Private Markets 360° | Episode 34: Regulatory Changes Influencing Investment Strategies

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Jocelyn Lewis [00:00:01]:

Welcome to Private Markets 360, where we delve deep into the world of private markets and bring you insights from industry leaders. Today, we're excited to welcome Adam Kanter, a partner in the Investment Management Practice Group at Mayor Brown. With over 17 years of experience, Adam specializes in regulatory compliance counseling both US and non US Investment advisors and and firms on a wide range of issues, including the recent changes to the SEC marketing rule. His expertise in navigating the evolving landscape of investment management makes him a valuable voice in understanding how these developments impact the industry. Adam, welcome to the show. How are you today?

 

Adam Kanter [00:00:50]:

How are you doing?

 

Jocelyn Lewis [00:00:51]:

Great, thank you. Thrilled to have you.

 

Christina McNamara [00:00:56]:

Yes, we are thrilled to have you. And Adam, to start, can you share some insights into your career journey and how your expertise in regulatory compliance has shaped your current role in advising investment advisors and companies?

 

Adam Kanter [00:01:14]:

One of the great things about going to law School in D.C. is all of the various trade associations and kind of everything that all of the action happening here in the city. And so while I was in law school, I ended up interning at the Investment Advisor association, which is a trade association for investment advisors, as the name implies, and really got to learn so much about the industry, about the people in it, about their kind of commitment to compliance and their fiduciary duty to their clients. And, you know, it's kind of nerdy to say, but I really fell in love with the business of the investment advisory field and, and kind of kind of knew that that's what I really wanted to dedicate in my career, to helping, you know, people do the right thing and really navigate a challenging and very complicated regulatory environment. And so, you know, I went from, you know, being. Being an intern to then, you know, graduating, you know, working, you know, coming to Mayor Brown, working at a big law firm. It's a super complicated regulatory space. We like to say that the, you know, the law l a w is pretty simple, but the lore l o r e is very complicated.

 

Adam Kanter [00:02:26]:

And so you have investment advisors that are, you know, by and large, trying to do the right thing, observing our obligations to their clients as well as under the law. But there are just tons of gray areas that they try to find their way through. And really, you know, I see my role as their outside counsel as really trying to find the best path through that kind of marries together the risk tolerance of my clients, understanding the regulatory landscape in which they operate and then finding that right path through meeting those regulatory objectives or meeting their, excuse me, meeting their business objectives, but doing so in a compliant fashion. And consistent with their, with their regulatory obligations. So, you know, it's a lot of problem solving. It's a lot of understanding what my clients, you know, what they're trying to do, what they're trying to achieve as well as, you know, it's certainly as the past few years have shown us with, as the kind of pendulum has swung from one side to the other and back again, really understanding what the SEC is interested in, what they're pursuing, and then how that's impacting what my clients are trying to do and try.

 

Jocelyn Lewis [00:03:36]:

To achieve ever evolving landscape. And I'm sure that you don't have two clients that are identical either.

 

Adam Kanter [00:03:46]:

No, absolutely not. Clients are all different shapes and sizes businesses, you know, and we are fairly, you know, kind of asset class agnostic when it comes to the clients we serve and the advice they need. So whether you have a hedge fund manager or a private equity fund manager or an advisor serving, you know, doing wealth management for a retail client base, they all have the same fundamental underlying regulatory obligations. But it all looks a little bit different and sort of how that business needs to sort of fit into that kind of standard regulatory rubric.

 

Jocelyn Lewis [00:04:22]:

That makes sense. Problem solving for sure. Well, Adam, thank you so much for that overview. It's always insightful to hear how expertise gets built over time. But shifting gears to the current landscape, there's been a lot of buzz around the SEC marketing rule and broader access to private assets. So what trends are you observing in the investment management landscape, particularly as it relates to the new marketing rule guidance and the growing accessibility of private markets?

