Private fund advisors set fees and performance under new US SEC proposals

WASHINGTON, Feb 9 (Reuters) – The US Securities and Exchange Commission (SEC) on Wednesday voted to propose tougher rules aimed at examining how private fund advisers charge investors and measure fund performance.

The rule changes, which will face public consultation before they can be adopted, would require private fund advisers such as private equity firms and hedge funds to disclose details of their fees and expenses to investors on a quarterly basis in order to shed light on high-growth funds market sector.

A fund advisor registered with the SEC would also, under the proposal, be required to conduct annual reviews of each private fund it manages and disclose “fairness opinions” summarizing specific business relationships.

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The measures would also seek to bar advisors from activities the SEC deems “contrary” to the public interest and investor protection, while prohibiting preferential treatment unless disclosed to current and potential investors, it said.

Such adverse behavior includes an advisor seeking reimbursement or limitation of its liability for a breach of fiduciary duty and granting certain investors preferential treatment with respect to information about portfolio holdings or exposure, among other things, the SEC said.

Armed with billions of dollars, such companies took advantage of record-breaking 2021 for mergers and acquisitions.

According to data from Refinitiv, private equity buyouts soared 133% to $818 billion in the first nine months of 2021 as investment firms rushed to deploy cash, often paying high prices, to take assets off public markets.

Some firms have joined forces in “club deals,” which some market watchers say could be a growing trend.

SEC Chairman Gary Gensler said investors should have more insight into such mega deals. The SEC voted 3-1 in favor of the proposed rules at an open session Wednesday.

New rules are essential for private funds — such as hedge funds, private equity funds, venture capital funds and liquidity funds — as better visibility must match their growth in size, complexity and number, Gensler said of the nearly $18 trillion sector includes gross assets.

“But beyond their size, these funds are important because what or who is on either side of them … the advisors touch so much of our economy through the funds they manage. It’s worth asking if we can encourage more efficiency, competition and transparency in this area,” he added.

FASTER BILLINGS

At Wednesday’s agency meeting, commissioners will also vote on a possible rule change that would reduce the time between the execution of a securities transaction and its settlement from two business days after a trading day to one business day. The proposal would also mandate new records and contractual transparency between brokers, investment advisers and their clients.

The move would be the most direct response yet from Wall Street regulators amid a slew of potential policy changes designed to address last year’s hectic meme stock trading. Continue reading

The agency will also table a proposed rule that would require consultants and funders to adopt and implement written cybersecurity risk mitigation policies.

Drew Maloney, who heads the American Investment Council, called the SEC’s proposals “unnecessary” and warned of their implications.

“We are concerned that these new regulations … will not strengthen bond yields or help companies innovate and compete in a global marketplace,” Maloney said, adding that the private equity industry “works closely with investors, to ensure they have the information they need to make the best investment decisions.”

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Reporting by Katanga Johnson in Washington; Edited by Chizu Nomiyama and Andrea Ricci

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