SEC Chair Gensler Puts Private Fund Advisers in the Spotlight
In case you have not heard the news, Chair Gensler is focused on private fund advisers. The numbers may give you an indication as to why. In a November 11th speech at the Institutional Limited Partners Association Summit, he provided the following: US private funds have gross assets under management of $17 trillion (net assets at $11.5 trillion). Within those numbers, hedge funds have gross assets at $8.8 trillion, net at $4.7; and private equity funds have gross assets at $4.7 trillion, net at $4.2. Interestingly, this data, he said, is taken from Form PF as of Q4 2020 (which also means these numbers do not include the value of the private funds of advisers whose regulatory assets under management are less than $150 million, because these advisers are not filing Form PF and thus not disclosing to the SEC their fund values).
Furthermore, Chair Gensler said, private fund advisers often “touch so much of our economy.” For example, investors are often retirement plans, pension plans, and university endowments; so, as the context goes, the underlying investors are teachers, students, professors—i.e., not the traditionally high net worth individual; and often the investees are entrepreneurs who in turn are hiring everyday people to work in the private companies. So, ‘it all matters’ is the point, and Chair Gensler is on the watch to facilitate capital formation, protect investors, and maintain fair, orderly, and efficient markets.
What Private Fund Advisers Need to Know
With that authority, Chair Gensler seems poised to bring us a new period of private fund adviser regulation, launching with the data and knowledge learned in the past decade following the enactment of Dodd Frank in 2010 and the resultant requirements that many private funds register with and disclose certain information to the SEC. In his speech, Chair Gensler stated that
- he believes there can be greater transparency to fund investors around fees, expenses, and performance metrics, stating that the aggregate billings are “pretty significant to our economy and capital markets,” and that “hundreds of billions of dollars in fees and expenses are standing between investors and businesses.” He referenced that transparency could “help lower the cost of capital for businesses raising money” and “ultimately help workers preparing for retirement and families paying for their college education.”
- he believes that side letters can “create an uneven playing field among limited partners”
- he believes that there is an “opportunity to strengthen trust in the private funds market” and
- he believes that ‘it is time for us to put [the learning from Form PF] to use.”
Thus, he told the industry that he has asked his staff to consider:
- what recommendations they could make to bring greater transparency to fee arrangements
- whether certain side letter provisions should be prohibited
- what can be done to enhance transparency of performance metrics
- whether certain practices and conflicts of interest should be prohibited and
- whether there should be enhanced reporting and disclosure through Form PF or other reforms.
Thus, it seems that 2022 and 2023 will be interesting years for private fund advisers, far beyond the transition to the new advertising and marketing rule that must be complied with by November 4 2022 and even if the COVID-19 shockwaves do further wane.
Private fund advisers should stay tuned for rule proposals not just to stay abreast of the regulatory environment but also because the rule proposals are always accompanied by a comment period, and many advisers will want to take the opportunity to respond either individually or as part of a larger group. Chair Gensler invited the feedback, stating that the Commission benefits from comments and perspectives.
See the full text of Chair Gensler’s speech, here.
Interestingly, Chair Gensler’s speech was given one day after the Division of Examinations released a “follow up Risk Alert” on fee calculations. The follow up Risk Alert provides further detail on compliance issues observed in approximately 130 examinations that comprised the National Advisory Fees Initiative. Although in the Initiative the Division focused predominantly on advisory fees charged to retail clients, the follow-up Risk Alert underscores again the Commission’s attention to fee transparency and, in the Risk Alert, the Division expressly noted its relevance to “fund clients” (“many of the principles and disclosure obligations also apply to other types of client accounts (e.g., institutional and fund clients)”). See a full text of the follow-up Risk Alert, here. Stay tuned for more commentary on fee transparency and conflicts of interest in compensation arrangements.
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