 

Adam Kanter [00:04:57]:

One of the things that we really saw over the last few years was kind of a hesitancy from the SEC and the staff to provide concrete guidance to industry participants. And so when the new marketing rule guidance came out earlier this year, I think it was regarded certainly by me and a lot of my fellow practitioners as a breath of fresh air, as a real return to form for the SEC to not engage in rulemaking or guidance by enforcement. But, but to get out in front and provide the industry with really helpful information about how they can go about, you know, navigating through that, that complex regulatory environment. And when the Martin rule was, was revised a few years ago, it left a lot of questions open. And so now that we can get this guidance from earlier this year, it has really unlocked a lot of ability for advisors to, you know, instead of taking a, you know, a reasonable but very conservative approach to how they needed to address extractive performance of, you know, how do you show a particular investment or even all of the investments of a fund that you're managing and do so in a, in, in a manner compliant with the rules. And now we do have clear guidance. And that is opening up a lot of opportunities for clients to really present information in a way that their investors want to see it. And I think it was super helpful to the industry.

 

Adam Kanter [00:06:27]:

And I don't think when you sort of take a step back and you think about, well, did that guidance come at the cost of investor harm or potential investor harm? And I don't think so. I think they really did strike a good balance between giving.

 

Adam Kanter [00:06:44]:

The investing side of the community information, need to make informed decisions, while kind of giving the sponsor side very helpful, clear guide in how they can present information in a complex way. And then aside from that, from the marketing rule guidance, of course, you know, earlier this summer we had the executive order come out from the White House regarding democratization of access to private investments and 401ks. And that's been kind of a huge change. Late this summer, we also saw an executive order come out from the Trump White House regarding democratization of access to private assets and 401ks. And I think this has been an area that I think everyone has really been monitoring for years now. And this, you know, bringing alternatives to 401ks is not a new concept. It's been something that I think a lot of people have had their eye on for a while. There have been private heavy real estate funds that have been in 401ks in some manner for, you know, close to a decade now, maybe a little over that's being broadened out or, or and a lot of market participants are trying to figure out ways to run that out and create and how they're doing so.

 

Adam Kanter [00:07:54]:

And I think, you know, a lot of the kind of market tension regarding private assets and 401ks is not necessarily in a sort of a right regulatory impediment as much as a lot of the plan fiduciaries. So there are a number of existing regulatory pathways to allow private assets into 401ks. But at the end of the day, the fiduciary to the plan need to get comfortable that it's a good investment B, that they're not going to take on risk for themselves when they make that decision to allocate some of the plan assets to private assets. So that's been one area that a lot of people have been looking at this. And I think there's also just some fundamental misunderstandings, especially the way some of this is Talked out in the press, there's some fear mongering over. Oh well, if the Department of Labor and the SEC do what the administration is asking them to do with respect to this, that it's going to be, well, everyone's 401s are just going to be invested in private equity funds or venture capital and you know, taking on, you know, huge risk. As a practical matter, based on, you know, the kind of existing limitations in the law, you know, unless the SEC does something very surprising, what we're really talking about is modest allocations to alternative assets as part of a broader portfolio. So it's about taking, you know, your, you know, 2045 retirement fund and you know, but 5 to 10% of that in alternative assets.

 

Adam Kanter [00:09:24]:

Right. Which, which I think generally speaking is going to help, you know, diversify risk, you know, provide differentiated kind of upside in different market environments and you know, can be a very reasonable thing to do. But I think we hear a lot about people saying, oh well, that just, it's just a, you know, a bonanza of fees for private equity managers and you know, to be sure, you know, that there's money to be made. You know, I think it's, it's no surprise that the alternative investment industry is looking to 401ks. You know, it's sort of the, the old adage of, you know, why do you rob banks? Because that's where the money is. Why are alternative managers trying to get their assets and their 401ks? Well, that's, that's, that's kind of a huge untapped market, large part.

 

Christina McNamara [00:10:09]:

So your insights definitely highlight how regulation and accessibility are reshaping the present investment environment. Looking ahead into the horizon, what emerging trends do you see impacting institutional wealth and retail investing, particularly concerning the adoption of tokenized funds?

