© 2011 Corgentum Consulting, LLC
New Regulatory Burdens Placed on Investors
The area of fund compliance has been in flux over the past few months. Spurred in part a number of factors including the continuing financial crisis and the passage of new laws such as Dodd-Frank, theUS financial regulatory system has seen the enactment of new registration requirements for manyfund managers, including hedge funds and private equity funds. As more and more funds haveadded their names to the regulatory registration rolls, so too have funds now been required torelease more information than ever before. Outside of the US, similar demands for increased fundregistration are being echoed in Europe via initiatives such as MiFiD, and in Asia via increasedregulatory oversight in countries such as Singapore.Fund managers and their lobbying groups originally resisted against such additional registration anddisclosure requirements. The unfortunate result for investors seems to be a regulatory compromisewhich relies seems to rely more on the volume of actual disclosures rather than how meaningful theyare. This all show and less substance regulatory format runs the risk of fueling an already vulnerableinvestor base which may be increasingly seeking to cut corners on unwisely operational duediligence. A good example of how this works in practice relates to enhanced ADV disclosures whichUS SEC registered fund managers must now make. Specifically, in the US, fund managers registeredwith the SEC are now required to disclose several pieces of information which were not previouslymandatory. Currently, for SEC registered funds, many of these disclosures come on Form ADV andpotentially in the future via additional forms such as the new Form PF.There is really nothing that new about the additional Form ADV disclosures, as they have been inplace for a while. However, as many managers which were previously unregistered now register,many recent articles in the media have focused on the information revealed in this form abouttraditionally very secretive managers. The types of additional information disclosed which were notnecessarily mandated a few years ago includes additional biographical information about the firmand key personnel as well as details about fund service providers. While the general consensusamong the investment community, at least in a due diligence context, is that additional disclosuresand government oversight is a good thing, the hedge fund industry has seemed to pull the wool overinvestor's eyes. The nature and types of disclosures allow hedge funds and private equity managersto seemingly be more transparent and perhaps indicate a sense of capitulating to investor andgovernment demands for additional transparency. The problem for investors seeking to perform duediligence however, is that the transparency levels are set so artificially low as to make theseadditional disclosures almost moot in nature.The bulk of the "additional" Form ADV disclosures provide information which is so basic in naturethat any investor performing operational due diligence on a fund manager would be reckless as tonot request it to begin with. For example, in Part B of Section 7.B.1(1) of Schedule D, the currentForm ADV disclosures require fund managers to provide service provider information concerning fivetypes of service providers (auditors, prime brokers, custodians, administrators and marketers) whichthe SEC views as being important so-called "gatekeepers" for private funds. Generally, therequirements are that the fund manager provide the "gatekeepers": 1) identity, 2) location and 3)state whether they are related (i.e. - affiliated) with the fund manager.