Sure, they have billions of dollars invested and spend millions in consulting and advisory fees. But now, some of the world's largest private equity investors, along with an industry group, are demanding oversight over the industry they're largely funding.
On Tuesday, the Institutional Limited Partners Association and 35 of its member institutions sent a letter to the Securities and Exchange Commission pushing for stronger regulations on private equity advisory firms.
“This is a culmination of our efforts on this issue,” Chris Hayes, senior policy counsel at ILPA, said by phone Tuesday.
ILPA and the institutions that signed its letter are asking the SEC to enforce tougher standards for private equity fund advisers by requiring clearer standards for disclosures of conflicts of interest, according to the letter. The letter was signed by the Alaska Permanent Fund, the California Public Employees’ Retirement System (CalPERS), the California State Teachers Retirement System (CalSTRS), and the New York City and State retirement systems, among others.
Public pension plans such as these signatories are heavy investors in private equity.
“The SEC has increasingly permitted private equity advisers to limit their fiduciary obligations under the Advisers Act by permitting vague, all-encompassing disclosure of conflicts of interest to meet the informed consent requirement,” according to ILPA’s statement on the letter.
The letter followed up on two previous communications ILPA sent to the commission: one on August 6, 2018, and another on November 21, 2018.
The letter included several specific demands for the SEC. ILPA and the institutions want the SEC to rescind a no-action letter it published in 2007 that they claim “diminishes the effectiveness of the fiduciary duty standard in the Investment Advisers Act of 1940.”
“Our concern is that if you’re an institution, you have your own fiduciary duty to your beneficiaries,” Hayes said. He added that the no-action letter effectively shifts more risk to the institutions.
The group also wants the SEC to make it clear that private fund advisers – not their investment clients – are on the hook for the costs of any settlements of enforcement actions.
Additionally, according to ILPA and the institutions, the SEC should encourage private fund advisers to limit “pre-clearance” of their conflicts of interest. The SEC should also encourage private fund advisers to have a Limited Partner Advisory Committee, which would help determine the advisers’ conflicts of interest, according to the letter.
“Our members in ILPA feel that it's pretty fundamental that when you give someone money for ten to 15 years, they’re acting in the best interest of the person who gave them money,” Hayes said.