rule's 45-day timing
requirement.\424\ Other commenters suggested that additional time or
flexibility should be provided, as discussed below.\425\ Based on our

experience, advisers generally should be in a position to prepare and
deliver quarterly statements within this period. We believe that the
timing requirement is important because quarterly statements will
provide fund investors with timely and regular statements that contain
meaningful and comprehensive information. Some commenters, however,
suggested allowing for additional time for the fourth quarterly
statement of the year as audited financials are also being prepared at
this time.\426\ We recognize the value in providing additional time for
the fourth quarterly statement in light of the increased burdens that
advisers will concurrently face in preparing other end-of-year
statements, such as audited financials. Some commenters suggested
specifically extending the deadline for the fourth quarterly statement
to 120 days to parallel the deadline for audited financials.\427\
Although we recognize the potential for some value in aligning the
deadline for the fourth quarterly statement to 120 days to parallel the
deadline for audited financials, it would delay the delivery of these
quarterly statements too greatly. Assuming a December 31 fiscal year
end, allowing 120 days would mean that an adviser would not have to
deliver the fourth quarterly statement until April 30 of the following
year (assuming it is not a leap year). However, the first quarterly
statement for that following year would be due only 15 days later on
May 15. It is important that investors receive quarterly statements on
a timely basis so that they can effectively monitor the costs and
performance of their investments. Additionally, requiring the
preparation and delivery of the fourth quarterly statement before the
deadline for audited financials under the final rule should not in our
view lead to undue burdens or investor confusion. Although we recognize
the possibility that information reported in the fourth quarterly
statement may ultimately be updated or corrected in the subsequently
delivered audited financials, the final rule will not separately
require an adviser to issue a reconciled fourth quarterly statement
reflecting such updated or corrected information (which, however,
generally should be reflected in subsequent quarterly reports).\428\
This approach balances the needs of investors to receive fee, expense,
and performance information relatively quickly following the end of the
fiscal year, with the needs of advisers to have sufficient time to
collect the necessary information and distribute the statements to
investors. Accordingly, in response to commenters, we are increasing
the deadline for the fourth quarterly statement from 45 days to 90
days. We believe that 90 days is an appropriate approach to allow
additional time to prepare the fourth quarterly statement while also
preparing the annual audited financials without delaying this quarterly
statement too greatly.
---------------------------------------------------------------------------

    \424\ See, e.g., Convergence Comment Letter; Predistribution
Initiative Comment Letter II; Healthy Markets Comment Letter I.
    \425\ See, e.g., MFA Comment Letter I; AIMA/ACC Comment Letter;
Comment Letter of Ullico Investment Advisors, Inc. (Apr. 22, 2022)
(``Ullico Comment Letter'').
    \426\ See, e.g., ILPA Comment Letter I; SBAI Comment Letter; AIC
Comment Letter I.
    \427\ See, e.g., CFA Comment Letter I; AIC Comment Letter I.
    \428\ Although the rule does not separately require an adviser
to issue to investors a reconciled fourth quarterly statement
reflecting information updated or corrected in the subsequently
delivered audited financials, advisers should consider whether
particular updates or corrections to this information under the
facts and circumstances could be sufficiently material to implicate
other applicable disclosure obligations, e.g., as under rule 206(4)-
8.
---------------------------------------------------------------------------

    Some commenters suggested allowing additional time for the first
three quarterly statements of the year as well.\429\ Other commenters
suggested allowing for a more flexible standard, such as ``as soon as
reasonably practical'' or ``promptly''.\430\ We do not think it is
necessary to extend the time allowed for the first three quarterly
statements or adopt a more flexible standard for the deadline. It is
important that investors are receiving these quarterly statements
routinely, so that they can properly monitor the fees and expenses and
performance of their investments. If investors receive these quarterly
statements only 60 or more days after quarter-end for the first three
quarterly statements, the statements may be too delayed to enable
effective engagement and investment decision-making as an investor
(e.g., whether to redeem from the private fund (if applicable), to
invest additional amounts with or divest other investments with the
adviser, or to otherwise modify the investor's portfolio). Moreover, a
more flexible standard, such as ``as soon as reasonably practical'' or
``promptly,'' might lead to inconsistently delivered quarterly
statements, which could impair their comparability and thus their
value. However, we recognize there may be times when an adviser
reasonably believes that a fund's quarterly statement would be
distributed within the required timeframe but fails to have it
distributed in time because of certain unforeseeable
circumstances.\431\ Accordingly, and in light of the fact that there is
not an alternative method by which to satisfy the rule, the Commission
would take the position that, if an adviser is unable to deliver the
quarterly statement in the timeframe required under the rule due to
reasonably unforeseeable circumstances, this would not provide a basis
for enforcement action so long as the adviser reasonably believed that
the quarterly statement would be distributed by the applicable deadline
and the adviser delivers the quarterly statement as promptly as
practicable.
---------------------------------------------------------------------------

