HEDGE FUNDS: Hedge funds prepare for legal battle with SEC over fee disclosures

Hedge funds and private equity firms are laying the groundwork for a legal clash with the U.S. Securities and Exchange Commission over its bid to tighten rules on disclosing fees and dealing with investors.

The Managed Funds Association recently told members that the trade group could sue the SEC within two weeks of the new regulations being finalized, unless they're softened significantly from what the agency proposed in February 2022. The email message, which was obtained by Bloomberg News, spotlights rising industry angst around a cornerstone of Chairman Gary Gensler's regulatory agenda.

As proposed, the new rules would require hedge funds and private equity firms to disclose details of what they charge investors, while blocking certain types of fee arrangements. It would also be easier for pensions and endowments to successfully sue managers over investment decisions.

Trade groups and investment firms, including Citadel and Andreessen Horowitz, have sent the SEC comments opposing the plan since the regulator released its initial proposal.

The SEC hasn't announced a date to implement the plan, but a near-final version is now circulating between the offices of the agency's five commissioners, according to people familiar with the status, who asked not to be identified discussing non-public matters. That typically means a final vote could come in a month, or less.

"MFA has been preparing to defend members through litigation," the group said in its recent note to members. "As a part of MFA's litigation strategy, we have gathered a coalition of impacted trade groups to join our potential suit against the SEC."

The group said that suing depends on an internal approval process and whether the final version ultimately fails to blunt aspects of the plan that MFA opposed. Its members include many of the biggest hedge fund and private equity firms in the world.

The U.S. Chamber of Commerce and private equity-funded American Investment Council have spoken with the MFA and other trade groups about common concerns about the proposed rules, said people with knowledge of the discussions, who asked not be identified discussing the deliberations. Various trade groups are waiting for the final details before deciding how to mobilize.

Tom Quaadman, executive vice president for the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said that his organization would review the final rule before making any decisions on potential lawsuits. "In its current form, the proposal is unworkable for many private fund advisers," he added. A representative for AIC declined to comment.

In a statement, the SEC said it "undertakes rulemaking consistent with its authorities and laws governing the administrative process." The agency didn't address the MFA's plans.