SEC drops controversial proposal but keeps focus on adviser liability protections
The Securities and Exchange Commission (SEC) has withdrawn a contentious proposal that aimed to ban contractual provisions shielding investment advisers from negligence or breach of fiduciary duty. This move follows a review of existing rules and industry feedback. The SEC has, however, advised private fund advisers, particularly those managing 3(c)(1) funds, to reassess their contractual indemnification and exculpation arrangements.
The SEC's decision comes after it acknowledged that the antifraud provisions of the Advisers Act already cover many of the provisions targeted by the dropped proposal. However, the commission maintains that advisers cannot seek reimbursement, indemnification, or exculpation for breaching their federal fiduciary duty. Advisers managing three or more funds are urged to review and potentially revise their existing contract provisions related to indemnification and exculpatory clauses.
The SEC predicts that contractual indemnification or exculpation provisions will remain a focus in 2024. It expects exams, enforcement actions, and GP/LP disputes to involve these provisions. The commission may prioritize private funds with predominantly retail investors over those with institutional or sophisticated investors. The SEC allows advancement of investigation or litigation expenses prior to a breach, provided certain conditions are met. Insurers may still play a role in filling gaps in contractual arrangements.
While the SEC has withdrawn its controversial proposal, private fund advisers and investors should remain vigilant. Reviewing and revising existing contractual arrangements, particularly for 3(c)(1) funds, is now crucial. The SEC's focus on these provisions is set to continue, ensuring advisers uphold their fiduciary duties and protect investors' interests.
