According to an official notice, Wall Street's top regulatory authority will adopt new transparency regulations for the private investment fund industry, which has a scale of $20 trillion, next week. This proposal has met with strong opposition from within the industry. Originally proposed in 2015, the plan requires more brokers to register with the Financial Industry Regulatory Authority (FINRA). The five-member U.S. Securities and Exchange Commission (SEC) will also vote on a proposal on August 23.
At the beginning of 2022, the SEC proposed a series of reforms for private fund advisors, including the requirement to submit quarterly performance and fee reports, and conduct annual audits. Among other regulations, it also prohibits charging fees for services never provided. Although the final version of the proposal has not been published, it is almost certain to be approved by the Democratic-majority SEC.
As the private fund industry lacks sufficient investor protection and poses certain financial stability risks, lawmakers and regulators have been seeking to strengthen regulation of the private asset management industry. SEC data shows that the size of the private asset management industry has more than doubled over the past decade.
Financial reform advocates and Democratic lawmakers support these reforms, stating they will help protect millions of retirees whose majority of funds are stored in privately managed funds. Individual investors are also increasingly attracted to private credit funds.
Industry organizations argue that the SEC lacks the legal authority to adopt these rules and point out that a 2022 Supreme Court ruling significantly weakened the federal government's power to issue related regulations. The Securities Industry and Financial Markets Association stated that Congress did not intend to grant the SEC unlimited power to regulate private fund advisors or limit investors' ability to negotiate prudent terms with their advisors.
In 2015, the SEC, under the leadership of then-chair Mary Jo White, released this proposal. If passed next week, it means that dozens of proprietary traders will need to register with the Financial Industry Regulatory Authority (FINRA).
Current rules stipulate that some non-exchange member brokers engaged only in proprietary trading do not need to register with FINRA. However, SEC officials state that due to the development of financial markets, some provisions of the current rules are not only outdated but also inappropriately protect certain financial firms from regulation. The new rules require that most brokers must obtain FINRA membership and be subjected to SEC and FINRA regulation, with the exception of exchange members that do not accept client orders.