 

Adam Kanter [00:10:31]:

So when it comes to tokenization, I think it's attracted a lot of attention in the market because clearly there are potential for reducing friction and transaction costs and then ultimately, you know, reduce, you know, reducing costs and increasing returns to investors that can have long term consequences. And so I think it's, it's, everyone is watching the space, everyone is watching those first movers and trying to make sure that, you know, even if they aren't ready to fully commit to tokenization, that they're keeping an eye on developments because they don't want to get left behind. If everyone else has already moved on to tokenization and they are so far ahead and lowering costs and increasing returns for their investors, then you're not going to be able to compete if you are starting from square one by the time you realize, well, that that train has left the station and we weren't on it and you know, we're going to be behind for the foreseeable future. So, you know, I think for a lot of my clients, they are looking really carefully at what's going on. A lot of them not quite dipping their toes in yet to sort of go full force ahead with, with tokenized products, but making sure that they are ready to move if, if they really see a lot of those kind of benefits materialize in more than a theoretical way. So it, it's, it's a huge area of interest and you know, it's one of these things where of course, you know, you, you look back, you know, a few years ago and you know, cryptocurrency was, was all the rage and it was crypto this and digital asset that. And of course some of that has stuck around. But I think, you know, one of the real takeaways from that, that era of, of hype around meme coins and the like is that the underlying technology of, of led, you know, distributed ledgers, I think has real staying power.

 

Adam Kanter [00:12:24]:

And I think, you know, the advisors that, and, and funds that are, are ignoring it may be doing so to their peril and really should have a strategy for how to, how to keep pace with the technology and how it's going to impact how funds are operated from an operational perspective and again, ultimately, hopefully reducing costs over the long term and benefiting investors.

 

Jocelyn Lewis [00:12:49]:

It's a huge untapped market. And I would also say to people, I've had conversations about how, how many people, when you even are invested in funds in your 401k, do you really understand what's in all of those funds? So I think that sure, we have to understand what's in these private markets funds, but also it's just more to me anyways of a diversification or a, a way to allow individuals to further diversify.

 

Adam Kanter [00:13:26]:

It's a fantastic question. And you know, I think everyone sort of lives in the shadow of, you know, the great financial crisis and you know, no one wants to become, you know, sort of the poster child for the next crisis. Right. And I think when you look at the proliferation of private credit, just as an example, over the last few years, it has really sort of boomed in its importance and it's the position it occupies in, in the investment space and really filling in the, the, you know, the gap that was left when, when a lot of the bank, bank, I think it's simple to look at that and say, oh well, obviously that's where the next crisis is going to come from. Right. But not necessarily. And, and I think by and large, you know, investment managers, you know, when they think about what they're doing and how it interacts with the markets more generally, I think they, they are all fairly risk minded of, you know, again, not, not wanting to be the name on, on, on the front cover of the Wall Street Journal. No, no one wants to be the next Lehman Brothers or Bear Stearns.

 

Adam Kanter [00:14:33]:

You know, those are the names that, that haunt us today and will continue to do so. And, and I, I think it, it's sort of a, one of those object lessons of kind of thinking through what you're doing, what risks are entailed and how it sort of connects into the broader financial ecosystem. So there's obviously this ongoing tension of kind of the need to generate returns for investors and for yourself because it's sort of grist for the mill. It feeds the machine. The better your returns, the more investors you attract, the more money you're going to make. Absolutely. But also being aware that there, there is the downside. The more you continue to sort of move up the risk and scale to achieve those, those greater returns, the, the more risk you do take on.

 

Adam Kanter [00:15:25]:

And so I think it's, it's really about, from our perspective, from, and from our clients perspective, making sure that we don't have, you know, issues with style drift. Right. So you, you never want an investor to be invested in a product without appreciating the types of investments that they were being exposed to and the kinds of risk they were taking on. If, you know, to, to sort of parallel to the late 80s. I suppose if you're investing in junk bonds, you want to know that you're investing in junk bonds. That, that, that should be sort of on the page. Right. So really I think when, when people start getting overly creative about some of the financial engineering to try to increase leverage and jam, you know, what's the label on the, on the page say, is this a risky product or not? That's where I think a lot of the focus is.

 

Adam Kanter [00:16:14]:

It's just making sure that the disclosure, what investors understand is happening is aligned with what you're actually doing. And when those things get out of, out of alignment, that's when everyone takes on risk. You know, that's risk to the, to the investment manager, that's risk to the investors and that's risk to the financial system potentially.

