SEC private-market proposals draw compliance warnings from ACA Group and STP consultants

The Securities and Exchange Commission voted to propose letting advisors to regulated funds earn performance-based fees capped at 20% of a fund's net gains, with the fees conditioned on findings by a board whose majority is independent. It also proposed allowing interval funds to offer monthly repurchases and replacing their fixed liquidity requirement with a principles-based approach. Separately, the commission is considering whether holders of the CFP, CFA and CPA credentials should qualify as accredited investors, and Chairman Paul S. Atkins linked the effort to President Donald Trump's executive order opening 401(k) plans to private equity and other alternative assets.

The people who would have to build the machinery around those rules describe the direction differently from the way it reads on paper. Dan Campbell, a managing director at the compliance advisory firm ACA Group in New York, told InvestmentNews that retailization may look like deregulation from the outside while meaning a much more complex compliance environment for many managers, and that firms which have historically operated in institutional and high-net-worth markets could find the shift arrives as a culture shock.

What he expects to change is procedural. Regulated-fund structures carry expectations around independent governance, valuation, liquidity and investor disclosures, and Campbell's account is that many private-market managers have not historically had to operationalize those as processes. Shane McGreevy, a compliance consultant at STP Investment Services, an investment operations and compliance firm in West Chester, Pennsylvania, described the same package as a balance the SEC has to strike, giving more investors access without losing protections that are there for a reason, and pointed to the interval-fund and performance-compensation proposals as pieces of it taking shape.

Within the package, the fee cap is the part clients will ask about and the board finding is the part that has to be produced. A majority-independent board reaching a conclusion about performance compensation implies valuation work legible enough for directors whose function is to test it, which suggests the cost sits less in the 20% than in the repetition: the same reasoning, holding on the same terms, in every registered vehicle a firm runs. Managers whose governance has run through their own investors would be answering to a different room, and the file that supports a fee would have to survive that room's questions.

Campbell's second point lands on that file. The underlying assets, he said, do not become easier to value simply because they are being offered to a broader investor base, and as private markets move further into regulated and retail structures, firms will need much stronger governance around valuation methodologies. A manager running a private vehicle and a registered fund over overlapping positions is carrying two marks and owing one explanation, and the explanation is what an independent director can interrogate.

Interval funds are where the terms move on paper. Monthly repurchases would put the redemption schedule of a private-asset vehicle closer to the rest of a client's holdings, and replacing a fixed liquidity requirement with a principles-based approach trades a bright line for judgment. A standard that leans on judgment is a standard that has to be documented, which is why the liquidity language is the item to watch: a principle either acquires specifics in an adopting release or leaves the argument to the file.

Atkins's link between the proposals and the 401(k) executive order is the distribution half of the story. An accredited-investor standard that recognizes CFP, CFA and CPA holders would widen who can be offered private placements, and monthly repurchases would bear on how those vehicles fit a client's cash needs, so the two proposals together touch questions advisors already field. The credential piece describes a population rather than a mechanism; the coverage does not say how a firm would document a client's designation, nor when any of the proposals might be finalized.

Both consultants quoted work for firms that sell compliance and operations services, which is worth carrying alongside a forecast about demand for compliance and operations work without discounting it. The practical read for advisors running allocation decisions is that the buy-side items are the ones that would change what sits in a client account, while the documentation burden lands with managers, and the near-term decision for managers is a build-or-wait calculation against a rule that has not been adopted.

The interval-fund liquidity standard is where the first specifics will have to appear, and what the coverage describes is the approach rather than the tests.