For more crisp and insightful business and economic news, subscribe to The Daily Upside newsletter. It's completely free and we guarantee you'll learn something new every day.

Get ready for possibly the biggest reform to US financial markets since the Dodd-Frank Act of 2010.

The Securities and Exchange Commission is gearing up to pass sweeping regulations for private equity groups, hedge funds, and real estate investment firms that aim to bring oversight and transparency in line with US stock exchanges.

Out of the Shadows

Often called "shadow banks," PE groups and hedge funds are the go-big-or-go-home high rollers of the investment world. Not only do they invest money from ultra-wealthy clients, but they also throw massive amounts of leverage (borrowed capital) into the mix for precarious bets. The end result can be incredibly lucrative or devastating -- the late 1990s downfall of Long-Term Capital Management being one prime example.

Stock investing can be a similar gamble for those who trade aggressively, but the markets themselves and some of the bigger investment banks are highly regulated. Private funds, not so much.

The SEC plans to meet Wednesday to vote on standards for shadow banks that were first proposed in February 2022. The rules are mainly focused around transparency and would require funds to provide detailed quarterly performance reports, ban secret side deals that favor some investors but not others, and limit what expenses private managers could pass on to clients. The rules would affect US private funds as well as overseas managers who take money from American investors. And of course, the changes have some obvious enemies:

  • Many industry groups feel the SEC is overstepping its power, especially since no contracts between private funds and clients, some of which have been around for decades, will be grandfathered in under the new rules. "It really upends the whole concept of freedom of contract between buyer and seller," Alternative Investment Management Association CEO Jack Inglis told the Financial Times.
  • The Managed Funds Association recently told members it's ready to sue the SEC if the regulations are passed this week. The group's chief counsel, Jennifer Han, told the FT, "[The SEC] have failed to identify a market failure and they haven't done a proper cost-benefit analysis."

Ready to Retire: The new regulations weren't designed just to stick it to elite money-making firms. Private funds manage $25 trillion in assets globally. Ten years ago, it was less than half of that at just $9 trillion. And much of that is tied to public pension money and endowments. So in addition to ridiculously rich clients making big bets, plenty of cops, firefighters, and teachers have their employee retirement accounts partially managed by opaque hedge funds and private equity groups. When some of these groups opt to get involved with meme-stocks like Gamestop, working-class public servants might benefit from some protection.