Private equity firms and hedge funds are facing increasing pressure to be more transparent as the U.S. Securities and Exchange Commission pushes them to provide expansive disclosures on fees and expenses.
The SEC proposal, which the regulator introduced on Wednesday, calls for quarterly reports that include specific measures of performance and that account for all costs. The rules would make an industry known for varying levels of disclosure adhere to strict new standards.
Since taking office in April, SEC Chair Gary Gensler has maintained that private funds’ fees are opaque and too high, presenting a risk to investors such as pension funds. The new requirements would apply to a corner of finance that the regulator says has ballooned to about $18 trillion in gross assets.
“I support this proposal because, if adopted, it would help investors in private funds on the one hand, and companies raising capital from these funds on the other,” Gensler said in a statement. “It’s worth asking whether we can promote more efficiency, competition, and transparency in this field.”
As part of the plan, funds’ financial statements would need to be audited at least annually, and advisers would be prohibited from taking more expenses from portfolio companies than they have agreed upon. Industry lobbyists are already bracing for a fight, arguing that their investors are sophisticated and agree to fees ahead of time.
The plan was backed by Gensler and the agency’s other two other Democrats, Allison Herren Lee and Caroline Crenshaw. Hester Peirce, the lone Republican commissioner, said wealthy and institutional investors that put money into private funds are sophisticated enough to make their own decisions.
“Our resources are better spent on retail investor protection,” Peirce said. “These changes represent a meaningful recasting of the SEC’s mission,” she added.
Drew Maloney, president of private equity lobbying group the American Investment Council, said the regulations may be “unnecessary and will not strengthen pension returns or help companies innovate and compete in a global marketplace.”
The proposed changes would “harm the most sophisticated investors, including pensions, endowments and foundations, who rely on these funds to serve their beneficiaries,” said Bryan Corbett, president and chief executive officer of the Managed Funds Association, which represents the hedge fund industry.
Private equity has expanded dramatically during a decade of low interest rates as pensions and endowments poured money into buyout and credit funds in search of higher returns. Firms often charge investors fees of as much as 2% of money they manage and 20% of profits.
Managers also get paid by charging portfolio companies for services, including consulting, arranging loans and even jet travel by deal makers. Investors without bargaining power to request that information say that leaves them in the dark.
The SEC says the changes would also:
- Require independent opinions for some transactions as a way to limit advisers’ conflicts of interest. This rule takes aim at transactions which usually involve buyout firms shifting investments between different funds they manage. These deals can boost valuations of companies and benefit investors in one fund over those in another fund.
- Prohibit charging fees for services that aren’t actually performed;
- Prevent advisers from limiting liability for breaching a fiduciary duty;
- Ban giving preferential treatment for certain investors;
- Add record-keeping requirements.
Separately, the SEC also proposed shortening to one business day the time allowed for stock trades to settle, from two days currently. The agency said the move was meant to respond to market volatility associated with the COVID-19 pandemic and last year’s wild trading in meme stocks. The agency also put out for public comment a plan that would require investment companies to bolster their cybersecurity.
All three proposals will be subject to a period of public comment. The commission will then hold another vote for the regulations to become final.
