The new, watered down rules are aimed at increasing transparency, fairness and accountability in the industry.
The United States Securities and Exchange Commission has voted to overhaul rules for private equity and hedge funds, but in a victory for the industry, it did not make it easier for investors to sue fund managers and also did not ban arrangements that make it easier for some investors to cash out than others.
The securities regulator’s five-member panel voted 3-2 on Wednesday in favour of a series of changes aimed at increasing transparency, fairness and accountability in the private funds industry, which has more than doubled its assets over the past decade. The industry manages approximately $20 trillion in assets.
The new rules will require private funds to issue quarterly fee and performance reports and disclose certain fee structures while barring giving some investors preferential treatment over redemptions and portfolio exposure. The rules also will require funds to perform annual audits.
The rules will go into effect in 60 days. Some rules will have a staggered adoption, depending on the size of the fund.
SEC Chair Gary Gensler said ahead of the panel’s voting that the changes will benefit investors in these funds, typically wealthy individuals and institutional investors, such as pension funds and companies raising capital from them.
“Today’s final rules will promote private fund advisers’ efficiency, competition, integrity and transparency,” Gensler said, noting that the SEC pulled back from some proposed requirements after receiving industry feedback.
Advocacy groups have accused the private fund industry of unfair, conflicted and opaque practices that hurt Americans who invest in such funds through their pensions.
Watered down rules
While the changes marked the biggest overhaul of industry rules in years, the SEC rowed back on some proposals after major players, including Citadel and Andreessen Horowitz, argued that the agency was overreaching its authority by attempting to bar long-established fee structures and liability terms.
The agency dropped a proposal to bar fees for services that are not performed, such as compliance expenses or costs defending regulatory probes, and scrapped another that would have made it easier for investors to sue funds for misconduct.
The newly approved rules require fund managers to disclose so-called “side letters” – an industry practice through which funds can offer some investors special terms – when they are financially material. Offering some investors special redemption terms or detailed information about portfolio holdings was prohibited.
These SEC rules will apply only to new deals, meaning the industry will not have to rewrite all existing contracts.
Despite the softening of the original proposal, the new rules drew industry pushback.
The Managed Funds Association industry group said it continues to have concerns that the new requirements will raise costs and curb investment opportunities. 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 litigation,” CEO Bryan Corbett said in a statement.