The U.S. on Wednesday was set to overhaul rules for private equity and hedge fund, but in a victory for the industry, the securities regulator did not make it easier for investors to sue fund managers and it also did not ban arrangements that make it easier for some investors to cash out than others.
The Securities and Exchange Commission's (SEC) five-member panel will vote on the changes aimed at increasing transparency, fairness and accountability in the private funds industry which has more than doubled its assets over the past decade, agency data shows. Private funds industry manages around $20 trillion in assets.
The new rules would require private funds to issue quarterly fee and performance reports, disclose certain fee structures, and bar giving some investors preferential treatment over redemptions and portfolio exposure. They would also require funds to perform annual audits.
When discussing the changes this morning, SEC Chair Gary Gensler said they would benefit investors in such funds, typically wealthy individuals and institutional investors like pension funds, and companies raising capital from them.
"Today’s final rules will promote private fund advisers' efficiency, competition, integrity, and transparency," he said.
Advocacy groups have accused the private fund industry of unfair, conflicted and opaque practices which hurt everyday Americans who invest in such funds through their pensions.
While the changes mark the biggest overhaul of industry rules in years, the SEC rowed back on some contentious proposals after major players, including Citadel and Andreesen Horowitz, argued 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.
Industry groups such as the Managed Funds Association and Alternative Investment Management Association had said those proposals would have increased costs related to liability insurance and prevent fund managers from engaging in certain trades or deals seen as more risky.
The rule would 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 would be outright prohibited.
These SEC rules will only apply to new deals, meaning the industry will not have to re-write all existing contracts as some had feared under the original proposal.
The rules will be effective in 60 days. Some rules will have a staggered adoption, depending on the size of the fund.
