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Prepared Remarks At the Institutional Limited Partners Association Summit

Nov. 10, 2021

Thank you. As is customary, I will note that I am not speaking on behalf of the Commission or SEC staff.

Today, I’d like to talk about private funds, and the importance of certain of these funds — in particular, private equity and hedge funds — to our capital markets.

Why do these funds matter?

First, they matter because they’re large, and they’re growing in size, complexity, and number. Altogether, U.S. private funds have gross assets under management of $17 trillion with net assets of $11.5 trillion.[1] The sheer size and transaction activities of these funds represent a critical portion of our overall capital markets.

Hedge funds have gross assets of at least $8.8 trillion and net assets valued at about $4.7 trillion. Private equity funds gross assets of $4.7 trillion and net assets of $4.2 trillion.[2]

More than those figures, though, these funds matter because of what, or who, stands on either side of them.

The funds pool the money of other people: the limited partners. Many of these limited partners may be in the audience today.

And who are those limited partners? Sometimes, they’re wealthy individuals. Often, though, they’re retirement plans, like state government pension plans. They’re non-profit and university endowments. The people behind those funds and endowments often are teachers, firefighters, municipal workers, students, and professors.

And who are the people on the other side of the private funds? They’re entrepreneurs, trying to turn big ideas into big companies. They’re small business owners looking to hire employees, invest in new technologies, and grow. They’re the managers of late-stage companies, bought and sold by private equity firms.  

Private funds touch so much of our economy. So it is worth asking ourselves at the SEC whether we’re meeting our mission with respect to this important slice of the capital markets.

Are we protecting investors?

Are we facilitating capital formation?

Are we maintaining fair, orderly, and efficient markets in the middle?

After the 2008 financial crisis, Congress felt it was important to bring the private fund advisers into the public-policy frameworks that had been laid out in an earlier generation, in the midst of a different crisis: the Great Depression.

In the early 1930s, Franklin Delano Roosevelt and Congress passed two foundational securities laws. The ’33 and ’34 Acts required companies and other registered issuers to provide full and fair disclosures to investors; created the SEC; and established regulated exchanges.

Six years later, they realized their job wasn’t done. They realized there’s a fundamental difference between an operating company that makes cars and an investment adviser that manages someone else’s money.

When you manage someone else’s money, there may be additional opportunities for conflicts of interest between advisers and investors. Moreover, for an outside investor, it can be harder to evaluate that fund than to understand what a car company does.

So Congress decided that there should be additional laws and rules for individuals and companies that managed other people’s money. Those dual statutes, the Investment Advisers Act and Investment Company Act of 1940, continue to be the basic framework for investment funds and their advisers today.

Today, we all recognize the basic elements of asset management regulation.  Investment advisers owe a federal fiduciary duty to their clients. Advisers have to register with the SEC or the states. They have conflict of interest obligations. They have to provide transparency around the fees they charge and how they manage other people’s money.

But until recently, many of these foundational laws generally didn’t apply to private fund advisers.

It took another financial crisis in 2008 before Congress said, let’s bring private fund advisers into the Advisers Act. Lawmakers saw that private funds not only were large; they also were systemically important to our economy, and they had implications for investor protection.

Under the Dodd-Frank Act of 2010, many private fund advisers had to register with the Commission. Further, this new law gave us additional authority to seek investment adviser disclosures and to prohibit investment adviser conflicts of interest, sales practices, and compensation schemes contrary to the public interest and investor protection. Advisers also had to report information about the private funds’ holdings to the SEC through new Form PF filings.

Over the last decade, we’ve learned a lot about these funds and their advisers — from Form PF and from our examinations and enforcement regimes, including the unique business models and the resulting conflicts of interest.[3] The Division of Examinations has issued Risk Alerts highlighting compliance issues they observed in examinations of private fund advisers, such as with respect to fees and expenses.[4]

I think it’s time we take stock of the rapid growth and changes in this field, as well as that decade of learning, and bring more sunshine and competition to the private funds space.

