February 22, 2022
The proposed rules represent in spirit some advancements in transparency while also creating a powerful force running counter the SECs mandate to foster capital creation. When compared to HUD or the Federal Reserve, the SEC is notably sloppy in its performance of its regulatory function where an unnecessary degree of ambiguity comes through in its rules. In the industry we feel this is attributable to SECs frequent practice of hiring those with zero experience in finance which prior experience ought to be a rule in itself. The SEC ought to adopt the banking regulator practice of requiring standardized forms for private securities offerings that fulfill its goals while satisfying its disclosure desires. Failing to provide safe-practice and regular documentary frameworks is a failure of the SEC to conduct its role in a responsible manner. The largest problem with the proposed rules owes to the composition of funds and the definition of a fund. Many funds are single purpose entities raising money for either real estate or single entity venture capital. Single purpose funds ought to have special treatment in that their financials are simple enough to not necessitate annual audits. Practically I do not believe the accounting and audit industries are capable of the sheer volume of auditing work that these rules would create and that the practical limitation will destroy a great deal of capital creation. A solution is to exempt single purpose funds. Prohibitions against structured redemption preferences, manager exculpation and indemnity are the most concerning part of the proposed rules and must not pass. SEC will recklessly trample financial innovation and capital creation by interfering with the operating document negotiation process unilaterally. The shift in liability to fund managers for even righteous and lawful acts destroys the ability to be a fund manager because without tort reform there will be the endless ability of all investors to assert manager responsibility for investment losses where risk is an integral part of the definition of investing itself. Thus, future managers will no longer be able to be exculpated and indemnified, or that ability will be reduced, shifting an intolerable burden to fund managers that will have disasterous destructive affects to the entire economy by stifling capital creation in the extreme.