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US securities regulators are deciding on an ambitious reform package that would reshape the way private equity, real estate and hedge funds deal with their investors.
The Securities and Exchange Commission on Wednesday will vote on new rules for private funds that would require detailed quarterly reporting on performance and regular audits, while prohibiting secret side deals that give better terms to some investors.
If a majority of the five commissioners vote in favour, it would mark the most significant regulatory change in more than a decade for a global industry with $25tn in assets under management, lawyers said.
“This is industrial policy. The SEC wants to be much more involved in the oversight of these institutions,” said Brian Daly, partner at Akin Gump.
Industry groups have been lobbying against the proposals since they were first put forward in February 2022. They argue tight regulation will stifle innovation, raise expenses and force investors and fund managers to tear up tens of thousands of existing contracts.
The final package going up for a vote addresses some but not all of their concerns. Most notably, it drops the idea that fund managers ought to be liable for “negligence” rather than “gross negligence”, adds an element of “grandfathering” that will mean some contracts can stay intact and phases in most requirements over a one- to two-year period.
But the commission stuck to plans requiring quarterly performance reports with standardised metrics and annual audits.
It also plans to ban treatment that gives some investors favourable redemption rights and additional information about fund holdings. The SEC is also proposing to require disclosure or explicit investor consent in cases in which funds want to pass on compliance costs.
In briefing papers pertaining to the proposed rule, the SEC cited the “increasingly important role” played by private funds and said the reforms were designed to protect investors by “increasing visibility . . . and prohibiting or restricting adviser activity that is contrary to the public interest”.
Several industry groups have suggested they are considering legal action to prevent the rules from going into effect. Financial reform groups support the proposals.
“Ensuring disclosure of critical information to investors, which promotes both capital formation and competitive capital markets, lies at the core of the SEC’s mission,” said Andrew Park, senior policy analyst at the Americans for Financial Reform Education Fund.
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