The Dodd-Frank Wall Street Reform and Consumer Protection Act brought certain advisers to private funds under the federal securities laws, requiring them to register with SEC. These advisers include hedge fund and private equity sponsors that re registered with the SEC. The GAO has issued a report on the feasibility of forming a self-regulatory organization, or SRO, to provide primary oversight of private fund advisers. The report discusses:
- the feasibility of forming such an SRO, and
- the potential advantages and disadvantages of a private fund adviser SRO.
Regulators, industry representatives, investment advisers, and others told GAO that it was difficult to opine definitively on the feasibility of a private fund adviser SRO, given its unknown form, functions, and membership. Nonetheless, the general consensus was that forming a private fund adviser SRO could be done, as evidenced by the creation and existence of other SROs. At the same time, they said that the formation of a private fund adviser SRO would require legislation and would not be without challenges.
Creating a private fund adviser SRO would involve advantages and disadvantages. The SEC will assume responsibility for overseeing additional investment advisers to certain private funds on July 21, 2011. It plans to oversee these advisers primarily through its investment adviser examination program. However, the SEC likely will not have sufficient capacity to effectively examine registered investment advisers with adequate frequency without additional resources, according to a recent SEC staff report. A private fund adviser SRO could supplement SEC’s oversight of investment advisers and help address SEC’s capacity challenges. However, such an SRO would oversee only a fraction of all registered investment advisers. Specifically, the SEC would need to maintain the staff and resources necessary to examine the majority of investment advisers that do not advise private funds and to oversee the private fund adviser SRO, among other things. Furthermore, by fragmenting regulation between advisers that advise private funds and those that do not, a private fund adviser SRO could lead to regulatory gaps, duplication, and inconsistencies.
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