Reposted from “Hedge Fund Regulation: It’s Back” on the Intralinks.com Blog.
And this time it’s taking private equity and venture capital with it. First, let’s quickly rewind to 2006, when hedge funds throughout the U.S. were completing their ADV and implementing technology to retain their e-mails and documents. At the time, they were anticipating having to register with the SEC under the Investment Advisers Act of 1940. Enter Phil Goldstein of Bulldog Investors, who lives up to the company moniker by suing the SEC and to the surprise of everyone-wins.
The movement to regulate hedge funds lies dormant for several years, until the fall of 2008, when Wachovia and Merrill Lynch are listed for sale on eBay. This time around the government is smarter. They introduce an amendment to the 1940 act called the Private Fund Investment Advisers Registration Act of 2009 and, just to be safe, throw PE and VC firms under the bus along with hedge funds.
The 2009 Act eliminates the private adviser exemption that funds relied on to avoid regulation. It also takes step to ensure that the Phil Goldstein’s of the world don’t reappear by granting the SEC enhanced authority to define terms in the 2009 Act. (Note: Goldstein successfully claimed that the SEC exceeded its rule making authority in 2006.)
Recently, a lot of attention has been given to the Private Fund Investment Advisers Registration Act’s requirement that advisers report their positions, off-balance sheet borrowing and assets under management in an effort to identify systemic risk. There’s less clarity concerning the government’s proclamation that “the SEC should be given expanded authority to promote transparency in disclosures to investors.” Sounds a bit open ended, doesn’t it?
If you want to close that loop, refer to the Managed Fund Association’s Sound Practices for Hedge Funds. The section on creating a disclosure framework gives advisers the direction they need to establish transparency between themselves, investors and counterparties. It recommends that fund managers provide “timely and accurate disclosure of material information to investors,” including monthly performance data, quarterly investor letters and an annually updated PPM. The guidelines also suggest that managers provide a narrative description of the fund’s performance along with the requisite financial data points. Funds also need to communicate with investors when unscheduled material events occur, such as entry into a side letter, a key IP leaving the firm or switching fund administrators.
The rub is that sharing sensitive information just isn’t part of the DNA of a fund manager. (For starters, examples abound of data leaking to websites, driving down the fund’s NAV and reputation.) But the fact is that communicating with your investors – and constantly keeping them informed – will remind them why they decided to invest with you in the first place. That’s why hedge, venture and private equity funds will increase their communication and transparency with investors whether the proposed regulations become areality or get bit by another Bulldog.
by Paul DiBlasi
Product Marketing, IntraLinks