The SEC voted to finalize a controversial rule Wednesday that will require increased disclosure from private fund advisers and prohibit certain fee arrangements.
Specifically, the rule will require private fund advisers to supply investors with quarterly statements, including information on fees, expenses and performance; obtain an annual audit for each fund it manages; and acquire a fairness opinion in connection with an adviser-led secondary transaction.
It will also bar advisers from various activities and practices "that are contrary to the public interest and the protection of investors," unless they disclose certain information, or in some cases, receive consent from investors, according to an SEC fact sheet on the rule. The rule prohibits certain types of preferential treatment without disclosing such treatment to current and prospective investors, as well.
The rule passed in a 3-2 vote, with both Republican commissioners voting against it.
Many industry groups have expressed opposition to the rule proposal after it was first released in February 2022, though SEC Chairman Gary Gensler said during Wednesday's meeting that the final rule is sufficiently different from the proposal.
The final rule now includes a "legacy provision" for restricting certain activities and preferential treatment, meaning advisers will "not need to renegotiate or, one might call, repaper limited partnership agreements" that were made before the rule takes effect, Mr. Gensler said during Wednesday's meeting.
The new rule also includes "a much smaller menu of prohibitions" than the original proposal, said Kenneth Holston, a partner in the asset management and investment funds practice group for law firm K&L Gates.
Sean McKee, KPMG's national practice leader for public investment management, characterized the main changes as "the moving of what was proposed as prohibited activities into restricted activities," meaning certain fees, expenses and clawbacks are only allowed if subject to disclosure requirements, and in some cases, investor consent.
The Managed Funds Association previously expressed concern about the proposal, and "MFA continues to have concerns that the final rule will increase costs, undermine competition, and reduce investment opportunities for pensions, foundations and endowments," said Bryan Corbett, president and CEO, said in a statement Wednesday.
"MFA will assess the final rule and work with our members to determine the appropriate next steps to protect the interests of alternative asset managers and their investors, including potential litigation."
Rep. Patrick McHenry, R-N.C., chairman of the House Financial Services Committee, said in a news release Wednesday, "I urge the SEC to rescind this ill-advised rule, which is a thinly veiled attempt to dictate private fund management."
Meanwhile, the non-profit organization Better Markets said the SEC should not have adjusted its original proposal at all. "The industry's attacks on the proposed rules were groundless, predicated on myths that have proven hollow again and again," said Stephen W. Hall, legal director and securities specialist for the organization, in a news release.
Separately, in another 3-2 vote along party lines, the SEC finalized a rule that will narrow the exemptions for when registered broker-dealers can forgo membership with the Financial Industry Regulatory Authority.
Under the Securities Exchange Act of 1934, any broker or dealer registered with the SEC must become a member of a national securities association — FINRA is the only registered national securities association — unless the broker or dealer affects "transactions in securities solely on an exchange of which it is a member," according to an SEC fact sheet on the rule.
The rule will further narrow these exemptions in an effort to boost oversight, Mr. Gensler said.
"National securities association membership will help enhance robust and consistent oversight, particularly with regard to cross-market and off-exchange oversight," Mr. Gensler said in a news release Wednesday.
