Maryland CIO pushes back on proposed SEC rules banning use of side letters

Maryland State Retirement and Pension System CIO Andrew Palmer shared mixed opinions about the SEC’s proposed rules that would increase oversight over private equity.

While some large public pension funds have endorsed the SEC’s regulations, others behind the scenes say there is a large split on the proposed rules, especially for policies that would prohibit preferred treatment certain LPs receive via side letters.

Recently, Los Angeles Fire and Police Pensions publicly supported the SEC’s proposed rules that would prohibit preferred treatment for certain LPs. The potential regulations have also won the support of New York City Comptroller Brad Lander and North Carolina Treasurer Dale Folwell.

But others have said they see several unintended consequences that could stem from the proposed rule changes, such as increased costs passed on to LPs due to increased compliance demands placed on GPs. Also, many LPs also use side letters as a way to invest in a fund while carving out mandated exceptions, like avoiding vice-related companies.

“The rules regarding special treatment for some LPs over others could be more eloquently crafted and should rely more on disclosure than prohibition,” Palmer told the Maryland board during an informational session at its most recent meeting.

The board did not take any official action after the discussion.

Palmer also said he had concerns about rules that would also prohibit GPs from demanding indemnification from LPs. He said it was “an area that should be worked on but probably overly restrictive as written.”

However, Palmer said the SEC’s proposals that would require more disclosures of private fund fees and expenses are a “great fit for investors like ourselves.”