Trade Associations React Against SEC’s Newly Adopted Private Fund Advisor Rule
A group of trade associations representing the alternative asset management industry has filed a lawsuit against the US Securities and Exchange Commission (SEC) challenging the SEC's recently adopted Private Fund Adviser rule.
The trade associations, including the Managed Funds Association (MFA), argue that the rule will harm investors, fund managers, and markets by increasing costs, reducing competition, and limiting investment opportunities for institutional investors (viz., pensions, foundations, and endowments).
Believing that the new rules goes against the SEC's mission to protect investors and facilitate capital formation, the petitioners highlight three harmful aspects of the rule:
limiting the right of private fund advisers and their investors to tailor their relationships and interactions,
imposing prohibitions and restrictions on certain private fund adviser activities, and
imposing onerous disclosure requirements and administrative obligations.
The trade associations argue that these aspects of the rule go beyond the SEC’s authority under the Investment Advisers Act of 1940 and other applicable laws.
The global alternative asset management industry, which includes hedge funds, credit funds, and crossover funds, has assets under management of $4 trillion. The industry serves institutional investors by providing portfolio diversification and risk-adjusted returns.
The Managed Funds Association (MFA) represents the global alternative asset management industry and advocates for its members on regulatory and business issues. MFA has more than 170 member firms managing nearly $2.2 trillion across various investment strategies.
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What are the New SEC Private Fund Advisor Rules?
On August 24, the Securities and Exchange Commission (SEC) adopted reforms it had been considering to improve oversight and regulation of private fund advisors. The new rules and amendments are aimed at enhancing transparency, investor protection, and competition within the private fund industry.
Requirements pertaining to private fund advisers registered with the Commission:
Provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance;
Obtain and distribute to investors an annual financial statement audit of each private fund it advises; and
In connection with an adviser-led secondary transaction, obtain and distribute to investors a fairness opinion or valuation opinion.
Requirements pertaining to all private fund advisors:
Prohibition from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors. (In all other cases of preferential treatment, a disclosure-based exception is available, including a requirement to provide certain specified disclosure regarding preferential terms to all current and prospective investors.)
Prohibition from charging or allocating to the private fund certain investigation costs where there is a sanction for a violation of the Investment Advisers Act of 1940 or its rules.
In addition, the final rules will restrict certain other private fund adviser activity, unless appropriate specified disclosures are made and, in some cases, investor consent obtained.