U.S. SEC chair Gensler seeks to scrutinize private fund fee arrangements, 'side letter' provisions

SEC Chair Gary Gensler testifies before a Senate hearing on the SEC on Capitol Hill in Washington, September 14, 2021. REUTERS/Evelyn Hockstein/Pool

WASHINGTON, Nov 10 (Reuters) - The chair of the U.S. Securities and Exchange Commission (SEC) said on Wednesday that the agency will consider new rules that scrutinize how private funds charge investors and measure performance.

Gary Gensler, in a keynote address to members of the Institutional Limited Partners Association, added that agency rules would address how funds use separate agreements with investors, so-called "side letters," as a work-around to fund constitutions.

The regulator hopes the new rules would mitigate conflicts of interest between fund general partners, affiliates and investors.

Gensler also said he has asked staff for recommendations to enhance hedge fund reporting and disclosure through the agency's Form Private Fund (Form PF), which is required for annual or quarterly disclosure in some cases, to help shed light to regulators on the activities of private fund advisers.

"Private funds have multiple levels of fees — among others, management fees, performance fees and for many private equity funds, portfolio company fees," Gensler said.

"I wonder whether fund investors have enough transparency with respect to these fees."

Armed with billions of dollars, buyout firms have taken advantage of what has been a record year for mergers and acquisitions, selling some of their assets for top dollar. read more

Private equity-backed M&A deals more than doubled to a record $818.4 billion in the first nine months of this year, up from $315.2 billion last year, according to Refinitiv.

While large buyout deals have been few and far between this year, some private equity firms have banded together to acquire companies for huge sums, raising expectations that such 'club deals' could happen more often.

Gensler says he wants to get a better look at the fees associated with such mega deals, revealing that many investors have flagged that they routinely find themselves billed for extra costs.

Side letters are agreements separate from a fund's constituting documents that are often used to negotiate concessions between a fund and an investor in cases where an investor has specific commercial, legal, regulatory, taxation or operational concerns.

More disclosure by private funds adds to an already jam-packed agenda for the SEC, which is working on new corporate climate change-risk disclosures, cracking down on blank-check company deals and overhauling several aspects of the U.S. equity market structure.

Reporting by Katanga Johnson in Washington, Editing by Nick Zieminski and Steve Orlofsky

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Thomson Reuters

Washington-based reporter covering U.S. regulation at the Securities and Exchange Commission and the Consumer Financial Protection Bureau, previously in Ecuador, alumnus of Morehouse College and Northwestern University’s Medill School of Journalism.