The SEC’s regulation of the private investment funds industry has generated significant attention and commentary, as well as a fair amount of hand-wringing.  From our perspective as lawyers, however, there is a relatively commonsense explanation for the SEC’s approach.  Rather than acting with a heavy-hand by imposing a comprehensive set of “regulations,” the SEC is implementing its regulatory regime primarily through a combination of examinations, enforcement proceedings, and speeches, with a clear focus on potential and undisclosed conflicts of interest.

The SEC’s regulatory strategy can be described as an attempt to create “community standards” for the private funds industry.  The SEC is establishing standards of conduct by publicly declaring certain practices improper through enforcement proceedings and public statements.  While some might prefer the “certainty” of a comprehensive and detailed set of regulations, the private funds industry is too large and diverse to lend itself to simple rule-making, especially at the beginning of the regulatory process.  Moreover, the most significant drawback (arguably) of the SEC’s current approach—uncertainty—is preferable in most instances to a set of “one size fits all” regulations from a new regulator.