Statement on Proposed Rules for Private Fund Advisers

Transparency, protection against conflicts of interest, and accountability – these are cornerstones of investor protection in all markets and for all investors. I am pleased to support today’s proposal which seeks to achieve these goals in the private fund space in a thoughtful and well-informed manner. With over 5,000 registered private fund advisers managing over $18 trillion in private fund assets, this growing segment of the market has a significant impact on investors, capital markets and our economy. As noted in the release, the staff has a decade of oversight under its belt,[1] and now brings that depth of experience and expertise to bear in proposing a number of important reforms.

Today’s proposed rules address informational gaps and asymmetries, as well as inherent conflicts of interest that can harm investors and markets. In considering this proposal, it’s critical to note the large and growing presence of retail investors, and particularly those with retirement assets, exposed to this market. For example, U.S. pension funds hold roughly $480 billion in private equity investments, representing an average of about 9% of their holdings.[2] What’s more, so-called crossover investors such as mutual funds, with numerous retail investors, are steadily increasing their participation in these markets.[3] Thus, I’m pleased with the thoughtful approach today’s proposal takes and I look forward to public comment on all of the proposed changes. I will highlight today just a few of the most significant potential improvements.

One key reform is a proposed requirement for registered private fund advisers to provide private fund investors with a quarterly statement containing critical information about the fund’s fees and expenses at both the fund and portfolio investment level.[4] This detailed, simple, and clear information would give retail and institutional investors alike standardized cost information in a straightforward and digestible, tabular format. This information should facilitate reasoned, well-informed decisions by investors who may, in certain circumstances, otherwise be at a disadvantage vis-à-vis the adviser or other investors. As we’ve said before with respect to registered funds, the Commission has a “strongly held belief” that fees and expenses are centrally important to investment decision-making.[5] That principle holds true for private fund investors as well because informed decision-making is paramount to well-functioning capital markets. 

A second key area of reform relates to protection from certain conflicts of interest. For example, the proposal would prohibit a private fund adviser – whether registered or not – from granting preferential redemption terms to one or a subset of investors.[6] This practice can lead to significant dilution for those without the preference. Private fund advisers would be also required to disclose other forms of preferential treatment to all investors. Preferential treatment coupled with a lack of transparency can severely inhibit a party’s bargaining ability and power, essentially leaving investors to bargain in the dark. Lack of transparency can also inhibit the ability to make an informed decision about investments, which can impact returns. In sum, these proposed protections related to conflicts represent the collective wisdom of the staff after years of monitoring this space and observing the costly financial impact these conflicts can create.[7] I have full confidence in their assessment.

And finally, this proposal requires and promotes accountability among certain private fund advisers in a number of ways. Among the most prominent is the requirement to obtain a financial statement audit performed by an independent public accountant that is registered with and subject to regular inspection by the PCAOB.[8] As stated in the release, our experience has shown that audits provide meaningful protection against misleading information and misrepresentations of important metrics such as fees, performance and other items.[9] This provides a crucial safeguard for the accuracy of an adviser’s representations.[10]

The practical effect of the proposed rules is to help bring efficiency and fairness to this market, through transparency, addressing conflicts and creating accountability. I want to thank the staff in the Division of Investment Management, Examinations, and Economic Risk and Analysis, and the Office of the General Counsel. Together, you have produced a well-considered, meaningful and balanced regulatory framework, and I’m happy to support this proposal.