While I was preparing for Thanksgiving on Wednesday, the Securities and Exchange Commission put 43 of its rules on the chopping block.
As you know, it’s not so simple to just eliminate a rule. Eliminating a rule is itself a rulemaking, requiring notice and comment periods. Of course, the SEC would also need to justify why the rule which was at one time deemed to work, no longer works.
The Regulatory Flexibility Act requires requires federal agencies to review regulations for their impact on small businesses and consider less burdensome alternatives. Sec did its part and provided 43 rules. The list is not binding. It’s just notice that the SEC is thinking about making changes to these rules and invite comment. The rules may be continued without change, or could be
“amended or rescinded to minimize any significant economic impact of the rules upon a substantial number of such small entities.”
I’m not sure where private funds and real estate fund managers might fit into the size and scope of a “small entity.”
I found two rules to be the most applicable to private fund managers on the list:
- 206(4)-8 Prohibition of fraud by advisers to certain pooled investment vehicles.
- 206(4)-2 Custody Rule
The applicability of fraud to investors rule is a bit a remnant from the SEC trying to breach the old small adviser exception to registration. There is always an inherent conflict between a fund manager looking out for the best interest of the fund and looking out for the best interest of a certain investor. Fund investors are going to have different tax, liquidity and diversity requirements. I’m not sure what is wrong with the rule that has caused the SEC to put it on this list.
The Custody Rule is full of land mines and foot faults for fund managers. I’m sure many fund managers and investment advisers would like clarification on many aspects of the rule and to clean up the messy guidance that has followed since the rule was last amended in 2009.
In a recent conversation with some SEC folks, we discussed the Chairman’s reminder that guidance is not binding. Word is that the SEC would like to roll up guidance into officially approved rules. It seems like the Custody Rule and its followup guidance fit into that category.
Sources:
- SEC Lists Rules for Review by Matt Kelly in Radical Compliance
- List of Rules to be Reviewed Pursuant to the Regulatory Flexibility Act Release Nos. 33-10576; 34-84640; 39-2523; IA-5067; IC-33298; File No. S7-25-18
