US securities regulators implement sweeping reforms for private funds industry

In a landmark move, the US Securities and Exchange Commission (SEC) has greenlit an ambitious reform package that brings about significant transformations in how the $27 trillion private funds industry interacts with its investors.  

In a landmark move, the US Securities and Exchange Commission (SEC) has greenlit an ambitious reform package that brings about significant transformations in how the $27 trillion private funds industry interacts with its investors. 

The SEC’s decision introduces substantial alterations to the regulation of private equity, venture capital, and hedge funds. This marks the most comprehensive overhaul in over a decade for this globally expanding industry, which caters to pension funds, universities, and high-net-worth individuals. The reforms address transparency, performance reporting, expenses disclosure, and curbing preferential treatment for certain investors. 

The reform package mandates private funds to provide detailed quarterly performance reports and enhanced disclosures of expenses to investors. Additionally, the package introduces limits on undisclosed preferential arrangements that offer better terms to select investors. Notably, the new rules also attempt to standardize performance metrics for comparison purposes. 

The private funds industry, represented by various industry groups, had strongly opposed these reforms since they were initially proposed in February 2022. Critics contended that the regulatory changes would stifle innovation, inflate costs, and necessitate the renegotiation of numerous existing contracts. Despite industry pushback, the SEC proceeded with its decision to enhance transparency and investor protections. 

The reform package has undergone modifications to address industry concerns. Notably, it eliminates changes to fund liability rules that would have enabled investors to sue for “negligence” rather than “gross negligence.” Furthermore, some proposals regarding preferential treatment and certain fees have been replaced with disclosure requirements. 

The SEC’s reforms aim to create a more transparent and accountable private funds market, with the introduction of standardized performance reporting, curbing preferential arrangements, and increasing cost transparency. While some industry groups have expressed satisfaction that their input was taken into account, they still harbor reservations about potential impacts on innovation and economic environments. 

Read more: https://on.ft.com/3QMnA4t