SEC can fend off a compliance fiasco

GPs could submit to regulations from many states or, if ILPA has its way, comply with a national standard on transparency of fees and expenses.

The Securities and Exchange Commission has the power to prevent a tricky compliance situation from morphing into a much more complicated beast.

At the end of April, the Institutional Limited Partners Association submitted a letter to SEC Chair Jay Clayton on potential rulemaking decisions. Among them was a push to require GPs to disclose their fees and expenses to LPs for the sake of transparency.

GPs are not generally fans of having their fees and expenses disclosed, but that is exactly what is starting to happen.

California last year legally required GPs that do business with state pension funds to disclose fees and expenses, and that information becomes public. The Golden State has the backing of its state funds, which are among the biggest in the US. CalPERS, for instance, has investments valued at more than $350 billion, and, with so much money at stake, it wants to keep a close eye on fees and expenses tied to its private equity investments. And other states, like Illinois, are getting into the act.

Therein lies the problem. If Illinois passes its own law, that could compel other states to follow, setting off a cascade of events in which multiple states have their own set of standards for disclosure of fees and expenses that GPs must follow. Should the SEC implement a national standard, that would make it unnecessary for each state to work on their own. Instead, GPs would follow SEC guidance.

What’s important about ILPA’s letter is its address on a national scale. Instead of reaching out to individual states, ILPA is pursuing dialogue with the SEC. Directing the issue through a national regulator would be better than talking with 50 state lawmaking bodies.

While GPs may bristle at the idea of more disclosure requirements applied across all its US investors, it will be preferable to the alternative: 50 slightly different versions and 50 different calculations.

ILPA simply acts in serving the best interests of its LP members, so it’s taking the initiative that makes sense, and that means pushing a national agenda. At the same time, states could work with ILPA in supporting the group’s measures, and that would help reduce time and money on their separate activities.

Should disclosure go the state-to-state route, there would be one clear winner: the group of advisors and consultants racking up the fees and expenses paid by GPs to comply, the kind of costs that LPs want to keep in check.