Hedge funds are now fighting the SEC in a new lawsuit over transparency rules that were recently passed on a 3-2 vote.
Industry groups have lobbied furiously against the proposals since they were first put forward in February 2022, saying institutional investors should be free to make their own deals with fund managers.
They claim that tighter regulation will stifle innovation, raise expenses and force investors and fund managers to tear up tens of thousands of existing contracts, per Financial Times.
“Six private equity and hedge fund trade groups on Friday sued the U.S. Securities and Exchange Commission (SEC), arguing the agency overstepped its statutory authority when adopting sweeping new expense and disclosure rules last week,” reports Reuters.
“Economically, our investors, large or small, benefit from greater transparency and integrity,” SEC chair Gary Gensler said after the vote. “These are significant enhancements in the capital markets.”
The rule “is unnecessary government interference . . . [that] will squelch competition in the name of enhancing it,” said Hester Peirce, an SEC commissioner who has close ties to a lobbyist group of anti-regulators.
The new rules would impose “significant costs” and big changes on the industry, said Elizabeth Shea Fries, partner at Sidley. “This is trying to make private funds more like registered funds.”
“These rules will help protect workers’ pensions and create a more transparent and accountable private funds market,” said Senator Sherrod Brown, who chairs the banking committee.
However, Stephen Hall, legal director of Better Markets, said, the final rules “fall short of what’s necessary to protect investors from the appalling array of unfair, predatory and opaque practices.”
“The rules exceed the Commission’s statutory authority, were adopted without compliance with notice-and-comment requirements, and are otherwise arbitrary, capricious, an abuse of discretion, and contrary to law, all in violation of the Administrative Procedure Act,” the associations wrote in the lawsuit.
Hedge Funds Have Lobbied Lawmakers to Disrupt New SEC Rules
Representatives of private equity firms, venture capitals, and hedge funds have lobbied lawmakers to disrupt new proposed SEC rules, reports WSJ.
In July, the SEC finalized new transparency regulations meant to shed light on the U.S money market fund industry.
“The amendments will revise the primary rule that governs money market funds to remove the ability for a fund board to temporarily suspend redemptions if the fund’s liquidity falls below a threshold.
These money market funds will be required to provide daily disclosure of the percentage of its total assets invested in weekly liquid assets (as well as daily assets) on their website to provide transparency to investors and “increase market discipling”.
“Private-equity and hedge funds are bracing for what could be the biggest regulatory challenge in years to their business of managing money for deep-pocketed investors”, says WSJ.
“Since the agency first proposed new rules for the industry last year, representatives of private equity, hedge funds and venture capital have met frequently with SEC officials to try to dissuade them, SEC meeting logs show.
They have lobbied lawmakers to push back against the SEC’s plans and formed a group to fight the final rules, which could differ from the proposal.”
“Investors need increased transparency, more informative and useful data, and prohibitions on abusive and conflicted practices,” Sen. Elizabeth Warren and seven other Democratic senators wrote in a May 15 letter urging Gensler to complete the rules.
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