SEC ramps up hedge fund regulation

Hedge funds, private equity funds and other private funds will face tougher disclosure demands as well as new restrictions under controversial new rules adopted by the U.S. Securities and Exchange Commission (SEC) Wednesday.

The SEC approved the new rules and changes to beef up the regulation of private fund advisors. The regulator said the reforms will enhance investor protection by increasing transparency, competition and efficiency in the private funds sector.

Among other things, the rules will require registered advisors to provide investors with quarterly account statements detailing their funds’ fees, expenses and performance. The rules also prohibit firms from providing investors with preferential treatment in certain circumstances, and to disclose other sorts of favouritism.

“The rules are designed to protect investors who directly or indirectly invest in private funds by increasing visibility into certain practices involving compensation schemes, sales practices and conflicts of interest through disclosure; establishing requirements to address such practices that have the potential to lead to investor harm; and restricting practices that are contrary to the public interest and the protection of investors,” the SEC said in a notice.

The fund industry has pushed back on the new rules, which they argue will increase the regulatory burden and harm industry competition.

In response to the news that the SEC adopted a final rule, Bryan Corbett, president and CEO of the Managed Funds Association (MFA), said his group, “continues to have concerns that the final rule will increase costs, undermine competition and reduce investment opportunities for pensions, foundations and endowments.”

“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,” he said.

To ease the costs of complying with the new provisions, the SEC adopted grandfathering provisions for certain restrictions.

It also said new annual audit requirements could be satisfied be complying with current custody rules, rather than through a new set of requirements.

Those custody rules are currently facing the possibility of their own reforms, so the SEC has reopened the public consultation on these provisions for an additional 60-day comment period.

Jack Inglis, CEO of the Alternative Investment Management Association (AIMA), welcomed some of the SEC’s revisions to the final rule, noting that an earlier version “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.”

The final version of the rule reflected many of the industry’s concerns, Inglis said. “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,” he said.

“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,” he said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.