The SEC’s proposed rules would prevent investors and advisors from entering into certain arrangements when creating a private investment fund—a subset of funds that exist outside of most current SEC regulation under the Investment Company Act of 1940. For example, the rules would ban certain fee arrangements, agreements to limit liability for advisor services, and loans from private fund clients.
Grundfest notes that the investors likely to be affected by this rule would be sophisticated investors who know what to expect when negotiating an investment advisory agreement, even though one of the goals of SEC regulation is to protect unsophisticated investors. So these investors—who put money into venture capital firms, private equity funds, and hedge funds—would receive greater protections than unsophisticated investors, which Grundfest argues would create “internal contradictions” between the levels of protections for different kinds of investors.
‘Enforcement 40’ for 2020
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