The U.S. Securities and Exchange Commission (SEC) is continuing to take steps that would force private funds to report more disclosures. This morning, the SEC voted 3-1 in favor of passing a proposal that would force hedge funds and private-equity funds to report more disclosures and conflicts of interest to regulators. The SEC will now seek input from the public for at least two months before announcing a final rule.

Source: Mark Van Scyoc / Shutterstock.com

Hedge funds and private-equity funds currently disclose less information to the public than mutual funds. This is because these private funds usually cater to wealthy clients that value privacy. The SEC also views private fund clients as more “sophisticated” than smaller retail mutual fund investors. If today’s proposal passes, private fund managers would have to provide investors with “quarterly statements detailing fund performance, fees and expenses, as well as manager compensation” for the first time. These private funds would also have to undergo annual audits to make sure fund employees are receiving the appropriate compensation based on performance.

However, if passed, the proposal would not make private funds file these new disclosures to the SEC. Rather, private funds would have to maintain an organized record book that would be audited by federal regulators. Gary Gensler, chair of the SEC, added, “Private fund advisers, through the funds they manage, touch so much of our economy. Thus, it’s worth asking whether we can promote more efficiency, competition, and transparency in this field.”

With that in mind, what else should you know about the SEC’s new proposal? Let’s dive right in.

What to Know as the SEC Votes in Favor of Private Fund Proposal

1. As part of the proposal, private funds would be prohibited from practices that could put their interests “contrary to the public interest.”
2. Hester Pierce was the lone wolf who voted against the proposal. She believes the proposal undermines investors by assuming they “are not competent or assertive enough to obtain and analyze the information they need to make good investment decisions or to structure appropriately their relationships with private funds.”
3. Currently, hedge funds are only required to report their positions once per quarter.
4. Last month, the SEC voted 3-1 in favor of increasing the amount and timeliness of Form PF filings. Large hedge funds and private-equity firms file the Form PF on an annual or quarterly basis.
5. As part of this proposal, large hedge funds would have to file reports within one business day if they incur certain incidents.
6. Furthermore, these incidents include “extraordinary investment losses, large increases in margin requirements or defaults by major counter-parties.”
7. In addition, the proposal would also change the threshold that defines a large private-equity advisor from $2 billion to $1.5 billion.

On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.