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00:00I spend so much of my time talking to people on Wall Street about how they can create new products,
00:05how they can sell those products, and how they can push them to a sort of a new breed of
00:08investors.
00:09There's a regulatory side and a legal side of this that still hasn't been resolved.
00:13And I do wonder, you know what's on the table at the SEC, you know what's on the table at
00:17some of
00:17these regulatory agencies. Are we going to actually see those rules actually come to fruition anytime
00:23soon? I mean, it'll take time if we get there, right? It won't be an open market, sort of
00:27everybody can get in. And what you're seeing is market participants be clever about it. So right
00:33now, rules will take at least another 12 months from now to the extent they even get through.
00:37So what can we do right now? Markets are waiting to be flooded here. So instead, you have products,
00:43evergreen products, retail that are sort of retail focused, that will permit a more robust distribution
00:50channel. So you're switching from just institutional investors to maybe high net worth individuals
00:54because they're coming through their financial advisor, their sort of rep that can bring a
01:00different product to them. And so for now, that's where this will live. And that market
01:04is booming. These evergreen products are, you know, every sponsor is trying to think about
01:08how to roll one out to a new population of investors.
01:11But there's a big question right now about the liability, who sort of has the burden or onus
01:18if something goes wrong. And I think you go back to sort of private credit days, even the early
01:22private equity days. Those were basically contracts. And they were very well spelled out
01:25by two basically institutional investors or corporations and their lenders. And the terms
01:31are very clear. And you can sort of see what was at stake. How does an individual investor
01:37sort of come into that environment and know what they're getting into? And is it his or her
01:43responsibility to know what they're getting into?
01:45To an extent, it is a little bit their responsibility. But luckily, there is a financial advisor who has a
01:49fiduciary duty there in the mix. Because otherwise, how is someone, you know, the premise of the private
01:54markets is you'll fend for yourself and you have the sophistication to figure out. But what if it's
01:58actually not true? And what if they can't figure it out? And are they just cut out of the market,
02:02which
02:02is what the answer has been so far. This is not for you to participate in. And so this sort
02:07of move to
02:08bring more retail access is trying to buttress balance this point of can investors understand what the
02:15product is. We've seen, you know, a sort of misunderstanding of what these evergreen products
02:20can be that the gates dropping a few months ago, as we talked about on the panel, is a feature,
02:25not a bug.
02:26It's meant to protect the investors in the fund when there's sort of a run on the fund. But did
02:31investors
02:31understand that? Maybe, maybe not. You know, I think it's clear in the documents what's permitted. But ultimately, when an
02:36investor is reading it and a financial advisor is recommending a product, how clear is that disclosure meeting the end
02:44result? Because the standard PPMs aren't aren't digestible to individual investor. I mean, you've
02:51been on both sides of this, obviously, at Kirkland and Nellis now as a lawyer, but also at the SEC.
02:56Give me a sense here as to what you think the SEC wants to do, not necessarily in the specifics,
03:01but
03:01overall, what do you think is their overarching goal in regulating private markets? I think it changes from
03:06administration to administration, right? I mean, clearly, this administration is looking way more at
03:11expanding access. And they'll do it in a reasonable way. They'll understand, you know,
03:15no matter how sort of open you want the markets to be, there are structural inefficiencies that exist in
03:20this market that can't just be open to every retail investor. And so balancing how do we do this in
03:26a
03:26responsible way while still allowing this to be accessible to investors is really where this SEC is
03:32looking to pressure test. I think in prior commissions, when this idea of democratization has come up, it's been
03:39less amenable to trying to change rules. Because what if something poor happens here? What if there is
03:46sort of a market meltdown and it's you're back to 2008 and now it really is across retail investors
03:51that are experiencing this and their 401ks are decimated with retirement funds? And then the claim
03:57is we didn't understand the product. And to your point, who's liable at that point?
04:01Well, as the door widens a bit for 401ks, I understand why the creators of these products are pushing
04:08them. But what about the actual plan sponsors themselves? Are they as enthusiastic about this
04:14and are they actually ready to actually maybe start to integrate? Two different questions too,
04:19right? I think that theoretically, yes, the returns are there for private equity. So it makes sense that
04:22they would want their portfolio to have access to it. But there is a liability shield there that,
04:26you know, any fiduciary is sort of at a black cloud over the head thinking about what plaintiff might
04:34come out of the corner. If I've taken a riskier asset, then sort of staying right down in the
04:38middle. But, you know, risk versus reward there of trying to sort of chase yields and chase returns,
04:43there is an incentive to want to go find these private market exposures.
