Private equity split on new SEC rules
- Dan Primack, author of Axios Pro Rata
Illustration: Sarah Grillo/Axios
The SEC earlier this week proposed new rules for private equity funds. Now the industry is weighing in.
The big picture: There are some big disagreements between fund managers and their investors. GPs and LPs talk ad nauseum about aligned interests, but that doesn't seem to apply in this situation.
- The Institutional Limited Partner Association, which represents more than 500 institutions that manage over $2 trillion in PE assets, lauded the SEC.
- The American Investment Council, which represents dozens of big PE firms, signaled strong concerns with what it views as "unnecessary" rules. Law firm Simpson Thacher, which represents lots of PE funds, called the proposals "intrusive" and said they "assume a bleak view" of fund manager behavior.
One major point of contention is the SEC’s proposal to prohibit fund managers from indemnifying themselves against breaches of fiduciary duty.
- A 2020 ILPA survey found that 71% of LPs saw fiduciary duties modified or eliminated in at least half of their PE funds. Getting this change has been one of the trade group’s top regulatory priorities, and it believes regulators have the legal authority to mandate such a prohibition.
- Simpson Thacher, however, questions that legal authority, and calls the proposal an “abrupt departure from longstanding, negotiated market practice.”
PE fund managers are making less noise about the SEC's proposed fee disclosure requirements, likely because there's no coherent reason to oppose them. In short, it's about periodically validating that LPs are paying for what they agreed to pay for.
- LPs may end up picking up the costs for additional accounting and legal work, but they seem okay with that trade-off.
- European financial regulators are working on similar fee disclosure rules.
The bottom line: Lobbyists from both sides are hard at work, scouring the regulatory text. But there's little reason to believe this SEC, in which 3-1 votes have become the norm, will be swayed too far by fund manager pushback.