Aug. 23, 2023
The choice we face today is leaving in place a framework for overseeing investment advisers that does not adequately protect private fund investors, or strengthening it to better serve them and the public interest.
By reforming oversight of current practices in this space, we level the playing field for investors of all sizes. We also honor our mission, consistent with congressional mandates, to promote fair and transparent markets.
Advisers play a major role in managing private funds, such as hedge funds and private equity funds. The number of private funds managed by all private fund advisers has tripled in the last ten years.
Following the 2008 financial crisis, Congress directed the Commission to collect data from private fund advisers. Since 2012, extensive analysis of this data has informed the Commission’s rulemaking, examination and enforcement efforts.
Examinations have revealed risks that advisers to private funds disclose inaccurate, incomplete or misleading information, engage in disparate treatment of investors, and often inadequately address conflicts of interest.
The Commission has also brought numerous enforcement actions against advisers to private funds for fraudulent and deceptive practices.
In all of these instances, Commission staff deserve praise for their diligent efforts to oversee this growing industry and to protect investors and the public interest.
In today’s release, the Commission has laid out a strong case for reforming current adviser practices.
A variety of investors with different profiles, levels of sophistication, and bargaining power invest in private funds. While some of these investors may have the financial leverage to negotiate a good deal for themselves with their advisers, other investors may not.
Advisers’ preferential treatment of certain investors can have a material, negative effect on these other investors. The investors most affected by these disparities may have little or no knowledge of the preferential treatment that some investors receive.
Market forces have not solved for these disparities. The way the market works under current rules places many of these investors in the unfair position of having no choice but to accept disadvantageous terms from their advisers.
There are, for example, more than 5,000 public sector retirement systems in the U.S., representing more than 26 million working and retired beneficiaries.
These pension plans serve firefighters, educators, law enforcement officers, and other workers who provide vital services to communities throughout our country. Increasingly, these pension plans rely on private fund investments, both to bolster unfunded pension liabilities and to maximize returns for beneficiaries.
Under the status quo, these beneficiaries can be harmed, through lower returns, by a lack of transparency in fees and expenses and when their advisory relationships are tainted with inadequately addressed conflicts.
To the extent smaller pension plans experience disparate treatment, they may lack the leverage with investment advisers to negotiate better terms to manage their portfolios.
By leveling the playing field for investors, today’s reforms help remedy these disparities.
Through strengthened disclosures, private fund investors will be better able to understand the terms of their relationship with investment advisers, the fees and expenses involved, and performance metrics.
In an efficient, transparent market, this is basic information that any investor should not have difficulty accessing.
Quarterly statements will offer fund investors standardized disclosures that are comparable across the market.
Advisers will be prohibited from offering preferential terms to one investor unless they disclose those terms to all fund investors, so as to prevent certain opaque and unfair practices that benefit some investors at the expense of others.
Because informed consent empowers and protects investors, advisers will be required to obtain written consent from fund investors prior to borrowing money from private funds, or before passing on fees and expenses associated with an investigation by any governmental or regulatory authority.
Advisers will be required to keep a record of any notification or consent sent to or received by a private fund investor, promoting accountability and enhancing transparency of the adviser’s practices.
Advisers will be prohibited from passing on to fund investors any fees and expenses associated with investigations that result in sanctions for violations of the Investment Advisers Act and/or its rules.
The overall result: fairer and more transparent markets and strengthened investor protections.
When someone is in the business of managing money for investors, it is reasonable for these investors to expect transparency.
Transparency makes it possible for these investors to make informed investment decisions. It allows them to assess, more effectively, advisers’ fees and performance, and any conflicts of interest.
Transparency fosters competitive markets and an environment where market participants can have the confidence to raise capital with the benefit of full information.
It also builds trust and helps prevent fraud, deception, and manipulation.
To the extent there’s adviser misconduct, market transparency makes it easier for it to be spotted, reducing investor harm.
Today’s release also addresses, directly, the concerns expressed by some market participants regarding the reforms’ interaction with other Commission rulemakings. As a general practice, the Commission’s economic analysis offers a baseline that takes into account both existing rules and recently adopted ones. The costs and benefits of today’s rulemaking are measured against that baseline.
Recognizing possible implementation costs, the release provides for longer transition periods, for smaller advisers in particular, and limited exceptions from certain prohibitions.
Overall, the Commission has undertaken a considered, targeted approach to crafting today’s reforms, consistent with the rigorous public comment process required by law.
The investing experience should not be marred by risks that arise from unfair practices that benefit some investors but not others, or the advisers themselves.
Today’s reforms protect all investors by addressing opaque and anti-competitive practices that market forces have failed to mitigate.
As a result of today’s reforms, investors will benefit from improved access to key information that will allow them to make the most informed investment decisions, in a more transparent market.
My thanks to Chair Gensler for his leadership in advancing these important reforms, which I support; to Commissioner Crenshaw for strengthening the rule by contributing her valuable ideas; and to Commissioners Peirce and Uyeda, for informing the discussion with their keen and thoughtful insights.
I have much respect for my fellow commissioners, their perspectives, and the thoughtful approach each of them brings to the work of the Commission.
Whether a Commission action is the product of a unanimous or of a majority vote, the public benefits in either instance from the open, deliberative process that makes it possible for a wide range of views to be aired and considered. This deliberative process is a reflection of our highest democratic ideals and plays a vital role in informing our decision making and in advancing the public interest.