    \429\ See, e.g., IAA Comment Letter II; Ropes & Gray Comment
Letter; Comment Letter of Colmore (Apr. 25, 2022).
    \430\ See, e.g., Ullico Comment Letter; Segal Marco Comment
Letter; SBAI Comment Letter.
    \431\ For example, an adviser may experience sudden departures
of senior financial employees.
---------------------------------------------------------------------------

    We asked in the proposal whether advisers should be required to
report based on the private fund's fiscal periods, rather than calendar
periods, as proposed. Because the proposed rule required advisers to
distribute all four reports, including the fourth quarter report,
within the same time period (i.e., 45 days), we did not believe the
distinction between fiscal periods and calendar periods was as
significant for purposes of the proposed rule. However, because we are
modifying the final rule to provide additional time for fourth quarter
statements, as discussed above, we believe it is important to revisit
this question. Because certain private funds may have a fiscal year
that is different from the calendar year, we believe it is appropriate
to revise the rule text to reference fiscal periods, rather than
calendar periods, to ensure that advisers and private funds receive the
benefit of the additional time for the fourth quarter statement.
Commenters generally agreed with this approach, stating that fiscal
periods would more closely align with industry practice.\432\ We
recognize that this modification may affect comparability for investors
across different funds if their fiscal years differ, as funds with
different fiscal years will have different reporting periods. However,
we view this potential disadvantage as being justified by the benefit
investors will obtain by receiving quarterly statements that align with
fund fiscal years. This modification will additionally allow funds with
fiscal years that do not match the calendar year more time to prepare
their fiscal year-end quarterly statements alongside their annual
audited financials. It is also our understanding that the majority of
private funds' fiscal years match the calendar year, and thus we do not

expect comparability to be substantially affected in most cases.
Accordingly, in a change from the proposal, advisers are required to
distribute the required reporting based on a fund's fiscal periods,
rather than calendar periods.
---------------------------------------------------------------------------

    \432\ See, e.g., AIMA/ACC Comment Letter; ILPA Comment Letter I;
SIFMA-AMG Comment Letter I (suggesting that the SEC only require
reporting on an annual basis within 120 days of the fund's fiscal
year end); GPEVCA Comment Letter (suggesting that any periodic
disclosure requirement be tied to the annual audit process).
---------------------------------------------------------------------------

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

same adviser typically advises and controls all three funds, and the
master fund typically makes and holds the investments. Because the
feeder funds are conduits for investors to gain exposure to the master
fund and its investments, the rule requires the adviser to provide
feeder fund investors with a single quarterly statement covering the
applicable feeder fund and the feeder fund's proportionate interest in
the master fund on a consolidated basis, so long as the consolidated
statement provides more meaningful information to investors and is not
misleading.
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    \440\ See final rule 211(h)(1)-2(f). The use of any consolidated
reporting is an important criterion for the calculation of expenses,
payments, allocations, rebates, waivers, and offsets as well as
performance. See supra sections II.B.1.c) and II.B.2.c).
Accordingly, advisers generally should disclose the basis of any
consolidated reporting in the quarterly statement, including, e.g.,
if the statement includes multiple entities and, if so, which
entities and the methods used to calculate the amounts on the
statement allocated from each entity. Advisers generally should also
disclose any important assumptions associated with consolidated
reporting that affect performance reporting as part of the quarterly
statement. An example might include how unequal tax expenses are
factored into consolidated performance reporting where one fund has
greater tax expenses than the other funds in a consolidated fund
structure. See supra section II.B.2.c).
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    Due to the complexity of private fund structures, the rule takes a
principles-based approach with respect to whether private fund advisers
must consolidate reporting for a specific fund structure.
    Some commenters supported this principles-based approach to
consolidated reporting for certain fund structures, arguing that it
will provide more meaningful information to investors.\441\ Other
commenters argued that this consolidation requirement could undermine
the transparency goals of this rulemaking.\442\ Some commenters argued
that consolidated reporting will confuse investors.\443\
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    \441\ See, e.g., GPEVCA Comment Letter; Convergence Comment
Letter; CFA Comment Letter II.
    \442\ See, e.g., SIFMA-AMG Comment Letter I; SBAI Comment
Letter; Ropes & Gray Comment Letter (describing, as an example,
certain master-feeder fund structures where some of the feeder funds
do not invest in the master fund).
    \443\ See, e.g., Ropes & Gray Comment Letter; PWC Comment Letter
(the consolidation requirement could create confusion in instances
where U.S. GAAP does not require consolidation for financial
reporting purposes); IAA Comment Letter II.
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    We acknowledge that, in certain circumstances, requiring reporting
by each private fund separately may result in more granular
information. For example, in certain parallel fund structures, an
investor would receive information specific to the parallel fund in
which it is invested instead of the consolidated information for all
parallel funds. However, in many of these circumstances, consolidated
reporting of the cost and performance information by all private funds