Private equity finds itself in the SEC’s spotlight: Story of the Year

Proposals which began with stringent new disaster-reporting requirements for registered funds, followed by further new compliance reporting obligations for all funds.

Last year began with a rather weighty surprise for private equity, with the US Securities and Exchange Commission proposing sweeping changes to private funds.

Although additional regulation was anticipated, private equity participants were caught off guard by the scope of the proposals. They began with stringent new disaster-reporting requirements for registered funds, and were swiftly followed by further compliance reporting obligations for all funds.

On the latter – created as part of the SEC’s aim to provide transparency to LPs – private fund advisers will have to brief their investors on fees and expenses every quarter, and audit their funds yearly. The proposed regulation, as is, would also:

  • Require advisers to “obtain a fairness opinion” on the prices of secondaries transactions;
  • Ban a raft of fees, expenses and business practices in all private funds, registered or not;
  • Prohibit “preferential terms” to select investors in all private funds, registered or not;
  • Expand the scope of books and records rules;
  • Require all registered advisers – private or not – to document their annual audits.

The proposed regulation sparked a number of conversations around unintended consequences: if benefits to some LPs are disclosed to other current and prospective investors, will large LPs simply turn to SMAs as a workaround? Would the proposed amendment to Form PF, which would require advisers to report GP-led transactions within only one business day of execution, distract from the work itself? Will the proposal to prohibit GP clawbacks being net of taxes have harmful effects for LPs and market-wide competitiveness?

The SEC has been serious about stepping up its watch of private equity. The regulatory body filed 434 new enforcement actions in fiscal year 2021, representing a 7 percent increase over the prior year, it said in a statement. Of these actions, 159 were against registered investment advisers or investment companies.

Igor Rozenblit, who spent more than a decade at the SEC and founded and co-led its Division of Examinations’ Private Funds Unit, told Private Equity International in August that one of the reasons for the hike in private equity examinations is because SEC chairman Gary Gensler seems to see changing private equity as a big part of his legacy

“He doesn’t appear to have a very forgiving view of the industry,” Rozenblit added.

As we begin the New Year, it appears the full shock may not be entirely felt after all. In December, affiliate title Regulatory Compliance Watch learned that aides to Gensler have told private fund reform advocates to dial back their expectations so the chairman can focus on ESG and market structure proposals. His closest advisers have also voiced concerns that commission staff may not have the bandwidth to see the private fund reforms through, sources told RCW.

It is by no means off the cards completely. However, advocates are worried that any reforms will be weaker than they believe they should be.

Among those fighting for stricter measures is SEC commissioner Caroline Crenshaw, sources told RCW. In mid-November, the Consumers Federation of America – former home of Gensler adviser Barb Roper – sent a letter to the chairman urging him to stay the course.

“For too long, Congress and the commission have promoted policies that expanded private securities markets, at the expense of public markets,” the letter stated. “Given the unbridled expansion of private markets, we encourage you to prioritise the public/private-related reforms on the commission’s regulatory agenda.

“In addition, the commission should pursue other opportunities that would help restore the health and vitality of our public markets and limit the excessive growth of private markets.”