High-End Securities Regulation

The SEC has long taken a hands-off approach to private markets. Instead of direct regulation, the SEC has used investor access restrictions to create high-end contracting environments where investors (in theory) have the resources needed to fend for themselves. But in early 2022, this hands-off philosophy was turned on its head. In response to booming growth and concerns about harms to public pension plans and other institutional investors, the SEC proposed a sweeping set of regulatory interventions in the $18 trillion private fund industry, a vast and important part of the private market ecosystem. In this Article, I argue that any effort to intervene in private securities markets should revolve around a basic question: What are the causes of bargaining failure? What, in other words, is stopping well-resourced industry participants from structuring their affairs effectively? Unfortunately, this question was not a central focus of the SEC’s 2022 private fund proposal, and most of the public pension plans, endowments, and other institutions that invest in private funds have not publicly weighed in on the issue. To help fill this void in the policy dialogue, this Article presents the first empirical study asking institutional investors to identify the issues that they think cause bargaining outcomes in private equity funds to fall short of optimal outcomes. Looking to the future, I predict that the debate over high-end securities regulation in private markets has only just begun, and I call on the SEC, industry participants, and scholars to work together more deliberately to study the causes of bargaining failure in private funds and private markets more broadly. I also provide a novel framework to help policymakers and courts determine when the SEC has (and has not) sufficiently verified the causes of bargaining failure before intervening in private markets, and I encourage the SEC to embrace a long-term perspective when addressing problems in these spaces. As the private marketplace continues its meteoric growth, these principles provide an essential foundation to guide the future of securities law policy in private funds and across the spectrum of private markets