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    May 1, 2025

New Marketing Rule FAQs Offer Safe Harbors for Using Extracted Performance and Certain Metrics

On March 19, 2025, the SEC’s Division of Investment Management updated its Marketing Compliance Frequently Asked Questions (FAQs) to address persistent questions about the presentation of extracted performance and whether certain portfolio or investment characteristics are “performance” under Rule 206(4)‑1 – known as the Marketing Rule – under the Investment Advisers Act of 1940. The updated FAQs bring welcome relief to the private funds industry, opening the door for fund managers to more confidently include extracted performance breakdowns and certain performance metrics in their marketing materials, which can, if wielded correctly, help investors make better-informed decisions. This article summarizes the new FAQs and provides thoughtful analysis about potential issues and long-term implications based on interviews with several industry experts. See “SEC Examinations and Enforcement Staff Identify Targeted Misconduct Under the Marketing Rule (Part One of Two)” (Feb. 6, 2025).

Legal Due Diligence Considerations for HNWIs and Family Offices Investing in Closed End Private Funds

Investments in closed-end private funds have long been the purview of institutional investors. High minimum investment amounts, illiquidity, higher fee loads and the overall complexity of investing have long deterred retail investors. However, high-net-worth individuals, family offices and vehicles investing on their behalf (collectively, HNW Investors) have become increasingly interested in managing those concerns to reap the benefits of closed-end private funds, such as greater portfolio diversification and potentially outsized returns. Eager to claim a share of the relatively untapped pool of HNW Investor assets, fund managers have opened up closed-end private fund structures to HNW Investors. Closed-end private fund investment opportunities for HNW Investors will likely continue to increase in number with the SEC’s no-action letter creating a well-defined path for fund managers to comply with Rule 506(c) of Regulation D and, therefore, to engage in general solicitation. However, because closed-end private funds are not subject to the Investment Company Act of 1940, there is greater variability between the terms they offer – and what constitutes a “fair deal” – compared to registered funds. In a guest article, K&L Gates LLP attorneys TJ Bright and Nicole D. Doherty highlight the key economic and governance terms that all potential investors should consider when performing diligence on closed-end private funds, along with key HNW Investor-specific issues and points to evaluate when considering a prospective closed-end private fund investment. See “SEC No‑Action Letter Concerning General Solicitations Under Rule 506(c) Opens the Door to Retailization Efforts” (Apr. 17, 2025).

GCs’ Increasingly Critical Role in Managing Risk and Ensuring Compliance

As compliance requirements evolve rapidly, the GC role becomes more critical for avoiding regulatory entanglements and operational risks. Increasingly, in-house legal personnel are grappling with risk assessments, internal investigations, liaisons with regulators, strategic advice to executive staff and other areas not traditionally within the GC’s domain. In-house lawyers can also play a prominent role in litigation on behalf of the industry, as in banking organizations’ recent lawsuit against the Federal Reserve over stress testing models. Those new and expanded responsibilities factor into the increased importance of in-house legal staff in their firms’ efforts going forward. Those points were expressed at the Compliance & Legal 2025 Annual Seminar hosted by the Securities Industry and Financial Markets Association in a panel moderated by Steven R. Peiken, partner at Sullivan & Cromwell, which featured Cynthia B. Adams, head of U.S. legal and GC, TD Bank; Roberto Braceras, GC at Fidelity Investments; Eric F. Grossman, executive vice president and chief legal officer at Morgan Stanley; and Stefan Simon, CEO of the Americas and chief legal officer at Deutsche Bank. This article presents key takeaways from the discussion. See “Practical Tips and Insights From Senior GCs at Leading Private Fund Managers” (Aug. 30, 2022); and “In-House Legal Teams Prove Their Value and Prompt New Approach to Legal Spending” (Feb. 15, 2022).

