MFA submitted a comment letter to the U.S. Securities and Exchange Commission in response to its request for comment on the Private Fund Adviser rule.
In the letter, MFA explains that the SEC’s proposed rule would fundamentally reshape the nature of the relationship between private funds and their investors, discarding the historical disclosure-based regime. From the letter:
“[We] first want to address what we believe to be several fundamental issues with the Proposed Rules taken as a whole, particularly with respect to the proposed prohibitions on private fund advisers’ and sophisticated private fund investors’ ability to define the terms of their commercial relationship. The right to ‘shape that [adviser-client/investor] relationship by agreement, provided that there is full and fair disclosure and informed consent,’ is the decades-long hallmark of the Commission’s regulatory approach to an investment adviser’s fiduciary duty to its clients, including for private fund advisers and private funds.”
MFA argues that the proposed rule would harm rather than protect institutional investors, needlessly upset the carefully constructed arrangements private fund advisers and sophisticated investors have negotiated over many years, and significantly increase legal, regulatory, compliance, and operational costs, which will create steep barriers to entry for new advisers, as well as lead to consolidation in the industry, thereby reducing competition and the investment choices available to investors. From the Letter:
“Ironically, by needlessly upsetting the carefully balanced arrangements that private fund advisers and their sophisticated investors have developed over many years, we believe that the Proposed Rules will ultimately harm those investors by significantly reducing their ability to negotiate the terms on which they are able to invest in private funds—thereby disrupting the freedom to contract that is a hallmark of the U.S. free market economy and undermining the competitive advantages that U.S. markets have compared to markets in other countries—and reducing the choices of funds that are available to such investors.”
MFA notes that, ultimately, institutional investors will likely experience higher fees and reduced transparency as a result of the proposed rule. From the letter:
“Alternative investment strategies by their nature require more independent research and other data, more investment staff, and often more complex technology to support them than a typical retail investment product. The likely result of the prohibitions and other rules included in the Release, including but not limited to those related to expenses, is that advisers will charge higher fees, limit the options available to investors, and provide less transparency into the actual costs such fees are meant to offset.”