It is no surprise that the US Securities and Exchange Commission – now led by Gary Gensler, the Chair appointed last year by the Biden administration – has made proposals to increase the regulation of private fund managers (or "investment advisers"). But perhaps it is surprising that that the rules proposed earlier this month could have an important impact on many European firms, as well as those in the US.While there is likely to be significant market push-back to some of the mooted rule-changes which, among other things, challenge well-established and heavily negotiated risk allocations agreed with sophisticated investors, the SEC seems to be signalling that protection of institutional investors is now firmly within its remit. And, importantly, non-US "exempt reporting advisers" (or ERAs) are in scope of some of the most dramatic changes.Many non-US firms who raise funds from US investors are classified as exempt reporting advisers because they have their principal place of business outside of the US, their only US "clients" are private funds, and all assets managed by the firm from a location in the US (if any) are solely attributable to private funds and total less than $150 million. ERAs must make regular public SEC filings containing a limited amount of information (at least annually), and are subject to a reduced set of SEC rules.Some of the most controversial proposals made by the SEC – specifically, the changes that are included under the headings "Preferential Treatment" and "Prohibited Activities" – would apply to all private fund advisers, including ERAs, with no grandfathering for existing funds.The "Preferential Treatment" rule would prohibit certain arrangements with particular investors (for example, in a side letter) that the SEC regards as detrimental to other investors in the fund, such as preferential redemption and transparency rights that would have a “material negative effect on other investors in the private fund”. The Preferential Treatment rule would also require additional disclosure of other preferential terms, with that disclosure being provided pre-commitment to prospective investors, and annually to existing investors.The proposed "Prohibited Activities" include a range of activities and contractual provisions that the SEC has deemed to be “contrary to the public interest” and would include, for example, a prohibition against any clawback of overpaid carried interest being limited to the net after-tax amount; and a prohibition on indemnification by the fund or its investors for the adviser's negligence.These and other proposed changes would, if implemented, force a change to market practices in both European and US private funds and would require changes to existing (negotiated) contracts. And, while many of the other changes outlined in the SEC's proposals will only affect investment advisers that are registered with the SEC (and not ERAs), those changes would also add significant additional reporting, disclosure and compliance requirements for those firms.One change – though not one applicable to ERAs – that has caught the attention of the secondaries community is the proposed requirement for a "fairness opinion" on a GP-led secondary transaction. The SEC claims that this is "an important check against an adviser’s conflicts of interest in structuring and leading a transaction from which it may stand to profit at the expense of private fund investors". In fact, of course, fairness opinions are fairly standard in the US (and European) market as a way to manage the unavoidable conflicts of interest that arise on a secondary deal that is initiated by the private equity fund sponsor, including when the manager wants to offer investors an opportunity to continue to...

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