Let's be honest. Everyone, including the ultra-wealthy, values a great deal — perhaps even more so the ultra-wealthy.
That's why when the Securities and Exchange Commission voted 3-2 last week to put in place new requirements for private funds — which collectively manage tens of trillions in assets for pension plans, endowments and wealthy individuals — Crain Currency jumped into action to see what the rule change meant for family offices.
What we found is that the new rules restrict the ability of private equity and hedge funds to offer better terms to wealthy investors in exchange for their investment. These deals, often referred to as side deals, must now be disclosed to all investors if they involve "material economic terms."
If there's a bright side to this story, it's that it could have been worse. Indeed, the original proposal would have required asset managers to disclose all side letters to investors before closing a deal.
We're also including this story to make sure you're aware of the possibility that the SEC will take some action — accept, reject or delay its decision — on pending bitcoin ETF applications from Bitwise, BlackRock, VanEck, WisdomTree and Invesco. Since it's estimated that nearly one-third of family offices dabble in digital assets, it seems like something we should all stay on top of.
As always, we appreciate any comments, ideas and insights that would make this newsletter more useful. I look forward to growing this family office community with your help. Please email me at [email protected].
HANDPICKED: SEC's new rules affect private equity, hedge funds and family offices
By MARCUS BARAM
The latest sweeping rule change from the Securities and Exchange Commission targeting private equity and hedge funds affects family offices and high-net-worth investors by limiting preferential side deals known as side letters. It constitutes the sector’s biggest regulatory challenge in years.
The rule, passed last Wednesday, requires private fund advisers to supply investors with quarterly statements, including information on fees, expenses and performance; obtain an annual audit for each fund it manages; and acquire a fairness opinion in connection with an adviser-led secondary transaction.
It also bars advisers from activities and practices "that are contrary to the public interest and the protection of investors," unless they disclose certain information or, in some cases, receive consent from investors, according to an SEC fact sheet on the rule.
Many industry groups expressed opposition to the rule proposal after it was first released in February 2022, though SEC Chairman Gary Gensler (right) said during Wednesday's meeting that the final rule is sufficiently different from the proposal.
One aspect of the rule change that is likely to affect wealthy individuals and family offices is a provision that prohibits certain types of preferential treatment without disclosing such treatment to current and prospective investors. That change could have a cooling effect on co-investments as well as larger investors' ability to negotiate any sort of fee reduction, said Molly Diggins, Boston-based general counsel for placement agent Monument Group Inc.
Pat Soldano, president of Family Enterprise USA, said the disclosure requirement is “concerning, as it could potentially put family offices and private investors more at personal and financial risk and make them think twice about investing in private funds.”
So far, the reaction has been mixed, with some fund managers pleased that the final rules didn’t include proposals that would have significantly increased a manager’s liability risk.
“Regardless of the decision taken by the SEC, it’s clear that there will be additional regulations coming to the private markets as they continue to represent a growing proportion of investors’ portfolios,” Charlie Tafoya, CEO of Chronograph, a private markets data monitoring and insights company, said in a statement. “Regulations will put further burden on finance professionals to produce more timely information and provide additional regulatory disclosures.”
The rule change will be harmful to both asset managers and their investors, as it would increase costs and reduce investment options, said Bryan Corbett, president and CEO of the Managed Funds Association. The association will consider its “full range of options” including potential litigation, he said.
“More troubling, the SEC proposed these sweeping changes in a way that exceeded its statutory authority and lacked sufficient analysis of the impact of the rule on investors and markets,” Corbett said in a statement.
One of the more commonly cited problems with the proposed changes is that they are certain to increase compliance costs for fund managers. The burden, as usual, will be heaviest for smaller managers and those just starting out, who might not have the resources to comply.
Although some in the private funds industry are against the SEC’s proposals, citing numerous negative consequences for both investors and fund managers, in essence the rules will help align the U.S. market with the likes of Europe and Singapore, which both have more stringent regulation of alternative asset managers.
"The devil will be in the details," said Paul O'Shea, senior vice president and head of fee services at Preqin's technology and services company, Colmore. "Market participants will be looking keenly to see what version of the SEC's proposals make it into law," O’Shea said. Colmore's own research found that among recent-vintage funds, many already provided enhanced fee disclosures, he said.
