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SEC Adopts New Rules to Enhance Regulation of Private Fund Advisers

S.J. Steinhardt
Published Date:
Aug 24, 2023

The Securities and Exchange Commission (SEC) voted to adopt new requirements for private funds, which manage more than $25 trillion in gross assets for pension plans, university endowments and wealthy individuals.

The new rules and rule amendments are intended “to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers and “are designed to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market,” the SEC said in its announcement.

“Private funds and their advisers play an important role in nearly every sector of the capital markets,” SEC Chair Gary Gensler said in the announcement. “By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency. Consistent with our mission and Congressional mandate, we advance today’s rules on behalf of all investors—big or small, institutional or retail, sophisticated or not.”

The final rule limits the ability of private-equity and hedge funds to lure  large investors by offering them special deals, known as side letters, for better terms than those offered to other investors, The Wall Street Journal  reported. The SEC will also require private funds to provide their investors quarterly financial statements detailing their performance and expenses, and to undergo annual audits.

Industry groups that represent hedge funds such as Citadel, Bridgewater Associates and Millennium Management; private-equity firms including Apollo, Blackstone and Carlyle Group; and venture-capital firms such as Andreessen Horowitz, have been opposed to the changes. Bryan Corbett, chief executive of Managed Funds Association (MFA), an industry group, told the Journal that MFA is concerned that the rules “will increase costs, undermine competition and reduce investment opportunities.” MFA’s members will assess the changes and determine whether to move forward with litigation, he added. 

In the 18 months since the SEC proposed the rules, representatives of hedge funds, private-equity firms and venture-capital funds have met more than three dozen times with agency officials, SEC records cited by the Journal show, and they have also lobbied members of Congress to oppose the SEC's plan.

The SEC has softened its stance somewhat on its proposed ban on certain side letters. The original proposal would have required asset managers to disclose a fund’s side letters to all investors before closing a deal. The final rule requires them to disclose only those side letters that involve “material economic terms.”

These and other changes may not dissuade industry groups from suing the SEC, Brian Daly, said partner at law firm Akin Gump Strauss Hauer & Feld who advises hedge funds and private-equity funds, in an interview with the Journal.

“There was a clear effort … to trim back some of the more assertive or aggressive positions to try and find that sweet spot of fulfilling the chairman’s vision and not triggering a litigation challenge,” he said.

More information is available on the SEC's fact sheet.

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