Last week, Securities and Exchange Commission Chair Gary Gensler, made a speech at the Institutional Limited Partners Association Summit. The topic? (You can guess by the title.) Private Funds. In particular, potential new regulatory requirements around private fund.
I think it’s time we take stock of the rapid growth and changes in this field, as well as that decade of learning, and bring more sunshine and competition to the private funds space.
Fees and expenses – These are always at the top of the list when talking about private funds. The industry had a long history of not being completely transparent about fees. His spin is that competition and transparency about fees should lower costs, which would raise the returns for limited partner investors, who are pensions and endowments, ultimately helping workers prepare for retirement and families pay for their college educations.
Side letters – Chair Gensler is concerned that side letters may create “uneven playing field” by giving some investors preferred liquidity terms or disclosures or different fees. I’m less concerned about fees. That’s a point of bargaining. Bigger investors get fee breaks. That’s true for mutual funds as well as private funds. The difference is that private funds can give bigger breaks to attract key investors, which reduces their costs. If its public, the fund can just stick to its schedule. Preferred liquidity can be more of a problem.
Performance metrics – Chair Gensler is concerned with the transparency of performance metrics for private funds. It is hard to compare apples-to-apples with private funds because many do things differently. The new Marketing Rule requires private fund managers (at least those that are registered investment advisers) to provide net returns in performance metrics. That would seem to provide a pretty good method to compare fund returns and to compare against other benchmarks.
Fiduciary duties and conflicts of interest – Chair Gensler expressed concerns about the modification and reduction of fiduciary duties by general partners. Of course, that only applies to fund managers that are not registered investment advisers. Once you’re registered, you’re subject to the fiduciary requirements of the Investment Advisers Act. As for conflicts, Chair Gensler raises the possibility of the SEC prohibiting certain conflicts and practices. No more information on what those conflicts or practices may be for private funds.
Form PF – Chair Gensler is looking to revise the Form PF filing information. “I think we ought to consider whether more granular or timelier information would be useful in these circumstances.”
It sounds like there is some future rulemaking in the works that will directly affect private funds,
Sources:
- Prepared Remarks At the Institutional Limited Partners Association Summit
- What’s the sec’s plan for private funds? Gensler signals priorities in speech to ILPA
- Commission Interpretation Regarding Standard of Conduct for Investment Advisers (IA-5248)