US SEC readies vote on regulatory overhaul for private funds

NEW YORK (Reuters) – The U.S. Securities and Exchange Commission is expected on Wednesday to finalize rules overhauling private fund disclosure requirements, banning certain fees and introducing other changes for the industry representing $20 trillion in assets.

The changes, first proposed in February 2022, would require hedge funds and private equity firms to detail all fees and expenses on a quarterly basis, ban charging customers for unperformed services or for adviser examination, and lower the bar for investors to sue fund managers. Fund advisers, even those not registered with the agency, would be prohibited from conflicts of interest or giving any investor preferential treatment without disclosing it.

At the time it was proposed, SEC Chair Gary Gensler said the changes would benefit investors in such funds, typically wealthy individuals and institutional investors like pension funds, and companies raising capital from them.

“Private fund advisers, through the funds they manage, touch so much of our economy. Thus, it’s worth asking whether we can promote more efficiency, competition, and transparency in this field,” he said.

Democratic Senators including Sherrod Brown and Elizabeth Warren have voiced support, saying in a May letter that they address a “critical need for greater transparency” for a sector that has grown in market significance.

Private funds reported holding $20.4 trillion in gross assets by the end of 2022, versus $8 trillion about a decade earlier, according to data available on the SEC’s website.

Industry groups and funds including Citadel LLC have pushed back against the plan, saying the SEC is reaching beyond its authority by scrapping agreed-upon liability terms and banning specific fee models.

“These changes will increase cost, decrease competition and transparency and, as a result, harm investors by giving them fewer opportunities,” Jennifer Han, chief counsel at the Managed Funds Association, said in an interview.

Investors may see higher fees as the liability risk for fund managers increases, some said.

“We don’t see that the SEC is solving anything with this,” said Jack Inglis, CEO of the Alternative Investment Management Association.

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