The SEC requires hedge funds and private equity funds to disclose more information about their funds and submit to annual reviews

Text/Jason Bisnoff

Hedge funds and private equity funds are always less scrutinized than mutual funds and public companies. Previous explanations for their relative lack of transparency have been that the investors in these funds are sophisticated and know how to navigate the alleys of Wall Street.

However, as these alternative funds continue to expand their cash sources to investors who may not be familiar with the associated risks, the U.S. Securities and Exchange Commission (SEC) voted Wednesday to force the funds to disclose their equity positions, results and expenses on a quarterly basis and undergo annual audits.

Brian Daly, a partner at Akin Gump Strauss Hauer & Feld, said: "This is a huge change in the SEC's approach. This bodes well for more disclosure of the financial operations of private funds, and these disclosures will increasingly approach the disclosure requirements of mutual funds. "

The move comes 10 months after SEC Chairman Gary Gensler took office, who had promised more government action to protect investors. As head of the Obama-era Commodity Futures Trading Commission (CFTC), Gensler experienced firsthand the aftermath of the 2008 global financial crisis, so he led the CFTC in drafting dozens of rules to regulate the chaotic financial derivatives market.

Gensler now brings the $18 trillion private fund market and its more than 5,000 registered advisors under its jurisdiction. These pools have hundreds of pension funds as limited partners, including pension accounts for civil servants such as police, fire and teachers. Under the new rules, these groups will have more information about their investments. According to the U.S. Securities and Exchange Commission, they pay a total of $250 billion in annual money management fees.

Gensler said in a statement: "Private fund advisors, through the funds they manage, touch many dimensions of our economy. It is therefore worth asking whether we can promote greater efficiency, competition and transparency in this area. "

Under the new rules, private funds managed by Wall Street private equity giants Blackstone, KKR and Carlyle Group will not be allowed to negotiate preferential terms with certain investors. According to the SEC, they will be barred from conducting compensation programs that have conflicts of interest and are "contrary to the public interest and protect investors."

Two Democrats on the committee, along with Gensler, voted in favor of the new rules, while the only Republican voted against it. There is currently a Republican vacancy on the committee.

Hester M. Peirce, the only Republican on the committee, said she feared the rule would "hinder capital formation" and undermine the SEC's mission to protect small investors.

"The SEC considers it wise to divert some of the resources that protect retail investors to protect these wealthy investors, even though these investors are represented by mature and experienced investment experts in pension and retirement funds," she wrote. "These rich, well-represented investors are able to protect themselves, and our resources are best spent on protecting retail investors."

Now, the regulation will accept a public comment period of at least two months before the final rule is issued, but it is expected to be implemented.

Translated by Vivian

School Li Yongqiang