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Keynote Address at the Managed Fund Association: “Five Years On: Regulation of Private Fund Advisers After Dodd-Frank”

Chair Mary Jo White

MFA Outlook 2015 Conference, New York, New York

Oct. 16, 2015

Good morning.  Thank you, Richard [Baker], for that kind introduction.  I am pleased to be here again to continue our dialogue at this important time for private fund advisers.  As I said at this conference two years ago, the Managed Funds Association has been an important and constructive voice representing your industry, and that certainly remains true today.

This past July marked the fifth anniversary of the Dodd-Frank Act, which required the Commission to implement a significant number of regulatory mandates, most of which are now completed.[1]  Most prominent for this audience, of course, were the rulemakings creating new registration and reporting requirements for private fund advisers.  Since the implementation of these rules, approximately 1,500 new private fund advisers have registered with us.  And the Commission now gathers considerable data on these advisers and their funds.

Required registration and reporting have been critical to increasing transparency and protecting investors in private funds.   But now, having moved past the financial crisis and the implementation of the post-crisis rules, we are in a new phase of oversight.

The regulatory regime for private fund advisers addresses two broad areas of risks: firm‑specific risks and risks that may also affect the broader asset management industry and potentially the financial system.  These two sets of risks are often intertwined, without clear distinctions between “firm” and “system.”  But it is clear that both current and future rules must focus closely on how threats to the financial system could impact our mandates of investor protection, fair, orderly and efficient markets and facilitating capital formation.

Registration and reporting have given us significant insight into the nearly 30,000 private funds managed by 4,500 registered advisers,[2] which helps us to understand potential risks for both individual firms and the broader financial system.  We have learned, for example, a great deal about the size, geographic distribution, and investment concentrations in the industry.  We have also begun to analyze data reflecting private fund strategies, including the use of leverage and counterparty exposures.  Excessive leverage, lack of liquidity, and asset concentrations have in the past been at the root of financial crises, and we now have the regulatory tools to help better identify and appropriately mitigate potential problems.     

Registration and reporting have also enabled our staff in the Office of Compliance Inspections and Examinations (OCIE) to conduct targeted presence exams, and when appropriate, the Division of Enforcement to bring actions for the most serious violations.  Conflicts of interest and inadequately disclosed fees and expenses are examples of the serious firm-specific risks that have been identified through this process.

Today, I thought I would highlight some of what we have learned about the risk profiles of private funds that will remain a focus for the Commission going forward.  I will start with what we have learned from the data we have collected and how we are seeking to use that data more effectively.  Then, I will discuss risks and challenges for private funds and their advisers that can have a systemic impact.  And finally, I will focus on some firm-specific risks you should be actively considering in your own business.

Understanding the Industry through Registration and Reporting

Before 2010, the Commission had relatively limited insight into private funds and the business of private fund advisers.  We did not know, for example, even how many existed,[3] and we had limited tools to learn more. 

The Dodd-Frank Act gave us the ability to see a much more complete picture.  The Commission and the public now have census information about private fund advisers and private funds.  Form ADV provides details about an adviser’s activities and relationships, as well as basic information about the organizational, operational, and investment characteristics of each private fund the adviser manages.  It also provides important information about affiliated entities and service providers that perform critical roles as “gatekeepers.”

As you know, Form PF is also filed confidentially with the SEC by private fund advisers that each manage more than $150 million in private fund assets.  Form PF, provides rich data about private funds to the Commission and other regulators, including the Financial Stability Oversight Council (FSOC).  A number of robust safeguards are employed to protect the integrity and confidentiality of this data.  This information enables us to assess potential risks to the U.S. financial system.  When I last spoke to you, we had only received our first full set of data.  We now have three full sets of annual PF data, as well as data from 11 sets of quarterly Form PF filings. 

With this data, we are also able to monitor trends in the industry.  For example, while the number of private fund advisers reported on Form PF has not changed appreciably since 2013, the number of large hedge fund advisers with at least $1.5 billion in hedge fund assets has increased by approximately 15 percent in the same period.[4]  We have also observed an 8 percent increase in the number of private funds reported from 2013 to 2014, and their total gross assets have increased by nearly $1 trillion, now totaling just shy of $10 trillion.[5]  Of that $10 trillion, about $6.1 trillion was reported by hedge funds.[6]  In terms of net assets, private funds had $6.7 trillion at the end of 2014 and hedge funds had $3.4 trillion.[7]

These statistics, which have already been made public in annual reports to Congress, are just a small sampling of the information that is available on the form.  Form PF data also allows the staff to monitor investment strategies among private funds and to understand the potential effects of certain market or global events.  We have used it to assess funds’ reliance on derivatives and leverage, their exposure to certain international markets, and their use of high frequency trading strategies.

