Page 13 - Investment Advisor January/February 2022

markets,” the agency said, adding that PRIVATE EQUITY AND average before the buyout, it becomes on
its proposed amendments are designed, ADVISOR MISCONDUCT par with the industry average after the
in part, to address concerns about prime A recently released study found that buyout,” the study explains.
and tax-exempt money market funds private equity-backed RIAs had a 147% The increase in misconduct “is stronger
highlighted by these events. increase in the percentage of their advi- in firms with higher post-buyout growth
Gensler said that the plan is designed sors committing misconduct and 200% in assets under management per adviser
“to reduce the likelihood of runs on increase in the average number of mis- and is concentrated in firms whose clients
money market funds during periods of conduct incidents after the ownership include retail customers,” the report states.
stress. They also would equip funds to change. The research released by the “Our results suggest a tension between
better meet large redemptions, address- University of Oregon examined whether advisory firms’ profit motive and ethical
ing concerns about redemption costs ownership by private equity firms encour- business practices, especially when cus-
and liquidity. Given the broad reach of ages or deters financial misconduct. tomers are financially unsophisticated.”
short-term funding markets, these pro- The authors analyzed the records of The authors note that PE firms have
posals speak to our remit to maintain individual advisors around buyouts of also “shown a keen interest in the finan-
fair, orderly, and efficient markets.” investment advisory firms by private equity. cial advisory business in recent years.”
The proposed amendments would “Our estimates suggest that private According to research by the M&A con-
increase liquidity requirements for equity ownership leads to an increase of sultant DeVoe & Co,, PE firms partici-
money market funds to provide a more 147% in the percentage of the acquired pated in 5% of all registered investment
substantial liquidity buffer in the event firm’s financial advisers committing advisory firm merger transactions from
of rapid redemptions. misconduct,” the study states. “While 2013 to 2019 and accounted for 26% of
The plan would also remove provisions the misconduct rate of the acquired the deals as measured by assets under
in the current rule permitting or requiring firms is only about 40% of the industry management, the report states.
a money market fund to impose liquidity
fees or to suspend redemptions through a
gate when a fund’s liquidity drops below IRS Warns of Bumpy Tax Filing Season Ahead
an identified threshold. “These provi- The Internal Revenue Service began accepting and processing 2021 tax year
sions appeared to contribute to inves- returns in late January, although IRS Commissioner Chuck Rettig warned that “the
tors’ incentives to redeem in March 2020 pandemic continues to create challenges” for the tax filing season and urged tax-
as some funds’ reported liquidity levels payers to take steps to mitigate processing and refund delays.
declined,” the agency stated. “Planning for the nation’s filing season process is a massive undertaking, and
To address concerns about redemp- IRS teams have been working non-stop these past several months to prepare,”
tion costs and liquidity, the proposal Rettig said in a statement. “Filing electronically with direct deposit and avoiding a
would require institutional prime and paper tax return is more important than ever this year.”
institutional tax-exempt money market Rettig urged “extra attention to those who received an Economic Impact
funds to implement swing pricing poli- Payment or an advance Child Tax Credit last year. People should make sure they
cies and procedures that would require report the correct amount on their tax return to avoid delays.”
redeeming investors, under certain cir- The filing deadline to submit 2021 tax returns or an extension to file and pay
cumstances, to bear the liquidity costs of tax owed is April 18, instead of April 15, for most taxpayers. “The due date is April
their redemptions. 18, instead of April 15, because of the Emancipation Day holiday in the District of
In other news, Gensler told CNBC’s Columbia for everyone except taxpayers who live in Maine or Massachusetts,” the
“Squawk Box” in January that the agency IRS explained.
Evelyn Hockstein/Reuters/Bloomberg ciency in the private fund space,” with have until Oct. 17 to file.
plans to “take up again a project around
Taxpayers in Maine or Massachusetts have until April 19 to file their returns due
driving greater competition and effi-
to the Patriots’ Day holiday in those states. Taxpayers requesting an extension will
the SEC proposing “some rules to drive
Rettig noted that IRS employees continue to work hard on “critical areas affect-
more transparency and competition.”
ed by the pandemic,” including processing of tax returns from last year and record
In the new year, the SEC also is con-
levels of phone calls. Online resources should be used before calling. Last filing
sidering proposing amendments to
season, as a result of COVID-era tax changes and broader pandemic challenges,
Form PF, the form on which advisors to
the IRS phone systems received more than 145 million calls from Jan. 1 – May 17,
private funds report certain information
more than four times more calls than in an average year, the IRS said.
about those funds to the commission.
JANUARY/FEBRUARY 2022 INVESTMENT ADVISOR 11