The Securities and Exchange Commission’s (“SEC”) newly adopted rules for the private fund industry marks a major overhaul for the rapidly growing industry, which has more than doubled its assets over the past decade.
On Wednesday, the U.S. securities regulator’s panel voted 3-2 to implement the new rules aimed at increasing transparency, fairness and accountability in the private funds industry, which manages around $20 trillion in assets.
The new proposal will require players like Blackstone Inc. BX, The Carlyle Group Inc. CG, Apollo Global Management, Inc. APO, KKR & Co. Inc. KKR and other private funds to issue quarterly fee and performance reports, and disclose certain fee structures.
The new rule also puts limits on secret side deals that give better terms to some investors. Funds will be required to perform annual audits as well.
After the panel voted in favor of the new package, the SEC chairman, Gary Gensler, 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, while some will be phased in depending on the size of the fund. Also, the rules will apply to new agreements so that the existing contracts will not have to be rewritten.
The initial proposal was put forward in February 2022. Since then, various industry groups have strongly opposed the proposal, saying that institutional investors should be free to make their deals with fund managers. The groups felt that tighter regulation would restrain innovation and increase expenses.
Thus, keeping in mind the above-mentioned fears, the final proposal has been modified to an extent. The SEC did not proceed with proposals that would have expanded the funds’ legal liability.
It dropped a proposal to bar fees for services that are not performed, such as compliance expenses or costs defending against regulatory probes, and scrapped another that would have made it easier for investors to sue funds for misconduct.
Also, the new rules do not outright ban arrangements that allow some investors special terms. Instead, per the new proposal, fund managers must disclose such agreements when they are financially material.
However, the SEC did ban the practice of offering some investors special redemption terms.
In a rapidly growing industry, such tighter regulations are needed to help protect investors. While the new rules are expected to increase costs and curb investment opportunities, they will increase transparency in an industry that has long been criticized for its opacity.
Currently, BX, CG, APO and KKR carry a Zacks Rank #3 (Hold).
Blackstone Inc. (BX): Free Stock Analysis Report
KKR & Co. Inc. (KKR): Free Stock Analysis Report
Apollo Global Management Inc. (APO): Free Stock Analysis Report
Carlyle Group Inc. (CG): Free Stock Analysis Report
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