In a triumph for the industry, the U.S. Securities and Exchange Commission decided against outright prohibiting some fees and making it simpler for investors to sue fund managers as it was about to finalize a comprehensive revamp of private equity and hedge fund regulations.
The five-member Securities and Exchange Commission (SEC) panel will vote on the amendments put out last year with the goal of enhancing accountability, fairness, and openness in the private funds sector, which has seen its assets more than double over the previous ten years, according to agency data. Assets worth $20 trillion are managed by the private fund sector. The new regulations forbid private funds from offering some investors special treatment when it comes to redemptions and portfolio exposure and mandate that they provide fee and performance reports on a quarterly basis. Additionally, they would need money for yearly audits. When the modifications were first put forth, SEC Chair Gary Gensler claimed they would help both businesses seeking funding from such funds and their investors, who are often affluent individuals and institutional investors like pension funds. The funds that private fund advisers handle have a significant impact on our economy, he noted at the time. The regulation would demand that fund managers disclose “side letters”—a practice used in the business where funds can give certain investors additional terms—when they are financially significant. It would be strictly forbidden to give some investors preferential redemption terms or in-depth information about portfolio assets. The SEC withdrew on some contentious proposals after major players, including Citadel and Andreesen Horowitz, claimed the agency was overstepping its authority by attempting to forbid long-established fee structures and liability terms, even though the changes represent the biggest overhaul of industry rules in years. The idea of prohibiting fees for non-performed services, such as compliance costs or costs associated with fighting regulatory investigations, was also dropped. Additionally, funds will no longer be prohibited from limiting their liability, which would have made it easier for investors to sue funds. These ideas, according to business associations like the Managed Funds Association and the Alternative Investment Management Association, would have raised liability insurance costs and prevented fund managers from doing certain trades or deals that were viewed as more hazardous. The SEC is exempting current contracts from the new regulations. Prior to the new changes, all contracts between investors and private funds would have to be rewritten.
