My Crypto Lawyer
Washington D.C.
Sept. 19, 2023
Thank you, Erica [Duignan]. Welcome to members of the Committee and thank you to today’s panelists. I would also like to extend my congratulations to the Committee’s new officers, Chair Erica Duignan, Vice Chair Sue Washer, Secretary Jasmin Sethi, and Assistant Secretary Davyeon Ross. Thank you for your willingness to serve.
From today’s full agenda, I would like to focus on smaller venture-capital funds and emerging fund managers, a topic central to the conversation about meeting the early-stage financing needs of small businesses. Asset management should be a dynamic, low-barriers-to-entry industry in which new entrants compete for investor assets alongside their more established peers. Regulation, however, is inhibiting competition and fostering consolidation.
Last month, the Commission finalized a rule for private fund advisers. Many aspects of this rule prevented me from supporting it, but a primary objection rested on the deleterious effect this rule will have on small fund managers and the potentially insurmountable barriers it will create for aspiring managers. The Commission’s economic analysis acknowledged that the rule’s compliance costs could result in smaller advisers leaving the market.[1] The Commission argued that registered smaller advisers could sidestep the rule’s costs by reducing their assets under management below the required SEC registration threshold.[2] Urging smaller advisers worried about regulatory burden to shrink undermines, rather than fosters, competition.
While the Commission does not intend to formulate rules that disadvantage smaller advisers, we are insensitive to how individual rules could harm them. Save the occasional staggered compliance date, we have refused to accommodate the unique circumstances and challenges smaller entities face. We have been practically indifferent to the cumulative costs of our regulations.
Last week, the Investment Adviser Association (“IAA”) petitioned the Commission to amend the rule that calls on the Commission to revisit the definition of small adviser it uses when considering how a proposed rule will affect small advisers.[3] The Commission currently treats as small investment advisers that have less than $25 million in assets under management, which is lower than the $100 million threshold to register with the Commission. So when the Commission is considering the effects of its rules on small entities, as the Regulatory Flexibility Act requires, it generally concludes that few, if any, small entities would be affected. The IAA’s rulemaking petition calls for a new definition of small adviser based on number of employees.
Smaller asset managers might be more willing to work with start-ups, so your input on this topic is important. What are the primary barriers keeping dynamic VC funds and emerging fund managers from entering and thriving in our private markets? What should the Commission do to foster opportunities for smaller venture capitalists? And, of equal importance, what should the Commission undo?
Thank you all for your commitment of time and energy. I look forward to today’s discussion, which I hope is a fruitful and vigorous one.
[1] See, e.g., Private Fund Advisers Adopting Release at 529 (“To the extent heightened compliance costs cause certain advisers to exit, competition may be reduced. This may particularly occur through the compliance costs associated with mandatory audits, as those costs are likely to fall disproportionately and have a disproportionate impact on funds managed by smaller advisers, and funds advised by smaller advisers facing new increased compliance costs may be among those most likely to exit the market in response to the final rules.”). (“Adopting Release”)
[2] See Adopting Release at 530 (“However, the effects on the smallest advisers will be mitigated where those advisers do not meet the minimum assets under management required to register with the SEC. Some registered advisers may therefore have the option of reducing their assets under management to forego registration, thereby avoiding the costs of the final rule that only apply to registered advisers, such as the mandatory audit rule.”).
[3] https://investmentadviser.org/wp-content/uploads/2023/09/IAA-Rulemaking-Petition-9.14.23.pdf?t=650356467cbe3
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