The Securities and Exchange Commission approved three proposals today that will directly impact financial advisors—a proposal to require advisors to private funds to provide full cost and performance disclosures to clients, a sweeping proposal that outlines advisors’ cybersecurity duties and last but not least, a proposal to accelerate the securities settlement cycle from two days to one.
The first proposal would require that advisors to private funds provide transparency to their investors regarding the full cost of investing in private funds and the performance of such private funds.
SEC Chairman Gary Gensler said that assets in the private fund industry, which includes hedge funds and private equity funds, has doubled in the past five years to $19 trillion.
The proposal would also require advisors to obtain an annual financial statement audit of each private fund it advises and, in connection with an advisor-led secondary transaction, a fairness opinion from an independent opinion provider.
In addition, the agency seeks to prohibit all private fund advisors, including those not registered with the SEC, “from engaging in certain sales practices, conflicts of interest, and compensation schemes that are contrary to the public interest and the protection of investors,” the proposal states.
All private fund advisors would also be prohibited from providing preferential treatment to certain investors in a private fund, unless the advisor discloses such treatment to other current and prospective investors.
On the cybersecurity front, the agency proposed a rule that would require both advisors and funds to implement written cybersecurity policies and procedures designed to address cybersecurity risks that could harm advisory clients and fund investors.
The proposed rule would also require advisors to report significant cybersecurity incidents affecting the advisor or its fund or private fund clients to the SEC using a new confidential form.
"The proposed rules and amendments are designed to enhance cybersecurity preparedness and could improve investor confidence in the resiliency of advisers and funds against cybersecurity threats and attacks,” Gensler said.
To further help protect investors in connection with cybersecurity incidents, the proposal would require advisors and funds to publicly disclose cybersecurity risks and significant cybersecurity incidents that occurred in the last two fiscal years in their brochures and registration statements.
Additionally, the proposal would set forth new recordkeeping requirements to improve the availability of cybersecurity-related information and help facilitate the SEC’s inspection and enforcement capabilities, the agency said.
Last, but far from least, the SEC approved a proposal that would create a one-day settlement process for securities transactions.