September 12, 2023

At Hearing, Warren Calls on SEC to End Private Equity’s Evasion of Public Disclosure Requirements and Ensure Transparency for Investors in Private Markets

Warren Reiterates Call for Chair Gensler to Issue Strong Climate Risk Disclosure Rule Swiftly

Video of Hearing (YouTube)

Washington, D.C. – At a hearing of the Senate Banking, Housing, and Urban Affairs Committee, U.S. Senator Elizabeth Warren (D-Mass.) called on Securities and Exchange Commission (SEC) Chair Gary Gensler to protect investors and the fairness of markets by reining in private equity’s evasion of public disclosure requirements to ensure transparent and honest markets for investors. She also reiterated her call on Chair Gensler to swiftly issue a strong climate risk disclosure rule to protect investors. 

In her questioning of Chair Gensler, Senator Warren noted that private equity funds and their portfolio companies use SEC registration exemptions intended for small businesses to raise trillions in private markets without filing public disclosures, allowing them to avoid disclosing to the public risk factors, audited financial statements, and other data that could show if that company has lost all its contracts or is getting sued for billions of dollars. 

Between July 2021 and July 2022, investors poured about $4.5 trillion into private markets covered by weaker SEC disclosure rules, while investors put over $1 trillion into public markets, where registration and public disclosure is required by the SEC – meaning that the SEC is carefully regulating public markets that handles only about one out of four investment dollars, while almost three out of four dollars are going into a private market with much weaker rules. 

Transcript: Oversight of the U.S. Securities and Exchange Commission
U.S. Senate Committee on Banking, Housing, and Urban Affairs 
Tuesday, September 12, 2023 

Senator Elizabeth Warren: So the job of the SEC is to protect investors, not the fossil fuel industry. And when you were nominated two and a half years ago, you said the giant corporation should not be able to hide their climate risks from investors. Without a strong climate risk disclosure rule, that is exactly what companies will continue to do. You have a mandate to protect investors, you have strong public support to do this, and I just want to say, it is time for you to get this job done. But instead of spending the rest of my time fencing with you over when you're going to get this rule out on climate, and a strong rule on climate, I want to shift gears and talk about private equity. 

When private equity funds acquire a company they and the companies they buy don't have to follow many of the rules that apply to publicly traded companies and to brokers that are selling registered securities. So last month, the SEC finalized new rules that ban some but not all of private equity’s most abusive tactics. Even so, after the role change private equity funds can still use registration exemptions intended for small businesses to raise trillions of dollars in private markets without filing public disclosures. 

That is a great deal for private equity, not such a good deal for investors. Again, SEC’s job is to protect investors. But more and more people are at risk because they're sucked into markets that have weaker rules. 

Chair Gensler, do you have a ballpark estimate of how much money investors poured into the private equity markets, private markets, including private equity markets, where they're covered only by the weaker SEC disclosure rules?

Gary Gensler, Chair, Securities and Exchange Commission: The private funds, total assets under management are about 26 and a half trillion dollars. 

Senator Warren: But how much was poured in last year? Do you know that number? I want to look at what’s happening now.

Chair Gensler: I'm sorry, it's in the low single digit trillions.

Senator Warren:  Does four and a half trillion sound right to you?

Chair Gensler: We could get back, but it's probably in the ballpark. 

Senator Warren: It is right. Okay, it’s right. So do you know how much money investors put in, in the same time period, into the public market where they got much better protection?

Chair Gensler: What you’re highlighting is, is there's as much activity and in some years more activity in the private markets and the public markets. 

Senator Warren: Do you know what the number was last year? 

Chair Gensler: I suspect you're going to tell me. 

Senator Warren: I am. It was a trillion dollars. In other words, the SEC is carefully regulating a public market that handles only about one in four new investment dollars, while almost three out of four dollars are going into a private market that has much weaker rules. And those weaknesses are meaningful, even after the rules change. 

So for example, private equity firms selling exempt securities don't have to report audited financial data to the public. Also, they don't have to disclose data showing that a company has lost all of its contracts or is getting sued for billions of dollars. Seems to me like that as an invitation for fraud. 

The SEC was built so that investors could have confidence in the honesty of markets. And now, three fourths of investments that are coming in are not getting those basic protections. So, Chair Gensler, how do you explain to the American people that the SEC, whose job it is to make sure that markets are honest, is standing by while private equity and the companies they own scoop up investor money without any public verification that the books are honest or that they aren't hiding huge risks? Isn't it your job to fix that?

Chair Gensler: Well, part of what we did in a finalized rule just a few weeks ago was require quarterly reporting on their fees, performance, and side letters, and then at least annual audits of those documents.

Senator Warren: So let me just say here, Chair Gensler, since we are really pressed on time. I'm not disputing that you've done good things. I hope I said that right at the beginning, you have. But these look like two giant holes to me. And the question I'm asking is, how do you explain to investors who now represent three quarters of all the new investment money, that you're not even making these guys do an audited financial statement?

Chair Gensler: Well, actually, the rule that we just finished has an annual audit in it. So it's, it's of these private funds, not of the underlying companies, but of the private funds themselves.

Senator Warren:  Well, let me just say, we’re out of  time. I really think that given the risks in this market, I appreciate what you've done, there's more still to do, and I hope we can do it as quickly as possible