With additional reporting by Courtney Deegan and Arleen Jacobius of Pensions & Investments, a sibling publication of Crain Currency
Bitcoin ETF deadlines loom again for SEC ahead of Labor Day weekend
By MARCUS BARAM
The journey to a potential Bitcoin exchange-traded fund has so far been long and arduous. But some key decisions in the race are likely coming this week as crypto faithful await to see how things play out this time.
The U.S. Securities and Exchange Commission is expected to respond to filings from Bitwise, BlackRock, VanEck, WisdomTree and Invesco right before the Labor Day weekend, according to Bloomberg Intelligence. Regulators can reject, approve or delay.
Bitwise’s application is set for consideration by Friday, with the others due the following day, making it likely the SEC will weigh in before the weekend.
Analysts and industry observers anticipate the SEC will once again punt on making a decision. The regulator had already in early August dealt a delay to 21Shares for its spot-Bitcoin application with ARK Investment Management and has before that denied numerous applications over the past decade.
“We can expect to see more delays from the SEC, especially after they already delayed their decision earlier this month on ARK’s spot-Bitcoin ETF filing,” said Roxanna Islam, associate director of research and head of sector and industry research at VettaFi. “We need to see a decision from the SEC on Grayscale’s lawsuit first. Otherwise, we might see them approve Ether-futures ETF filings before they approve any spot-Bitcoin ETF filings.”
The SEC last year rejected Grayscale Investments’ plan to convert its Bitcoin trust to an ETF, saying crypto markets are too ripe for fraud and manipulation. Grayscale sued, asking the D.C. Circuit Court of Appeals to overturn a decision the company called arbitrary and discriminatory because the SEC had already approved ETFs that track Bitcoin futures.
Many in the crypto community — and fans outside of it — have been longing for a spot-Bitcoin ETF for years. They argue that it would not only make investing in Bitcoin more accessible to everyday investors but also that it would help bring digital assets closer to traditional financial markets.
On the other hand, regulators have consistently cited fraud and manipulation as some of the reasons not to approve such a product. Gemini, founded by brothers Tyler and Cameron Winklevoss, was the first firm to try for a physically backed Bitcoin ETF with a 2013 filing. It was rejected by the SEC, as have multiple attempts by other issuers.
“To the extent the SEC can delay its decisions, I think it will until there’s a court ruling in Grayscale,” said Elliott Stein, senior litigation analyst at Bloomberg Intelligence. He places the odds of Grayscale winning a ruling vacating the SEC’s rejection order at 70%.
BlackRock Inc. kicked the race for a spot-Bitcoin fund into high gear when it filed in June. The asset manager has a near-pristine track record of getting ETFs off the ground. That pushed some analysts to posit that this time, the applications — from BlackRock and others — might have a stronger chance of getting approved.
And the recent excitement over the potential for a fund has emboldened companies to not only try their hand at Bitcoin ETFs but more exotic vehicles as well. A number of firms have submitted paperwork for Ether-futures or Bitcoin-and-Ether-futures-medley funds. The SEC is poised to allow the Ether-futures funds to start trading in October in what many say could be seen as an industry win, Bloomberg News reported.
Bitcoin on Monday traded around $26,100 after having reached nearly $31,000 in mid-July. The largest digital asset traded at an all-time high of almost $69,000 in late 2021.
LOOSE CHANGE
These two families will get billions from sale of Subway: The sale to Roark Capital, which reportedly led bidders with an offer to buy the fast-food chain for more than $9 billion, represents a big payday for the families of founders Fred DeLuca and Peter Buck.
Tiger Global says it’s being targeted in tell-all by ex-employee: The investment firm reached out to its limited partners Friday to tell them about an allegedly forthcoming article by The New Yorker magazine that contains “damning and unsubstantiated allegations” about the firm.
Bugatti celebrates legacy at Pebble Beach Concours D'Elegance: The carmaker celebrated its legendary Type 57, a 1938 Coupe de Ville, at the annual collector car event and won two awards from a panel of judges.
Help us with a story: We're working on a story about family office regulation. If you have any comments on the topic, reach out to [email protected].