The SEC has voted 3 – 2 to go ahead with the adoption of new rules governing private funds.
The rules aim to bring visibility to investors in hedge funds and private equity firms, particularly around fees and expenses, accountability, and fairness.
Whilst the industry has evolved and has become more transparent over the last 10 years, many investors and regulators still believe that such transparency is not sufficient. With the unstoppable growth of inflows from institutional investors, including public pension funds, in the past decade, (see our recent collaborative research report with Alternatives Watch) the rules should be a welcome addition. However, industry groups, including AIMA, opposed some elements, saying they went too far and would have limited benefits for investors.
Following this opposition, the SEC did not proceed with proposals to extend funds' legal liability or to ban side letters, but fund managers will be required to disclose agreements where preferential terms have been agreed. Where other investors may be negatively impacted, some preferential terms will be prohibited.
Following the ruling, Jack Inglis, AIMA CEO, said: “AIMA welcomes many of the Commission’s revisions of the original Private Fund Adviser Rule proposal. The February 2022 proposal contained a number of terms that would have stifled innovation, imposed disproportionate burdens on private fund market participants, and hindered the industry's ability to deliver value to investors in a manner that balances risks and rewards in the ways investors are seeking.
“We note that the final version of the rules reflects many of the concerns raised by AIMA and other industry stakeholders. However, the rules adopted today still contain several areas of concern for AIMA and our global membership, which includes fund managers and investors of all sizes, and the final text will need to be examined in detail to identify where these remain.
“AIMA is reviewing these revisions and will seek clarification from the SEC on certain aspects. We are assessing the full impact that these rules will have on our members and will be discussing our options with AIMA’s governing board.”
The new rules mean private funds will be required to perform or obtain an annual audit for each private fund, issue quarterly fee, expenses, and performance reports, and to disclose certain fee structures. Giving preferential treatment over redemptions and portfolio exposure will also not be allowed.
Where advisers promote secondary transactions, they will be required to obtain a fairness opinion or valuation opinion.
Gary Gensler, SEC Chair said, "Investors, large or small, benefit from greater transparency, competition and integrity. It's not as if some state pension fund benefits from opacity".
The rules will go into effect in 60 days, although some will be phased in depending on the size of the fund. They will apply to new agreements, meaning the industry will not have to rewrite all existing contracts.
The Managed Funds Association industry group said it continues to have concerns that the new requirements will hike costs and curb investment opportunities.
The group will "work with our members to determine the appropriate next steps to protect the interests of alternative asset managers and their investors, including potential litigation," CEO Bryan Corbett said in a statement.
Private fund managers that are concerned about the increased disclosure burden could benefit from a solution to automate the quarterly and annual reporting.
“We’re seeing increased interest in Dasseti Engage from private fund managers who are struggling to meet the demand for fund and company data required of them by investors. We have designed our platform to automate and personalize data management and reporting for fund managers. Our clients have reported better relationships with investors and freeing up time to spend on new mandates and revenue generating tasks.” Said Wissem Souissi, CEO, Dasseti.
Dasseti’s software platforms for institutional investors, consultants, managers and GPs see more than 8,000 registered users responding to over 100,000 questions every year. more managers are using Dasseti as their central communication to respond investment, operational, regulatory and ESG requests.
In anticipation of the rule changes, the team has been building report templates in the platform that will support managers and GPs in meeting these requirements. So, this could be the ideal time for private fund managers in the US to evaluate Dasseti Engage.