Middle-Market Public Policy Roundup
ACG members prepare to gather in Washington, D.C., next week, and the SEC issues a set of rules on so-called “hedge clauses."
Next week, ACG members from across the country will come together in Washington, D.C., to tell the powerful story of the middle market on Capitol Hill during ACG’s Middle Market Fly-In.
Meanwhile, the Securities and Exchange Commission issued a long-awaited set of final rules and interpretations that includes clarity for private funds on so-called “hedge clauses,” as well as other issues.
ACG Members Visit Capitol Hill Next Week for ACG’s Middle Market Fly-In
To strengthen the voice of the middle market with policymakers, ACG will host the Middle Market Fly-In next week in the nation’s capital.
During the member-exclusive event on June 19, middle-market business leaders and deal-makers from across the country will come together in Washington, D.C., to speak to members of Congress and their staff about the important role of the middle market in creating jobs and boosting revenue, as well as the need for policies that promote growth.
Participants will have a chance to educate members of Congress and their staff about the middle market and to promote the Congressional Caucus for Middle Market Growth, a group of lawmakers committed to pro-growth policies. These efforts are critical to help broaden the message of the middle market in Washington, D.C., and to ensure the middle market is top of mind for policymakers. Stay tuned for more coverage of the event.
SEC Adopts Rules Impacting Investment Advisers, Broker-Dealers
Last week, the Securities and Exchange Commission approved a broad package of final rules and interpretations focused on investment advisers, broker-dealers and their affiliated persons and agents.
The new rules apply primarily to broker-dealers and financial professionals with retail investor clients, but there are items relevant to ACG members in the package, including important clarifications contained within the Commission Interpretation Regarding Standard of Conduct for Investment Advisers.
Fiduciary Duty and Hedge Clauses
The SEC’s interpretation clarifies the federal fiduciary duty that investment advisers owe their clients and how it can be shaped—a hot-button issue in the GP-LP community.
Notably, while the federal fiduciary duty may not be waived, the interpretation acknowledges that it may be “shaped” by an agreement, provided there is full disclosure and informed consent. As far as any applicable state-level fiduciary duties to an adviser, the SEC expressly took no position in the interpretation.
Given the push by institutional investors for the SEC to rescind its 2007 Heitman No-Action Letter, which stated that inclusion of so-called “hedge clauses” are not intrinsically misleading and steps should be taken to limit them, this is particularly important for investment advisers to private funds.
While the Heitman No-Action Letter was ultimately rescinded by the SEC in the interpretation, it was done so on procedural, not substantive, grounds. Instead, the SEC clearly affirmed in the interpretation that the particular facts and circumstances should determine whether a hedge clause in an agreement with an institutional client violates the Advisers Act. This interpretation provides additional certainty for private fund advisers that they may use hedge clauses or other limitations of liability so long as the other party understands the provisions and is not being misled.
Full and Fair Disclosure
The interpretation reaffirms the long-held notion that an adviser must eliminate or make “full and fair” disclosure of all conflicts of interest as part of the adviser’s duty of loyalty, and that the adviser must still act in a client’s best interest even where full and fair disclosure has been made. In determining what constitutes full and fair disclosure, the interpretation provides guidance on the appropriate level of specificity regarding the conflict and disclosure regarding allocation of investment opportunities.
Level of Specificity
The interpretation states that disclosures must be specific enough for the client to fully understand the conflict. For example, it is inadequate for an adviser to say it has other clients without addressing how the conflict is managed. It also reaffirms that advisers should not indicate there may be a conflict where a conflict actually exists.
Investment Allocation
The interpretation also clarifies that in allocating investment opportunities, an adviser’s allocation practices must not prevent it from providing advice that is in the best interest of its clients.
ACG’s public policy team will continue to examine the package of rules for additional items relevant to the middle-market community.
Are you an ACG member who enjoys reading the public policy roundup? Join our Public Policy Interest Group to receive even more in-depth coverage of federal policy activity impacting the middle market, as well as opportunities to help shape ACG’s advocacy efforts.
Maria Wolvin is ACG Global’s vice president and senior counsel, public policy.
Ben Marsico is ACG Global’s manager of legislative and regulatory affairs.
