A recent SEC proposal could vastly change how private investment funds are regulated — mandating annual audits, increasing required transparency with investors and banning certain fee-seeking practices.
Dallas is a hub of private equity and hedge fund firms, along with the institutions, organizations and high net worth individuals that invest in them. Dozens of locally-headquartered firms, mostly centered on the middle market and lower-middle-market, broke their own fundraising and investment records in the last two years. The sweeping proposal would meaningfully increase how much information most those funds provide to investors on recent, and ongoing deals.
Private investment vehicles — hedge funds, private equity, venture capital and liquidity funds — have about $18 trillion in gross assets, per SEC data. In North Texas, traditional, middle-market private equity funds alone raised more than $3 billion.
On the investor side, Dallas is the city with the third-most family offices, following New York City and Chicago, per family office data platform Fintrx. The Teacher Retirement System of Texas is one of the largest pension funds in the world, according to Pensions and Investments.
SEC Chairman Gary Gensler, who has promised in the past to increase scrutiny of private funds, said the new proposal would help investors on one end of private funds, and companies accepting capital from them.
Scott Mascianica, Dallas-based partner at law firm Holland & Knight who works with private fund adviser, said a “tension point” of the proposal is whether the rules stand to benefit individual investors or “newly created burdens that will offer little benefit to the experienced, sophisticated investors in the space.
“What is most interesting about the proposed rule is how sweeping it is in scope. Aspects of the proposed rule seek to treat registered private fund advisers like public company registrants, with quarterly reporting obligations and annual audits,” Mascianica said in an emailed statement to DBJ. “Further, the proposed rule creates additional books and records and compliance requirements, including on advisers that do not advise private funds. And, if approved, certain practices — even for those advisers not registered with the agency — would be prohibited.”
Though the proposal will likely impact all private funds and limited partners in North Texas, more than a local dozen private equity firms and limited partners declined to comment or didn’t respond to Dallas Business Journal’s request for comment when asked about the possible changes. Several firms said that they were waiting to see if the proposal gets passed, and whether it will change from its current form.
The SEC approved the proposal 3-to-1 last week and will seek public comments for at least two months before a final decision.
This proposal is the latest to increase regulations for private fund advisers. Last month, the SEC issued a proposal that would, if passed, amend aspects of a regulatory form to increase the amount and frequency of disclosure requirements.
One of the amendments would force large hedge funds and private equity funds to file a Form PF, the confidentially reported financial performance document, within one day of major business events.
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