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Statement Regarding Private Fund Advisers Rulemaking

Aug. 23, 2023

Thank you, Chair Gensler, and many thanks to the team for their recommendation today, which I am pleased to support.

The Landscape

Investor Base. As one legal scholar recently put it, the “private” in private equity (or private funds more generally) is a misnomer.[1] “Private” in the context of ownership – private property or a privately held asset – tends to connote ownership in the hands of a small, concentrated base; perhaps ownership by a family or a small group of investors. Public ownership, in contrast, tends to connote a dispersed and widespread ownership base.

But, in fact, private fund corporate ownership today may be just as widespread and dispersed as public company ownership. Private fund investors (or limited partners) are generally large institutions – public and private pension funds (which collectively comprise nearly one-quarter of all private fund assets under management), as well as non-profits like endowments or foundations, among many others.[2] And, behind those institutions are thousands or even millions of individuals. The Release notes, for example, the 26.7 million working and retired U.S. public pension plan beneficiaries – public servants such as teachers, firefighters, law enforcement, government and community servants – are likely to have increased exposure to private funds and their portfolio company investments.[3] In other words, while we have stark legal and regulatory distinctions between investors in private funds and investors in the public markets, the ultimate, beneficial investor base of any given private fund investment likely looks very similar to that of a public company.[4]

Market Impact. Further, the invested capital of private funds – i.e., the impact of private fund investments on our markets – is significant and growing at a rate that outpaces the public markets[5] (even if adjusted returns do not necessarily indicate that private fund returns are greater than public company returns). [6]

  • Private fund assets under management reached 26.6 trillion in 2022;[7]
  • The number of private funds has more than tripled in the decade from 2012 to 2022; and[8]
  • Between the year 2000 and 2021, private equity global assets under management grew at four to five times faster than the overall U.S. economy.[9]

Portfolio Companies. And private capital leaves virtually no corner of the markets untouched.

  • Private funds own real estate – from office buildings and warehouses to single family rental units; they own pharmaceutical companies and hospitals; they own infrastructure and energy businesses; and, they own agricultural businesses. In the wake of the regional banking failures, we’ve seen private credit funds step in to take on a new prominence in the asset backed and other lending markets.[10]
  • And, private funds play an increasingly prominent role in the lifecycle of companies: while there was a time when private funds and investors sought to IPO their portfolio companies to cash out, a more attractive exit strategy in recent decades is to sell a portfolio company to another private fund – either managed by a competing adviser or even to another fund managed by the same adviser. Recent history also bears examples of private funds “taking private” formerly public companies.

By any measure, private funds play an important role in our economy.

And yet, despite the prominence of private funds in our markets, and the fact that so much of the capital at risk in this market is ultimately held for the benefit of everyday retirees, the industry is nonetheless marred by opacity – which affects regulators, investors and the market alike. In other words, more American capital is at risk – retirement capital at that – and yet there is still precious little known about private fund conflicts of interest, investments, performance, fees, expenses, valuation practices, risk, controls, due diligence practices, and governance mechanisms, among many other topics.


Today’s rule takes aim at that opacity (at least in part.) Acting squarely within our Congressional mandate, today’s rule would establish baseline, consistent disclosures for investors.

Disclosures & Audits. For example, advisers will be required to provide fund investors with quarterly statements reflecting fund performance, fees and expenses, as well as audited financial statements. The provision of this information is both foundational and prophylactic.

  • By understanding the extent to which fees and expenses are being passed on to the fund (including those paid to the benefit of the fund’s adviser and related persons by the fund and its portfolio investments), private fund investors will be in a position to evaluate the actual costs of their investments.[11] Advisers will also have to cross-reference the fee and expense language to the fund governing documents, so investors can effectively confirm that the fees and expenses that they are obligated to pay are consistent with what they in fact are being charged.
  • Armed with standardized performance information, investors will also be in a position to compare performance metrics across funds and holistically evaluate their fund investments.[12]
  • And, requiring that advisers obtain and provide to investors audited financial statements, performed by an independent public accountant, will help not only prevent misuse or misappropriation of funds, but also help to ensure a baseline level of accuracy to fund asset valuations (which an adviser may have an incentive to overstate since they often serve as the basis for the calculation of advisory fees).[13]

