The SEC is pushing for new disclosure rules that would require hedge funds and private equity firms to disclose their quarterly performance along with the (typically hefty) fees they charge to investors.
The agency on Wednesday voted in favor of adopting a string of new rules that would require annual audits of private funds – including family offices like Archegos – while barring certain fees that buyout shops charge, while also barring preferential treatment for certain investors, according to the FT.
Funds affected by these new rules have roughly $18 trillion in assets under management, the SEC said. The move comes at a time when big investors like pension funds and endowments are allocating more money to so-called ‘alternative’ asset strategies, including real estate and infrastructure.
As SEC chief Gary Gensler explained, PE firms and hedge funds touch a wide swath of the economy via the companies in which they invest.
“Private fund advisers, through the funds they manage, touch so much of our economy,” SEC chair Gary Gensler said. “Thus, it’s worth asking whether we can promote more efficiency, competition, and transparency in this field.”
The proposals are among the most stringent yet imposed on hedge funds and PE shops since the passage of the Dodd Frank Act a decade ago, the last time American regulators tried to impose tighter requirements on hedge funds and private equity shops.
“This is a path-breaking moment for the SEC,” said Andrew Park, senior policy analyst at Americans for Financial Reform, a progressive campaign group. “They are making a concerted effort to get their arms around the massive growth of private markets especially over the past decade and to provide investors with the information they need to make sensible decisions.”
Gensler has called for more transparency around private equity and hedge fund fees, which he estimated to be approximately $250 billion a year.
The agency is also seeking to prohibit practices “that are contrary to the public interest and the protection of investors” – even by funds that aren’t registered with the SEC. The procedures in question include charging fees linked to unperformed services, such as accelerated monitoring fees.
SEC commissioners last month voted in favor of proposed rules that would force hedge funds to report immediately when they suffer extreme losses or large investor withdrawals, in a bid to close gaps that were exposed by market ructions last year.
The new rules will likely face serious pushback from the industry.
“It really is a shot across the bow for the industry,” said Adam Kanter, a partner at law firm Mayer Brown, who highlighted the SEC’s new proposed rules around general partnership-led secondary transactions and so-called “side letter” fee arrangements that firms negotiate with investors. “It is targeting somewhat common practices,” said Kanter. He said he expected “to see some vigorous advocacy from the industry against some of these changes.”
Reducing the settlement window would free up funds that brokers are required to deposit at clearing houses to cover any potential losses before a trade has been finalized.