 

Christina McNamara [00:16:33]:

And so how has the liberalization of the Rule 506 influenced the role of data in advising clients. And what benefits do you see arising from improved data quality in the fund sponsorship landscape?

 

Adam Kanter [00:16:50]:

Rule 506c changes from earlier this year, it's another example, like with the marketing rule of, you know, real helpful guidance that comes kind of can help the industry, you know, move in a good direction. And essentially for those, you know, who weren't following those changes, essentially back when the Jobs act was adopted a number of years ago, I guess we're, we're almost coming up on 10 years now. I think there was this ability to generally solicit to use general advertising. You know, a private equity fund could theoretically take out a full page ad in the Wall Street Journal or, or you know, go on, go on TV and talk about their fund as long as they're complying with the stick part of the carrot and stick that goes along with using 506C, which is essentially heightened verification requirements for investors to make sure that they are accredited investors before they invest. But for a number of years since that rule change was made, most funds did not take advantage of those opportunities because of the kind of looming specter of well, what does that verification entail? And you know, it can be a very cumbersome process. And the no action guidance from earlier this year essentially said, well, you know, putting it very simply, if we get certain representations from investors that they weren't borrowing to fund their investment and they are investing over a certain amount of money, then they are sort of per se verified as far as their accredited investor status is concerned. And that's a huge unlock to simplify that switch over from the traditional no general solicitation, no general advertising private offerings to these new 506C or relatively new 506C offerings. And you know, we have a number of clients that are actively, have, either have already made that switch based on the guidance or are actively pursuing a switch.

 

Adam Kanter [00:18:48]:

You know, what I always tell my clients that are thinking about this is, you know, switching from 506B again, the traditional private offering to a 506C general solicitation private offering doesn't actually change what you're doing. It changes what you're allowed to do. And so a lot of our clients are, you know, when they, when they make that switch or think about making that switch, they think about, well, once I do this, what am I actually going to do with all of this freedom that's afforded? Am I going to take out that full page ad in the newspaper? Am I going to go on TV and talk about the fund or am I going to use some of that flexibility in more targeted ways? And some of that is just sort of the proliferation of data to some of the data aggregators out there. There was always this concern for many years of oh, such and such data provider. They pulled my performance information from some, you know, a public pension fund has published, you know, their returns in my fund and this data provider has scraped that data. But it's not correct. There was some sort of idios. Idiosyncrasy in that public or that public pension fund and they're reporting and that's got pulled into this public data.

 

Adam Kanter [00:20:02]:

And do I feel comfortable reaching out to that data provider to say, hey, those numbers are actually too low or too high and here's the correct number. And is that very sort of reaching out to the data provider at some form of general advertising or general solicitation? Right. And when you switch over to 506C, all of those questions and those concerns, they fly out the window. You don't need to worry about that at all anymore. You have that total flexibility if you want to do that outreach. And that I think over the long term is going to lead to much higher fidelity in those in the, in the data that is available and ultimately is going to facilitate, I think, better information for investors to make informed decisions as well as better comps for the fund managers themselves in how they stack up against their competition. So I think it's one of these things that is going to be a long term good for everybody and we may not see some of the benefits of that for a few years as these funds are switching over slowly but surely many of them, but not all of them. And I think, you know, we'll see how this kind of makes its way both into marketing materials as well as into investor reporting and comparisons and the like.

 

Adam Kanter [00:21:20]:

And you know, we've obviously seen some market participants that are, you know, taking bets on this. Right. And really moving into and doubling down in some cases on their plays in the data space, in the alternative fund space? So it's certainly an area to watch and I think is going to really benefit the industry as a whole.

 

Christina McNamara [00:21:47]:

And looking ahead, what is your outlook on the investment management industry over the next few years in general, particularly in terms of any regulatory changes we have.

