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U.S. SEC to vote on overhaul for $20 trillion private fund industry

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A flag outside the U.S. Securities and Exchange Commission headquarters in Washington, Feb. 23, 2022.
Al Drago | Bloomberg | Getty Images

The U.S. securities regulator on Wednesday was set to finalize a sweeping overhaul of private equity and hedge fund rules, but stopped short of banning certain fees and making it easier for investors to sue fund managers, in a victory for the industry.

The Securities and Exchange Commission’s (SEC) five-member panel will vote on the changes, proposed last year, aimed at increasing transparency, fairness and accountability in the private funds industry which has more than doubled its assets over the past decade, agency data shows. The private fund industry manages $20 trillion in assets.

The new rules would require private funds to issue quarterly fee and performance reports, disclose certain fee structures, and bar giving some investors preferential treatment over redemptions and portfolio exposure. They would also require funds to perform annual audits.

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.

Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), during an interview in Washington, DC, US, on Thursday, July 27, 2023.
Andrew Harrer | Bloomberg | Getty Images

“Private fund advisers, through the funds they manage, touch so much of our economy,” he said at the time.

The rule would require fund managers to disclose so-called “side letters” – an industry practice through which funds can offer some investors special terms – when they are financially material. Offering some investors special redemption terms or detailed information about portfolio holdings would be outright prohibited.

While the changes mark the biggest overhaul of industry rules in years, the SEC rowed back on some contentious proposals after major players, including Citadel and Andreesen Horowitz, argued the agency was overreaching its authority by attempting to bar long-established fee structures and liability terms.

It also scrapped a proposal to bar fees for services that are not performed, such as compliance expenses or costs defending regulatory probes, and will no longer ban funds from limiting their liability, which would have lowered the bar for investors to sue them.

Industry groups such as the Managed Funds Association and Alternative Investment Management Association earlier said those proposals would have increased costs related to liability insurance and prevent fund managers from engaging in certain trades or deals seen as more risky.

The SEC is carving out existing agreements from the new rules. Earlier, the proposed rules would require investors and private funds to re-write all their contracts.

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