Views diverge as SEC rules sink in

Just over a week ago the US Securities and Exchange Commission approved its final rules increasing regulation of private fund advisers. The most common view at the time was that compliance would result in an inevitable drain on time as well as additional cost (a particular worry for newer and smaller funds), but that this was nonetheless a price worth paying for what appeared to be a step back from the more aggressive approach advocated by SEC chair Gary Gensler.

It’s interesting that, since then, some sharply divergent views have emerged. In conversation with the head of one firm which channels wealth capital into private markets, the following view was expressed: “I think the rules are actually pretty fair. If you think about the explosion of private products and private asset managers over the last decade or two, there hasn’t really been much regulatory change over that period.”

The same source pointed to similar rules already put in place for the broker-dealer market, namely the Regulation Best Interest rule introduced in June 2019. “It had some really good principles to it around duty of care and conflicts and I’d say the adoption of those same principles to private asset managers makes a lot of sense,” said the source.

The key difference with REG BI is that it encompassed the private wealth/retail universe, whereas private markets are considered largely to be the domain of the ‘sophisticated’ investor. The argument against too much regulation in the private sphere is that contracted terms are a matter for negotiation between parties able to fully understand and appreciate what they are entering into – and, if you don’t like my contracted terms – you can simply go and sign up to someone else’s. Such considerations were of course crucial when deciding what to do about side letter arrangements.

But, in an upcoming feature, Private Debt Investor’s Christopher Faille reveals that he has found the dreaded ‘l’ word being whispered: litigation. Trade bodies have been particularly forthright in seeking to draw a line in the sand, beyond which no regulator shall pass.

The Loan Syndications & Trading Association, for example, although commending the SEC on its exemption of CLOs from the new rules, said in a statement: “This rule, like many other SEC rulemakings, may have been adopted without appropriate regard for the substantive and procedural requirements imposed by Congress on SEC rulemakings and may exceed the SEC’s statutory authority.”

It should be added that it didn’t go so far as to promise litigation, saying only that it will assess the next steps necessary to protect the interests of loan fund managers and investors.

The Managed Funds Association, on its webpage, expressed the same concerns as the LSTA: “The final rule will increase costs, undermine competition, and reduce investment opportunities for pensions, foundations and endowments.”

The MFA also, though, stopped short of promising a lawsuit: it is assessing the final rule and is at work determining the appropriate next steps. But it included litigation as one of the possibilities. The implications of the SEC’s action could yet have some way to run.

Write to the author at andy.t@pei.group