A significant new rulemaking proposal1 from the U.S. Securities and Exchange Commission (SEC) would fundamentally alter how private investment funds2 negotiate and communicate with their investors. The proposal (“Proposal“) would prohibit indemnification of managers for many types of mistakes, restrict some common side letter terms, require auditors to report certain events to the SEC and mandate quarterly reporting for private fund investors. Crucially, some of the Proposal’s prohibitions would, for the first time, substantively regulate unregistered and exempt investment advisers, both inside and outside of the United States. The repercussions of the Proposal would extend beyond private fund managers and affect co-investment structures, portfolio companies, institutional investors, and many key service providers to private funds. Auditors, in particular, may come under greater SEC enforcement scrutiny.
The Proposal is not yet final, and the SEC is requesting comments, which will be due no earlier than 11 April 2022. Interested parties are encouraged to reach out to the Baker McKenzie attorneys with whom they typically work to discuss any possible comments, questions or concerns.