Restricted Activities. In addition to requiring basic disclosures and audits, the rule will build guardrails around certain highly conflicted transactions or potentially harmful behavior.[14]

  • Thus, for example, in adviser-led secondary transactions, an adviser will be required to obtain and distribute to investors a fairness or valuation opinion from an independent third party.
  • Where an adviser seeks to borrow funds or assets from its client, it will now be required to obtain advance, written consent from its investors following disclosure of the material terms.
  • The rule also prohibits preferential redemptions, where it may have a material negative effect on other investors, with limited exception.
  • And, the rulemaking makes clear that advisers cannot be indemnified for breaches of its fiduciary duty, or pass on investigative costs where a court or governmental authority has imposed a sanction for violations of the Advisers Act.

The Sophisticated Strawman

Finally, I want to address the critique that the SEC should play no part in the negotiations between sophisticated investors. To me these arguments ring hollow.

First, it is our imperative, our mandate, our responsibility, to protect all investors – large and small. Congress spoke broadly when setting the scope of our remit.[15] Sitting in this seat for long enough, my colleagues and I have the unfortunate distinction of learning that investors of all stripes are the victims of fraud and breaches of fiduciary duty.[16] Additional disclosure and restrictions relating to conflicted or fraught practices will have the effect of preventing misconduct (including harmful sales practices), protecting investor funds from misuse and misappropriation, and conserving both public and private investor resources in ferreting out pernicious behavior. Indeed, the Commission today is not meddling in negotiations between sophisticated parties, but rather setting baseline parameters to protect all private fund investors and promote market integrity.

Second, as the release lays out, even assuming arguendo that sophisticated investors do not warrant the same level of protection as smaller investors, the playing field is not level. Informational and bargaining asymmetries flow to the advisers in this industry, to the detriment of investors, for a number of reasons. For example, because of the increasingly complex nature of fund structures, absent regulations requiring additional disclosure, it would be difficult for investors to ever know (and therefore potentially remedy) the true extent of hidden conflicts of interest, or hidden fees and expenses. Moreover, despite the growing number of private funds, the space is in fact highly concentrated – both in terms of the funds themselves and the lawyers representing those funds – and lacks meaningful competition, to the detriment of investors.[17] Those largest advisers (including advisers to the aptly coined “mega funds”[18]) have extreme informational and bargaining advantages, and a greater ability to refuse to provide information to investors, to amend contractual terms, or to change conflicted practices. Even sophisticated investors accept sub-optimal contractual terms for a number of reasons, including the fear that if they push for higher quality terms, they will lose access to current or future fund allocations.[19]

Further, of course, not all investors are created equally. Smaller investors, who hold retirement funds under management or otherwise, simply may not have the capital to negotiate for favorable terms, despite the economic pressure to participate in order to gain exposure to the vast (and growing) portion of the private fund investment landscape. Additionally, because not all investor interests are aligned, collective action problems appear to prevent coordination among investors to bargain for uniform baseline terms.[20] In other words, relying on the parties’ sophistication alone, in the absence of regulation, will continue to leave investors exposed to unfair or harmful practices.


Today, empowered by Congressional directives and armed with years of data collection, and Enforcement and Examinations experience in the private fund space, we recalibrate the baseline for private fund investor disclosures and build guardrails around certain highly conflicted transactions and potentially harmful practices. Today’s rule is a tremendously important step in the name of investor protection, competition, and market integrity in the private fund space.

I want to express my gratitude to the teams in the Division of Investment Management, the Division of Economic and Risk Analysis, the Divisions of Examinations and Enforcement, and the Office of General Counsel. Your hard work, expertise, and legal and professional acumen all shine in this final rule. I am grateful for your insights and thoughtful advice.

I am happy to support this rule.

[1] John Coates, “The Problem of Twelve: When a Few Financial Institutions Control Everything”, Columbia Global Reports (for Kindle), (2023) (hereinafter “The Problem of Twelve”) at 52 (“The word ‘private’ in ‘private equity’ connotes the opposite of ‘public’—a single or small group of owners, perhaps a founding entrepreneur. The label seeks to drape private equity with the legitimacy of private property that public companies lost as their ownership dispersed. Yet private equity funds do not raise capital from one individual or a small group, and they rarely partner with founders. Rather, they raise capital derived from thousands or even millions of individuals, just as do public companies. The trick is that they do so through other financial institutions, such as pension funds. This allows them to rely on legal fictions to count their owners differently than public companies do.”).

