US overhauls regulation of private fund industry

The SEC has introduced new regulations for private equity, real estate and hedge funds, including the publication of detailed performance reports every three months. The rules, designed to ensure that investors are protected, also aim to stop confidential agreements that give some investors better deals than others, and limit the expenses that fund managers can charge their clients.

There had been concern from a number of industry groups, including some threatening to sue the SEC over proposals to hold them responsible for ‘negligence’ instead of the higher standard of ‘gross negligence’ – although that particular measure did not make its way into the final text.

Mark Shaw, investment fund regulation expert at Pinsent Masons, said: “The European industry has been watching these developments with interest, since many of the practices that are subject to change are not allowed under the EU’s Alternative Investment Fund Managers Directive (AIFMD).”

“In particular, the principal around fair treatment of investors and disclosure is a fundamental tenet of AIFMD. Having said that, European managers will be breathing a sigh of relief at the rejection of the proposal to limit their liability from gross negligence to simple negligence,” Shaw added.

“In terms of how this might impact the US market, those with a longer memory will recall the impact of similar rules around transparency for preferential liquidity terms introduced by the Financial Services Authority (FSA) in 2006, so we may see managers using this as an opportunity to homogenise investor terms,” Shaw said.

He added: “While there has been a lot of resistance to the proposed changes in the US, many principles are reflected in good market practice anyway. The EU already has similar rules in place, but was still curious to see whether the SEC would push the regulatory agenda further in certain areas.”