Limited AI and Alternative Data Adoption for Legal and Compliance Efforts, According to Survey

Lowenstein Sandler has been gauging fund managers’ uptake of alternative data since 2019. Its most recent alternative data survey of more than 100 PE, hedge fund and venture capital firms found that two-thirds of respondents now use alternative data. “Alternative data is no longer novel, but the combination with [artificial intelligence (AI)] creates the possibility for original insights at a scale and speed that was previously unattainable,” said Lowenstein Sandler partner Scott H. Moss, in a report prepared based on the survey results (Report). “We have entered a new era of investment that will be shaped in large part by technology’s exploitation of data.” The Report covered sources and uses of alternative data; key concerns; rate of AI adoption; and legal and compliance uses for the technology. This article distills the findings in the Report, with additional commentary from Moss. See “Driven by AI, Private Funds’ Use of Alternative Data Continues to Grow, Survey Finds” (May 30, 2024).

Common SEC Exam Issues for Large Advisers and How to Avoid Them

Large fund advisers with diverse funds, clients and strategies face considerable compliance challenges – all of which are fodder for SEC examiners. A segment of Seward & Kissel’s Regulatory Roundup series looked at the complex examination issues faced by large advisers and how advisers can address them. The program, which featured Seward & Kissel partners Daniel Bresler and Debra Franzese and senior associate Theodore Kaminski, covered compliance with the Marketing Rule, conflicts of interest, fee practices, investment due diligence, investment allocations, disclosure practices and allocation of expenses. Although it remains to be seen how the incoming SEC leadership will approach those issues, “these topics are not necessarily divided on party lines,” said Bresler, who noted that both the Marketing Rule and the SEC’s interpretation of advisers’ fiduciary duty were issued during President Trump’s first term. This article distills the key takeaways from the program. See “Potential Areas of Scrutiny in Future SEC Examinations of PE Sponsors” (Jan. 9, 2025); and “SEC 2025 Examination Priorities Feature Essential Compliance Concerns, Emerging Technologies and Several Notable Omissions” (Dec. 12, 2024).

O’Melveny Adds Investment Funds Partner in Los Angeles

O’Melveny has announced that Salim N. Azzam has joined the firm’s Los Angeles office as a partner in the asset management practice group and PE industry group. His practice focuses on managing complex, multi-disciplinary transactions for private funds and investment management clients. See “Four Distinct Ways to Structure Minority Stake Investments” (Mar. 7, 2024); and “Relevant Criteria for Selecting a GP Stake Partner and Recent Trends in Minority Stake Transactions” (Oct. 19, 2021).

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Upcoming Webinar to Examine GP‑Led Restructurings

Please join the Private Equity Law Report on Thursday, March 12, 2020, at 11:00 a.m. EDT, for a complimentary webinar exploring secondary transactions led by GPs. To register for the webinar, click here.

Upcoming Webinar to Explore Best Practices for Alternative Data Use

Please join our sister product – the Hedge Fund Law Report – on Wednesday, January 15, 2020, at 11:00 a.m. EST for a complimentary webinar discussing issues relating to the use of alternative data by private fund managers. To register for the webinar, click here.

The PELR Will Resume Regular Publication in January

Please note that the Private Equity Law Report will not publish during these holiday weeks and will resume its normal weekly publication schedule during the week starting January 6, 2020.

Upcoming Fireside Chat With SEC Commissioner Hester M. Peirce 

Please join our sister product – the Hedge Fund Law Report – on Thursday, October 3, 2019, at 1:00 p.m. EDT for a complimentary webinar during which SEC Commissioner Hester M. Peirce will discuss topics of interest to private fund managers and answer attendees’ questions. To register for the webinar, click here.

Upcoming Webinar to Explore Effective Tabletop Exercises

Please join our sister products – the Hedge Fund Law Report and the Cybersecurity Law Report – on Tuesday, July 30, 2019, at 1:00 p.m. ET for a complimentary webinar discussing the strategies and tactics fund managers can employ to conduct an effective tabletop exercise. GCs and CCOs are encouraged to invite their CISOs and CTOs to join as well. To register for the webinar, click here.

PELR Webinar to Examine Issues and Trends in Impact Investing

Please join the Private Equity Law Report on Wednesday, June 12, 2019, at 2:00 p.m. EDT, for a complimentary webinar exploring impact investing. To register for the webinar, click here.

Webinar to Explore Best Practices for AML Compliance

Please join our sister product, the Hedge Fund Law Report, on Thursday, May 30, 2019, at 11:00 a.m. EDT, for a complimentary webinar discussing the key components of a robust anti-money laundering program. To register for the webinar, click here.

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