When I think about policies around market structure, I consider the underlying principles of efficiency, competition, and transparency; market integrity; and resiliency. Albeit somewhat reordered, these three principles map to that middle arm of our mission to maintain efficient, fair, and orderly markets.

How do those principles inform this work?

Efficiency, Competition, and Transparency

Fees and Expenses

First, I think we can promote additional transparency around fees and expenses to fund investors.

Private funds have multiple levels of fees — among others, management fees, performance fees, and for many private equity funds, portfolio company fees.

I wonder whether fund investors have enough transparency with respect to these fees. I wonder whether limited partners have the consistent, comparable information they need to make informed investment decisions.

Back in my time on Wall Street, there was the traditional “2 and 20” model — 2 percent annual management fee and 20 percent performance fee. Since then, there’s been significant growth in assets under management and reductions over time in fees of registered investment funds and index funds.[5]

Meanwhile, what’s happened in private fund fees? The fees may not have come down comparably.

The average private equity[6] fees were estimated to be 1.76 percent (annual management fee) and 20.3 percent (performance fee) in 2018 and 2019 — not that different from when I was on Wall Street. Among the largest private equity firms, those fees might be even higher.[7] Average hedge fund[8] fees were estimated to be 1.4 percent (annual management fee) and 16.4 percent (performance fee) last year.

Together, those fees might add up to 3-4 percent in private equity and 2-3 percent per year in hedge funds. Against these $9 trillion in net assets under management, there may be somewhere in the range of $250 billion that are going to fees and expenses each year.

That may not even be counting other fees that private funds collect from limited partners and portfolio companies. These can include consulting fees, advisory fees, monitoring fees, servicing fees, transaction fees, director’s fees, and others. One estimate suggested that these fees can be quite significant.[9] As noted in a recent Financial Times article, “Investors say they routinely find themselves billed for extra costs.”[10]

In aggregate, that’s pretty significant to our economy and our capital markets. Hundreds of billions of dollars in fees and expenses are standing between investors and businesses.

More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets. This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.

That’s why I have asked the staff to consider what recommendations they could make to bring greater transparency to fee arrangements.

Side Letters

Furthermore, it’s not even the case that every investor gets the same deal within a particular private fund.

Unlike in the public markets and mutual funds, private funds can select which investors they’re letting in and on what terms. Over the years, there’s been an increasing use of differential terms to investors.

Each limited partner may be negotiating its own deal. Sometimes, they get their own deal through the use of what’s called side letters.

Some of these side letters are benign, related to the specific paperwork a limited partner might need based upon its tax treatment.

Other side letters, however, can create preferred liquidity terms or disclosures. This can create an uneven playing field among limited partners based upon those negotiated terms. Research in this area suggests that similar pension plans consistently pay different private equity fees. The range of fees can be large.[11]

Thus, I have asked staff to consider recommendations regarding how we can level the playing field and strengthen transparency, or whether certain side letter provisions should not be permitted.

Performance Metrics

Next, I’d like to discuss performance metrics.

There’s a debate about whether private equity outperforms the public markets net of fees, or taking into account leverage and liquidity.[12]

I’m not here to weigh in on that debate. The point is, when people debate the fees and performance of mutual funds, they draw on a great deal of knowledge and information. In contrast, basic facts about private funds are not as readily available — not only to the public, but even to the investors themselves.  

Regardless of that overall economic debate about whether various forms of private funds outperform public markets on a risk-, liquidity-, and leverage-adjusted basis, there may be benefits to fund investors to increasing transparency of the performance metrics. I have asked staff to consider what we can do to enhance such transparency.

Market Integrity

Fiduciary Duties and Conflicts of Interest

Next, I’d like to turn to fiduciary duties and conflicts of interest.

Sometimes, general partners seek waivers at the state level of their fiduciary duties to investors. I understand that many limited partners have concerns about these waivers.

