US SEC Prepares for Vote on Regulatory Overhaul for Private Funds

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The U.S. Securities and Exchange Commission (SEC) is poised to finalize regulatory changes that would revamp disclosure requirements for private funds, restrict certain fees, and introduce other reforms in an industry with assets totaling $20 trillion.

Initially proposed in February 2022, these modifications would necessitate hedge funds and private equity firms to provide comprehensive details about fees and expenses on a quarterly basis. The rules would also prohibit charging clients for services that weren’t delivered and eliminate charges for adviser examinations. Additionally, they would make it easier for investors to take legal action against fund managers. Even unregistered fund advisers would be barred from undisclosed conflicts of interest or giving preferential treatment to specific investors.

SEC Chair Gary Gensler highlighted that these changes are geared toward benefiting investors in these funds, a group often comprising high-net-worth individuals, institutional investors, and companies raising capital.

Gensler stated, “Private fund advisers have a significant impact on our economy. It’s worth examining if we can enhance efficiency, competition, and transparency in this sector.”

Democratic Senators like Sherrod Brown and Elizabeth Warren have expressed support for the reforms. In a joint letter in May, they emphasized the “critical need for greater transparency” in a sector that has gained substantial market importance.

According to the SEC’s data, private funds reported holding $20.4 trillion in gross assets by the close of 2022, a remarkable increase from around $8 trillion a decade earlier.

Industry associations and funds, including Citadel LLC, have pushed back against the proposed changes. They argue that the SEC is overstepping its authority by altering agreed-upon liability terms and prohibiting specific fee structures.

Jennifer Han, Chief Counsel at the Managed Funds Association, commented, “These changes will escalate costs, curtail competition and transparency, ultimately harming investors by limiting their opportunities.”

Some analysts speculate that fund managers may pass on the increased liability risk in the form of higher fees.

Jack Inglis, CEO of the Alternative Investment Management Association, expressed his skepticism, stating, “We don’t believe the SEC is effectively addressing the underlying issues with this approach.”

In conclusion, the SEC’s upcoming decision on regulatory changes for private funds underscores the ongoing debate about striking a balance between transparency, competition, and investor protection in this thriving sector.

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