On February 9, 2022, the United States Securities and Exchange Commission (SEC) proposed a series of new rules under the Investment Advisers Act of 1940 (the Advisers Act) that apply to private fund advisers (the proposed rules). The proposed rules, which run to 341 pages, aim to provide private fund investors with increased transparency around spending and performance, but would affect CLO securitizations by imposing new disclosure requirements and new expenses on collateral managers for CLO. Many CLO managers are thinly capitalized, so the proposed rules raise potential issues for CLO securitizations.
The SEC notes in the proposed rules release that there are currently 5,037 registered private fund advisers with more than $18 trillion in private fund assets under management. The proposed rules (1) would require registered investment advisers (RIAs) of private funds to provide transparency to their investors regarding the cost of investing in private funds and the performance of those funds, (2) would require a RIA to a private fund to obtain an annual audit of the financial statements of each private fund it advises and, in an advisor-led secondary transaction, a fairness opinion from an independent fairness opinion provider , (3) prohibit all private fund advisers (registered and unregistered) from engaging in certain sales practices, conflicts of interest and compensation schemes, and (4) prohibit preferential treatment to certain investors in a fund private, unless the adviser discloses such treatment to other current and potential investors.