This year has already been a busy one for the SEC, and the first quarter isn’t even over.
The agency wants to enhance private fund investor protection and increase cybersecurity risk management. The latter is probably an exceptionally good idea, given the potential for spillover from Russia’s physical attacks on Ukraine and cyber ones on anyone with which country is displeased. Then there were the proposed amendments to enhance private fund reporting back in January.
“The proposed rules would increase transparency by requiring registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance,” the SEC said on the first topic.
“The proposed rules would require advisers and funds to adopt and implement written cybersecurity policies and procedures designed to address cybersecurity risks that could harm advisory clients and fund investors,” the second said. “The proposed rules also would require advisers to report significant cybersecurity incidents affecting the adviser or its fund or private fund clients to the Commission on a new confidential form.”
“The proposed amendments would require current reporting for large hedge fund advisers and advisers to private equity funds,” the third said. “These advisers would file reports within one business day of events that indicate significant stress at a fund that could harm investors or signal risk in the broader financial system. The proposed amendments would provide the Commission and FSOC with more timely information to analyze and assess risks to investors and the markets more broadly.”
The total is far more than three releases even begin to touch.
“The various proposals that could impact private asset managers, including commercial real estate, [run] a thousand or more pages,” David Larsen, a managing director in alternative asset advisory group at advisory firm Kroll, tells GlobeSt.com. Those thousand pages are ones that a lot of real estate funds will likely have to review.
“If we try to focus purely on commercial real estate from a direct perspective, it’s probably not too much of an impact,” Larsen says. “If you’re talking about commercial real estate in any type of registered fund perspective, managed by a registered fund advisor, then it’s the same impact as on a hedge fund manager, a private equity fund manager, anybody. If you’re a manager of a REIT, you should read this and give feedback.”
That’s because the rules, while not final, are likely close and the implications can be difficult. For example, if there’s been a major change in the value of an investment of a fund greater than $1.5 billion in size and there’s been a 20% loss, the January material would require a fund to report that within a day.
Another rule that would apply to registered and non-registered funds controls what kinds of fees can be charged to a fund. “Certain fees and certain types of compensation would be prohibited because of the rules,” says Larsen.
The rules don’t “technically have any impact on valuation per se because it doesn’t have any effect on the fair value rules,” he adds. But it still could have a large impact. “The key question is does this apply to a REIT? Why or why not, and if it does, REITs have had special accommodations” in the past. Whether they will today under the Biden administration is impossible to say.
“The first reaction is to read the proposals,” says Larsen. “The second reaction should be to comment on the proposals. The third reaction should be to assume the proposals are going to be enacted as they’re written and start taking steps to comply.”