Hedge funds and private equity firms face new requirements to disclose fees and restrictions on giving investors special treatment under sweeping rules the US Securities and Exchange Commission plans to impose on Wednesday.
(Bloomberg) — Hedge funds and private equity firms face new requirements to disclose fees and restrictions on giving investors special treatment under sweeping rules the US Securities and Exchange Commission plans to impose on Wednesday.
The five-member commission is set to vote to require private funds to detail quarterly fees and expenses to investors. Firms also would be prohibited from allowing some favored investors to cash out more easily than others — unless those deals are offered to all other fund investors. It is the latest bid by the SEC under Chair Gary Gensler to tighten its grip on the fast-growing, multitrillion-dollar industry.
Industry groups have said the SEC, under Gensler’s helm, has stepped beyond its authority. The Managed Funds Association recently told members that it could sue the SEC within two weeks of the new regulations being finalized, unless they’re softened significantly from what the agency proposed in February 2022.
It’s unclear whether the industry will view the changes in the final version as sufficiently addressing their concerns — or at least enough to stave off a major legal challenge. In one significant revision, the SEC plans to scrap a provision that would have made it easier for investors to sue fund managers when wagers go sour.
Some of the core measures of the rule remain in place, however. In a bid to crack down on conflicts of interest, the SEC would bar private funds from making any one group of investors shoulder an outsize share of fees beyond their fair share – unless that practice is disclosed.
If firms engineer complex deals to cash out investors and transfer older positions from one fund to another, they will need an independent auditor to ensure investors are getting a fair deal.
The regulator will, however, allow existing arrangements to remain in effect, rather than forcing funds to renegotiate their deals with investors — a measure pushed for by industry lobbyists.
The changes would mark a new era of regulatory scrutiny for private equity firms, which have rapidly expanded amid lighter regulation and as investors search for higher yields. Many now extend far beyond buyouts and into lending, financing critical infrastructure and funding real estate deals.
Private equity firms and hedge funds often charge investors fees as much as 2% of the money they manage and take a cut of 20% of profit. They also collect other charges from investors and the companies in which they invest.
Since taking office in 2021, SEC Chair Gensler has made bringing more transparency to the $17 trillion industry a cornerstone of his rulemaking agenda. He has argued that its fees are opaque, while its footprints across markets merit heightened scrutiny.
The rule has been in the works for years, with investor groups lobbying lawmakers to impose more disclosure rules on private equity and meeting with President Joe Biden’s transition team to make the case for more regulation.
Separately, the SEC will also vote to approve a final rule that would subject proprietary-trading firms to greater regulatory oversight by limiting how many of them can claim an exemption from registering with the Financial Industry Regulatory Authority.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.