Now that the reporting infrastructure is in place and we have begun to analyze the data, we have turned our focus to making aggregate data from Form PF public, while also protecting proprietary information of individual firms that file.

Just this morning the Commission staff published a “Private Funds Statistics” report that provides certain aggregated and anonymized census data and statistics derived from Form PF data.[8]  These statistics include, for example, the distribution of borrowings, an analysis of hedge fund gross notional exposure to net asset value, and a comparison of average hedge fund investor and hedge fund portfolio liquidity.

While this is highly aggregated data, the statistics illustrate trends and practices in the industry.  Consider just a few examples.  First, although the total notional value of derivatives reported on Form PF has increased, from about $13.6 trillion to about $14.8 trillion, that value has decreased relative to total net assets from the beginning of 2013 to the end of 2014, from about 256% of net asset value to about 221% of net asset value.[9]  Second, more than half of all large hedge fund advisers report aggregate economic leverage less than two and a half times their total reported hedge fund net assets.[10]  And finally, the data indicates that fewer than 100 reporting hedge funds--representing less than $70 billion in combined net assets--manage some portion of their funds using high-frequency trading strategies.[11]

The public availability of aggregated information should help to address persistent questions, and to some degree misconceptions, about the practices and size of the private fund industry.  As I said in 2013, this type of information helps investors understand your business and investment approach.  When investors have that kind of information, they can make more informed choices and the transparency benefits your entire industry.

We are publishing this aggregate data to help facilitate constructive feedback and additional analysis to deepen the knowledge of the Commission and other regulators.   As we publish more information derived from Form PF data, we encourage your input on how we can make the information as useful as possible and what it demonstrates to you in terms of trends and risks.

Risks Beyond the Firm

The data we are now receiving is giving us a better understanding of not only the risk profiles of individual firms, but also the broader fund industry and potentially the financial system as a whole.

The financial crisis re-focused financial regulators, including the Commission, on addressing risks that could have a systemic impact.  To my mind, addressing these risks is fundamental to our long-standing mission to protect investors, maintain market integrity, and promote capital formation.  Simply put, investors are not protected if broad and interconnected segments of the financial system are at risk.

Private funds and their advisers obviously play an important role in the financial system.  The newly public Form PF statistics show that there are about 2,600 private fund advisers that each manages more than $150 million in private fund assets.[12]  Some of the largest groups of private fund investors include individuals, pension plans, and non-profit organizations, and large hedge funds turn over trillions of dollars in listed equity and futures transactions each month.[13]  It is therefore natural for the characteristics of your funds – their leverage, their concentration, their size – to be of interest to the SEC and our fellow regulators. 

Risks Arising from Services and Activities

One insight is that potential risks can cut across the asset management industry, arising from the services provided to investors and the activities of a range of financial market participants.  The request for comment from FSOC earlier this year thus addressed the client services and activities of asset managers with vastly different profiles.[14]  The SEC staff was very active in the preparation of the request, which I thought was a constructive shift in FSOC’s focus from firm-specific analyses to considering activities that may pose potential systemic risks.  It was also a demonstration of the utility of FSOC as a unique forum for gathering regulators with different missions and information to identify potential systemic risks, which by definition can extend beyond market participants regulated by a particular regulator.  This collaboration among regulators is essential for better coordinating our actions and closing any gaps in oversight.

For our part, the Commission is in the midst of proposing a series of important measures to help ensure that our regulatory program for investment advisers and mutual funds is addressing the challenges and risks of the evolving marketplace.  Just last month, the Commission unanimously proposed new rules for liquidity management programs and swing pricing at mutual funds.[15]  And in May, the Commission unanimously proposed extensive new data reporting requirements for registered funds and advisers.[16]

Operational Risks

Another industry-wide risk that our current program focuses on is operational risk, which can arise from inadequate or failed processes and systems that provide services to the adviser or funds.  As highlighted by the recent incident this summer where a major third party service provider did not provide end of day values for mutual fund portfolio holdings, problems in these processes and systems can have real consequences for funds and their advisers.  No doubt most of you are closely focused on mitigating operational risks, including how you deal with operational risks of third party service providers, and our efforts in this area will likely bear directly on the efforts of all advisers.  I would like to briefly highlight three specific operational risks that merit close attention.

