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PE Panorama: SEC serves up a glass half full?

By Paul Mackintosh   
August 28, 2023

By the time you read this the big news will have already been broken and the big vote will have already happened. The five-member US Securities and Exchange Commission under Gary Gensler, in its 23 August meeting, voted 3-2 to approve new transparency and other rules for the $20 trillion dollar private funds industry - including of course private equity, private debt and venture capital.

The draft proposals floated in 2022 included requirements for private funds to produce quarterly statements on performance and fees and submit to annual audits. Also included were restrictions on private funds charging fees for services, including those services never actually done. So how many of these proposals actually made it past the finish line?

Those provisions calling for detailed quarterly reports by funds and increased exposure for expenses did at least make the cut. However, long term close observer of private equity Dan Primack had already run the headline “The SEC waters down new private equity rules” prior to the actual vote, citing several instances where the final version of the rules was weaker than the original draft. For example, fees for unperformed services were no longer banned, although the SEC apparently believes they were already covered by other rules. GPs are still able to keep preferential arrangements for some LPs, allowing them to cash out sooner than others. There has also been little movement on GP liability to LPs, according to Primack. The Financial Times described the new rules as the biggest shakeup in the private funds industry in more than a decade, but Barrons also ran a report stating that the final document “omits most of the elements that fund managers found objectionable”.

The Institutional Limited Partners Association (ILPA), the trade body for pension funds and other investors in private equity, in the run up to the vote, called for “improved transparency, governance and alignment of interests in the industry”. The ILPA, as representative of millions of pensioners, can also be taken as representing the public interest in this field. And ILPA CEO Jennifer Choi stated after the vote that the results “take steps forward on fee and expense reporting and begin to address persistent conflicts of interest”.

The outcome does seem to have delivered at least some of what was hoped for - and of course, disappointed others. Hester Peirce, the Republican commissioner who voted against some provisions, cried “unnecessary government interference”. However, Stephen Hall, legal director of Better Markets, said “there is no adequate justification for weakening the reforms in the SEC’s original proposal”.

I’m sure it could have been better. But considering the repeated failure of regulators to rein in private funds, even a glass half full is very much better than no glass at all.