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Commercial Awareness Discussion
Commercial Awareness 2023/24 Thread
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<blockquote data-quote="Yash" data-source="post: 149781" data-attributes="member: 27791"><p><strong>Commercial issue: SEC Regulation of Private Funds</strong></p><p></p><p>The US Securities and Exchange Commission recently imposed new rules demanding greater disclosure and compliance from Private Equity, Venture Capital, and Hedge Funds. Some hail these regulatory demands as the most significant ever.</p><p></p><p>These can be summarised in 4 brackets:</p><p></p><p><strong>1)</strong> Standardisation of quarterly disclosure of performance, fees, and expenses</p><p></p><p><strong>2)</strong> Limits on "side letters", which are arrangements that give certain fund investors preferential terms</p><p></p><p><strong>3) </strong>A ban on fund managers passing through to the investors legal expenses connected to Advisers Act violation</p><p></p><p><strong>4)</strong> Mandatory audits for private funds, with certain asset sales requiring a third-party valuation opinion.</p><p></p><p>The SEC has estimated that new requirements for audit statements and quarterly performance reports would cost the industry $961mn annually, and the regulation of the unequal treatment of investors and disclosure of fund expenses another $938mn.</p><p></p><p>There has been considerable pushback for these regulations, with six industry groups filing suit to stop the new private regulation rules from going into effect.</p><p></p><p><u>Is Regulation Necessary?</u></p><p></p><p>Arguments <em>against </em>the regulations on commercial grounds have come in waves.</p><p></p><p>Increased compliance requirements increase barriers to entry in what is otherwise a highly concentrated industry.</p><p></p><p>The inability to have preferential treatment will hurt fundraising (bracket 2). Fund managers would not be able to give customisable offerings to potential investors. We can see how vital this is in the UK, given the use of the 'English Limited Partnership' for master funds to this end. Given how difficult fundraising is in this macroeconomic environment, this exacerbates the issue.</p><p></p><p>Minor violations of the Advisors Act (bracket 3) are routine parts of settlement deals and are a cost of doing business with many fund managers. However, the new SEC rules would result in funds having to internalise the cost of such settlements.</p><p></p><p>Finally, some feel the industry already gives investors plenty of disclosure, mainly because funds must compete for investors. Failing to disclose to potential investors hurts the fund's competitiveness; hence, they already disclose enough information as investors see fit. It is important to note that private fund investors are not similar to your average consumer, as they are well-represented by highly qualified professionals and have a lot of negotiation leverage. They can protect themselves. Over-regulation here is disregarding the freedom to contract.</p><p></p><p>However, there is praise <em>for </em>the regulations.</p><p></p><p>Pension funds are significant investors in these private funds. Hence, improving accountability and transparency is justified to give individuals contributing to pension funds 'colour' as to what is happening with their investments.</p><p></p><p>Furthermore, the SEC has also argued that "investors of all stripes are victims of fraud". The inability of institutional investors to protect themselves was evident with FTX, which BlackRock and Third Point backed.</p><p></p><p>There are informational and bargaining asymmetries to the detriment of investors. Fund structure complexity can make it difficult for institutional investors to know hidden conflicts of interest, fees, and expenses.</p><p></p><p>Some argue the competitiveness of the private funds market can be overstated. The presumption that institutional investors have all the leverage, especially when negotiating with 'mega-funds', can also be doubted.</p><p></p><p><u>Impact on Law firms</u></p><p></p><p>At first glance, over-regulation seems to be great for law firms, as legal compliance would suggest private funds would be more inclined to seek legal advice from law firms. However, private funds seek to recruit more staff to navigate the increased regulatory burden. In-house legal teams will likely grow as funds poach from legal departments at traditional asset managers and banks, including the SEC. Therefore, law firms would initially be consulted heavily in the run-up to the 18-month run-up to the effective date of the rules. However, funds will likely bolster their internal legal and compliance teams to deal with regulatory burdens.</p><p></p><p>The effects of the regulation may hamper fundraising and hamper profitability for these funds. This could impact the deal volume in the Private Equity space and, thus, harm law firms heavily reliant on Private Equity for revenues.</p></blockquote><p></p>
[QUOTE="Yash, post: 149781, member: 27791"] [B]Commercial issue: SEC Regulation of Private Funds[/B] The US Securities and Exchange Commission recently imposed new rules demanding greater disclosure and compliance from Private Equity, Venture Capital, and Hedge Funds. Some hail these regulatory demands as the most significant ever. These can be summarised in 4 brackets: [B]1)[/B] Standardisation of quarterly disclosure of performance, fees, and expenses [B]2)[/B] Limits on "side letters", which are arrangements that give certain fund investors preferential terms [B]3) [/B]A ban on fund managers passing through to the investors legal expenses connected to Advisers Act violation [B]4)[/B] Mandatory audits for private funds, with certain asset sales requiring a third-party valuation opinion. The SEC has estimated that new requirements for audit statements and quarterly performance reports would cost the industry $961mn annually, and the regulation of the unequal treatment of investors and disclosure of fund expenses another $938mn. There has been considerable pushback for these regulations, with six industry groups filing suit to stop the new private regulation rules from going into effect. [U]Is Regulation Necessary?[/U] Arguments [I]against [/I]the regulations on commercial grounds have come in waves. Increased compliance requirements increase barriers to entry in what is otherwise a highly concentrated industry. The inability to have preferential treatment will hurt fundraising (bracket 2). Fund managers would not be able to give customisable offerings to potential investors. We can see how vital this is in the UK, given the use of the 'English Limited Partnership' for master funds to this end. Given how difficult fundraising is in this macroeconomic environment, this exacerbates the issue. Minor violations of the Advisors Act (bracket 3) are routine parts of settlement deals and are a cost of doing business with many fund managers. However, the new SEC rules would result in funds having to internalise the cost of such settlements. Finally, some feel the industry already gives investors plenty of disclosure, mainly because funds must compete for investors. Failing to disclose to potential investors hurts the fund's competitiveness; hence, they already disclose enough information as investors see fit. It is important to note that private fund investors are not similar to your average consumer, as they are well-represented by highly qualified professionals and have a lot of negotiation leverage. They can protect themselves. Over-regulation here is disregarding the freedom to contract. However, there is praise [I]for [/I]the regulations. Pension funds are significant investors in these private funds. Hence, improving accountability and transparency is justified to give individuals contributing to pension funds 'colour' as to what is happening with their investments. Furthermore, the SEC has also argued that "investors of all stripes are victims of fraud". The inability of institutional investors to protect themselves was evident with FTX, which BlackRock and Third Point backed. There are informational and bargaining asymmetries to the detriment of investors. Fund structure complexity can make it difficult for institutional investors to know hidden conflicts of interest, fees, and expenses. Some argue the competitiveness of the private funds market can be overstated. The presumption that institutional investors have all the leverage, especially when negotiating with 'mega-funds', can also be doubted. [U]Impact on Law firms[/U] At first glance, over-regulation seems to be great for law firms, as legal compliance would suggest private funds would be more inclined to seek legal advice from law firms. However, private funds seek to recruit more staff to navigate the increased regulatory burden. In-house legal teams will likely grow as funds poach from legal departments at traditional asset managers and banks, including the SEC. Therefore, law firms would initially be consulted heavily in the run-up to the 18-month run-up to the effective date of the rules. However, funds will likely bolster their internal legal and compliance teams to deal with regulatory burdens. The effects of the regulation may hamper fundraising and hamper profitability for these funds. This could impact the deal volume in the Private Equity space and, thus, harm law firms heavily reliant on Private Equity for revenues. [/QUOTE]
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