04:48What about disclosure overall? As you look at some of these deals right now,
04:53are the disclosures in your view strong enough? Do they need to be changed in some way?
04:58I think the disclosures are there. It's comprehension, which is sort of a different
05:02story. And the SEC has for many years thought really about what does layered disclosure look
05:06like? How do we make this disclosure plain English? Less, you know, less like I might draft
05:10something and more that is consumable by my parents, so to speak. So that's always a desire,
05:16I think, in the SEC for regardless of who's in charge, has been focused on that because there's
05:20a recognition of if disclosure is the best sunshine or disinfectant, then we need to be able to make
05:25it just understandable and not just reams of paper. The current sort of status of certainly private
05:31equity and private markets is just kitchen sink disclosure. Describe everything and make sure the
05:37investor has all the information. That's just not feasible for an institutional or for a retail
05:42investor to really consume and digest to understand the plain risks that exist in these products that
05:48are more liquid than they think or more volatile than they think and have more conflicts than they
05:52probably think. Well, I am curious, though, about the idea, though, of some of the changes that the
05:56SEC are proposing, some of them having to do with the rules of disclosure of I had funds basically
06:01raising the threshold. So the idea is that only the largest of the largest funds will actually have
06:05to make some of these disclosures to the same extent. And then on the flip side of that, the idea
06:09of the wealth test and making sure it was suitability test. The idea as to whether we should be looking
06:15at a wealth or income threshold to determine whether somebody would actually have the knowledge,
06:21institutional knowledge to actually be able to interpret it. Yeah. I mean, look, our securities
06:24laws are by definition paternalistic of saying this group is not ready for private markets and this
06:29group is. And as we're finding ways to expand it, you know, that sort of have and have nots is
06:35going
06:35to have to marry itself to finding a way to actually meet because this train is coming, right? This is
06:41a
06:41move that I think for the last 30 years the markets have performed how they've performed. There's a real
06:45desire from fiduciaries as well as institutional investors or individual investors to have access
06:51to these private markets. So how do we do this properly? How do we make sure they understand
06:54what they're actually investing and how it fits into their overall portfolio?
06:59I do have to ask you right now about the divide between what we're seeing on the regulatory side
07:04and what we're maybe not seeing on the legislative side. Some of the regulatory proposals out there
07:09right now to a certain extent would be, if not temporary, more of a stopgap, maybe a bridge to something
07:15that's legislative and permanent. Does that raise fears among plan sponsors and other folks from
07:23actually pushing into this if they don't have the certainty that if the SEC puts something on the
07:27books today, it's not going to be rescinded in a new administration absent Congress actually
07:32enshrining it into law? I think it's a great point, right? We've seen the sort of wild swings between
07:36a Gensler SEC and now an Atkins SEC of sort of rules being just snatched from the jaws of victory
07:43or
07:44however you want to sort of perceive them. But that's a real fear of can a rule change? A rule
07:48can be rescinded. It can be stopped. How do we make sure we have some consistency here? And
07:53from administration to administration, the financial markets need stability more than anything,
07:57right? Regardless of what position you want to take. Stability is going to be the answer to sort of
08:01leveling things out over time. Products take time to develop. They will take months,
08:05not years, to sort of really get through the distribution channels and get into plan sponsor
08:10options. So great point to try to figure out what's the answer. You know, is it going to be
08:15congressional activity to sort of enshrine this as this is how it will go? Or if it's sort of
08:19reasonable rules that are being rolled out that maybe that, you know, another administration is
08:23not going to take a negative approach to it and recognize this is better than nothing and we need
08:28to sort of stay stable. And finally, I do just have to ask you about where we're at right now
08:32at the
08:33Center for the Financial Markets of Quality Conference. And the idea of what the intent of
08:39this whole center was to be to be that bridge between what's going on in Washington and what's
08:43going on on Wall Street. Are we having the right dialogue right now? Look, this has been an amazing
08:47conference. It's grown over the years. And Mike Bessaros, it's sort of it's his ethos. Every
08:51conversation I've ever had with him is about it doesn't matter left or right. These are these are
08:55fundamental questions that sort of as a market we need to approach. And, you know, but having both sides of
09:00the aisle, both ideological sides, sort of always discussing these issues is the right start. And
09:04whether or not, you know, you've got future policymakers in these rooms, existing policymakers,
09:09it's great for them to hear what the issues are on an investor level. You know, the SEC's mission is
09:14threefold. We often are focused on capital formation, but investor protection is also right there. So
09:19I think these conversations need to continue happening. And it may not be overnight, but the
09:24sort of theory of regulation can evolve over time.
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