Global: US SEC Set to Enforce New Regulations for $20 Trillion Private Fund Industry

The leading regulator on Wall Street is poised to implement fresh transparency regulations for the private investment fund industry, valued at $20 trillion. The announcement comes according to an official notice and follows a proposal that has faced considerable resistance from the industry.

The five-member U.S. Securities and Exchange Commission (SEC) is scheduled to cast their votes on August 23rd, concerning a proposal initially introduced in 2015. This proposition aims to broaden the requirement for more broker-dealers to register with the Financial Industry Regulatory Authority (FINRA).

Earlier in 2022, the SEC presented a series of alterations targeting private fund advisers. Among other stipulations, the proposal called for the submission of quarterly performance and fee statements, as well as annual audits. It also sought to prevent charging fees for services not rendered.

While the final version of this proposal has yet to be released, potential modifications might have been introduced during an extended notice-and-comment phase. With Democrats in the majority on the commission, the ultimate version is expected to be approved.

Government officials and regulators have been advocating for increased oversight of the private asset management sector. This move is in response to concerns about financial stability and insufficient investor safeguards. The SEC’s own data indicates that this industry has doubled in size over the last decade.

Proponents of financial reform and Democratic lawmakers have endorsed these changes. They argue that these regulations will safeguard the interests of numerous retirement savers, a significant portion of whose funds are invested in privately managed funds. Additionally, these changes will offer protection to retail investors who are increasingly engaging with private credit funds.

However, industry groups counter this stance, asserting that the SEC lacks the legal authority to adopt such a rule. They refer to a 2022 Supreme Court verdict that restricted the federal government’s power to enact climate regulations.

“The Commission’s authority was never intended to extend to unlimited regulation of private fund advisers or to restrict investors and advisers from negotiating terms that they consider prudent,” the Securities Industry and Financial Markets Association conveyed in a letter.

The second proposal on the SEC’s docket next week pertains to broker-dealers and their registration with FINRA. This proposal, originally introduced in 2015 during Mary Jo White’s tenure as Chair, could potentially mandate dozens of broker-dealers to register with FINRA.

The current regulations exempt certain broker-dealers from joining FINRA if they execute proprietary trades on exchanges of which they are not members. However, SEC officials argue that this exemption is outdated and disproportionately shields some investment firms from regulatory scrutiny.

The proposed changes would necessitate FINRA membership for these broker-dealers, unless they hold memberships with national securities exchanges and have no customer accounts.