By Douglas Gillison
(Reuters) – Wall Street’s top regulator is set next week to adopt new transparency rules for the $20-trillion private investment fund industry, according to an official notice, acting on a proposal that has drawn sharp industry objections.
The five-member U.S. Securities and Exchange Commission is also due to vote on Aug. 23 on a proposal, initially unveiled in 2015, that would require more broker-dealers to register with the Financial Industry Regulatory Authority (FINRA).
In early 2022, the SEC proposed a set of changes for private fund advisers that would, among other things, require them to produce quarterly statements on performance and fees and submit to annual audits. They would also be prohibited from charging fees for services never rendered, among other provisions.
The final version of the proposal, which has not yet been released, may have changed after an extended notice-and-comment period. Democrats hold the majority on the commission, meaning the final version is virtually assured to pass.
Lawmakers and regulators have sought to increase oversight of the private asset management sector, citing risks to financial stability and insufficient investor protections in an industry that according to SEC figures has more than doubled in size over the last decade.
Financial-reform advocates and Democratic lawmakers have supported the changes, saying they would help protect millions of retirement savers, much of whose money is parked in privately managed funds, and the retail investors increasingly drawn to private credit funds.
Industry organizations say the SEC lacks the legal authority to adopt the rule and point to a 2022 Supreme Court ruling which sharply curtailed the federal government’s power to issue climate regulations.
“Congress did not intend to give the Commission unbounded power to regulate private fund advisers or to limit the ability of investors to negotiate for terms that they and advisers believe are prudent,” the Securities Industry and Financial Markets Association said in a letter.
The second proposal under consideration next week could, if adopted, require dozens of broker-dealers to register with FINRA. The SEC had originally issued the proposal in 2015 under then-Chair Mary Jo White.
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Under current rules, some broker-dealers who perform proprietary trades on exchanges of which they aren’t members need not join FINRA. However SEC officials say this exemption is outdated, given the growth of securities markets, and unduly shields some investment firms from oversight.
The proposal would now require FINRA membership for such broker-dealers unless they are members of national securities exchanges and carry no customer accounts.