 

Adam Kanter [00:22:00]:

Coming, you know, from administration to administration? We saw a, what I guess will characterize as a fairly aggressive regulatory agenda under Chair Gensler to now, I guess what I, what I would characterize as a fairly aggressive deregulatory agenda under Chair Atkins. And I think, you know, when I talk to many of my clients, what they really, you know, in their heart of hearts, would they prefer somewhat less regulation? Maybe what they really talk about is certainty. And so I think, you know, what we have ahead of us is a somewhat uncertain regulatory environment and a very complicated one. And you know, we've already seen a number of delays of compliance deadlines for finalized rules this year. We've seen delays in the Form Pfizer reporting requirements related to private funds. We've seen delays in the AML rule for registered investment advisors, and we've seen court decisions involving the securities Lending Rule as well as the short sale reporting rule. And I think what this adds up to so far is a lot of, you know, fund advisors and other investment advisors that are unsure where to best allocate their compliance and legal budgets. Right.

 

Adam Kanter [00:23:22]:

Because you have to plan in advance for these changes. And you know, some of these changes, including some of the form PF compliance delays, were sort of on the eve of the compliance date. And so you have, you know, fund managers that are ready to switch over to the, to the amended form ready to go. And then right before the filing deadline, oh, it's gotten, it's gotten delayed. So, so, you know, it's, it's the, it's not quite the Lucy with the football metaphor, but it's pretty close. And so I think it's really, I think for many of our clients, they need to stay nimble. They need to really be on top of, you know, monitoring for these changes because you don't want to be the only one who doesn't get the memo on, oh, you were, you were spending all of your legal budget in getting prepared for, you know, the changes to the regulation sp privacy rule. Well, what happens if, you know, two weeks from now the SEC decides to delay that too? Well, then, then you, you've wasted your budget or, or at least you, you've spent it earlier than you had to and you could have been working on something else in the meantime.

 

Adam Kanter [00:24:26]:

So I think, you know, it, it is one of these issues where, you know, long term, presumably the, the industry will benefit from, from lower costs associated with some of the deregulatory agenda being pursued by the sec. But it does come at the cost of kind of short term uncertainty, short term, kind of, you know, not necessarily analysis paralysis of being unable to, to figure out where to devote your time and attention. But it does put a lot of pressure on, you know, where they should be focusing when, when there Are so many balls in the air.

 

Jocelyn Lewis [00:25:02]:

Well, Adam, great insights. It's clear that staying ahead in this space requires both strategic fores, adaptability. But before we close, any final thoughts you'd like to share?

 

Adam Kanter [00:25:14]:

I think my real final thought is really just, you know, for all of my clients, you know, the real verdrain is, is kind of just keeping your head on a swivel and keeping mindful of, of course, the North Star is their fiduciary duty to their clients and is putting their client interests ahead of their own. But, you know, as we all kind of keep track and adapt to this, you know, really changing regulatory environment and, you know, just kind of making sure that you're staying on top of developments is, is really key. And that's everything from, of course, you know, looking at what the SEC is doing directly, looking at what the trade associations are doing and how they're engaging. And, you know, I think for many of our clients that are looking for ways to, you know, obviously not during the government shutdown itself, but when the SEC does reopen for business, you know, making sure that they have an opportunity to be heard. Because I think during these times of regulatory upheaval, you know, if you're not talking to the SEC or having your voice heard through, you know, indirectly through one of the trades, then, you know, you're. You're liable to be left behind. And for, for our clients that have, you know, interests that, that differ from each other, you know, certain, you know, certainly some people in the market are going to pull in one direction and some in another. So I think it sort of just behooves everyone to.

 

Adam Kanter [00:26:40]:

To make sure that you're engaging early and often with the regulators. And just staying on top of developments is just so key to, to the business where we are right now.

 

Christina McNamara [00:26:49]:

Thank you so much for tuning into this episode of Private Markets360. We hope you enjoyed our engaging conversation with Adam Kanter, partner in the Investment Management Practice Group at Mayor Brown. Adam's extensive experience in regulatory compliance and investment management has shed light on the evolving landscape of investment advisory and the implications of recent regulatory changes. From discussing the impact of a new market marketing rule to exploring the significance of data quality and the outlook for the industry, Adam has provided us with valuable insights. If you enjoyed this episode, please subscribe to Private Markets360 and leave us a review. Join us next time as we continue to explore the world of private markets and bring you more insight from industry leaders. Until then, keep thinking critically and exploring the opportunities that lie ahead in private markets.