The U.S. Securities and Exchange Commission (SEC) has announced a slew of new proposed rules and amendments for private funds and investment advisers, which—if enacted as proposed—will significantly increase the Commission’s oversight and enforcement powers in the private markets (the Proposed Adviser Rules). By extending the Commission’s public market protections to a wide array of private investment vehicles, the Proposed Adviser Rules ignore the sophistication and preferences of private market investors and override some of the unique benefits those investors enjoy. At bottom, the Proposed Adviser Rules offer a solution where there is no problem; as the Commission and courts have observed for decades, these private investors are more than capable of fending for themselves.

One of the SEC’s proposed new rules seeks to prohibit “certain sales practices, conflicts of interest, and compensation schemes that are contrary to the public interest.” Amongst the new prohibitions is total bar on “[s]eek[ing] reimbursement, indemnification, exculpation, or limitation of its liability by the private fund or its investors for a breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness in providing services to the private fund.” Although the Commission notes that contractual provisions limiting adviser liability “may be permissible under certain state laws, a waiver of an adviser’s compliance with its federal antifraud liability for breach of fiduciary duty to the private fund or with any other provision of the Advisers Act or rules thereunder is invalid under the Act.” Thus, even though the Commission’s justification for the new measures only refers to federal securities laws, the breadth of the proposed rules’ prohibited conduct would endanger contractual indemnification and exculpation remedies available under state law.

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