The Securities and Exchange Commission on Wednesday approved a slate of rule proposals to enhance private equity and hedge fund disclosures, shorten the securities settlement cycle and boost cybersecurity requirements for investment advisers and funds.
In a 3-1 vote, with the commission's lone Republican, Hester M. Peirce, dissenting, the SEC proposed a rule to require private fund managers provide investors with quarterly statements detailing information about performance, fees and expenses.
The proposal would also require private fund managers to provide investors with an annual audit for each fund and to obtain a fairness opinion in connection with an adviser-led secondary transaction. Moreover, it would prohibit those managers from engaging in activities that SEC Chairman Gary Gensler said are "contrary to the public interest and the protection of investors," like seeking reimbursement, indemnification, exculpation, or limitation of its liability for certain activities, such as a breach of fiduciary duty. It would also forbid private fund managers from providing certain types of preferential treatment to investors in their funds and all other preferential treatment unless it is disclosed to current and prospective investors.
In support of the proposal, Mr. Gensler said it would improve efficiency, competition and transparency while simultaneously helping investors and companies raising capital from the private funds.
Bryan Corbett, president and CEO of the Managed Funds Association, said in a statement that the private funds proposal will "harm the most sophisticated investors, including pensions, endowments and foundations, who rely on these funds to serve their beneficiaries. The agency's treatment of private funds as if they were serving retail investors is misguided."
The private equity industry supports transparency and disclosure, said Drew Maloney, president and CEO of the American Investment Council, in a statement. However, "We are concerned that these new regulations are unnecessary and will not strengthen pension returns or help companies innovate and compete in a global marketplace," he added.
The SEC has been particularly focused on private funds in recent weeks. In January, its division of examinations issued a risk alert stating that private equity and hedge fund managers have demonstrated conflict of interest and due diligence deficiencies. That same month, the commission in a 3-1 vote proposed amendments to its Form PF to require private fund managers to file reports within one business day of events that indicate significant stress at a fund that could harm investors or signal risk in the broader financial system.
In a separate vote at Wednesday's meeting, the SEC unanimously approved a proposal that would shorten the securities settlement cycle to T+1 — settling a trade one business day after it is executed — from T+2, or two business days. The proposed move, which has industry backing, is aimed at reducing the credit, market and liquidity risks in securities transactions faced by market participants and U.S. investors.
"We welcome the proposal today from the SEC supporting this acceleration of the settlement cycle and look forward to reviewing and commenting as the industry continues it work to follow our roadmap to T+1," said Kenneth E. Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association, in a statement. SIFMA, along with the Investment Company Institute and the Depository Trust and Clearing Corp., published a report in December recommending the shift to T+1 by 2024.
"The SEC's proposal rightly recognizes that moving to T+1 is the correct step for our financial system, and now we need to make sure the details are right," said Eric J. Pan, president and CEO of the Investment Company Institute, in a statement.
And in another 3-1 vote with Ms. Peirce dissenting, the commission approved a proposal to require investment advisers and funds to adopt and implement written cybersecurity policies and procedures designed to address cybersecurity risks that could harm clients and investors. The proposed rules would also require advisers to report significant cybersecurity incidents affecting the adviser or its fund or private fund clients to the commission on a new confidential form.
The comment periods for all three proposals will be open for 60 days following publication on the SEC's website or 30 days upon publication in the Federal Register, whichever period is longer.
