At the recent Columbia Law School Conference, “Hot Topics: Leading Current Issues in Securities Regulation and Enforcement,” SEC Commissioner Kara M. Stein’s keynote address focused on a number of transparency and disclosure issues regarding municipal securities, private equity and exchange traded funds.
Commissioner Stein highlighted the importance of municipal finance to the growth of the nation and noted that ordinary investors now own over 70 percent of the municipal securities market, either directly or through investment companies.
In light of this data, Commissioner Stein addressed two areas where, in her view, regulators could act to improve transparency in the municipal securities market. The first is to require post-trade pricing disclosure showing transaction costs on customer confirmations. Second, Commissioner Stein urged that market information, such as who in the market is interested in trading a municipal security and at what price, be made available to ordinary investors in advance of trading.
Commissioner Stein also stressed the importance of increased transparency in the private equity market. In particular, Commissioner Stein encouraged private equity funds to consider improving their disclosures regarding fees that are charged to portfolio companies and fund performance, noting that the range of sophistication among institutional private equity investors varies and that the SEC’s Office of Compliance and Inspections has identified violations or material weaknesses in controls concerning fees and expenses in many private equity examinations.
With regard to fees, the Commissioner urged disclosure of greater detail concerning consulting fees and separate fees charged to portfolio companies under various “monitoring agreements,” expressing concern that such fees might reflect “hidden and unexpected expenses” that investors may not have fully understood when committing capital to the fund. As to fund performance, the Commissioner encouraged greater detail on how the internal rate of return is calculated, such as disclosing the extent to which the value of unrealized investments is included in the calculation, and whether the calculation includes returns on capital contributed by the fund’s general partner or preferred investors.
The Commissioner’s remarks complement other recent events outlined in this blog demonstrating increased regulatory scrutiny of the private equity market.
Exchange Traded Funds
Last, Commissioner Stein addressed the SEC’s recent consideration of applications by actively managed ETFs to be exempted from a requirement to disclose their portfolio holdings on a daily basis, for fear that the daily disclosure obligations would permit competitors to front run their investment strategies. Commissioner Stein expressed concern whether the benefit of such exemptions outweighed the resulting loss of transparency. She has requested that the Staff prioritize a written request for comment to solicit public input on these issues.
As Commissioner Stein stressed throughout her remarks, transparency and disclosure of information have been, and continue to be, foundational tools to ensure effective securities regulation.