Comment Letter on Proposed SEC Private Fund Advisers Rule ('Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews')

23 Pages Posted: 30 Apr 2022 Last revised: 4 May 2022

See all articles by William W. Clayton

William W. Clayton

Brigham Young University - J. Reuben Clark Law School

Date Written: April 21, 2022

Abstract

This letter is written in response to the request by the SEC for comments on “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews,” published in Release No. IA-5955, File No. S7-03-22. In this letter, I discuss what appears to be one of the most profound sources of disagreement between proponents and opponents of SEC intervention in the private funds industry: the question of whether investors and managers in private funds can be assumed to bargain effectively. To aid my analysis, I introduce proprietary institutional investor polling data obtained in fall 2021.

This letter’s basic purpose is to emphasize the heightened importance of articulating and understanding the limits of private market bargaining as the SEC considers this new phase of regulatory activity. I also include a brief discussion of my research cited by the Commission in the Proposal.

I offer two suggestions. First, if the Commission proceeds with a final rule, I encourage the staff to be even more explicit about articulating the bargaining problems in private funds that lead to problematic outcomes (based on its perspective gleaned from examinations, investigations, and elsewhere). As noted above, much of the analysis of bargaining problems in the Proposal is spread throughout the Proposal. I would encourage the staff to include a more robust and unified discussion of bargaining problems in its initial framing of the rule and be more explicit about how the various aspects of the rule respond to those problems. Moreover, to the extent that the Commission has access to more data that provides additional insight into bargaining problems or has received additional detail from industry commenters on bargaining problems during the comment process, I encourage the staff to include that information in the final rule. An explicit assessment of private fund bargaining limitations should play a central role in the cost-benefit analysis of any regulatory interventions in this space.

Second, I think it is important to note that even if a final rule is issued, ongoing research into these issues will continue to be very important. Private funds have long been an understudied topic in the legal literature. While this fact is not surprising due to the challenges of researching this area, it is an extremely important policy area that needs more theoretical and empirical research contributions from scholars. Accordingly, I call on corporate finance scholars and securities law scholars to find thoughtful ways to make these contributions in coming months and years. The same need exists in the private operating company domain.

Suggested Citation

Clayton, William W., Comment Letter on Proposed SEC Private Fund Advisers Rule ('Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews') (April 21, 2022). BYU Law Research Paper 22-16, Available at SSRN: https://ssrn.com/abstract=4095422 or http://dx.doi.org/10.2139/ssrn.4095422

William W. Clayton (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States

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