Maryland CIO pushes back on proposed SEC rules banning use of side letters

Maryland State Retirement and Pension System CIO Andrew Palmer shared mixed opinions about proposed SEC’s proposed rules that would increase oversight over private equity.

While some large public pension funds have endorsed the SEC’s regulations, others behind the scenes say there is a split on the proposed rules, especially for policies that would prohibit preferred treatment certain LPs receive via side letters.

Some say the proposed rule changes could have unintended consequences, such as increased costs passed on to LPs due to additional compliance demands placed on GPs. Also, many LPs also use side letters as a way to invest in a fund while carving out mandated exceptions, such as avoiding vice-related companies.

“The rules regarding special treatment for some LPs over others could be more eloquently crafted and should rely more on disclosure than prohibition,” Palmer told the Maryland board during an informational session at its most recent meeting.

The board did not take any official action after the discussion.

Palmer also said he had concerns about rules that would also prohibit GPs from demanding indemnification from LPs. He said it was “an area that should be worked on but is probably overly restrictive as written.”

However, Palmer said the SEC’s proposals that would require more disclosures of private fund fees and expenses are a “great fit for investors like ourselves.”

Recently, Los Angeles Fire and Police Pensions publicly supported the SEC’s proposed rules that would prohibit preferred treatment for certain LPs. The potential regulations have also won the support of New York City Comptroller Brad Lander and North Carolina Treasurer Dale Folwell.

“Every LP should be treated equally,” Folwell said in a previous interview. “I don’t think any LP based on proportional investment should be treated different than anyone else.”

Maryland’s pension system has about $68 billion in assets under management and a 26.4 percent allocation to alternatives, according to data gathered by Venture Capital Journal. About 17 percent of its AUM is allocated to private equity versus a targeted PE allocation of 13 percent.

The pension made three commitments to vintage 2021 venture funds, all of them managed by GGV Capital. It committed $13 million to GGV Discovery III (a $610 million vehicle), $30 million to GGV Capital VIII ($1.46 billion) and $7 million to GGV Capital VIII Plus ($366 million).

Additional reporting by Lawrence Aragon