Aides to SEC Chairman Gary Gensler have told private fund reform advocates to dial back their expectations so the chairman can focus on ESG and market structure proposals, affiliate title RCW has learned.

Under Gensler, the Commission has proposed a number of private fund regulation reforms. Gensler hinted that even more drastic changes were in the works, with new definitions for accredited investors and shareholder-of-record at the top of the Commission’s regulatory flex agenda (RCW, June 27, 2022).

As summer turned to fall and then to winter, though, the chairman’s closest advisers have told erstwhile allies that Commission staff may not have the bandwidth to see the private fund reforms through, sources tell RCW. The sources spoke on the condition of anonymity because Commission rules require deliberations to be secret.

The $21 trillion private fund industry was caught off-guard by the depth and breadth of the Commission’s reform proposals. It recovered quickly, mounting ferocious rear-guard attacks advocates hoped would help the chairman understand they saw his maneuvers as existential threats. Many of the comment letters condemning his Form PF and audit proposals, for instance, were written by veteran trial attorneys rather than government affairs lawyers, something that wouldn’t be lost on Gensler or his team. The industry also got help from members of Gensler’s own party.

The fall

In September, Gensler testified before the Senate Banking Committee. Its chairman, Sherrod Brown (D-Ohio) is a Gensler ally. But Gensler was also subject to some pointed questions from Sen. Jon Tester (D-Mont.). The next day, Tester sent a letter to Gensler signed by several Democratic senators, urging him to slow his regulatory roll. Tester is most concerned about Gensler’s ESG ambitions. Other senators on the letter, though –Kyrsten Sinema (D-Ariz.), and Mark Warner (D-Va.), for instance – are friends of private funds.

“The SEC has important work to do to strengthen transparency and accountability in our markets, promote efficiency and competition, and foster the innovation and access to capital that contribute to economic growth,” the senators said in the letter. “As you know, that work currently includes a significant number of separate proposed rulemakings on its agenda. It is critical that, as the SEC moves through the rulemaking processes, there is adequate time to evaluate each individual rule as well as how those rules interact with existing and other proposed rules.”

The Democratic letter was followed in short order by a report from the SEC’s acting Inspector General, Nicholas Padilla. Gensler’s everything-all-at-once reform proposals, Padilla warned, threatened the Commission’s “mission critical” functions (RCW, Oct. 28, 2022).

The final blow came in November, when the Republicans won the House back in the mid-term elections, sources say (RCW, Nov. 9, 2022). Given the GOP’s hostility toward Gensler’s proposals, aides have said they must pick their battles. Private funds reform  especially given Democratic divisions on the question – slid down the to-do list, the sources say.

‘Unbridled expansion’

It’s not that Gensler opposes private fund reforms, the sources add. One of his first speeches as Chairman was to ILPA. He promised the group that he would crack down on private fund abuses (RCW, Nov. 18, 2021). But sources say private funds reform was much more important to Gensler’s predecessor, then-acting Chairwoman Allison Herren Lee.

No one thinks Gensler will abandon the cause altogether. Advocates are worried, though, that any reforms will be weaker than advocates think they should be. Among those fighting for stricter measures is SEC Commissioner Caroline Crenshaw, the sources say. In mid-November, the Consumers Federation of America – former home of Gensler adviser Barb Roper – sent a letter to the Chairman urging him to stay the course.

“For too long, Congress and the Commission have promoted policies that expanded private securities markets, at the expense of public markets,” the November 15 letter states. “Given the unbridled expansion of private markets, we encourage you to prioritize the public/private-related reforms on the Commission’s regulatory agenda. In addition, the Commission should pursue other opportunities that would help restore the health and vitality of our public markets and limit the excessive growth of private markets.”