[2] See Division of Investment Management: Analytics Office, Private Funds Statistics Report: Third Calendar Quarter 2022 (April 6, 2023) at 15 (showing beneficial ownership of all funds by category as reported on Form PF, including that public and private pension funds made up over 23% of all reported private fund investments).

[3] Adopting Release, Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, IA Rel. No. 6383, File No. S7-03-22 (Aug. 23, 2023) (hereinafter “Release”) at 10-11 (citing National Data, Public Plans Data).

[4] The Problem of Twelve, at 64 (“Businesses owned by the private equity industry no more deserve the connotations of ‘private’ than General Motors or Exxon do.”).

[5] See generally George S. Georgiev,The Breakdown of the Public-Private Divide in Securities Law: Causes, Consequences, and Reforms, 18 N.Y.J.L. & Bus. 221, 227-29, 241 (2021), Appendix Figure A-4 (Volume of Capital Raised in the Public and Private Markets (2009-2017)); Joan Farre-Mensa & Michael Ewens,The Evolution of the Private Equity Market and the Decline in IPOs, Harv. L. Sch. F. Corp. Governance (Sept. 28, 2017); Commissioner Allison Herren Lee, U.S. Secs. & Exch. Comm’n, Going Dark, the Growth of Private Markets and the Impact on Investors and the Economy (Oct. 12, 2021).

[6] See The Problem of Twelve at 64 and 131 (“Many industry voices loudly proclaim that private equity generates superior returns, but these claims are often based on raw return data—that is, unadjusted for risk and not benchmarked against alternatives—or they rely on private and unverified data. Even adjusted raw return data show a decline over time in private equity’s ability to generate value for investors. Other studies find that, appropriately benchmarked, private equity matches but does not beat the market—which, given the significant fees private equity firms charge, implies that they underperform for investors.”). Cf. Elizabeth De Fontenay, Written Testimony Before the U.S. House of Representatives Committee on Financial Services, Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets “Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment,” (Sept. 11, 2019) at 6 (“Evidence is mixed as to whether even large institutional investors achieve better risk-adjusted returns in the private markets than in the public markets.”).

[7] Release at 9 (citing to Form ADV data).

[8] Id.

[9] The Problem of Twelve at 65.

[10] See, e.g., Madeline Shi, As Regional Banks Avoid Risky Loans, Private Lenders See Opportunity, Pitchbook (July 17, 2023). Private credit funds were seeing surges even before the banking events of 2023. See, e.g., Private credit investments surged 89% in 2022, Reuters (Feb 22, 2023). See generally Moody’s Investors Service, Sector Comment, “How Risks in Private Credit Could Evolve as Financial Conditions Tighten,” (Apr. 13, 2023) (“The rapid growth of the [private credit] sector in recent years coupled with its opacity and lighter regulation when compared to that of the banking sector suggest that the sector could harbor risks that are not currently visible . . . .”)

[11] See Release at 86 (noting a trend among advisers shifting certain expenses related to their advisory business to private fund clients, and an overall increase in expenses in recent years due to, among other things, advisers’ use of increasingly complex fund structures, the expansion of global marketing and investment efforts by advisers, and increased service provider costs); see also id. at nn.217-225 (listing examples of Enforcement actions for misconduct relating to fees and expenses as well as related Examination observations).

[12] See, e.g., Howard Marks Public Letter to Oaktree Clients, “Lines in the Sand,” (Apr. 17, 2017) (noting that one fund with a higher IRR doesn’t necessarily outperform another, unless other variables are being consistently compared).

[13] Release at 167-168 and n.492 (discussing Enforcement actions related to misstated valuations). See generally Matt Levine, Money Stuff, Private Markets Don’t Like to go Down (Jan. 4. 2023).

