Director of SEC’s Division of Investment Management Discusses Easing Restrictions on Certain Registered Fund Investments in Private Funds

At a recent speech at PLI’s Investment Management Institute, Dalia Blass, Director of the SEC’s Division of Investment Management (Division), announced that the Division’s staff (Staff) was re-examining a Staff position that historically limited certain registered fund’s investments in underlying hedge funds and private equity funds (private funds). The Staff’s position previously required a fund to either limit its investments in underlying private funds to 15% of its assets, or else impose an “accredited investor” standard on investors in the fund.

The re-examination is being driven as part of the SEC’s initiative to enhance public access to private markets. Ms. Blass noted that public investors have historically been able to access private fund returns indirectly through participation in defined benefit plans. The shift in retirement savings to defined contribution plans has reduced this access, as such plans typically do not offer private funds as an investment option. Easing the Staff’s limitation on registered funds’ investments in private fund could help to address this issue.

Ms. Blass suggested that the Staff’s current position could be modified to provide more flexibility for closed-end funds and target date funds to invest in private funds. Ms. Blass encouraged market participants to contact the Staff regarding potential answers to various lines of inquiry noted in her speech, such as whether funds should be required to limit exposure to a single private fund adviser and how a fund’s investments in private funds could be made without the imposition of additional layers of fees and expenses.The SEC previously requested comment on some of these issues in June of last year in a concept release regarding harmonization of exempt offering exemptions.

The speech and concept release are available at the links below.

https://www.sec.gov/news/speech/blass-speech-pli-investment-management-institute

https://www.sec.gov/rules/concept/2019/33-10649.pdf