For example, this group, the Institutional Limited Partners Association (ILPA), has reported that 48 percent of institutional investors — about half the people in this room! — reported that general partners had modified or reduced their fiduciary duties in new capital allocations.[13]

Make no mistake: An investment adviser to a private fund has a federal fiduciary duty to the fund enforceable under the Advisers Act. This federal fiduciary duty may not be waived. 

Contract provisions purporting to waive the adviser’s federal fiduciary duty are inconsistent with the Advisers Act. This is regardless of the sophistication of the client.

Private fund advisers need to be acting consistent with those fiduciary duties.

Furthermore, when it comes to conflicts of interest, I believe we have the opportunity to strengthen trust in the private funds market.

I’ve asked staff how we can better mitigate the effects of conflicts of interest between general partners, their affiliates, and investors. This could include considering the need for prohibitions on certain conflicts and practices.


Form PF

Finally, I’d like to turn to financial resiliency. Form PF, which is how hedge funds and private equity funds provide information about their activities to the government, is an important barometer of financial system resiliency. I think we can freshen up Form PF.

After the 2008 crisis, Form PF was adopted to shed light on a growing part of the financial sector that was not transparent to regulators. The information collected on Form PF is critical to the Commission’s oversight of private fund advisers, the protection of investors in those funds, and financial resiliency.

Since the adoption of Form PF, we’ve learned a lot. For example, the role of hedge funds was not immediately apparent in the March 2020 dysfunction in the Treasury market. 

It is time for us to put that learning to use. I think we ought to consider whether more granular or timelier information would be useful in these circumstances.

I’ve asked staff for recommendations for the Commission’s consideration around enhancing reporting and disclosure through Form PF or other reforms. We are working with our sibling agency, the Commodity Futures Trading Commission, on potential joint rulemaking, as well as with partners at the Financial Stability Oversight Council, the Department of the Treasury, and the Federal Reserve.


While I spoke about the principles underpinning our work related to private funds in isolation, the reality, of course, is that these concepts are interrelated. Together, they encompass the middle of our mission regarding the markets. With $17 trillion of gross assets under management, if we get that middle right with respect to private funds, there could be meaningful benefits to investors on the one hand and capital formation on the other.

Before I conclude, I have a request of the audience: As we make proposals, the Commission benefits from your comments and perspectives.

While our missions may vary, I imagine that we can all agree that we should maintain markets that are the best in the world.

I’ll leave it there. Thank you.


[1] Data from Form PF as of Q4 2020. Data applies only to funds managed by advisers with more than $150 million in private fund assets.

[2] Gross assets of private equity funds reported by SEC-registered investment advisers is $5.05 trillion. Data from Form ADV, which includes funds that are excluded from Form PF filings.

[3] See Andrew J. Bowden, “Spreading Sunshine in Private Equity” (2014),

[4] See and These risk alerts, like all staff statements, has no legal force or effect; it does not alter or amend applicable law, and it creates no new or additional obligations for any person

[5] See Investment Company Institute, “Trends in the Expenses and Fees of Funds, 2020,”

[6] Average private equity fees in 2018 and 2019 estimated at 1.76 percent (annual management fee) and 20.3 percent (performance fee). See

[7] See Ludovic Phalippou, “An Inconvenient Fact: Private Equity Returns & The Billionaire Factory,” available at

[8] Average hedge fund fees in 2020 estimated at 1.4 percent (annual management fee) and 16.4 percent (performance fee) (citing HRF Microstructure Hedge Fund Industry Report Year End 2020).

[9] Phalippou.

[10] See “Investors take aim at private equity’s use of private jets,”

[11] See Juliane Begenau and Emil Siriwardane, “How do private equity fees vary across public pensions?” available at

[12] See, for example, Michael Cembalest, “Food Fight: An update on private equity performance vs. public equity markets,” available at,

[13] See FT.

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