[14] Conflicts of interest in the private funds industry are ubiquitous. Some daily or typical conflicts might include: allocation of investment opportunities, or fees and expenses, between clients; multiple clients invested in different layers of the capital stack of a particular investment (to be adverse in the event of bankruptcy or work out); the provision of advisory or affiliated services by the adviser or its related persons to the fund or a portfolio company; a private credit fund lending to the portfolio company of second client; and so on. The conflicts of interest sections in Private Placement Memoranda and other offering documents frequently run for dozens of pages. See, e.g., Andrew J. Bowden, Director of OCIE, U.S. Secs. & Exch. Comm’n, Spreading Sunshine in Private Equity (May 6, 2014) (“[T]he private equity adviser can instruct a portfolio company it controls to hire an adviser, or an affiliate, or a preferred third party, to provide certain services and to set the terms of the engagement, including the price to be paid for the services . . . or to instruct the company to pay certain of the advisers bills or to reimburse the adviser for certain expenses incurred in managing its investment in the company . . . or to instruct the company to add to its payroll all of the adviser’s employees who manage the investment.”). The rules promulgated today help ensure that clients can give true informed consent to conflicts of interest, which has been recognized as a cornerstone of the fiduciary relationship by this and prior Commissions. See, e.g., Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Rel. No. 5248, 84 FR 33669, 33677 (July 12, 2019) (“In all of these cases where an investment adviser cannot fully and fairly disclose a conflict of interest to a client such that the client can provide informed consent, then the adviser should either eliminate the conflict or adequately mitigate (i.e., modify practices to reduce) the conflict such that full and fair disclosure and informed consent are possible.”) (published under Chair Clayton).

[15] See Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. 80b-6 and 80b-11(h). Section 206(4) of the Advisers Act (“Advisers Act”) provides the Commission with authority to adopt rules “reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive or manipulative.” Section 211(h) of the Advisers Act, among other things, directs the Commission to “facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with…investment advisers” and “examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.” See also Letter of Senators Sherrod Brown and Jack Reed, File No. S3-07-22 (Aug. 4, 2022) at Section II.

[16] See, e.g., Release at 14-15 and nn.26-32, 17 and nn.34, 51 and n.146, 62 and n.170, 63 and n.177, 64 and n.178, 76-77 and nn.217-225, 168 and n.492, 169 and n.495, 225-6 and nn.666-668, 245-6 and nn.732-34, 268 and nn.797-803 (collecting cases); see also Declaration of John J. Ray III In Support of Chapter 11 Petitions and First Day Pleadings,In Re FTX Trading, LTD., et al.,No. 22-11068, (Bank. Ct. D. Del. 2022), Dkt. No. 24, ¶ 5 (despite the presence of sophisticated investors, the court-appointed post-bankruptcy CEO nonetheless declared regarding FTX: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”); SEC v. Theranos, 18-cv-1602, Dkt. No. 1 (SEC Complaint alleging that Theranos, its CEO Elizabeth Holmes, and President Sunny Balwani raised more than $700 million from sophisticated investors through false and misleading statements).

[17] See The Problem of Twelve at 68 (noting, for example, that the four largest private equity complexes report assets totaling $2.7 trillion, while the median size is roughly $100 million); Release at 338-331 (discussing concentration of law firms representing private fund advisers); see generally Advisers Act, 15 U.S.C. § 80b-2(c) (discussing consideration of competition as necessary to each rulemaking); Commissioner Robert J. Jackson, U.S. Secs. & Exch. Comm’n, “Competition: The Forgotten Fourth Pillar of the SEC’s Mission” (Oct. 11, 2018) (discussing the history of competition “at the heart of [the SEC’s] mission.”).

[18] McKinsey & Co., “Private Markets Annual Review: 2017-2022” (discussing rise of “megafunds,” or funds raising more than $5 billion in capital).

[19] Letter of Professor William W. Clayton, Associate Professor of Law, Brigham Young University, File No. S3-07-22 (Apr. 21, 2022) at 9.

[20] This applies not only to smaller institutional investors, but also to individual investors. See, e.g., Miriam Gottfried, “Blackstone, Other Large Private-Equity Firms Turn Attention to Vast Retail Market, Wall St. Journal (June 7, 2022). See also Release at Section VI.C.1.

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