Feb 9, 2022 - Economy

All eyes on SEC private equity transparency rules

A searchlight looking for a dollar sign

Illustration: Brendan Lynch/Axios

All private equity eyes today are on Washington, D.C., where the SEC will propose new transparency rules that would cover much of what the industry considers to be trade secret.

The big picture: The SEC is in charge of investor protection, no matter the type of investor, and believes that pension funds and other limited partners in private equity funds aren't always given adequate visibility.

  • Private equity, of course, would argue that its LP agreements are heavily-negotiated contracts between sophisticated investors. Or, put another way, leave us alone.

What's being proposed: The proposal would require covered funds to provide LPs with a quarterly statement that includes a "detailed accounting" of all fees and expenses paid by the fund during the period. It also would need to include compensation paid by portfolio companies to the general partner or any related parties.

  • It also would require funds to undergo an annual financial statement audit, and to obtain a fairness opinion when seeking to execute a GP-led secondary transaction. There also would be new disclosure requirements related to cybersecurity breaches.
  • Side letters continue to be allowed, but there now would be new restrictions on permissible preferences and all LPs (including prospective ones) would need to be informed of preferential treatment being given to select LPs. This is an investor protection that may not go over great with certain, larger investors.

But wait, there's more: The SEC also wants to ban several PE fund fees and expenses charged to LPs and/or portfolio companies, which it believes are "contrary to the public interest and the protection of investors."

  • This includes accelerated monitoring fees, or any other expense tied to unperformed services.

Would this also impact VC funds? Yes, it would seem to.

Unrelated actions: The SEC today also will propose shortening standard settlement cycles for securities transactions to T+1 from T+2 (an issue that came up during last year's Robinhood/GameStop situation). Tomorrow the SEC will discuss updating its "accredited investor" definition.

The bottom line: This is the SEC's second major PE transparency push in as many months, following the Form PF proposal, as the industry appears to have outgrown the shadows.

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