Paper Abstract
96. Benjamin C. Bates, The Cost of Private Fund Regulation, 11/2023.
Abstract: When the Securities and Exchange Commission (SEC) ramped up its oversight of private equity and hedge fund advisers after the Financial Crisis, commenters argued that compliance costs would be far higher than the SEC predicted. In this paper, I test whose prediction was more accurate. I estimate private fund advisers’ compliance costs by measuring their “bunching” beneath an assets under management (AUM) threshold that triggers mandatory registration with the SEC. My estimate reveals that compliance costs for smaller advisers are lower than predicted by many commenters but in line with the SEC’s expectations. I find little evidence that advisers are passing their compliance costs on to investors. I also show that advisers take compliance costs into account when they raise additional capital and that oversight induces advisers to adopt stronger internal controls than they would otherwise, though this effect is relatively small.