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    Feb. 20, 2025

Using Elements of the PFAR to Develop an All‑Weather Approach to SEC Scrutiny of Private Fund Advisers

The decision by the U.S. Court of Appeals for the Fifth Circuit striking down the private fund adviser rules (PFAR) – along with ubiquitous predictions of a softer, gentler SEC under Paul S. Atkins – have understandably led many private fund advisers to breathe a sigh of relief. But even without specific and prescriptive rules, private fund advisers’ activities will continue to be scrutinized by today’s SEC and subject to examination and enforcement efforts long after the current administration. As Stephen Cutler, former Director of the SEC’s Division of Enforcement, presciently noted, the “pendulum” of securities law enforcement and reform swings both ways over time. Although struck down and overly prescriptive in many of its particulars, the PFAR largely codified positions and principles the SEC has taken and expressed over the years about the need for proper disclosures to avoid or mitigate conflicts of interest. Thus, the PFAR offers a helpful roadmap for steps to consider and action items to execute, particularly as private fund advisers launch new fund products and prepare to update their Form ADV disclosures for 2025. In a guest article, Finn Dixon & Herling partners Zachary J. Moore and Andrew M. Calamari outline some practical and proactive action items that private fund advisers should consider going forward, based on the requirements in the PFAR, to position themselves effectively for ongoing regulatory scrutiny and to offer best-in-class fund documents and transparency for their investors. See “Potential Areas of Scrutiny in Future SEC Examinations of PE Sponsors” (Jan. 9, 2025).

Grading Gary Gensler: Rulemaking, Culture and Operational Proficiency, and Relationship With Private Funds Industry (Part Two of Two)

As Paul S. Atkins takes the helm at the SEC, the beginning of the Trump administration offers a prime opportunity to benchmark the Commission’s performance by evaluating the tenure of former Chair Gary S. Gensler. With that evaluation in place, it will be easier to mark any shift in tactics and conduct by the Commission as to the private funds industry over the course of Atkins’ tenure. To assist with those efforts, the Private Equity Law Report spoke with several former SEC staff members about Gensler’s efforts in several key areas and asked them to grade those efforts on a five-point scale (poor, below average, average, above average and excellent). The experts supplemented their grades with analysis about positive and negative aspects of Gensler’s performance as to each key area, and offered forecasts about the SEC’s likely approach under the Trump administration. This second article in a two-part series addresses the Commission’s rulemaking efforts; culture and operational proficiency; and relationship with the private funds industry during Gensler’s tenure. The first article considered the efforts of the SEC’s Divisions of Examinations and Enforcement, respectively, as well as the quality of industry guidance (e.g., FAQs, risk alerts, etc.) under Gensler. See our two-part series on Dechert and Mergermarket’s 2024 PE Outlook: “Navigating Fundraising and Regulatory Headwinds” (Jan. 25, 2024); and “Parsing the Ongoing Growth of GP‑Led Transactions and Other Sectors” (Feb. 8, 2024).

What Investors Should Look for When Scrutinizing PE Sponsors’ Audits During ODD

PE sponsors’ practices have become more complicated over the years as firms seek an edge when valuing Level‑3 assets and as investment strategies have become increasingly complex. That has trickled down to firms’ financial statements and the opinions provided by auditors, particularly as auditors deploy sophisticated methodologies to probe valuations; fee and expense allocations; and other critical financial reviews. Ideally, a sponsor would receive an unqualified opinion from their auditor, but it is quite common for material misstatements or other discrepancies to lead to a qualified opinion or, in the worst-case scenario, an adverse opinion. Although, institutional investors have become more sophisticated at scrutinizing PE sponsors’ practices during their operational due diligence, it can still be daunting to parse the nuances and significance of issues raised in a sponsor’s audit report or valuation policy. To help PE investors understand and navigate sponsors’ financials, the Investment Management Due Diligence Association hosted a webinar that was moderated by its co‑founder, Daniel Strachman, and featured Jennifer Cuello and Thomas Murdoch, who are both audit partners in EisnerAmper’s financial services group. This article summarizes key takeaways from the webinar, including an overview of the audit process; recommendations on what investors should look for or ask about when reviewing a fund’s financial statements; and practical tips about how to confront key issues that can arise in audits of PE sponsors. For more on the audit process, see “The Importance of Exercising Due Diligence When Hiring Auditors and Other Vendors” (Jun. 21, 2018).

SEC Examinations and Enforcement Staff Warn Against Certain Private Credit Practices, Fee and Expense Conflicts (Part Two of Two)

The SEC recently gathered representatives at its Compliance Outreach Program to discuss private fund manager practices and general areas of focus garnering increased SEC scrutiny. One panel featured Shane Cox, Regulatory Counsel, Private Funds Unit in the SEC Division of Examinations (Examinations); Lee A. Greenwood, Assistant Regional Director, Asset Management Unit in the SEC Division of Enforcement (Enforcement); Adele Kittredge Murray, Private Funds Attorney Fellow, SEC Division of Investment Management; and Michael C. Neus, chief administrative officer, Brevan Howard US Investment Management LP. This second article in a two-part series details problematic practices of private credit funds relating to insider trading and valuations, as well as omnipresent SEC concerns about conflicts arising as to disclosures about, and allocations of, fees and expenses. The first article identified specific areas of focus for Examinations and Enforcement under the Marketing Rule. See “PE Industry in 2025: Trump Administration’s Likely Impact on Rulemaking, Examinations and Enforcement (Part One of Two)” (Jan. 9, 2025).

Adviser Ineligible for Registration Exemption Due to Overlapping Operations With Affiliated Adviser

Advisers must take a holistic approach when determining whether they are required to register with the SEC. And if they get that determination wrong, the SEC is likely to notice and take action. In a settled enforcement proceeding, the SEC claimed an investment adviser improperly relied on the private fund adviser exemption from registration under the Investment Advisers Act of 1940 (Advisers Act) because it had overlapping owners, managers, advisory personnel and operations with another adviser with which it shared office space. The nature and size of the operationally integrated enterprise rendered the adviser ineligible for the claimed exemption. Additionally, because the adviser should have registered, it was subject to Rule 206(4)‑2 under the Advisers Act – commonly known as the “Custody Rule” – but failed to comply with that Rule. This article discusses the basis for the enforcement proceeding, the alleged violations and the terms of the settlement. See our two-part series: “Best Practices for Exempt Reporting Advisers to Build and Implement Compliance Programs to Support a Transition to RIA Status” (Jul. 21, 2020); and “Notable SEC Examination Methods and Substantive Focus Areas for Exempt Reporting Advisers and Tips for Avoiding Violations” (Jul. 28, 2020).

Former Co‑Chief of SEC Asset Management Unit Joins Weil in New York

Weil has welcomed Andrew B. Dean as a partner in the firm’s securities litigation and white collar defense, regulatory and investigations practices in New York. He focuses his practice on government and internal investigations; regulatory enforcement actions; related civil litigation; and regulatory and compliance issues, including in the asset management context. For commentary from Dean, see our two-part series: “Latest on Navigating the SEC’s Examination Process and Avoiding Referral to the Division of Enforcement” (May 4, 2023); and “Deep Dive on Compliance Issues Targeted in SEC Examinations and the Agency’s Stance on CCO Accountability” (May 18, 2023).

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