In remarks to the Managed Funds Association, SEC Chair Mary Jo White encouraged hedge funds to embrace increased transparency under post-financial crisis rules and justified the SEC’s expanded jurisdiction, rule-making and enforcement efforts involving private funds.
White reported that, since the passing of the Dodd-Frank Act and the JOBS Act, private funds and their advisers have moved “from what some would say was a secretive industry, to a widely recognized and influential group of investment managers.” She said that transparency into private funds’ operations will benefit investors, the public and regulators and suggested that it would also “significantly redound” to the benefit of private funds and their advisers.
While White’s speech primarily focused on the responsibilities of private funds and their advisers in the “new era of transparency,” she acknowledged that the SEC’s rules, examination and enforcement programs must be “accurately tuned to a changing world and foster, not impede, the positive aspects” of transparency. Among other things, she said that the SEC uses new private fund data to help identify trends and emerging risks, rather than retroactively reacting to risks after they unfold, which should benefit the markets overall.
White cited the proposal to require private funds to provide information about Rule 506 offerings, including those that use general solicitation and general advertising under new Rule 506(c), as an example of the SEC’s continuing interest in gaining insight into this increasingly important part of the market. The data collected under the proposal would give the SEC data on the size of the private placement market, who is conducting offerings through private placements, and why offerings fail. This data, she said, will help the SEC “ensure that this new market, which private funds dominate, is conducted in a manner that furthers both new capital formation and investors’ interests.”
White acknowledged that the examination process for private fund advisers “may not be the most welcome aspect of the new age of transparency for hedge fund advisers.” She said that legitimate questions have been raised about whether including private fund advisers in the SEC’s examination program makes sense since hedge funds are sold to sophisticated investors. She said, however, that the performance of many sophisticated investors can impact the lives of people on Main Street, since “institutional investors” include pension funds and similar accounts that manage retirement funds for less sophisticated market participants. She also noted that the SEC’s mission of investor protection applies across all types of investors and “all investors in the U.S. markets deserve to know that there is a regulator on the block.”
White said that the SEC has a responsibility to understand the private fund business and the needs of private fund investors and cited recent staff guidance on how the custody rule works as an example of how the staff is trying to ensure that existing rules, many of which are decades old, should be interpreted to reflect today’s marketplace. (For more information on this staff guidance, see our recent blog post.) She also said that the staff fully anticipates that additional interpretive questions will arise under existing, new and proposed rules, and that it stands ready to address those questions.
Finally, White said that increased transparency into the private funds industry has allowed the SEC to “craft an enforcement program that is more focused and directed,” and cited several recent enforcement actions against private funds and their advisers, including actions related to insider trading, false advertising, valuation and conflicts of interest. She said that the private funds industry should support the SEC’s examination and enforcement program’s efforts to “build investor confidence in the fairness and integrity of our markets.”