First are the operational risks surrounding the transition of client accounts from one adviser, often winding down, to a new adviser.  The Commission staff is developing recommendations to help advisers assess and plan for the impact on investors when an investment adviser is no longer able to serve its clients. 

In the event of an abrupt change in the management of a private fund, unique issues may arise in the transition to another adviser or, more likely, the liquidation of the fund.  For example, private funds may be invested in asset classes that are harder to sell and where there are fewer alternative advisers-- a problem not typically faced by advisers to large equity funds.  Investors in private funds are also more likely to have special contractual rights that other advisers may be unwilling to accept or that may limit the adviser’s ability to transfer management or liquidate the fund without further action by the investors.  And investors in private funds tend to have confidentiality concerns that may make finding a replacement adviser more difficult.  These issues can be fairly readily addressed, but they should be thought through in advance rather than in a stress or wind-down scenario.  A clear, well-defined transition plan will, of course, benefit investors and should also safeguard the market in crisis scenarios.

A second universal operational risk is cybersecurity.  Staff guidance earlier this year encouraged advisers to assess their ability to prevent, detect and respond to attacks in light of their compliance obligations under the federal securities laws, and detailed a number of measures advisers may wish to consider.[17]  Pay careful attention to the areas discussed in the guidance. 

A September settled enforcement case also illustrates the problems investment advisers can face in this space.  In that case, a hacker stole sensitive information about more than 100,000 individuals from an investment adviser’s web server.  The adviser was charged with not having written policies and procedures reasonably designed to protect customer records and information, in violation of Regulation S-P.[18]  That rule generally requires registered investment advisers to adopt written policies and procedures reasonably designed to ensure the security of customer information, and to protect against anticipated threats to and unauthorized use of that information.[19]   

The potential impact of these risks is not confined to individual firms.  Stolen information or compromised infrastructures can spill over into the financial system, potentially putting at risk assets and information far outside the hacked firm. Cybersecurity is the shared responsibility of all regulators and market participants, including investment advisers, to guard the broader financial system against intrusions.  While cybersecurity attacks cannot be entirely eliminated, it is incumbent upon private fund advisers to employ robust, state-of-the-art plans to prevent, detect, and respond to such intrusions. 

The final operational risk I will highlight is market stress.  I have spoken before about how the Commission staff is considering ways to implement the Dodd-Frank requirements for annual stress testing by large registered investment advisers and registered funds.[20]  International bodies such as IOSCO are also considering these issues as they look at the asset management space.  Our initial focus is on registered funds and their advisers, but there are important questions about how to address this issue for other registered advisers that meet the Dodd Frank asset threshold, including private fund advisers. 

A key challenge is tailoring our implementation of this mandate to the specific risks and business models of diverse asset managers.  Regulatory stress testing is a new concept for most asset managers, with the exception of money market funds, and the traditional models of stress testing for banks and broker-dealers may not be transferrable.  Indeed, since the financial distress of an investment adviser may affect only the assets of the adviser, rather than the finances of the likely much larger funds it manages, there are real questions about precisely what the goal of stress testing should be for advisers.

It is too soon to draw any conclusions about what our stress tests will look like for advisers, but we have received some useful inputs from certain of the Form PF questions addressed to existing stress testing practices.  As the staff develops their recommendations, we welcome your thoughts on how you currently address these issues and how current approaches could be improved and, where appropriate, standardized.

Changes in the Broader Regulatory Framework

Before turning to a discussion of firm-specific compliance risks, I want to reverse my lens and touch briefly on how shifts in the broader regulatory framework have affected private fund advisers.  Due in part to the renewed focus on systemic risk, there are a number of significant new rules in recent years that – while not directly applicable to private funds – have profound effects on them.

A prime example is the Volcker Rule.  While not directly aimed at private fund advisers, it certainly had a significant impact on who can own and sponsor private funds, requiring some advisers to substantially alter their activities.  Another example is clearing. While funds are generally not members of clearing agencies, the manner in which clearing agencies manage risks can nonetheless have a significant impact on funds – including through margin requirements, collateral protections, and the portability of positions.

