Regulation of Private Equity Funds


Private equity funds, along with hedge funds, are the least regulated compared to banks, investment companies and other financial institutions. Unlike regulated banks and others, private equity funds don’t deal with the general investing public, attracting only wealthy individuals and institutions. Also, private equity funds are less interconnected with other elements within the financial system and have historically posed a low systematic risk. There are certain regulations applied to private funds, however, that aim to bring all financial operations under regulatory scrutiny.

Adviser Registration

  • Financial regulations in the U.S. require advisers of private equity funds to register with the Securities and Exchange Commission, which is consistent with registration requirement for managers of other investment companies such as mutual funds. In light of private equity funds' deep involvement in the business community and their sometimes hefty financial maneuvers, the required SEC adviser registration is not as heavy a regulation as many of those imposed on banks and other financial institutions, even in the view of private equity funds themselves. The registration covers mainly personal information, credentials and any disciplinary actions against advisers.

Transaction Reporting

  • The SEC requires private equity funds to report their portfolio of company holdings with the agency whenever it is necessary to assess any potential systematic risk posed by a private fund. Transaction information is confidential and can be shared with only other regulatory authorities. Based on data received by the SEC, if the government decides that a private equity fund has grown too large and is too risky, the fund could be placed under the supervision of the Federal Reserve.

Asset Inspection

  • Private equity funds with assets of $150 million or more under management are subject to periodic asset inspection by the SEC. Private equity funds that use substantial leverage in their investments, and thus potentially pose a systematic threat to financial stability, may be subject to stricter standards. In certain cases, private equity funds would have to disclose the names of their limited-partner investors in the funds to the SEC, giving the government greater capacity for investor protection.

Bank Sponsorship

  • Some banks run their in-house private equity funds even if the operations deviate from banks’ generally more conservative lending activities. Riskier private-equity investments may threaten the safety of the banks as depository institutions. Private-equity regulations allow banks to invest in private equity funds, in house or otherwise, for no more than 3 percent of a fund’s total capital. Private-equity investments must also not exceed 3 percent of a bank’s core capital, or tier-1 capital, the most stable and safest funding sources, including common stock and preferred stock.


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