SEC Announces Large Regulatory Push and Targets Private Fund Advisers
Over the last few weeks, our staff and members met with Securities and Exchange Commission (SEC) staff, including Commissioners Allison Lee, Caroline Crenshaw and Hester Peirce as well as Barbara Roper, Senior Advisor to Chairman Gary Gensler, to discuss portfolio diversifying investments. These meetings came at a critical time, as the SEC rolled out its largest regulatory agenda in decades, including roughly 50 proposed rules and rules changes being considered this spring.
We are closely monitoring two proposals: new share repurchase disclosure rules and heightened scrutiny of private fund advisers charge fees and fund performance measurement. Other proposed rule changes consist of many hot button issues, ranging from environmental, social and government (ESG), insider trading and executive compensation to trading activities and investor protection.
SEC Proposes New Share Repurchase Disclosure Rules
On December 15, 2021, the SEC voted to propose amendments to its rules regarding disclosure about an issuer’s repurchases of its equity securities, often referred to as buybacks.
- The proposed rules would require an issuer to provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. Form SR would require disclosure identifying the class of securities purchased, the total amount purchased, the average price paid, as well as the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).
- The proposed amendments also would enhance existing periodic disclosure requirements regarding repurchases of an issuer’s equity securities. Specifically, the proposed amendments would require an issuer to disclose: the objective or rationale for the share repurchases and the process or criteria used to determine the repurchase amounts; any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction on such transactions; and whether the issuer is making its repurchases pursuant to a plan that it intends to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) and/or the conditions of the Exchange Act Rule 10b-18 non-exclusive safe harbor.
- The proposed rules apply to issuers that repurchase securities registered under Section 12 of the Securities Exchange Act of 1934, including foreign private issuers and certain registered closed-end funds.
The IPA has sought feedback from our members about this proposal. We are concerned about the application of the proposed rule amendments to NAV REITs and BDCs, for which they are inappropriate. Moreover, the SEC requested comments about their possible application to interval funds and tender offer funds, for whom the proposed rule amendments would be similarly inappropriate. We will be submitting a comment letter prior to the April 1 comment deadline.
SEC Proposes to Enhance Private Fund Investor Protection
On February 9, the SEC also voted to propose new rules and amendments under the Investment Advisers Act of 1940 to enhance the regulation of private fund advisers and to protect private fund investors by increasing transparency, competition, and efficiency in the marketplace.
- The proposed rules would require registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance.
- The proposed rules would prohibit private fund advisers, including those that are not registered with the SEC, from providing certain types of preferential treatment to investors in their funds and all other preferential treatment unless it is disclosed to current and prospective investors. In addition, the changes also would create new requirements for private fund advisers to fund audits, books and records, and adviser led secondary transactions.
- The proposals also would prohibit all fund advisers from engaging in several activities, including seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity; charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services and fees associated with an examination or investigation of the adviser; reducing the amount of an adviser claw back by the amount of certain taxes; charging fees or expenses related to a portfolio investment on a non-pro rata basis; and borrowing or receiving an extension of credit from a private fund client.
- The rule changes, which will undergo a period of public consultation before they can be adopted, would require private fund advisers to disclose to investors quarterly details about their fees and expenses, in an effort to increase transparency as the market grows.
The IPA is similarly seeking feedback from our members about this proposal. Comments are due April 11, 2022, or 30 days after publication in the Federal Register, whichever is later.
Finally, we’d like to thank all of our members who participated in our recent SEC meetings and other regulatory work. If you have any questions about the SEC’s latest regulatory agenda or the private fund proposal, please do not hesitate to reach out to Tony or me.
SVP, Government Affairs and General Counsel
Institute for Portfolio Alternatives