The Securities and Exchange Commission voted on Wednesday to reform private equity and hedge fund rules, but in a victory for the industry it did not make it easier for investors to sue fund managers, nor did it ban arrangements that make it easier for some investors to cash out than others.
The five-member Securities Regulatory Commission voted 3-2 in favor of a series of changes aimed at increasing transparency, fairness and accountability in the private fund industry, which has more than doubled in assets over the past decade. The industry manages about $20 trillion in assets.
The new rules require private funds to issue quarterly reports on fees and performance and to disclose certain fee structures while preventing certain investors from being given preferential treatment over portfolio redemptions and exposure. The rules also require funds for annual audits.
The rules will take effect in 60 days. Some rules will be adopted gradually, depending on the size of the fund.
SEC Chairman Gary Gensler said before the committee’s vote that the changes would benefit investors in these funds, usually wealthy individuals and institutional investors such as pension funds and companies that raise capital from them.
“Today’s final rules will enhance private fund advisors’ competency, competition, integrity and transparency,” Gensler said, noting that the SEC backtracked on some of the proposed requirements after receiving industry feedback.
Advocacy groups have accused the private fund industry of unfair, inconsistent and opaque practices that harm ordinary Americans who invest in such funds through their pensions.
While the changes represent the biggest overhaul of industry rules in years, the SEC backed away from some proposals after major players, including Citadel and Andreesen Horowitz, argued that the agency was overreaching its authority by trying to ban long-established fee structures and liability clauses. long. .
The agency dropped a proposal to ban fees for services that are not performed, such as compliance expenses or costs for defending regulatory investigations, and struck down another proposal that would have made it easier for investors to sue funds for misconduct.
Newly approved rules require fund managers to disclose so-called “side letters” – an industry practice by which funds can offer special terms to certain investors – when they are financially significant. It is forbidden to offer special redemption conditions to certain investors or detailed information about portfolio holdings.
These SEC rules will only apply to new deals, which means the industry won’t have to rewrite all existing contracts.
Although the original proposal was watered down, the new rules sparked industry opposition.
The Managed Funds Association industry group said it still had concerns that the new requirements would drive up costs and limit investment opportunities. CEO Brian Corbett said in a statement that the group “will work with our members to determine the appropriate next steps to protect the interests of alternative asset managers and their investors, including potential lawsuits.”