SEC Chair Gary Gensler addressed regulatory developments in the private funds market, calling attention to issues around fees, fiduciary duties and disclosures.
Noting that private fund management and performance fees have not declined along with those of index and registered investment funds, and that other unknown fees could be added as extra costs, Mr. Gensler called for more transparency in private fund fee arrangements. He also asked SEC staff to offer recommendations for achieving greater transparency, and suggested that the staff examine side letters and fund performance metrics.
Mr. Gensler stated that private fund advisers owe an unwaivable fiduciary duty to the fund under the Advisers Act that they cannot avoid through contractual provisions.
Mr. Gensler highlighted the importance of Form PF, the instrument for disclosing fund activity to the government, and advocated for revising the document to collect more specific and up-to-date information. He emphasized opportunities for cooperation between the SEC and CFTC, as well as the SEC's work with the Federal Reserve, Treasury and Financial Stability Oversight Council, in making these changes to private fund regulation.
Commentary
Key takeaway from Chair Gensler's speech: SEC is focusing efforts on hedge funds and private equity funds. Good news: areas of focus are already on the radar of (and may even be well settled for) private fund managers: accurate and detailed disclosure of all fees, fair use of side letters, transparency on performance, and understanding of fiduciary obligations and mitigation of conflicts. Even better news: SEC with the CFTC will review the efficacy of Form PF (and hopefully streamline the form or at least make it user friendly). Best news: it is very clear that the private fund industry is thriving and recognized as a critical part of the capital markets.
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