Season 2, Episode 1: Private Markets: Now Serving, Retail

In this season two premiere episode of the Asset Management Corner podcast, Andrew Dean and Chris Mulligan reconnect with former SEC colleague Michael Spratt, who is now a leader at the Investment Company Institute, to discuss the retailization of private funds, among other topics. Andrew and Chris also break down some Marketing Rule updates, including the infamous footnote 590, and this Commission’s little noticed take on so-called shadow trading.

 

Andrew Dean: Hello and welcome to Season 2 of Asset Management Corner. We are your hosts, Andrew Dean and Chris Mulligan — partners at Weil. This podcast covers all things SEC compliance and enforcement. On today's episode we're joined by Michael Spratt, Associate General Counsel at the Investment Company Institute (ICI) and a former leader in the SEC's Division of Investment Management. We're excited for that conversation.

Andrew Dean: But first, Chris — we made it. They said it couldn't be done. We're into Season Two. How do you feel?

Chris Mulligan: I thought we were going to get canceled at the end of Season One. I hadn't seen the Nielsen ratings on us yet, but somehow we made it to Season Two. Now I predict a long period — getting through Season One is the toughest.

Andrew Dean: I'll say — watching the Golden Globes introduce a new podcast category and seeing we were shut out in favor of Amy Poehler — a favorite of mine — was tough. But no Asset Management Corner award this year. That's fine.

Chris Mulligan: It's always next year.

Andrew Dean: At least we have something to aim for. Speaking of things to aim for — a lot has happened since our last podcast dropped in early December. Hope everyone had a great holiday. We have a marketing rule risk alert, marketing rule FAQs, lots going on — activity and exams. Catch us up.

Chris Mulligan: I'll start with the marketing rule FAQ that just came out — it's actually really important. It's about one of the most challenging footnotes in the 2020 marketing rule release. The rule itself doesn't require you to use a model fee; it sets requirements for when you do use a model fee for reporting performance. But footnote 590 said that if the fee to be charged to the intended audience is anticipated to be higher than the actual fees previously charged, the adviser must use a model fee reflecting the anticipated fee to avoid violating the rule's general prohibitions.

Chris Mulligan: That “must” caused a lot of hand-wringing. The marketing rule has seven broad general prohibitions that are open to interpretation. The footnote read like the Commission’s view that you must use a model fee when the advertised product’s fee is higher than fees used in the old product performance — which is difficult, because the baseline belief was that you could always use real performance.

Chris Mulligan: Last week, the SEC’s Division of Investment Management issued an FAQ that helps. It’s not the clearest FAQ in the world, but it gets the job done. It says the SEC staff will review all facts and circumstances around the use of actual fees versus a model fee and the calculation of net performance, including relevant disclosures, when considering compliance with the marketing rule. That clarifies advisors have a range of options. You do not have to recalculate entire performance histories using a model fee. Huge sigh of relief for the industry.

Andrew Dean: An adopting release that size — over 400 pages with more than 1,000 footnotes — you’re going to get a few clarifications. Footnote 590 was definitely one of them.

Chris Mulligan: Right before the holidays, there was also a risk alert from the Division of Examinations about deficiencies related to testimonials, endorsements, and third-party ratings. It walks through disclosures, policies and procedures, and required agreements. The takeaway is clear: the marketing rule remains a top examination priority.

Andrew Dean: We did our last podcast in early December. Things were heating up in the exam space then. Has it died down?

Chris Mulligan: Not at all. Exam activity has exploded. In our universe of clients, there’s almost an exam opening every day. Examiners are diving straight into issues like fees and expenses, affiliated service providers, the marketing rule, and custody — all priority topics.

Andrew Dean: That activity translates to enforcement as well. We’re seeing similar themes: management fees, offsets, hedge clauses, and ongoing litigation like the Panawat “shadow trading” case. The SEC is clearly continuing to litigate priority enforcement matters.

Chris Mulligan: Turning to today’s interview, one of the hottest topics in asset management right now is “retailization.” We’re thrilled to be joined by Michael Spratt, Associate General Counsel at the Investment Company Institute and former Assistant Director in the SEC’s Division of Investment Management.

Michael Spratt: Thanks for having me, guys.

Chris Mulligan: Can you tell us a bit about your role at the SEC and how you saw registered investment companies evolve?

Michael Spratt: The Division of Investment Management regulates investment advisers and investment companies with about 200 people. It includes rulemaking, the Chief Counsel’s Office, the disclosure and accounting office, and an analytics group. I spent most of my time in the disclosure group reviewing new and innovative products, including retail access to private investments.

Andrew Dean: When I was in enforcement, we relied heavily on IM — especially the Chief Counsel’s Office — for technical Investment Company Act issues. Now that you’re at ICI, what is the organization focused on?

Michael Spratt: ICI represents nearly the entire registered fund industry. Our work focuses on public policy, research, conferences, and member committees. One of our top priorities is expanding responsible retail access to private markets, along with ETF innovation and reducing unnecessary regulatory costs.

Chris Mulligan: How are registered funds doing commercially, and what regulatory changes are most important right now?

Michael Spratt: Regulatory leadership changes have been positive. We’ve seen withdrawal of costly proposed rules, renewed exemptive relief, and expanded co-investment flexibility. Commercially, the registered fund space remains innovative and competitive, which benefits investors.

Chris Mulligan: How are registered funds interacting with private funds?

Michael Spratt: Mainly through co-investments and closed-end funds investing in private funds. The SEC moved away from prior staff positions limiting those investments, while emphasizing robust disclosure so investors can make informed decisions.

Andrew Dean: Retailization is clearly coming. How do you see it progressing?

Michael Spratt: There’s been significant progress, but more work remains — including expanding co-investment relief and addressing ERISA-related barriers. Product innovation is strong, and investors now have many options for accessing private investments.

Andrew Dean: Michael, this was incredibly helpful. Thanks for joining us, and we’ll have you back as things continue to evolve.

Michael Spratt: Thanks for having me. It was great seeing you both.

Andrew Dean: That wraps up Season 2, Episode 1 of Asset Management Corner. Thanks for listening.

Disclaimer: The information contained in this podcast is for informational purposes only and does not constitute legal advice. Listening does not create an attorney-client relationship. This podcast may be considered attorney advertising in certain jurisdictions.

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