The shape of private fund reforms

Experts see SEC chairman Gary Gensler moving away from more access to venture capital, private equity and hedge funds and toward more transparency.

SEC chairman Gary Gensler’s menu of regulatory reforms is long but its recipes short.

Gensler has said he’s weighing changes to the exempt adviser industry and to Form PF. He’s also signaled he’s weighing mandatory ESG disclosures and wants to take a fresh look at the definition of accredited investors.

Affiliate publication Regulatory Compliance Watch talked to an array of experts about what Gensler might do, can do or should do.

Fiduciary duty, disclosures

Gensler has already endorsed rules against preventing private fund advisers from outsourcing their fiduciary duties. He’s also supported rules requiring more disclosures from private funds about their fees. Both were boons to the Institutional Limited Partner Association, a DC-based trade group that has been lobbying on these issues for nearly a decade.

“You’re seeing kind of a shift in the winds,” said ILPA’s Chris Hayes. “It’s a different viewpoint on whether expansion of private markets is a good thing for investors, and whether granting more access is a good thing.”

ILPA wants private markets to expand and thrive, said Hayes, senior policy counsel at ILPA. But it’s also worried that bringing in more retail investors will lower returns. Hayes said he loves what he’s heard from the new SEC so far.

“Looking closely at what chairman Gensler and the other Democratic commissioners have said, we’re looking at a move away from more access,” he said. “If you’re going to have access, you ought to have some kind of protection through the 1940 Investment Advisers Act.”

Risky business

Kurt Wolfe, counsel to Quinn, Emanuel, Urqhart & Sullivan, believes the Commission is likely to add new questions to Form D and Form PF that get at systemic risk, and in particular, risk from counterparties.

“Even Hester Peirce (a Republican) has talked about that,” Wolfe said. “Now I’m guessing that she’s not going to agree with what (Democrats) Gary Gensler or Allison Herren Lee are going to come up with, but at least there’s a fundamental agreement that there’s just not enough information in the space.”

In a 2018 speech to the Exchequer Club, Peirce endorsed the position of the Managed Fund Association. The association had argued that Form PF ought to “identify counterparties whose default would likely lead to a significant loss for the reporting fund, and correspondingly, better identify a reporting fund whose default would likely lead to a loss for financing providers.”

“Now that firms have struggled with Form PF for several years,” Peirce said, “it’s worth asking whether the data it generates actually provide us with a valuable systemic risk picture, particularly given the enormous costs involved.”

‘Transparency with teeth’

Toni Caiazzo Neff is an independent compliance consultant. Her whistleblowing helped lead to charges against GPB Capital, a $1.8 billion private fund adviser in New York. She has urged the SEC to conduct exam sweeps of exempt private fund advisers.

“What we need is transparency with teeth,” she said. “It’s more than a check-the-box exercise.”

In his May testimony before the House Appropriations Committee, Gensler asked for a $2.2 billion budget that includes additional examiners. Caiazzo Neff endorses the request but adds that it’s not just about more examiners, it’s about better ones.

“The SEC needs to have the sufficient resources – that’s in quality and quantity – to regulate the private markets space properly,” she said.

This article first appeared in affiliate publication Regulatory Compliance Watch