News Release: New SEC Private Fund Rules Can Help Stop Ripoff of Retirement Savers


Aug. 23, 2023

Carter Dougherty

New SEC Private Fund Rules Can Help Stop Ripoff of Retirement Savers

Washington, D.C. – New investor protections announced today by the Securities and Exchange Commission (SEC) have the potential to curb widespread practices that have allowed Wall Street’s $25 trillion private fund industry to harvest tens of billions in fees at the expense of public pensions, retirees, and other savers – all to the advantage of some of the richest people in the world.

In broad brush, the new SEC rules will require private funds – private equity and hedge funds, primarily – to disclose fees and returns in a clearer and more standardized fashion to the institutional investors whose savings have come to drive this industry. That step should allow those investors to shop around for the best deal they can find, force private fund advisers to compete on a fairer playing field for capital, and limit fees that reduce returns to people who have saved for retirement.

“The lack of basic, comparable information on investment terms in an industry that has grown exponentially in the last decade has enabled a massive transfer of wealth from savers and retirees to private fund executives, many of whom now have a net worth in the billions,” said Andrew Park, senior policy analyst at Americans for Financial Reform Education Fund. “The SEC is using the traditional, time-tested tools of transparency and disclosure to reinvigorate this part of our capital markets.”

Key provisions of the final rules include:

  • A requirement that private fund advisers disclose to investors a detailed breakdown of all fees and expenses charged on a quarterly basis, as well as expenses charged to portfolio companies
  • A standardized method of reporting on returns, which currently are often inflated to attract future money from pension funds into funds administered by private advisers
  • New rules on special agreements (“side letters”) that private fund advisers have with some investors, including a prohibition on ones that would harm other, often smaller, investors, such as granting certain limited partners an early redemption right and engaging in selective disclosure of portfolio holdings to others
  • Prohibitions – unless first disclosed to investors – of costs passed to investors related to compliance exams, expenses from portfolio company investments, and borrowing/loans from other funds administered by these private fund advisers
  • Prohibitions, without clear consent from investors, on passing on the costs for regulatory investigations. The rule includes outright bans on imposing costs on investors related to investigations of private funds advisers that lead to a court or regulatory order

As AFR-EF has documented, the problem of high fees and opacity has long plagued the private funds industry. One prominent scholar has called private equity a “billionaire factory” for its efficacy in extracting money from investors. The fee problem stems from the fact that investing in private funds is not done in a transparent and standardized manner, but rather through a series of bilateral negotiations where all the investors must negotiate separately for information. And in some cases, fees have gone toward lavish expenses incurred by private equity executives.

AFR-EF has long advocated for greater disclosure by private funds and reform of private equity in particular. We argued the case with President Biden’s transition team and supported the SEC at every step in the process, and helped defend Chair Gensler against industry-backed attacks in Congress. Before the SEC proposal,  AFR-EF has helped document fee-related abuses in the industry.

The private fund industry is likely to sue the SEC to stop the rules, a point driven home by its establishment of a new organization in Texas that has chimed in against the rules. Texas resides in the Fifth Circuit of the federal courts, known for its right-wing, business-friendly tilt. (The Supreme Court will soon hear a radical challenge to the funding of the Consumer Financial Protection Bureau that originated in the Fifth Circuit.) 

And, in today’s SEC meeting, Republican commissioners read into the record legal objections that the industry will now use in its court filings. Though the industry may argue that the SEC overstepped its authority, in truth the agency is fulfilling the mission Congress gave it.

“Ensuring disclosure of critical information to investors, which promotes both capital formation and competitive capital markets, lies at the core of the SEC’s mission,” Park said. “The SEC has long exempted private funds from much disclosure required in public markets, so it is only logical that it has the power to improve transparency for investors.”