#Focused scrutiny update#
He has asked SEC staff to consider potential prohibitions on specific conflicts and practices, but did not mention any in particular. Conflicts of Interest: Gensler stated an intention to mitigate the effects of conflicts of interest between general partners, affiliates, and their investors.It was unclear if Chair Gensler intended to break new ground or was referring to the Commission’s position on standards of conduct (i.e., fiduciary duty cannot be waived “though its application may be shaped by agreement”.) See, IA-5248, footnote 31. There are increasing efforts by general partners to add such provisions to fund documents. Fiduciary Duties: Chair Gensler reminded attendees that under no circumstances, and in no form, can general partners contract themselves out of their federal fiduciary duties under the Advisers Act.The SEC standardized and mandated performance reporting methodology for mutual funds decades ago, while allowing non-standard performance reporting if accompanied by SEC measures of “total return”. Performance Metrics: Chair Gensler advocated for increased transparency regarding performance metrics, including potentially requiring private funds to prepare performance information matching the standardized information already mandatory for mutual funds.Such provisions, he noted, result in “similar pension plans consistently pay different private equity fees”, a fact which he believes results in an “uneven playing field” among limited partners in a fund-presumably a condition to be remedied by more transparency of side letter terms. In particular, Gensler focused on side letters that result in preferred liquidity, disclosure, and/or fee terms. Importantly, he suggested the SEC is considering prohibiting certain types of side letter provisions. Side Letters: Chair Gensler advocated for additional transparency in side letter provisions to support more equality amongst similarly situated limited partners.
In particular he referenced the multiple types of fees common in private funds, including management fees, performance fees, portfolio company fees, consulting fees, advisory fees, monitoring fees, servicing fees, transaction fees, director fees, etc.-which, in his opinion, need streamlining or more transparency. Fees and Expenses: Chair Gensler advocated for additional transparency regarding private fund fees and expenses which he hopes will lead to greater competition.Careful to differentiate his statements from those of the SEC, he listed the following subjects as areas he expects will receive additional SEC focus in the near term: Gensler focused his remarks exclusively on private funds and detailed his view that private equity and hedge funds need more scrutiny and regulation. Last week, SEC Chair Gary Gensler gave the keynote speech for the 2021 Institutional Limited Partners Association’s virtual summit.
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