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Regulation

ILPA asks SEC for action on fiduciary duty protections

Institutional Limited Partners Association and 35 of its members submitted a letter Tuesday to the Securities and Exchange Commission urging the agency to uphold "fiduciary protections that investors are facing in the private equity market."

In the letter, Steve Nelson, CEO of ILPA, said limited partners "have been facing significant resistance in their efforts to retain meaningful fiduciary protections while investing in the private equity market on behalf of themselves or their beneficiaries. These headwinds can be alleviated if the commission acts on certain items, well within its authority, to signal to the market that it is important for investment advisers to act in the best interests of their investors."

The 35 ILPA members to sign the letter included Marcie Frost, CEO of the $351.1 billion California Public Employees' Retirement System, Sacramento, and Thomas K. Lee, chief investment officer of the $111.1 billion New York State Teachers' Retirement System, Albany.

Getting 35 high-profile members to sign onto the letter is "an indication that this is a widespread issue and that LPs are very concerned about the erosion of fiduciary duty," said Chris Hayes, senior policy counsel at ILPA.

ILPA would like the SEC to rescind the Heitman Capital Management no-action letter because it "diminishes the effectiveness of the fiduciary duty standard in the Investment Advisers Act of 1940," the letter stated. The no-action letter was issued in 2007 and said hedge clauses, which investment advisers use to limit their liability, are not in violation the Advisers Act.

In a letter to the SEC in August, the ILPA said an issue of particular importance is the "level to which an investment adviser may disclaim or diminish their fiduciary duties under the law in the state in which the private fund is domiciled, most commonly Delaware."

With that in mind Tuesday, the trade group also asked the SEC to issue a statement indicating that "any settlements of an enforcement action with a private fund adviser will be conditioned upon that adviser itself assuming those costs, rather than seeking indemnification from investors."

Tuesday's letter was the third ILPA has written to the SEC about fiduciary protections since the agency proposed a standard of conduct for investment advisers that states advisers have a duty to act and provide advice that is in the best interest of the client. The proposal, which was published in April 2018, is part of a larger package on which the SEC said it plans to issue a final rule by September.

The ILPA sought several clarifications on the SEC's proposed rule, including one requiring private fund advisers to "explicitly and clearly disclose the standard of care under both state law and the Advisers Act owed to LPs and the fund," and one that would state that the standard of care owed to the clients of private fund advisers under the Advisers Act is a "negligence" standard.