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. The SEC’s actions would limit investment opportunities for institutions that rely on private funds to meet their return targets for their beneficiaries. These needless proposals would do more harm than good and should not be implemented.
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. For example, hedge funds deliver billions in returns for institutional investors every year at half the volatility of the broader market. Data shows that university endowments with higher hedge-fund allocations correlate with better long-term returns. So why is the SEC trying to punish them?
SEC Chair Gary Gensler has launched a broad-based attack on active managers that would harm investors, compromise market integrity, and reduce overall U.S. competitiveness — all in the name of transparency. 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.
With respect to increased position-reporting requirements, the SEC would make it harder for managers to build positions in corporations. 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.
Furthermore, the SEC proposes to rewrite the relationships between institutional investors and private funds by applying mutual-fund-like disclosure and prohibitions on these funds. The SEC is effectively trying to inject itself into the middle of negotiations between sophisticated parties.
As a result, 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.
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.
My organization recently released recommendations for concrete market reforms. We hope the SEC will seriously consider them as a way to pursue more thoughtful and durable policies that genuinely reduce costs, do not harm investors, and yield better, more efficient markets. We stand ready to work with regulators to achieve these common objectives.
The U.S. financial markets are the deepest, most liquid, and most trusted in the world, benefiting millions of Americans. The SEC needs to change course to ensure the well-earned primacy of our financial markets and protect investors.
Bryan Corbett is president and CEO of the Managed Funds Association.