SEC Pushes for More Transparency from Private Companies

Anna Lyudvig

The SEC (Securities and Exchange Commission) is preparing to force more transparency from big private companies, as regulators have grown concerned about the lack of oversight of the private fundraising that has fueled their rise. 

According to Brian Schaeffer, Managing Director of InvestX, one of the more recent regulations that have been implemented is the SEC’s Regulation Best Interest (Reg BI), which establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.

Brian Schaeffer

“Furthermore, there has been a lot of jawboning around how the SEC is now looking to implement more regulations for large private companies, specifically as a first step redefining what an accredited investor should be,” he said. 

SEC Chairman Gary Gensler, as well as SEC Commissioner Allison Lee have been particularly vocal about this topic.

As the SEC Chair Gary Gensler recently spoke with CNBC, he said he wants to ensure large private companies and private equity firms are disclosing enough information to stakeholders.

“We’ve long had both public companies and private companies. And we’ve said, if you want to tap into the broad public [for capital], there’s a basic bargain: Share information, disclose information that’s important to that investor,” Gensler said.

Schaeffer commented: “To that end, there will be a direct correlation if the SEC increases the pool of investors who can access the asset class, they will need to invest more time into protecting them.” 

He added that the SEC concern is about the increase in pension plans and mutual funds that are investing into private equity, as well as the way everyday Americans’ savings are exposed to this asset class.

The trend that Schaeffer is seeing for private companies is that more companies are staying private much longer, which used to be three to five years and has now extended to 10 to 15 years. 

He said it’s incumbent on the SEC to make sure that all investors are getting a fair shake and that there is not an unfair advantage for the large buy-side firms who have gained a huge advantage by investing at early stages with these companies and having information that has become asymmetrical on these private companies, including their financial and operational disclosures. 

Schaeffer doesn’t think we should prognosticate on any regulations or reporting requirements that the SEC could potentially implement.

“However, I would imagine that their first concern would be around transparency on certain filings and some limited access to financials,” he said.

The Depository Trust Company (DTC) has already made some technological improvements to their platform to allow for the clearing and transfer of these private company shares. 

“InvestX has been taking a preemptive approach and we have thought a lot about making sure our cloud-based technology platform was on the cutting edge to be able to facilitate these transactions in a compliant manner and flexible enough to be able to react to any changes in the regulatory landscape along the way,” added Schaeffer.

If those regulations will take place, Schaeffer said they would like to imagine that by redefining what an accredited investor is, it will allow a larger swath of U.S. investors to participate in the private markets and hence there will be greater access in general. 

“Not only will you see more high net worth investors, but a larger retail base will invest as well,” he said.

He added that all of the banks and regional broker-dealers will need to have the capabilities and the technology to provide their clients with access. 

He further said the larger bulge bracket firms have all been investing in private equity platforms and InvestX is one of the few firms to only take investments from regional broker-dealers because those are the clients they exclusively serve. 

Schaeffer expects that going forward the regulators will take a very measured approach because the private markets are evolving at a rapid pace, and by taking a few small steps to provide more transparency and trust will be an iterative process. 

As SEC Commissioner Allison Lee stated in the Wall Street Journal, “I’m not interested in forcing medium- and small-sized companies into the reporting regime.” 

“This further emphasizes our expectations for what’s to come,” added Schaeffer.