WASHINGTON—Regulators proposed expansive new requirements for private investment funds Wednesday as part of a widening effort to police a rapidly growing but relatively opaque corner of the capital markets.
In a Wednesday morning meeting, the Securities and Exchange Commission passed a proposal that would force hedge funds and private-equity funds to provide basic disclosures to their investors and guard against conflicts. The Democratic-controlled commission approved the proposal by a 3-to-1 vote, signaling a strong chance that a final version will be adopted. The agency will now seek public comments for at least two months before issuing a final rule.
Since taking office last April, SEC Chairman
has moved to aggressively tighten rules on Wall Street intermediaries, aiming to save money for investors and companies raising capital. A major focus in recent weeks has been on private markets, where firms operate with far less government oversight than publicly traded companies or mutual funds.
Private-equity and hedge funds cater mostly to wealthy clients and institutional investors, such as pension funds and insurers. The SEC has traditionally viewed these investors as more sophisticated—and capable of fending for themselves without the government’s help—than small investors.
Wednesday’s proposal would mark a sea change. For the first time, private-fund managers would be required to provide their investors with quarterly statements detailing fund performance, fees and expenses, as well as manager compensation. Funds would have to undergo annual audits, in an effort by the SEC to place a check on asset-valuation estimates often used to calculate fund managers’ fees.
Mr. Gensler said the proposal reflects the growing importance of private funds, which hold more than $18 trillion of gross assets. He noted that their investors include pension plans representing millions of Americans, as well as university endowments.
“Private fund advisers, through the funds they manage, touch so much of our economy,” Mr. Gensler said. “Thus, it’s worth asking whether we can promote more efficiency, competition, and transparency in this field.”
While the new disclosures proposed Wednesday wouldn’t have to be filed with the SEC or made public, private funds would be required to maintain books and records to allow regulators to assess their compliance with the rules.
Private funds would also be prohibited from certain practices that could motivate asset managers to put their interests ahead of their clients’ or be “contrary to the public interest,” the SEC said in a fact sheet.
The proposal is likely to garner resistance from financial firms such as
& Co. Inc. that have a powerful lobbying presence in Washington.
“We work closely with our investors to ensure they have the information they need to make the best investment decisions,” said
president of the American Investment Council, a private-equity trade group. “We are concerned that these new regulations are unnecessary and will not strengthen pension returns or help companies innovate and compete in a global marketplace.”
The Managed Funds Association, which lobbies on behalf of hedge funds, echoed that concern, saying the SEC’s proposed rules would “harm the most sophisticated investors.”
The GOP also is poised to push back.
the lone Republican among the four current SEC commissioners, said she wouldn’t support the proposal, which she characterized as a recasting of the agency’s mission to protect small investors.
“It embodies a belief that many large, sophisticated institutions and high-net-worth individuals are not competent or assertive enough to obtain and analyze the information they need to make good investment decisions or to structure appropriately their relationships with private funds,” Ms. Peirce said of the proposal. “Our resources are better spent on retail-investor protection.”
Progressive groups cheered the proposal.
“More disclosure doesn’t hurt any investor or capital formation in any way,” said
a senior policy analyst at Americans for Financial Reform. “But darkness protects private equity from accountability to investors.”
SEC examiners have highlighted a range of compliance deficiencies in private funds, saying in a report last month that managers sometimes give investors misleading information about their performance to charge higher fees.
Currently, hedge funds only have to file quarterly snapshots of their equity holdings to…