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On February 6, 2024, the staff of the Securities and Exchange Commission (SEC) published updated FAQs regarding the Marketing Regulations (Rule 206(4)-1) under the Investment Advisers Act of 1940 (Advisers Act). There are two positions in this FAQ.
- Sponsors of private funds cannot provide a total internal rate of return (total IRR). without it In parallel with the impact of borrowing funds (including subscription lines) only Net internal rate of return (net IRR) and the effects of such borrowings;
- Displaying net IRR violates general prohibitions in marketing regulations. and (a) Impact of fund-level subscription facilities that do not exhibit comparable net IRR; without it or (b) provide appropriate disclosures that describe the impact of such Subscription Facility on Net IRR.
Sponsors of private funds should review performance presentations to ensure that:
- Total IRR offered without it Impact of subscription features is shown with net IRR without it Impact of Subscription Features.and
- Presentation of pure IRR and The impact of a subscription feature is indicated by one of the following:
- Net IRR without it impact of subscription features, or
- Appropriate disclosures explaining the impact of such subscription features on net IRR.
Disclosure of gross and net IRR with and without subscription facilities
Prior to the adoption of the Marketing Rule, it was not uncommon for private fund sponsors to provide gross IRR. without it Impact of subscription facilities or other borrowings and current net IRR at fund level and the impact of such subscription features or other borrowings; The Marketing Regulations include a requirement that if gross performance and net performance are calculated over the same period and using the same type of return and methodology, then gross performance must be given equal prominence to net performance. I did. The FAQ confirms that the requirement to use the same methodology means that gross IRR that does not reflect the impact of subscription features must be presented as net IRR that does not reflect the impact of subscription features. I am. (Note that if you present only net performance, you do not need to include gross performance. Therefore, even if you present net IRR that includes the impact of subscription features, the same methodology would require you to present gross IRR.) is not triggered.)
Disclosure of Net IRR for Subscription Facilities
This FAQ is also the first example of a reversal of performance presentation requirements in the new quarterly financials rules.1 (Adopted as part of the so-called private fund rules)2) into your marketing rules. Under quarterly closing rules, “illiquid funds” must present both gross and net IRR. and and without it The impact of fund-level subscription facilities on quarterly reports provided to existing investors.
In its Adoption Release of the Private Funds Rule, the SEC expressed its belief that performance numbers reflecting the impact of fund-level subscription facilities “in isolation may mislead investors.” .3 Specifically, the SEC was concerned that an investor could reasonably believe that “the leveraged performance results will be similar to those that the investor would have achieved by investing in the Fund.” Quarterly reports are stated as justifying reporting obligations with or without fund-level subscription features, but the potentially misleading position is that advisors, including marketing rules (Marketing Rules) This suggests that other rules under the Act may also be violated. This includes, among other things, the general prohibition against misleading representations in “advertisements,” such as communications soliciting private fund investors, and Advisers Act Rule 206(4)-8 (in communications with private fund investors). Prohibits misleading statements).
In the new Marketing Rule FAQ, the SEC staff reiterates this concern and states that only the net IRR is presented. and The impact of a fund-level subscription facility is determined by a private fund advisor’s ability to determine “(i) comparable performance (e.g., net IRR excluding the impact of the fund-level subscription facility), or (ii) its Appropriate disclosures that explain the impact of subscription features such as: “Appropriate disclosures” that describe the impact of subscription features such as: In particular, whether it is sufficient to include in the performance disclosure a statement that the net IRR reflects the impact of the subscription facility and that the performance an investor would achieve by investing in the fund would be different. is not specified.
[1] Advisers Act Rule 211(h)(1)-2.
[2] Private Fund Advisers; Registered Investment Advisers Compliance Review Document, SEC Release No. IA-6383 (August 23, 2023) (the “Private Funds Rule Adoption Release”).
[3] Private fund rules adopting release in paragraph accompanying fn. 375.
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