Private fund advisers to spell out fees, performance under new U.S. SEC proposals (updated)
09/02/2022 16:42
(Adds reaction)
By Katanga Johnson
WASHINGTON, Feb 9 (Reuters) - The U.S. Securities and
Exchange Commission (SEC) on Wednesday voted to propose
heightened regulations meant to scrutinize how private fund
advisers charge fees to investors and measure fund performance.
The rule changes, which must undergo public consultation
before they can be adopted, would require private fund advisers,
such as private equity firms and hedge funds, to disclose to
investors quarterly details about their fees and expenses, in a
bid to shed light on the rapidly growing market sector.
An SEC-registered fund adviser, under the proposal, would
also have to obtain annual audits for each private fund under
management, as well as disclose so-called "fairness opinions"
that summarize certain business relationships.
The measures would also seek to bar advisers from activities
the SEC deems "contrary" to the public interest and investor
protection, while also prohibiting preferential treatment unless
disclosed to current and prospective investors, it said.
Such contrary behavior includes an adviser seeking
reimbursement or limitation of its liability for a breach of
fiduciary duty and granting preferential treatment for certain
investors regarding information about portfolio holdings or
exposures, among other behaviors, the SEC said.
Armed with billions of dollars, such firms took advantage of
what had been a record 2021 for mergers and acquisitions.
Private equity buyouts surged 133% to $818 billion in the
first nine months of 2021 as investment firms rushed to deploy
cash, often paying rich prices to take assets off the public
markets, according to Refinitiv data.
Some firms banded together into "club deals," in what some
market watchers said could be a growing trend.
SEC Chairman Gary Gensler has said investors should have
more insight into such mega deals. The SEC voted 3 to 1 in favor
of the proposed rules at a Wednesday open meeting.
New rules are essential for private funds -- like hedge
funds, private equity funds, venture capital funds and liquidity
funds -- because better visibility must match their growth in
size, complexity and number, Gensler said of the sector that has
nearly $18 trillion in gross assets.
"Beyond their size, though, these funds matter because of
what, or who, stands on either side of them...the advisers,
through the funds they manage, touch so much of our economy.
It's worth asking whether we can promote more efficiency,
competition and transparency in this field," he added.
Private fund trade groups, including the American Investment
Council and the Managed Funds Association, criticized the SEC's
proposal as "unnecessary" and "misguided," while emphasizing
existing industry standards that put investors first.
"We are concerned that these new regulations...will not
strengthen pension returns or help companies innovate and
compete in a global marketplace," said Drew Maloney, who leads
the American Investment Council.
Bryan Corbett, who leads the group that represents hedge
funds, the Managed Funds Association, said the proposed changes
would "harm the most sophisticated investors, including
pensions, endowments and foundations, who rely on these funds to
serve their beneficiaries."
FASTER SETTLEMENTS
The commission also proposed a rule that would reduce the
time between the execution of a securities transaction and its
settlement from two business days after a trade date to one
business day. The proposal would also mandate new recordkeeping
and contract transparency between broker dealers, investment
advisers and their clients.
The move would be the Wall Street regulator's most direct
response yet amid a range https://www.reuters.com/business/finance/how-sec-is-cracking-down-equity-market-after-gamestop-saga-2022-01-27
of possible policy changes meant to address last year's
frenzied meme stock trading. urn:newsml:reuters.com:*:nL1N2RN1F7
Also, the agency voted to propose requiring advisers and
funds to adopt and implement written policies to mitigate
cybersecurity risks.
"The SEC's proposal rightly recognizes that moving to
(one-day) clearing is the correct step for our financial
system," said Eric Pan of the Investment Company Institute,
adding that the group would work with the agency on the details
to ensure its members make the shift to benefit of all
investors.
(Reporting by Katanga Johnson in Washington; Editing by Chizu
Nomiyama and Andrea Ricci)
((Katanga.Johnson@tr.com; 202-579-4165; Reuters Messaging:
@kjspeakstruth))