The Cost of Private Fund Regulation

The huge gap between the SEC’s and advisers’ cost estimates is concerning because the SEC routinely justifies its rules on cost-benefit grounds. If the SEC is naïve about how burdensome its rules are, it risks overregulated and slowing down economic growth. On the other hand, it is hard to know how much to trust industry members’ cost estimates. After all, they have an incentive to exaggerate to convince the SEC to loosen up its regulations.

In a new paper, I estimate the cost to private fund advisers of complying with the SEC’s Dodd-Frank-era rules to see whose predictions were more accurate….

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My main conclusion is that the SEC predicted compliance costs far more accurately than most industry commenters. Using administrative data from the SEC, I document that a statistically significant number of advisers bunch beneath the $150 million threshold. Based on the level of bunching I observe, I estimate that the average cost of complying with the SEC’s private fund rules was $54,000 per year from 2013 to 2022. This figure sits comfortably within the SEC’s predicted range but is far below most industry-provided estimates. Additionally, I find that compliance costs appear to have been somewhat higher for private equity fund advisers (around $84,000 per year) than for hedge fund advisers (around $30,000 per year).

Source: The Cost of Private Fund Regulation