I've been on a blogging tear this past week, posting almost every day. I'm not sure what's gotten into me, maybe its just wanting to get off to a running start this new year...anyways, I found an interesting document courtesy of Dan Primack of the new PE Hub. Debevoise & Plimpton has gone ahead and issued a letter to clients regarding new SEC rules proposed for communications by Hedge Fund and Private Equity Managers. Out of fear of some legal backlash, I won't post the document here, but you can get it at the PE Hub link.
In addition to some increases in the thresholds for accredited investor status ($2.5 million instead of $1 million), the letter proposes broad anti-fraud rules that are important for the industry:
1. The SEC would be the enforcer of any fraudulent communication. It would not be a private right of action but all disputes would go through the SEC.
2. The adviser does not have to have knowledge of the fraudulent or misleading statement.
3. While these types of rules have previously been limited to Investment Offering documents, this antifraud rule will apply to ALL communications.
4. The antifraud rule is not limited to actions of disclosure but include any fraudulent, deceptive, or manipulative conduct.
Well, well, well...my first reaction is "DUH!" these rules are nothing new - all managers of investment pools should be behaving in this manner already. Exhibiting fraudlent behavior will catch up with you in any business - wealthy individual and institutional investors have the firepower to enforce action through the legal system so if you are doing this, you are playing with fire!
While I commend these rules, the sad truth is that while they may seem to protect investors from evil managers, they will inevitably steer private equity managers toward less disclosure and communication.
Private equity managers are notorious for brevity in their communications and their disclosure of investment practices - these new rules will make it even worse. Why send your LPs detailed letters and statements if they will only expose you to additional liability? Additionally, this will increase legal and risk mitigation costs and it is not out of the realm of possibility for firms to retain counsel to now review all correspondence documents, not just investment offerings.
If anything, these proposed rules make it clear that the SEC does not have a handle on the Private Equity Industry. On the one hand, it wants to promote the growth and activity of investment pools. On the other hand, it wants to regulate them without scaring them away.