On February 9, the SEC proposed new rules under the Advisers Act to increase transparency for private funds and alternative investments. 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.
The SEC states that the reforms 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.”
Currently, most private equity investments are only offered to accredited investors. In 2019, 13% of all U.S. households were eligible to make private equity investments, versus the 1.6% in the early 1980s, according to SEC data. Given the increased access to accredited investors (perhaps to less sophisticated investors & within retirement accounts), and massive growth experience in the alts space (now $18 trillion, according to SEC Chair Gary Gensler), the administration believes that it’s time to enforce some standards around data and reporting.
What we think
The growing number of accredited investors has led to improved access to deals. Accordingly, asset managers are chasing these dollars. However, the Biden Administration believes there isn’t enough transparency in private funds, hence the proposal of these new rules.
There are absolutely gaps in the 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, and there is no requirement to audit the value of the funds underlying assets. Financial advisors often do not “know their customer”, because they can’t even keep up with their clients’ increasing alts portfolio. This makes properly reporting on alternative assets, and creating an alternative investment platform a bit of a challenge, to say the least.
Our mission at AltExchange is to improve the private market through increased transparency and better reporting processes to investors.
These newly proposed SEC guidelines go hand-in-hand with our mission for better private investment reporting systems. Funds of all sizes would be required to give investors and the general public greater transparency through data. AltExchange collects that data, extracts performance level metrics, and much more, to give investors the full picture into how their money is performing.
Whether these new rules are likely or unlikely to pass is still to be determined. The argument against the new rule is that accredited investors are sophisticated enough to understand performance, and to make their decisions. We believe this is an outrageously flawed argument on its own, but that the larger issue for participants (asset managers, advisors, investors, and tax consultants) is that the alternative investment space is highly inefficient, and regulations need to keep pace with the challenges in the space. Specifically, requiring basic standards like the ones proposed.