Nov 8, 2023 - Economy

Federal regulators take new aim at private equity and hedge funds

Illustration of a blank check with a magnifying glass hovering over it, revealing a one hundred dollar bill within the glass

Illustration: Annelise Capossela/Axios

There's an ongoing debate about whether private equity could create systemic risk for the U.S. economy, but regulators aren't waiting for consensus.

Driving the news: The Financial Stability Oversight Council recently finalized guidance that will make it easier to designate nonbanks, including private equity and hedge funds, as systemically important financial institutions.

  • In effect, this means that such entities could be placed under supervision of the Federal Reserve, extending the reach of Dodd-Frank well beyond its original targets.

Behind the scenes: FSOC members include Treasury Secretary Janet Yellen, Fed chair Jay Powell, and SEC chair Gary Gensler.

  • Yellen first proposed the change back in April, shortly after the collapse of Silicon Valley Bank, and it reverses prior guidance issued under the Trump administration.
  • Big banks have been supportive of the change, arguing that it is both fairer and safer. Many of those that are now being swept up in the new oversight are less keen on it, claiming it could needlessly increase compliance costs.
  • In addition to private funds, the change could lead to Fed oversight of certain private credit funds, mutual funds, crypto funds, and insurance companies.

The bottom line: Private equity has become ubiquitous in almost every sector of the U.S. economy, investing trillions of dollars. It's also become a pillar of the capital markets, and is seeking to engage with more individual investors.

  • Put another way, it's become a very important part of the system.
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