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SEC Commissioner Crenshaw Speaks on Private Fund Advisers Proposal

Investment advisers are their clients’ fiduciaries. This means that investment advisers are legally obligated to serve their client’s best interest.[1] This standard of conduct is not an aspirational goal. It must be meaningful and offer the real protections investors reasonably expect and deserve. And this standard of conduct is not limited to the context of an adviser’s relationship with retail clients or registered funds. Private fund investors, including entities such as pension funds, charitable organizations, and college endowments, rely on the protections afforded by the Advisers Act and benefit from advisers’ obligations to place their clients’ interest first.[2] In order to ensure that the fiduciary standard of conduct delivers these protections, we must carefully consider whether the current rules are the right ones.

Today’s release assesses, and then proposes reforms to, the markets in which private fund advisers operate.  These markets are often opaque and present a variety of investor protection concerns.  Through the work of the Division of Exams, the Commission has identified, among other things, many concerning examples of private fund advisers’ conflicts of interest, inconsistent disclosures, and improper allocations of fees and expenses.[3] Such practices can result in harm to investors and the rules that the Commission proposes today include several provisions to better align advisers’ disclosures and conduct with their clients’ best interests.

To that end, the release proposes specific and detailed disclosures about fees and expenses, adviser compensation, how private fund performance is calculated, and the preferential terms granted to some, but not all, investors.[4]  This additional information should help private fund investors better assess the adviser’s performance and decide whether to remain invested in a particular private fund, how to invest other assets, and whether to invest in private funds managed by the adviser in the future.

After a decade of oversight of private fund advisers, and multiple risk alerts,[5] it seems requiring better disclosures alone is likely not enough to adequately protect investors.[6] For example, we have seen private fund advisers structure deals to benefit advisers at the expense of the private fund and its investors, charge fees for services the adviser never intends to provide, obtain reimbursement from clients for expenses that don’t directly relate to the activities of the private fund, and attempt to convince investors they have fewer rights and avenues for redress in the event of adviser misconduct than the law actually provides.[7]  Such practices unfairly enrich advisers by putting their interests ahead of the fund and its investors, and private fund investors often have little or no meaningful opportunity to identify or address this conduct.  Given the evidence that many private fund investors lack sufficient bargaining power to demand greater protections and to have their interests placed first, disclosures alone don’t appear to be sufficient. [8] And the Commission should help ensure all investors are getting the protections they need.

I believe the proposal is a meaningful step in promoting the best interest of private fund investors.[9]  Thank you to the Chair, the Chair’s counsel, to my fellow Commissioners and their staff, the staff in the Division of Investment Management, Office of the General Counsel, and Division of Economic and Risk Analysis for their thoughtful work to advance today’s proposed rule. I look forward to reviewing the comment letters.


[1] “An investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. This fiduciary duty requires an adviser ‘to adopt the principal’s goals, trust, objectives, or ends.’ This means the adviser must, at all times, serve the best interest of its client and not subordinate its client’s interest to its own. In other words, the investment adviser cannot place its own interests ahead of the interests of its client. This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the “best interest” of its client at all times.” Sec.  & Exch. Comm’n, Commission Interpretation Regarding Standard of Conduct for Investment Advisers at 7-8 (adopted July 12, 2019).

[2] Id.

[3] See  Div. of Exams, Risk Alert: Observations from Examinations of Private Fund Advisers (Jan. 27, 2022) (EXAMS have found private fund adviser failures to follow practices described in their limited partnership agreements, operating agreements, private placement, memos and other disclosures; practices described in disclosures regarding calculation of management fees, failure to invest in accordance with disclosures regarding investment strategy, misleading disclosure about track records, performance calculations, awards received by the adviser, lack of reasonable investigation into underlying investments, inadequate policies and procedures regarding investment due diligence, and clauses in agreements and disclosures that attempt to limit advisers’ liability under the Advisers Act); Div. of Exams, Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020) (including many variations of conflicts such as those related to allocations of investments, multiple clients investing in the same portfolio company, financial relationships between investors or clients and the adviser, preferential liquidity rights with select investors, investments made in co-investment vehicles, service providers, fund restructurings, cross-transaction).

[4] See Private Fund Advisers; Documents of Registered Investment Adviser Compliance Reviews, Release No. IA-5955 (Proposed Feb. 9, 2020) (“Release”).

[5] See, e.g., note 2; Release at 12-19.

[6] See Release at 134 (noting that some conflicts of interest cannot be managed and are contrary to the public interest and the protection of investors.)

[7] See Release at 133, 136-160.

[8] See Release at 12-19, 133-160, n. 146 & accompanying text.

[9] The proposal contemplates, among other things, requirements that private fund advisers: 1) obtain an annual audit of the funds they manage; 2) meet enhanced recordkeeping standards; and 3) abstain from certain sales practices, conflicts of interest, and compensation schemes that incentivize private fund advisers to place their interests before their clients’ interests.  See Release at 99, 97, 113, 132-159, 178.

This statement was issued on February 9, 2022, by Caroline A. Crenshaw, commissioner of the U.S. Securities and Exchange Commission.