SEC’s Hard-Line Approach to Private Funds Would Harm Investors and Markets

 

May 10, 2022

MFA President and CEO Bryan Corbett penned an op-ed published by Institutional Investor spelling out the harmful consequences of proposed rules from the Securities and Exchanges Commission. The proposed rules would cripple active management, diminish the ability to hold corporations accountable, and limit investment opportunities for pension funds, non-profit foundations, and college endowments that rely on private funds.

Key excerpts are provided below.

A solution in search of a problem

“The mission of the Securities and Exchange Commission is to protect investors, but a recent raft of proposals would likely do the opposite. Strong-arm regulations that target the private-funds industry are solutions in search of a problem that would weaken America’s financial markets, increase costs, and raise fees.”

Consequences for institutional investors

“Public pensions, nonprofit foundations, and educational endowments employ sophisticated investment strategies in their portfolios to generate targeted returns over time. Private-equity, venture, real-estate, and hedge funds are essential to the portfolio allocations of institutional investors, and they deliver superior returns… So why is the SEC trying to punish them?”

About the proposals

“The SEC’s proposals would fundamentally change U.S. markets in two significant ways. First, the SEC would undermine active managers by requiring them to publicly disclose their positions on a more granular and frequent basis. Second, the agency is trying to rewrite — on the fly — longstanding contractual relationships between highly experienced parties that manage and invest in private funds.”

On increased position-reporting requirements

The regulator would shift the balance in favor of corporate managers at the expense of investors. With this limitation, investors would have diminished capacity to engage with managers and hold them accountable. Management has long desired to reduce the ability of shareholders to hold companies responsible, and ironically, the SEC is trying to do their bidding.”

On mutual-fund-like disclosure

This rule would have several unintended consequences that would measurably hurt those pensions and endowments that rely on private funds. A substantial number of investment opportunities would become unavailable to institutional investors as private funds would refrain from offering certain products. The proposal would raise fees for these investors and restrict their ability to negotiate better deals on behalf of their beneficiaries. It would also limit innovation and discourage new startup funds by forcing them to cover excessive regulatory compliance costs.”

A hurried regulatory process

The SEC is rushing these reforms to the U.S. financial markets through the regulatory process, without seriously considering the negative ramifications for investors or the economy. Unreasonably short comment windows make it difficult for affected parties to thoughtfully weigh in, consider the interoperability of the proposals, and study whether the costs are proportionate to the benefits. This hurried approach is counter to Chair Gensler’s call for a dialogue with the industry.”

__

MFA stands ready to work with regulators to ensure that U.S. financial markets remain the deepest, most liquid, and most trusted in the world and that they continue benefiting millions of Americans. The SEC needs to change course to ensure the well-earned primacy of our financial markets and protect investors.