Key Comments from the SEC’s Proposal Affecting Private Funds

The SEC’s new proposal creates concerns for investment advisers

As a follow up to my article from May 2022, Are Additional Operating Burdens Coming for Private Fund Managers?, I wanted to share some of the high level themes from comments the Securities and Exchange Commission (SEC) received from stakeholders in regard to its proposal to increase compliance and reporting requirements for advisers that manage private investment funds. While the SEC had posed specific questions for comment it was not surprising given the potential impact of this proposal that many general comments were received.

Comments regarding SEC’s proposed prohibitions on preferential treatment

The majority of critical comments arose from investment advisers as well as industry groups and law firms that represent advisers. A comment was also received from former SEC chair, Harvey Pitt, questioning whether these proposed rules were an overreach in general by creating a level of regulation to protect the most sophisticated level of the investor class. Surprisingly, even some large institutional investors were questioning if this proposal could create unintended consequences for investors in relation to some of proposed prohibitions on preferential treatment. Essentially those certain institutional investors are concerned they will lose their ability to negotiate key private fund fee terms through side letter agreements. While some of those comments were geared specific to preferential fee rate structures others focused on their ability to negotiate preferential redemption terms that are often necessary to comply with certain state laws, internal investment policies, or other regulatory obligations. Another critical area that received several comments surrounded a changing from the current “gross negligence” standard to more of a “negligence fiduciary duty” standard. The concern arises around potential diminished returns—as fund managers would be forced to alter their investment decision making methodology to better allocate risk in line with their fiduciary standard of care typically practiced in the traditional advisory business.

Proposed SEC rules may increase private investment fund transparency

There was a more positive reception of this proposal overall among investor groups, democratic lawmakers, as well as some of the advisers that commented. Many in the positive comment camp feel the proposed rules will highly increase transparency in the private fund industry and provide the highest level of investor protections that industry has ever seen. There is also a strong belief that this rule will provide better protections for the non-institutional accredited investor.

So, what comes next? Originally the SEC had requested comments by mid-June 2022 however, the comment period was opened back up for 30 additional days and the SEC website is still accepting comments currently as the latest comments were posted in mid-August. Based on the overall number of more critical comments, it is expected that there will still be room for negotiating what ends up in the final rule including more clarity provided to how and whom certain aspects of the rule would apply.

• Access the full listing of SEC proposal comments: Comments on Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews.
• For more information on these proposed rules and revisions to the Act, please visit the official release on the SEC’s website.

Keiter’s Financial Services Industry team is closely monitoring these and other possible regulation changes. We will keep you updated so you can plan accordingly. If you have any questions, please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000