Securities and Exchange Commission Chairman Gary Gensler has a flair for excess. Since taking office in 2021, he has inflated the Federal Register with almost 4,000 pages of new regulations nearly singlehandedly, with fewer than 20% resulting from congressional mandate. Last week, he added yet another host of onerous and expensive rules aimed at private funds to the list.
The full heft of Gensler’s attack is evident in the latest rule, which took effect last week. Weighing in at 656 pages, the regulation creates a morass of new measures, including an entirely new reporting regime, a brand new set of audit and valuation mandates, and a whole new list of prohibited activities relating to redemption rights and portfolio holdings. The new rule represents the most dramatic and fundamental change in private fund regulation in decades. The rule not only ignores market dynamics, but it also disregards congressional intent around investment regulations and fails to account for the damage it does to efforts to raise and invest capital that supports growth and economic development.
GAVIN NEWSOM MOVES TOWARDS THE MIDDLE AS WHITE HOUSE RUMORS PERSIST
The SEC’s stated mission includes the often-neglected directive to “facilitate capital formation.” Private funds finance thousands of companies that employ millions of workers, from insurance to healthcare to tech and retail. The list is endless. This function is no longer exclusively the role of banks thanks in part to credit constraints caused by increasing regulatory burdens. Private funds by nature have been able to nimbly fill a void, spurring job creation and business growth.
Private funds represent a $20 trillion industry that has more than doubled in size in the last decade because investors believe they can receive superior risk-adjusted returns and portfolio diversification. The evidence is found, for example, in public pension funds, 90% of which invest in some form of private funds. Simply put, private funds are both a source of significant capital formation and reliable returns. A dramatic change in their regulatory scheme should not be taken lightly.
More than 80 years ago, Congress established a regulatory framework that recognized that wealthy and institutional investors, a group that includes both Jeff Bezos and the $51 billion Texas Permanent School Fund, are very different from everyday retail investors, such as firefighters and teachers, because their sophistication and resources allow them to better protect their interests. Accordingly, that regulatory scheme does not impose on private funds the stringent rules required of products designed for retail investors, such as mutual funds. The SEC is conflating public pension funds with everyday investors while also ignoring that pension funds are fiduciaries with sophisticated investment strategies that strive to protect their pensioners.
The SEC points to market failures to justify their new rules, ignoring the existence of more than 10,000 private funds in a market that has doubled in just 10 years. The Committee on Capital Market Regulation found that the private equity market is well below the federal government’s “unconcentrated” threshold which necessitates more stringent regulations. Indeed, its market concentration is only a quarter of the mutual fund industry’s. The SEC itself admits the new rule will create a burden on smaller firms and new entrants. It’s seemingly designed to reduce competition and trigger an even greater regulatory burden.
Gensler has stated the industry fee model is “not that different from when I was on Wall Street.” But the SEC’s own Asset Management Advisory Committee acknowledged that fees can now be negotiated down to as low as 60% of the historic management fee rate. Furthermore, fund investors have numerous options should they fail to negotiate desirable terms or feel disclosures are inadequate.
SEC Commissioner Hester Peirce noted in her dissent that the agency is on shaky legal ground. In seeking to impose a retail framework on an institutional marketplace, the SEC has resurrected an obscure provision from the Dodd-Frank Act that was designed for retail investors and also relies on a general anti-fraud provision under the Advisers Act. Such an open-ended application could be used without restraint to justify a host of burdensome and punitive rules. Fortunately, after the Supreme Court’s landmark decision last year in West Virginia vs. EPA, the court clearly now takes a dim view of unelected administrators assuming implicit powers to decide “major questions.”
There is now litigation pending before the U.S. Court of Appeals for the 5th Circuit to overturn the SEC’s rule. During his tenure, Gensler has already had several previous rules overturned and is creating quite an unenviable loss record in court.
Given that this private fund rule is both unnecessary and harmful, let’s hope he soon extends his record.
CLICK HERE TO READ MORE FROM RESTORING AMERICA
Jeb Hensarling is a former chairman of the House Financial Services Committee (2013-2019) and an advisory council member to Americans for Prosperity.
Only the courts can stop the SEC's burdensome regulations
2
0
04.12.2023
Securities and Exchange Commission Chairman Gary Gensler has a flair for excess. Since taking office in 2021, he has inflated the Federal Register with almost 4,000 pages of new regulations nearly singlehandedly, with fewer than 20% resulting from congressional mandate. Last week, he added yet another host of onerous and expensive rules aimed at private funds to the list.
The full heft of Gensler’s attack is evident in the latest rule, which took effect last week. Weighing in at 656 pages, the regulation creates a morass of new measures, including an entirely new reporting regime, a brand new set of audit and valuation mandates, and a whole new list of prohibited activities relating to redemption rights and portfolio holdings. The new rule represents the most dramatic and fundamental change in private fund regulation in decades. The rule not only ignores market dynamics, but it also disregards congressional intent around investment regulations and fails to account for the damage it does to efforts to raise and invest capital that supports growth and economic development.
GAVIN NEWSOM MOVES TOWARDS THE MIDDLE AS WHITE HOUSE RUMORS PERSIST
The SEC’s stated mission includes the often-neglected directive to “facilitate........
© Washington Examiner
visit website
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Nikkei Editorial
Rami G Khouri
Ali Fathollah-Nejad
