ILPA Asks for Regulatory Changes for Private Equity

The Institutional Limited Partners Association and 35 of its member institutions sent a letter to the Securities and Exchange Commission pushing for stronger regulations on private equity advisory firms.  

ILPA is asking the SEC to make 7 changes.

1. Rescind the Heitman Capital Management No-Action Letter, issued in 2007.
2. SEC enforcement settlements with private fund advisers should not be conditional on them not seeking indemnification from their investors.
3. Require private fund advisers to explicitly and clearly disclose the standard of care owed to investors and the fund.
4. Set that the standard of care owed to clients of private fund advisers under the Advisers Act as a “negligence” standard.
5. Limit the ability for private fund adviser to “pre-clear” conflicts of interest to ensure informed consent by investors.
6. Private fund advisers should have a limited partner advisory committee as best practice, and all conflicts should be presented to the LPAC for resolution.
7. Provide more clarity surrounding hedge clauses, including the limits of their scope and the facts and circumstances in which they can be used.

This most recent letter is a follow-up to letter requests in August 6, 2018 and November 21, 2018 that raised similar concerns.

One focus is the standard of care owed to investors. ILPA’s letter raises concerns about eliminating or significantly modifying fiduciary requirements under Delaware state law. This practice was permitted under the Heitman Capital Management No-Action Letter.

This comes into play under the fund’s indemnification provisions which may require LPs to indemnify the fund manager to a “gross negligence” standard. The Advisers Act standard is a lower simple “negligence” standard. A hedge clauses may effectively raise the Advisers Act fiduciary standard to “gross negligence.” If the SEC brings an enforcement action and settles with the fund manager, LPs may be required to indemnify the fund manager for a fine under the fund’s indemnification provision.

Sources:

• They’re the Biggest Investors in Private Equity. Now They’re Asking the SEC to Step In. by Alicia McElhaney
• ILPA URGES SECURITIES & EXCHANGE COMMISSION TO TAKE ACTION TO ENSURE ROBUST FIDUCIARY DUTIES FOR INVESTORS IN THE PRIVATE EQUITY MARKET
• February 12, 2019 ILPA Letter
• August 6, 2018 ILPA Letter
• November 21, 2018 ILPA Letter
• Heitman Capital Management No-Action Letter, February 12, 2007