“A number of the proposals you could support are current practice,” such as some of the reporting requirements, said Genna Garver, New York-based partner at the law firm Troutman Pepper Hamilton Sanders LLP.
“Things that keep me up at night,” Ms. Garver said, include the section of the proposal regarding the allocation of fees and expenses between the manager, the fund and the holding company. The rule includes a prohibition — whether the manager is registered with the SEC or not — on charging certain fees or expenses from the adviser or person connected to a fund or portfolio investment, Ms. Garver said.
Examples of pass-through charges prohibited in the application are charges for unperformed services such as expedited monitoring fees and fees associated with an advisor review or investigation. According to the proposal, the rule would not change the practice of some managers of often charging private funds regulatory, compliance and other similar fees and expenses directly related to the activities of the private fund.
“There’s not a lot of clarity there” on what fees or expenses can be passed on to portfolio companies and/or the fund, Ms. Garver said.
For their part, many asset owners favor increased transparency and an attempt to reduce conflicts of interest between managers and investors. But, they say the massive proposal leaves room for improvement and fear parts of the proposal could make it difficult for owners of public assets to invest in alternative investments.
“We are generally very supportive of the proposed rules and believe they are an important step in the right direction,” said Matthew Sweeney, spokesman for the $279.7 billion New York State Common Retirement Fund. dollars, Albany, in an email response to questions. “We are considering some areas that could be improved, but one of our biggest concerns is the proposed rule regarding preferential treatment.”
If passed, the rule would prohibit managers from granting certain rights to an LP unless the manager determines that those rights will not have “a material adverse effect on other fund investors or investors in a pool.” substantially similar assets,” Sweeney explained. .
Preferential agreements with an LP that disadvantage other fund investors must be disclosed to other LPs, the proposal says.
By way of example, Sweeney said, the SEC’s proposal referred to side letter agreements granted to certain investors who require special accommodations, including data to satisfy fee reporting and other state mandates. He said the proposal does not make an exception that would allow such investors to enter into separate agreements with their principals to obtain the concessions they need to satisfy their state’s laws and regulations.
“This creates considerable uncertainty about our ability to obtain our required legal, regulatory and policy provisions,” Mr. Sweeney said. “We are concerned that this rule, as proposed, could lead to a situation where the (New York State Common Retirement Fund), other public plans and other regulated entities cannot access the all or a significant portion of the private equity fund market.”