The U.S. Securities and Exchange Commission (SEC) is moving forward with a controversial oversight of private fund advisers following a 3-2 vote among commissioners.
SEC Chairman Gary Gensler hailed the new private fund adviser rule saying it would result in greater competition and efficiency in markets under new rules and enhancement to the current Investment Advisers Act of 1940.
There are currently over $18 trillion in private fund assets under management handled by 5,037 registered private fund advisers. These strategies include hedge funds, venture capital funds and private equity funds. The rule drew much commentary in advance to today’s meeting, including claims that the commission was overstepping its boundaries.
The changes outlined in the new Private Fund Adviser rule are wide sweeping. The key provisions require managers to:
- Provide investors with quarterly statements detailing information regarding private fund performance, fees, and expenses;
- Obtain an annual audit for each private fund; and
- Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction.
It also does away with certain long-standing industry practices. The rule would:
- Prohibit engaging in certain activities and practices that are contrary to the public interest and the protection of investors unless they provide certain disclosures to investors, and in some cases, receive investor consent; and
- Prohibit providing certain types of preferential treatment that have a material negative effect on other investors and prohibit other types of preferential treatment unless disclosed to current and prospective investors.
- Additionally, the amendments would require all registered advisers, including those that do not advise private funds, to document in writing the annual review of their compliance policies and procedures.
In a rejection of the new rulemaking, SEC Commissioner Hester Peirce said that the rules are taking a retail approach to how funds are offered and in respect to the oversight of private fund advisors. At the same time, retail allocators are still not allowed to participate in private funds. Also, she expressed concern that terms offered to larger investors are done due to commitment size and whether the rule would mean those terms would be offered to other investors regardless of the size of the investment. SEC staffers affirmed that was the case during today’s meeting.
In response to widespread criticism of the SEC preventing private negotiation by fund advisors and investors, Commissioner Caroline Crenshaw added, “It is our mandate and responsibility to protect all investors large and small.”
Law firm Barnes & Thornburg in a report earlier this year outlined the concerns of large investors that the rule’s prohibitions and disclosure requirements would dissuade GPs from providing side letters at all. Other investors however want to see these letters and some allocators have been asking for redacted copies of executed redacted copies of the existing side letters rather than the ‘Most Favored Nation compendium’ that is typically offered after a final close, lawyers said.
Earlier this year, the SEC adopted amendments designed to enhance the ability of the Financial Stability Oversight Council to assess systemic risks and to bolster the Commission’s oversight of private fund advisors and its investors protection efforts.
