The secondary market has blossomed into a sector with opportunities for liquidity, diversification, and risk management in investment portfolios. This recent development underscores the need to understand the importance of regulatory changes in these public and private markets.
The regulatory landscape for secondary markets continues to evolve. This overview reflects general developments but should not be considered comprehensive or current regulatory guidance. Investors should consult with their legal and compliance advisors regarding applicable requirements.
Here’s a look at how regulatory shifts are shaping secondaries and what investors can expect in the future.
The 2008 global financial downturn highlighted the need for transparent, fair, and stringently regulated markets. The goal over the last several years has been to protect consumers and their data while maintaining the kind of freedom that promotes innovation and growth.
The Dodd-Frank Act, for instance, was a direct response to the economic crisis. The 848-page piece of legislation aimed to establish more oversight agencies to clamp down on a financial system that ran wild in the early 2000s.
More recently, regulation shifts have strived to cover more asset classes, expand their scope, require more diligent surveillance of transactions, and mandate quicker response times to inquiries from regulators. Private fund reforms have impacted secondary markets, including stock exchanges, bond markets, and private equity secondary markets. The goal of these changes was to enhance integrity, transparency, and investor protection across the sector.
In an ever-shifting technological landscape — one being transformed by artificial intelligence — tracking regulatory changes in the secondary market is a moving target. But a few key themes have emerged. Updated reporting requirements is the first.
In 2023, the U.S. Securities and Exchange Commission created new reporting guidelines for adviser-led secondary transactions. They included an amendment to Form PF, the confidential reporting vehicle that must be completed by certain SEC-registered investment advisers who work with private funds.
The amendments — which require private equity fund advisers to report some “triggering events” within 60 days of each fiscal quarter’s conclusion — were implemented so the SEC could better review and monitor secondary transactions. By increasing efficiency, the SEC hoped these efforts would better inform policy-making decisions and increase investor protection.
“Private funds and their advisers play an important role in nearly every sector of the capital markets,” SEC Chair Gary Gensler said at the time. “By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency.”
The introduction of cryptocurrency and the blockchain to the market has increased the need for guardrails on the secondary market. These advancements have the power to streamline the secondary market — by automatically and immediately executing trades on the blockchain, for instance — but they must be managed to keep data safe. More regulations surrounding these new technologies are expected in the future.
Investors and advisors have largely adapted to the changes in regulations and are prepared to do so in the future. Some are even using the advancements in data transparency and integrity
to streamline workflows, identify untapped opportunities, enhance productivity, and evaluate risk.
To minimize regulatory risks, it’s important to be mindful of asset valuations, compensation arrangements, vehicle terms, and complete disclosures. Even with the SEC’s heightened scrutiny, risks can be managed with thoughtful processes and transparent disclosures that address their concerns.
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.