The Top 10 New SEC Rules That Empower LPs, As Explained To Eighth Graders

Top 10 Things Fund Managers Need to Know, With Eighth-Grader Explanations

I saw the new piece from Pitchbook today, and thought it was pretty insightful, and it definitely had some key insights about how the pending SEC rules can strengthen LP power in your fund. That said, I didn't really think it was too easily digestible to a room full of 14-year-olds. So, I sat down with my man Jeep (my nickname for Chat-GPT) and we hammered out some distinct and simple explanations for the rules that all of the teenagers in your life will understand.

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1. Prohibition on Preferential Terms: *No Special Treats for Some Friends*  
  - The new rule says you can't give extra candy to just one friend if it means less candy for everyone else. This is to make sure it's fair for everyone. The SEC's concern here is that they want to make sure that fund managers don't give special deals to certain investors (Limited Partners or LPs) that could hurt other investors in the fund.

2. Quarterly Financial Statements: *Report Cards Every 3 Months*  
  - Fund managers have to give a "report card" to their investors every three months. This report card will show how the money is doing.

3. Fairness or Valuation Opinion: *Get a Second Opinion for Big Trades*  
  - If a fund manager wants to make a big trade, they have to ask an expert if it's a fair deal. It's like asking a teacher to check your homework before you turn it in.

4. Liability Rule Removed: *No Blaming Others for Mistakes*  
  - Originally, there was a rule that would have made fund managers get in big trouble if they made a mistake. But that rule got taken out, so they won't get in as much trouble now. Does this mean that there are some things that can go wrong? Heck yeah! There's now less accountability, greater investor risk, trust issues because fund managers aren't being held to the same legal standards as they were before, greater potential for unethical behavior, and if enough fund managers act unethically, there's even potential for market instability.

5. Material Negative Effect: *Be Clear About What's "Bad"*  
  - The new rule talks about things that could be "bad" for investors but doesn't clearly say what "bad" means. It's like a teacher saying "don't be disruptive" but not explaining what that means.

6. Disclosure and Exceptions: *Tell Everyone the Rules*  
  - If a fund manager wants to give special treatment to one investor, they have to tell everyone and offer it to everyone. It's like if a teacher has extra credit, they have to offer it to the whole class.

7. Legacy Provision: *Old Deals Are Safe*  
  - If you made a deal with your friends last year to trade snacks, you don't have to change it because of new cafeteria rules. The same goes for fund managers; old deals with investors don't have to change.

8. Transparency in LP-GP Power Balance: *Everyone Knows the Game*  
  - The new rules make it so everyone knows what kinds of deals are being made. It's like if everyone in a game knows the rules, so it's fair for everyone.

9. Additional Reporting Requirements: *Show All the Costs*  
  - Fund managers have to show all the costs involved, like if you have to show your parents all the candy you traded and what you got in return.

10. Restricted Activities and Exceptions: *Some Rules Can Be Bent, With Permission*  
   - Some things that were not allowed before can be okay now if everyone agrees. It's like saying, "Okay, you can trade your dessert, but only if everyone in the family agrees it's fair."

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