A Bang? A Whimper? Not So Fast: The SEC's Approach to Private Funds Evolves in 2024
As part of its formal fiscal year (FY) 2024 priorities, the SEC's Division of Examinations identified the review of investment advisers to private funds as a key priority. Fresh off the implementation of the Marketing Rule in late 2022 as part of the amendments to Advisers Act Rule 206(4)-1, the SEC signaled in late 2023 that compliance examinations would ramp up and include examinations of not only advisers' policies and procedures, but a substantive review of firms' implementation efforts, marketing materials, client disclosures, and books and records. This culminated in Division of Enforcement proceedings settled in September 2023 against nine registered investment advisers for misrepresenting hypothetical performance of advisory products in connection with a sweep of violations of the Marketing Rule.
Against this backdrop, the SEC in 2024 seemed poised to strengthen its oversight of private fund managers and enact further change through rulemaking in the form of the heavily debated Private Fund Rules adopted in late 2023 in a 3-2 vote that broke on party lines. Of course, as we detailed earlier this year, the U.S. Court of Appeals for the Fifth Circuit on June 5, 2024, vacated the newly adopted Private Fund Rules in a significant victory for private fund advisers and another setback to the current Commission's rulemaking agenda. In this sixth installment of Season's Readings, we take a quick look at other developments in 2024 and the impact they may have on examination and enforcement efforts going forward.
Enforcement Sweeps Remained Popular in 2024
Despite the absence of new Private Fund Rules in Enforcement's toolbox, the SEC continued to take aggressive action against registered investment advisers in general, and private fund advisers in particular, using existing tools at the SEC's disposal, including referrals from the Examinations staff. In particular, focused inquiries known as "sweeps" proved to be a potent technique for identifying and penalizing a range of firms, presumably in an attempt to send a clear message to the industry regarding compliance standards. In addition to Marketing Rule compliance, private and institutional fund managers were highlighted for alleged violations of core compliance obligations including books and records requirements identified in the so-called "Off-Channel Communications" recordkeeping sweep, which (repeatedly) zeroed in on Enforcement's disfavored use of noncompany controlled communications platforms such as text, WhatsApp and the like. This topic in particular – though it scored enormous financial returns through repeat enforcement – received continued dissent from two of the SEC's three commissioners, who astutely underscored the challenges firms face in managing effective compliance in light of modern (and evolving) modes of communication. The two dissenting commissioners also openly considered whether updated guidance could prove more effective than continued enforcement on an issue where "perfect" compliance may neither be achievable nor realistic.
Enforcement Also Focused on Routine Disclosures
In 2024, the SEC also signaled its intention to ensure that fund managers meet necessary public disclosure requirements through a variety of cases aimed at alleged deficiencies related to Exchange Act Section 13 filings related to beneficial ownership (Schedules 13D and G, Form 13F), as well as large trader status (Form 13H).
More recently, the SEC started FY 2025 (which commenced Oct. 1, 2024) with a focus on private fund managers and Form PF. On Dec. 13, 2024, the SEC announced settlements with seven private fund managers. Per the SEC's orders, the private fund advisers failed to file annual reports on Form PF. The Form PF filing requirement, which became effective in 2012, is applicable to private fund advisers managing $150 million or more in assets and is designed to provide the SEC key information about the private funds such advisers manage. The orders found that the advisers were delinquent in their filings over multiyear periods.
What Comes Next?
Looking forward, even absent the added requirements the Private Fund Rules would have ushered in, there is some reason to believe that private funds oversight and enforcement will continue despite a change in SEC leadership. As we have previously highlighted, many major industry participants, with increasingly large stakes in the private equity, venture capital and general private fund marketplace, continue to demand transparency and accountability from fund managers and were previously supportive of the proposed rules. Moreover, as was the case in 2024, the SEC's Division of Examinations once again cited private fund advisers as an area of priority with respect to the examination program. Though some may be keen to hope a change in leadership will mean an enforcement agenda that wholly drops any focus on private funds, we think this an unlikely outcome. Given the concentration of wealth in the industry and the overall mission of the SEC to facilitate capital formation and maintain fair, orderly and efficient markets, while also protecting investors, we expect to see careful examination of private funds and continued – though likely reduced – enforcement activity where the staff believe wrongdoing has occurred.