Institutional investors have long called for better transparency and disclosure regarding fees, expenses, pass-through costs, and conflicts of interest. The Securities and Exchange Commission’s private fund adviser rule sought to resolve some of these issues, but it was struck down in June after being challenged in court by a number of industry organizations largely representing managers.
The regulatory saga pitted investors and managers against one another, as groups that represented investors supported many aspects of the rule. But this picture is too simple, ignoring the industry’s own track record of collaboration to improve practices and address many of these challenges.
For many years, the Standards Board for Alternative Investments (SBAI) has worked to bridge the gap between alternative investment managers and institutional investors. One result of that work is the Alternative Investment Standards, which are based on a principles-based framework that addresses disclosure, valuation, risk management, fund governance, and shareholder conduct. Through serious collaboration, the industry has been able to move forward on many issues without disrupting the commercial negotiations of terms and conditions in private funds — a common criticism of the now struck-down rules.
The standards, which managers commit to when they become signatories, raise investors’ expectations and the bar of practice, while allowing the flexibility needed in an industry that thrives on innovation. Investors are part of the standard-setting process through their investor chapter membership, as ultimately it is investors that have the power to allocate capital and are in the driver seat in setting expectations.
The SBAI has worked to balance the ecosystem of managers and investors, including at the board level, to incorporate the views of global stakeholders of varying size, strategy, and sophistication. That way we find solutions that are workable for all. Managers from large platforms to small and emerging managers, as well as equally diverse investors, including sovereign wealth funds, pension funds, endowments, foundations, family offices, and others, are signatories to the standards.
One of the key strengths of the SBAI is its “comply-or-explain” approach embedded in the standards. This provides investors with the relevant disclosure to enable well-informed investment decisions, while giving private fund managers the flexibility to facilitate innovation and choice. The SBAI recognizes that asset management, unlike banking, is a dynamic, entrepreneurial, and sometimes Darwinian environment in which many funds are launched — and closed — every year.
Contrast this with a regulatory process that can be too narrowly focused on detailed, one-size-fits-all rulemaking that can be costly to managers and, ultimately, investors. Regulators also often ignore potential tools that can create better outcomes for investors and their beneficiaries, including principles-based standards.
Unnecessarily complex and costly rules risk furthering industry concentration and reduce investors’ bargaining power in the long run, as rising regulatory costs raise barriers to entry for emerging managers. And new entrants to the industry are vital to maintaining a vibrant marketplace, bringing innovation and competition, and providing more investment choices.
The SBAI Standards, a direct reflection of a diverse global alternatives ecosystem, seek to balance the need for disclosure, fiduciary concerns, competitive concerns, and cost in a way that is less prescriptive and can help avoid unintended consequences. One of our members told a story that illustrated how a too-prescriptive rule can backfire: an investor received a private placement memorandum that exceeded 1,000 pages from a manager struggling to comply with the new requirements.
As we look back and take stock of how we go forward as an industry, it is worthwhile reflecting on the progress that has been made since the development of the Alternative Investment Standards more than 15 years ago. During this time, the SBAI has empowered investors in their due diligence, enabled managers to advance practices in a number of areas, enhanced knowledge, and helped build confidence. Taking this progress forward, managers and investors must take charge and continue to be proactive in their willingness to work together to improve practices as the private funds industry grows and evolves — and gains more attention from regulators.
The SBAI will continue to advocate for regulation that is fit for purpose and effective and that recognizes that this is an institutional marketplace where investors and managers still have the power to negotiate.
We at the SBAI will continue to explore disclosure and transparency topics, including revisiting expense reporting based on our existing standards and standardized total expense reporting (STER) templates, and guidance on disclosures of private market valuations.
We invite alternative investment managers and investors to have a voice in improving industry practices by joining the SBAI through signatory status or investor chapter membership.
Thomas Deinet is executive director of the Standards Board for Alternative Investments
