Posted by Joseph Grundfest (Stanford University), on Tuesday, May 17, 2022
Editor’s Note:
Joseph A. Grundfest is William A. Franke Professor of Law and Business at Stanford Law School. This post is based on his recent paper.
I write this post in response to the release (the “Proposing Release”) regarding proposed rules (the “Proposed Rules”) under the Investment Advisers Act of 1940 (the “Advisers Act”).
The Scope of this Post. The Proposed Rules are of three categories: Disclosure Rules, Audit Rules, and Prohibited Activity Rules. These comments relate solely to the Prohibited Activity Rules that would forbid the following terms and conditions in investor advisory agreements:
- “Charging certain fees and expenses to a private fund or portfolio investment, including accelerated monitoring fees; fees or expenses associated with an examination or investigation of the adviser or its related persons by governmental or regulatory authorities; regulatory or compliance expenses or fees of the adviser or its related persons; or fees and expenses related to a portfolio investment on a non-pro rata basis when multiple private funds and other clients advised by the adviser or its related persons have invested (or propose to invest) in the same portfolio investment”;
- “Reducing the amount of any adviser clawback by the amount of certain taxes”;
- “Seeking reimbursement, indemnification, exculpation, or limitation of its liability by the private fund or its investors for a breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness in providing services to the private fund”; and
- “Borrowing money, securities, or other fund assets, or receiving an extension of credit, from a private fund”
