Fund Advertising, Meet Performance Standards

Will relaxed rules on general solicitation mean tighter performance reporting requirements?

Ask any expert what the dawning era of general solicitation—where fund managers can more broadly and openly hawk their wares—will look like and you’ll get the same answer: “I don’t know.”

This bold new world could be one of joyous sharing in which a thousand solicitous flowers bloom; it could also be even more painful than the seemingly more regulated world we just left behind.

Take, for instance, the pending SEC decision on whether there should be a commensurate tightening of requirements related to Form D—the document filed with every private offering. An expanded Form D could mean a lot more than simply filling out more fields. It might, for example, include new “content restrictions” that stipulate exactly how performance information is presented and, as such, could put serious restraints on both would-be fraudsters and their straight-shooting brethren.

The possibility of content restrictions in Form D was raised during a recent Privcap webinar about the SEC general solicitation decision. Our guest experts, Matthew Kaplan of Debevoise & Plimpton and  Scott Gluck of Venable, noted that the SEC is now accepting comments about the extent to which further rules should accompany the reversal of the ban, including changes to Form D. The SEC specifically asked for comments about content restrictions, indicating that this is a topic on the minds of the commissioners, and one which they appear poised to put serious resources behind.

According to Gluck: “They’re trying to find out if, for example, there should be standardized reporting requirement… There is a big concern with audited versus non-audited financials.”

Kaplan furthered this point: “The SEC has specifically proposed requiring that private funds include performance [data and] indicate whether fees and expenses have been deducted.”

The subject of performance standards in private capital is complex, yes, but it drives LPs crazy that some GPs continue to play games with track-record presentation, like showcasing gross IRRs, rather than net, in their marketing materials

Over the years, a number of groups–too many to list here–have attempted to convince “the industry” to broadly agree to guidelines for performance reporting. It’s been a tough slog. Underlying these partnerships are positions in private companies that can legitimately be valued in myriad ways. Adding to this challenge is an attitude of fierce independence among many GPs. A partner at a private equity firm once told me that the proper response to an auditor who disagreed with his firm’s valuations was: “You child! You don’t know my business!”

It may take an SEC rule to bring a bit more apples-apples to the sharing of performance information. As Kaplan noted in the webinar, content rules on performance may extend even to those managers who opt not to generally solicit.

As far as pushing private capital toward greater transparency, and making manager communications less of a headache, any new rules may be a blessing. But there are risks, too. An investor who relies on a formatted track record in a Form D filing, as well as in marketing materials based on this filing, may get the false impression that the SEC has given a “seal of approval” to that reporting. No rules, of course, will prevent those with a desire to bend them from doing so, a task made easier in a market so dependent on the valuation of relatively illiquid assets.

Want to tell the SEC what you think? Well, here’s your chance. Comment wisely.  ■

Follow David Snow on Twitter @SnowsNotes

Click here to view the full Privcap webinar: