Protecting Investors in Alternative Assets: Comparative Regulatory Developments
March 27, 2024
IGNACIO RUIZ RODRÍGUEZ
The implementation of the Alternative Investment Fund Managers Directive (Directive 2011/61/EU, "AIFMD") in Europe in 2013 marked a crucial milestone in the regulatory treatment of private funds. Until then, they lacked a robust regulatory framework and effective supervision. This directive introduced a more comprehensive regulatory environment, placing regulatory responsibility on fund managers and setting standards that ensure greater protection for investors, while promoting transparency in the European financial market.
The publication of the Private Fund Advisers Rules by the Securities and Exchange Commission (SEC) in August 2023 represents a turning point in the regulation of private funds in the US. These reforms impose comprehensive disclosure requirements, including detailed quarterly performance, fee and expense reports, explicit restrictions on certain activities of advisors, the prohibition of non-proportional allocations of fees and expenses, and certain prohibitions on preferential treatment among investors. All with a particular focus on financial and operational transparency to safeguard investors interests1.
Both the new SEC rules and the AIFMD provide a clear picture of the global evolution of investor protection in the private fund sector.
From the Chilean perspective, and in the case of alternative assets, institutional investors have faced disparities when investing in private funds in this asset class, where previously the prerogatives and benefits were mainly biased by the amount of the investment. As of 2017, when our regulations allowed direct investment for Chilean pension funds in foreign alternative assets, several aspects related to the protection of investors in this vehicle class became covered by Chilean regulation, such as the managers commitment (GP commitment), quarterly reporting, the ILPA format for fees and expenses, among others. By establishing this minimum regulatory framework, foreign managers distributing these funds were required to abide by these standards regardless of the ticket size of each investment.
Together with the evolution of our regulatory framework, the current difficulty in raising capital by alternative asset managers and the increasing sophistication of in-house teams and their advisors, has allowed Chilean institutional investors, and in particular pension funds, to negotiate better terms, reflecting the global trend towards greater transparency in private fund investing.
In conclusion, the evolution of investor protection of private funds requires adapting to the dynamism of these markets. In this regard, both the AIFMD in the European Union and the new SEC rules in the US set standards for investor protection, promoting fairness in access to such vehicles. These regulatory frameworks not only benefit sophisticated investors, but also encourage the entry of less experienced investors into the world of private funds, thus fostering the retailisation (democratisation) of these vehicles and strengthening the integrity of the market as a whole.
Looking ahead, the challenge for Chilean regulation in this field is to keep pace with a constantly evolving private market.
1ILPA - SEC Private Fund Advisers Rule Overview
Tags: Alternative Assets, Superintendency of Pensions, AFP, Investments, Private
Funds, SEC, ILPA, AIFMD.