As regulators maintain their focus on assessing systemic risk, there likely will continue to be efforts like these that will directly impact your business.  Your input is vital to ensuring that such consequences are fully understood, and that regulatory measures to address these broader risks are appropriately calibrated to achieve the desired objective in the most cost-effective way.

Risks Within the Firm

The kind of risks that, at least in their everyday perception, mean the most to investors are those close to home, tied to issues within a specific firm.  These are the risks that can harm investors most directly and clearly, shaking confidence in a firm and raising questions about practices in the broader industry.

I will highlight a few of the recurring, specific compliance risks our examiners have seen that each private fund adviser should be addressing every day.  I will start with fiduciary duty, the cornerstone of our regulatory framework for asset managers.  As part of that duty, investment advisers must serve the best interests of their clients and seek to avoid, or at least make full disclosure of, conflicts of interest, including those related to their organization, operation, and management of client assets.  This duty is the bulwark of investor protection. 

On completing their presence exam initiative last year, our examiners identified several areas where cracks in this bulwark were found.

Marketing was one area.  Staff was concerned that some hedge fund advisers may have used marketing materials that included back-tested performance numbers, portable performance numbers, and benchmark comparisons without key disclosures. 

Disclosure of conflicts was another area.  Examiners observed that some hedge fund advisers may not be adequately disclosing conflicts related to advisers’ proprietary funds and the personal accounts of their portfolio managers.  Examiners saw, for example, advisers allocating profitable trades and investment opportunities to proprietary funds rather than client accounts in contravention of existing policies and procedures. 

In exams of private equity advisers, examiners also observed instances of conflicts involving fees and expenses.  For example, staff was concerned that some advisers may have been improperly shifting expenses away from the adviser and to the funds or portfolio companies by, for example, charging a fund for the salaries of the adviser’s employees or hiring the adviser’s former employees as “consultants” paid by the funds.  Examiners also continue to observe advisers collecting millions of dollars in accelerated monitoring fees without disclosing the practice.

Our fee and expense observations go beyond private equity advisers.  Our Private Funds Unit in OCIE is completing a review of private fund real estate advisers, many of which may be hiring related parties.  Staff is concerned that disclosure about these arrangements may be non-existent or potentially misleading, particularly with regard to whether or not the related parties charge market rates.

In addition to these exam findings, I urge you to focus on a number of recent, important enforcement actions by the Commission against private fund advisers.  Many of these actions also center on disclosure and conflicts of interest, including advisers misallocating expenses to funds;[21] failing to disclose loans from clients;[22] using funds to pay their operating expenses without authorization and disclosure;[23] and failing to disclose fees and discounts from service providers.[24]

These cases underscore the value of our oversight and exam program, which identifies practices that would have been difficult for investors to discover by themselves.  They also illustrate that investment advisers to funds – including private funds catering to sophisticated investors – must disclose material facts to clients.  Investors, regardless of their sophistication level, must have, and deserve to have, the information necessary about their adviser and funds to make an informed investment decision – including their adviser’s actual or potential conflicts of interests.


The last five years have been a busy and important time for your industry and for us at the Commission.  As we move beyond the initial phase of post-Dodd-Frank rules, it is essential that we continue to work together to build a strong regulatory framework that addresses both these firm-specific risks and the risks that can have an impact on the broader financial system.

These risks are intertwined, and the strong compliance culture that individual private fund advisers build in carrying out their fiduciary duty is fundamental to the strength of the industry – and its ability to work with regulators, investors, and other market participants to foster a robust, resilient financial system.  As we continue to address broader risks to that system, your insights and participation in the regulatory process is essential to developing sustainable, efficient rules and guidance that make sense within individual firms.

Five years on, while the intensity of the specific changes precipitated by the Dodd-Frank Act may have lessened, we have continued to build a strong regulatory framework that protects investors while preserving the vibrant diversity of private funds.  I believe that the next five years must do the same.

Thank you.

[1] The Commission’s implementation of the Dodd-Frank Act is summarized at

[2] Investment Advisory Registration Data (IARD), as of September 30, 2015.  Investment advisers report general information about the private funds that they manage under Item 7 of Form ADV Part 1A.

