How New SEC Regulations May Actually Benefit Your Private Investments

On February 9, the SEC proposed new rules to increase transparency for private funds. The proposal requires private equity funds to:

• Issue quarterly statements detailing performance, fees, and expenses.?
• Obtain an annual audit.???
• Distribute a written summary of certain material business relationships.?
• Prohibit engaging in activities contrary to public interest.?
• Prohibit preferential treatment that may have a negative effect on other investors.?

According to the SEC, the regulations are:

“Designed to protect private fund investors by increasing their visibility into certain practices, establishing requirements to address practices that have the potential to lead to investor harm, and prohibiting adviser activity that is contrary to the public interest and the protection of investors.”?

Right now, private equity investments are only offered to accredited investors in most cases. 13% of all U.S. households were eligible for private equity investments in 2019 vs. 1.6% in the early 1980s, according to the SEC. With increased private equity access for accredited investors (including within retirement accounts), and massive growth experience in alternatives (now worth $18 trillion, according to SEC Chair Gary Gensler), the administration believes it’s time to enforce better standards around data and reporting.?

What we think

It is apparent that there are many holes in the private market’s current reporting system today. Some funds do not even report on anything. They may simply make a deposit into your account when a distribution is made, with no audit requirement for the value of the fund’s underlying assets. Additionally, many financial advisors do not fully “know their customer”, because they can’t even keep up with their clients’ increasing alts portfolio. Properly reporting on alternative assets (not to mention building an alternative investment platform) is quite challenging under the current circumstances, to put it lightly.?

?Our mission at AltExchange is to improve the private market through increased transparency and better reporting processes. These newly proposed SEC guidelines go hand-in-hand with our mission for better alternative investment reporting systems.

Whether these new rules are likely or unlikely to pass is to be determined. The argument against the new rule is that accredited investors are sophisticated enough to understand performance as is, and are capable of making their own decisions. We believe this is an outrageously flawed argument on its own, but that the larger issue (for asset managers, advisors, investors, and tax consultants) is that the alternative investment space is highly inefficient. There needs to be more regulations in place to keep pace with the challenges in private investments.??

?This post was originally published on the AltExchange blog — check out more of our articles by clicking here.