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SEC, Goodwin
Proposals by the US regulator, the Securities and Exchange Commission, to make advisors on private funds give quarterly disclosures on fees, costs and performance may not be as strict as once might have been hoped, a legal expert on the space says. 

A month ago, the SEC proposed new rules and amendments under the Investment Advisers Act of 1940, and made the $18 trillion market more open, efficient and competitive.

One detail is that the watchdog has re-opened a comment period for interested parties to weigh in with their views on the idea – raising concerns that the proposed rules might be less rigorous than originally desired, Elyn Xing, partner at global law firm Goodwin, said.

“When the SEC proposed those new rules to be applicable to relevant private fund advisors under Investment Advisers Act… such private funds rules were expected to be relatively swiftly adopted, and adopted largely as proposed by the SEC. However, the comment period was just re-opened unexpectedly, which might be due to widespread bipartisan pressure,” Xing said. “This re-opening of the comment period may indicate that the SEC will be pressured to adopt less aggressive versions of the Private Funds Rules.”

The SEC may adopt a “grandfather" clause – the rules will “grandfather” all pre-existing private fund contracts (including fund governing documents, advisory agreements, and side letters), and provide an extended and reasonable conformance period), he said. The watchdog may also clarify that new rules won’t cover non-US advisors (those that don’t have a place of business in the US) for the non-US private funds/clients managed by such non-US advisors. This confirmation would be important for advisors in Asia, for example, he said. 

The SEC may take a “less aggressive position” over bans on seeking reimbursement and indemnification by the private fund or its investors for a breach of negligence or recklessness, and on bans in reducing the amount any advisor may clawback by actual, potential or hypothetical taxes applicable to the advisor, its related persons, or their respective owners or interest holders, etc, he said.

Xing added that the rules suggest that the regulator has moved from a traditional principles-based approach to a more prescriptive one that could harm investors and advisors. For example, very detailed and specific disclosure requirements could reduce the freedom of contract between sophisticated investors and private funds advisors to ensure that the arrangements make economic sense to both parties. High compliance costs may also make it harder for smaller fund sponsors to enter the market.