Fiduciary duty can’t be outsourced, Gensler says

'Hundreds of billions of dollars in fees and expenses are standing between investors and businesses.'

Private fund advisers who outsource their fiduciary duties aren’t complying with the Advisers Act, SEC chairman Gary Gensler has said.

“Make no mistake,” the chairman told the Institutional Limited Partners Association, “an investment adviser to a private fund has a federal fiduciary duty to the fund enforceable under the Advisers Act. This federal fiduciary duty may not be waived. Contract provisions purporting to waive the adviser’s federal fiduciary duty are inconsistent with the Advisers Act. This is regardless of the sophistication of the client.”

ILPA and its members have been ringing alarm bells about fiduciary duty for years. Nearly half of the group’s members reported that fund managers had used sub-contracts to reduce their fiduciary burden in the last year. The group has been lobbying the Commission for new rules forbidding the practice. Gensler’s speech suggests new rules aren’t necessary.

Fees and expenses

Private fund fees and expenses were on the chairman’s mind. “I wonder whether fund investors have enough transparency with respect to these fees,” Gensler said. “I wonder whether limited partners have the consistent, comparable information they need to make informed investment decisions.”

When he worked at Goldman Sachs, Gensler recalled, Wall Street clung to the traditional “2 and 20” fee model – 2 percent for management and 20 percent performance. In the public markets, those fees have come down even as assets under management have grown. On the private side? Not so much.

“Against these $9 trillion in net assets under management, there may be somewhere in the range of $250 billion that are going to fees and expenses each year,” Gensler said. “Hundreds of billions of dollars in fees and expenses are standing between investors and businesses.”

Side letters

Gensler says he’s worried that the creep of side letters has created an uneven playing field for private fund investors.

“Some of these side letters are benign,” Gensler acknowledged, but others “can create preferred liquidity terms or disclosures. Research in this area suggests that similar pension plans consistently pay different private equity fees.”

He says he’s asked Commission staff to consider ways to “level the playing field and strengthen transparency, or whether certain side letter provisions should not be permitted.”

Performance metrics

Whether investors get a better deal in private or public markets is a separate argument, Gensler said.

What matters now is that it’s relatively easy to gauge public market performance, but nigh on impossible to get apples-to-apples data on private markets, he said.

“Regardless of that overall economic debate about whether various forms of private funds outperform public markets on a risk-, liquidity- and leverage-adjusted basis,” Gensler said, “there may be benefits to fund investors to increasing transparency of the performance metrics. I have asked staff to consider what we can do to enhance such transparency.”


Form PF needs a “freshening up,” Gensler suggested. The SEC is talking to the CFTC about a joint rulemaking that would get “more granular and timelier information” on the forms, he said.

“Since the adoption of Form PF, we’ve learned a lot,” Gensler said. “For example, the role of hedge funds was not immediately apparent in the March 2020 dysfunction in the Treasury market. It is time for us to put that learning to use.”

The Commission is also in talks with the Financial Stability Oversight Counsel, the Treasury Department and the Federal Reserve about updating the private fund risk reporting regime, Gensler added.

This article first appeared in affiliate publication Regulatory Compliance Watch