Registering interest

The House of Representatives voted to pass the Financial Choice Act with a majority of 47 on June 8. The bill, which was headed for the Senate as this magazine went to press, contains several measures that would ease the regulatory burden on US private fund managers, including removing the need to register with the Securities and Exchange Commission.

This proposal struck fear into the heart of the LP community. The Institutional Limited Partner Association, which acts on behalf of global private fund LPs, says investors have seen increased transparency and disclosure of fees and expenses, improved fund manager compliance with the terms in investment agreements and significantly improved compliance and voluntary disclosure from fund managers due to increased oversight. Eliminating the registration requirement would undo this and hurt investors, it says.

But most LPs have little to worry about. Whereas five years ago the proposal might have been music to fund operators’ ears, that has changed. Fund managers have adapted their operations and generally accept that increased regulatory oversight is better for investors and therefore better for business.

Several CFOs tell pfm that even if they were no longer required to register with the SEC they would continue to do so voluntarily for this very reason; investors appreciate the security and transparency it brings.

“The bar of expectations has been set. New managers would be expected to still meet that same standard [and] a regulated market is generally appreciated by investors,” one CFO tells pfm.

What they would like is greater clarity on rules and a more industry-specific approach to private fund oversight. Many of the rules are difficult to implement because they were not written with private funds in mind, while FAQ documents on some of the rules and expectations have been slow to appear.

“The challenges of standardizing regulation for the private equity mean the SEC has been reliant on tacit rulemaking. It would be great if there was a specific ‘private equity playbook’!” Hamilton Lane’s chief compliance officer Frederick Shaw says.

Lack of clarity is not a US-specific issue. Fund managers in Europe, which have been subject to the rigors of the Alternative Investment Fund Managers Directive for the past four years, also want their obligations more clearly defined.

The issues have arisen as the legislation has been transposed into law; fund managers have found certain definitions were lacking or unclear, or some measures were being interpreted differently across the bloc.

A review of the Directive is penciled in for delivery in 2018. Fund managers are not calling for fundamental changes to the rules, they would just like to have more certainty around their interpretation. Otherwise there is consensus the once-maligned directive is operating well and has been of benefit to fund managers and their investors.

Private fund managers should be clear with regulators about what they need and why they need it. Regulators have acknowledged that they are still getting to grips with private funds, but with the help of the industry the rules should become a lot clearer.