[3] Former Chairman Mary Schapiro testified in 2010 that these limitations meant that the Commission had “no detailed insight into how [private fund advisers] manage their trading activities, business arrangements or potential conflicts of interest.”  Chairman Mary L. Schapiro, Testimony Concerning the State of the Financial Crisis Before the Financial Crisis Inquiry Commission (Jan. 14, 2010), available at; see also Chairman Christopher Cox, Testimony Concerning the Regulation of Hedge Funds Before the U.S. Senate Committee on Banking, Housing and Urban Affairs (Jul. 25, 2006), available at

[4] Annual Staff Report Relating to the Use of Data Collected from Private Fund Systemic Risk Reports (Aug. 13, 2015), available at; Annual Staff Report Relating to the Use of Data Collected from Private Fund Systemic Risk Reports, (Aug. 15, 2014), available at, and

 Annual Staff Report Relating to the Use of Data Collected from Private Fund Systemic Risk Reports,

(Jul. 25, 2013), available at (together, the “PF Annual Reports”).  A large hedge fund adviser is defined as an adviser with at least $1.5 billion attributable to hedge funds.  See Form PF, General Instruction 3.

[5] See PF Annual Reports.

[6] See PF Annual Reports.

[7] See PF Annual Reports.

[8] Private Funds Statistics, Fourth Calendar Quarter 2014, October 16, 2015, available at (“Private Fund Statistics”).

[9] Private Funds Statistics, at Tables 18, 19.

[10] Private Funds Statistics, at Figure 5.

[11] Private Funds Statistics, at Tables 20, 21.

[12] Private Funds Statistics, at Table 2.

[13] Private Funds Statistics, at Tables 10, 11, 23.

[14] Financial Stability Oversight Council, Notice Seeking Comment on Asset Management Products and Activities FSOC-2014-00001 (Dec.18, 2014), available at

[15] Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment Company Reporting Modernization Release, Release No. IC-31835 (Sept. 22, 2015), available at

[16] Amendments to Form ADV and Investment Advisers Act Rules, Release No. IA-4091 (May 20, 2015), available at; Investment Company Reporting Modernization, Release No. IC-31610 (May 20, 2015), available at

[17] Cybersecurity Guidance, IM Guidance Update No. 2015-02 (Apr. 2015), available at

[18] In the Matter of R.T. Jones Capital Equities Management, Inc., Release No. IA-4204 (Sept. 22, 2015), available at

[19] Rule 30(a) of Regulation S-P.

[20] The Dodd-Frank Act requires the Commission to establish methodologies for stress testing of financial companies such as broker-dealers, registered investment companies and registered investment advisers with $10B or more in total consolidated assets—including baseline, adverse, and severely adverse scenarios—and to design a reporting regime for this stress testing, which must be reported to the Commission and the Federal Reserve Board. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, section 165(i)(2), 124 Stat. 1423 (2010) (codified at 12 USC 5365).

[21] The Commission settled charges against a private equity fund adviser for misallocating more than $17 million in so-called “broken deal” expenses to its flagship private equity funds, thus breaching its fiduciary duty.  In the Matter of Kohlberg Kravis Roberts & Co. L.P., Release No. IA-4131 (Jun. 29, 2015), available at

[22] The Commission settled charges against an adviser in August 2015 for breaching its fiduciary duties by failing to disclose a $50 million loan that a senior executive received from an advisory client.  In the Matter of Guggenheim Partners Investment Management, LLC, Release No. IA-4163 (Aug. 10, 2015), available at

[23] The Commission settled charges against a private fund adviser and its principal for using funds to pay for the adviser’s operating expenses in a manner not clearly authorized under the funds’ governing documents or accurately reflected in the funds’ financial statements.  In the Matter of Alpha Titans, LLC, et al., Release No. IA-4073 (Apr. 29, 2015), available at

[24] The Commission settled charges against three advisers for violations of their fiduciary duties to private equity funds.  The charges involved inadequate disclosures related to the acceleration of certain monitoring fees paid by the funds’ portfolio companies and legal fee discounts the advisers received that were substantially higher than the discount received by the funds.  In the Matter of Blackstone Management Partners L.L.C., et al., Release No. IA-4219 (Oct. 7, 2015), available at

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Modified: Oct. 16, 2015