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E-MailWulf Kaal is professor of law at the University of St. Thomas School of Law. This post is based on a recent paper authored by Professor Kaal.
Surveys conducted in the immediate aftermath of the enactment of Title IV of the Dodd-Frank Act suggested that private fund advisers successfully addressed compliance demands associated with the Dodd-Frank Act and absorbed the increased compliance costs of the registration and disclosure rules relatively quickly after registration. Refuting industry concerns over the effects of Title IV of the Dodd-Frank Act on the private fund industry, the Author showed in a survey conducted in 2012 that the private fund industry adjusted well to the regulatory landscape post Dodd-Frank. For example, the 2012 survey found that private fund investors’ rate of return was not adversely impacted by the registration and disclosure requirements. While private fund adviser firms that planned a strategic response were smaller than those firms that did not plan a strategic response, respondents in the 2012 survey did not take the Dodd-Frank Act changes into account in determining the assets under management (AUM) size of their funds and did not envisage a strategic response to the Dodd-Frank Act registration and reporting requirements. Moreover, compliance cost estimates in the 2012 survey were equally moderate, suggesting total compliance costs for the majority of advisers would range from $50,000 to $200,000. The long-term implications of Title IV’s unprecedented registration and reporting obligations for the private fund industry were at the time of the 2012 survey largely unclear.
Investor-driven market factors and expanding regulation suggest that the long-term implications of the private fund manager registration and mandated disclosures under the Dodd-Frank Act could be different than the initial survey studies suggested. The private fund industry has been subject to significant changes since the Dodd-Frank Act rules became effective for private funds in 2012. Between 2013 and 2015, the private fund industry grew by 26%, increasing from just over 2 trillion dollars AUM in 2013 to 2.7 trillion dollars AUM through 2015. In the same timeframe, investor-driven factors, such as the emergence and proliferation of so-called retail alternative or hybrid funds, including hedged mutual funds and synthetic hedge funds; increasing side-by-side management of mutual funds and hedge funds; and public offerings of alternative asset managers, among other changes, transformed the private fund industry. In addition to investor-driven factors, changing regulations have affected the private fund industry. The SEC continues to refine and expand the regulatory landscape for the private fund industry in the aftermath of the Dodd-Frank Act (“Title IV” or “Dodd-Frank”) and the Jumpstart Our Business Startups Act (“JOBS Act”), and it continues to amend rules and SEC reporting forms that apply to the private fund industry.
This survey study examines the industry’s adjustment to the unprecedented compliance requirements three years after the first application of the Dodd-Frank Act rules. Based on identical survey instruments, this study provides a short- and longer-term comparison of survey data, contrasting the results of a 2012 survey with the findings of a 2015/16 follow-up study. The population for both surveys consisted of 1267 private fund advisers who registered before the SEC’s registration effective date for private funds, March 30, 2012. Respondents (2012: N=94, 2015: N=69) answered questions in several categories designed to identify the effects of Title IV of the Dodd-Frank Act.
The findings of this comparative survey study support evidence from earlier studies suggesting that the industry adapted well to the evolving regulatory environment in the aftermath of the Dodd-Frank Act. Despite the overall comparatively low regulatory impact of the Dodd-Frank Act, this article shows that the compliance costs associated with the evolving regulatory environment for private fund advisers have many previously unexpected implications that have the potential to keep shaping industry practices.
Perhaps the most important findings of this comparative survey study pertain to the comparative- and long-term implications of the compliance costs associated with the evolving post-Dodd-Frank-Act regulatory environment for private fund advisers. The comparative data suggests that between 2012 and 2015 the industry has been subject to an overall higher cost structure. In addition to Dodd-Frank-Act specific compliance costs, the comparative data suggests that the cost structure for the evolving overall federal regulatory environment increased between 2012 and 2015. In fact, the comparative data suggests that the annual cost of compliance doubled for many survey respondents, moving from the $50,000 to $100,000 range to the $100,000 to $200,000 range. While the data provides some evidence that the industry became more effective from 2012 to 2015 in complying with reporting obligations under the Dodd-Frank Act, assuming that compliance hour requirements are a proxy for compliance cost, the comparative data suggests that the cost structure for all federal regulation increased between 2012 and 2015.
The full study is forthcoming in The Business Lawyer, Fall 2016, and available on SSRN here.
