Maureen Quill, executive director of registered funds, UMB Fund Services
What is the broad context for the reemergence of the 1940 Act as a topic of industry discussion?
The reason this comes up is that we’re seeing more asset managers from the private investment world moving into the registered fund world and they’re not familiar with the Act. These are not regulations they’ve had to deal with in the past. And can be a bit of a shock when they come into it.
Is the impetus coming from the private funds themselves who want to broaden their investor base or is it the mutual funds looking to extend the range of assets available to them?
It’s more from the private funds wanting to expand their distribution base. Typically, they’ve looked to attract endowment funds and high net worth individuals, but with registered funds, they can broaden their market and reach mainstream investors.
In your experience, what is it about the registration process that most surprises people who have not had previous exposure to it?
Given their traditional investors, the private fund environment is much less regulated. It doesn’t have the same constraints around it. These asset managers are used to operating in a different world.
By way of analogy, my son was very athletic in high school. He played American football and then in the middle of the winter, he’d switch to basketball. He could play both well. However, they are different games, therefore have different rules. Football is very much a contact sport and he’s a big guy. He was rewarded for being physically aggressive. For the first few games of the basketball season though, he’d quickly rack up fouls and the coach would put him on the bench, telling him, “Remember, you’re playing basketball. You can’t be the big guy knocking everyone around. That’s not how this game is played. And I need to get you playing by the rules of this game.”
For private funds, the registered world is a new game. There’s a new set of rules. They’re not optional. You can’t win the game if you aren’t playing by the rules of the game.
What’s your advice to private funds who want to get their ‘head in the game’?
To oversimplify, there are five things you’ve got to do. First, put an infrastructure team in to support the product. Second, you have to meet the deadlines and the regulatory requirements. Third, all shareholders need to be treated equally, which isn’t the case in the private fund world. Fourth, you need to be aware of the tax consequences of the fund’s investments because it trickles down to the investors. And fifth, you’re going to need a qualified custodian. In the private world a qualified custodian may not be required.
We’ve been able to help private fund managers with interval funds, tender-offer funds and other registered fund structures that suit their target markets. As long as you understand the rules, and play by them, you can be successful. But if you keep fighting them – and what we’ve seen is some people do try to fight them and find ways around them and spend legal time/money trying to do that – it’s a no-win situation.
If you are going to go into it, go into it with eyes wide open and understand the game you’re playing. You can improve your chances of success and save time, money and energy by working within the rules and taking on board the advice of your service provider partners.
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