SEC votes through disclosure reforms for private funds

The rules as originally proposed in February last year will apply to all SEC-registered managers, including those based in Asia and recognised by the commission as exempt reporting advisers (ERAs).

According to a filing, GPs will be required to provide LPs with quarterly statements detailing certain information regarding fund fees, expenses, and fund-level performance. Non-fund fee compensations paid to the manager must also be disclosed.

GPs will also be subject to an annual audit – targeting unrealistic valuations and misappropriation of assets – for each of their funds. These audits must be distributed to LPs along with an independent fairness opinion on valuations prior to any interests in the fund being sold.

Preferential terms regarding redemptions and information deemed material to investors are banned. Side letters for other special terms will continue to be permitted but must be disclosed to all current and prospective investors.

The rules specify that costs related to relevant investigations or violations cannot be passed on to the fund itself. There is a legacy provision for the rules related to restricted activities and preferential terms such that agreements in writing prior to the compliance date needn’t be renegotiated.

The compliance date for the rules on quarterly statements and annual audits will be 18 months after the date of publication in the Federal Register. The compliance date for the rules on fairness opinions and preferential terms will be 12 months after publication in the Federal Register for managers with at least USD 1.5bn in funds under management and 18 months for smaller managers.

The stated goal of the SEC is to protect LPs by increasing visibility into potentially harmful practices and restricting activity that is contrary to the interests of investors and the greater public. Industry participants have interpreted the reforms as part of a broader agenda around mass-market inclusion.

“The SEC is laying the groundwork for private equity as an industry to tap into additional sources of capital and go down the value chain,” Niklas Amundsson, a partner at placement agent Monument Group, told AVCJ following the initial proposal of the rules.

“We’re seeing it with wealth managers, and retail is next. Not next year, but in the next five years. For that to happen, you’re going to need reporting to be in line with what’s appropriate for retail investors. You need that transparency and regulatory support.”

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• Topics
• North America
• Fundraising
• Regulation
• GPs
• LPs
• Asia
• USA
• Fund formation
• Us securities and exchange commission (sec)