The U.S. Securities and Exchange Commission (SEC) is set to adopt new rules that will require private equity and hedge funds to disclose their quarterly performance, fees, and expenses in a meeting scheduled for Wednesday.
Increased Transparency and the Ban on Side Letters
In addition to the disclosure requirements, these rules will also prohibit the use of side letters. These are agreements made between specific investors and the fund, granting them preferential treatment.
The Growing Importance of Private Funds
SEC Chair Gary Gensler emphasized the expanding significance of private funds in the U.S. economy during a speech in May. He highlighted that these advisors now manage a staggering $25 trillion in assets. This amount has surged from $1 trillion in 1998, surpassing the scale of the entire U.S. banking sector.
A Vital Role in Capital Markets and for Investors
Gensler acknowledged the fundamental role played by the private fund industry across all sectors of the capital markets. He made these remarks while addressing the Managed Fund Association, a prominent industry group representing private funds. Furthermore, he emphasized that these funds are essential for various investors such as retirement funds and endowments. Gensler further noted that behind these entities are individuals from diverse backgrounds, including teachers, firefighters, municipal workers, students, and professors.
New Disclosure Requirements for Private Fund Advisers
The Securities and Exchange Commission (SEC) has introduced new disclosure requirements that will impact registered private fund advisers. However, exempt advisers, who typically manage assets under $150 million, will be exempt from these regulations.
Under the new rules, all fund advisers will be required to comply with a ban on side-letter agreements. However, any pre-existing agreements for preferential treatment will be given "legacy status" and can continue to be maintained.
Critics argue that these new regulations will increase costs for private fund managers, which could ultimately be passed on to investors. There are concerns that this could lead to a reduction in competition and potentially encourage consolidation within the industry.
Bryan Corbett, President and CEO of the Managed Funds Association (MFA), expressed his concerns about the potential impact of these rules. In a recent statement, he hinted that the MFA may take legal action against the SEC if the rules are adopted.
Corbett emphasized that these changes would not only increase costs but also limit investment options. He believes that it would make it more challenging for pensions, foundations, and endowments to diversify their portfolios and achieve their desired returns. Additionally, he criticized the SEC for proposing these changes without sufficient analysis of their impact on investors and markets.
The final decision on whether to adopt these proposals will be made by the SEC during a meeting scheduled to commence at 10 a.m. Eastern time.