A broad theme in investment over the past decade and beyond has been a relative shift from public to private markets. Ironically, the popularity of ESG investing highlights how the "G" – governance – works when large companies aren't required to disclose much information to the public. Lawmakers want this to change.

The US Securities and Exchange Commission is preparing to make private companies become more transparent about their activities, tapping into concerns that a shift from publicly listed to privately held firms has made corporate life more opaque.

The regulator has started to work on a plan to require more private companies to routinely disclose information about their finances and operations, according to a semi-annual rule-making agenda and people familiar with the matter, the Wall Street Journal said (January 11). The SEC is also considering tightening the qualifications that investors must have to access private markets and increasing the amount of information that some non-public companies must file with the agency, the WSJ said.

Democratic SEC Commissioner Allison Lee, who has called for the change, reportedly warned that large private firms can "have a huge impact on thousands of people’s lives with absolutely no visibility for investors, employees and their unions, regulators, or the public. I’m not interested in forcing medium- and small-sized companies into the reporting regime," she is quoted as saying.

Such a move fits with SEC chair Gary Gensler taking a more aggressive line as a regulator across several fields since taking up the post a year ago. 

With more firms choosing to stay private for longer before going to IPO, sometimes for reasons such as corporate reporting requirements on listed firms, the shift has arguably made business less transparent. This trend comes, ironically, at a time when ESG investing is all the rage. Yet the “G” in ESG – governance – is often about accountability and openness.

The WSJ report said the SEC’s move is at an early stage, but it is likely to be resisted by Silicon Valley and other sectors, such as oil and natural-gas infrastructure, that rely heavily on funding from private markets. Young firms typically attract the money they need to grow from venture-capital funds, private-equity firms and wealthy individuals.
 
The growth in private markets has been a strong trend for some time. Private market investments – such as private equity and credit – have exploded 30-fold since 2000 to $30.5 trillion today. A report in November 2020 by Investor's Business Daily noted that the Wilshire 5000 index of investible stocks listed on US markets totaled just 3,530, falling 1 per cent from 2019. Over five years, that figure fell 7 per cent, and collapsed by half over 20 years. There are several forces at work, amongst which are the regulatory costs of being a listed business and the pressure of delivering quarterly results.

If the SEC does press for more disclosures and reporting, this has implications for wealth managers and organizations such as family offices which are often closely involved in private capital markets. 

Much has changed since the Trump adminstration, where the regime made a point of retiring two regulations for every new one enacted. SEC chair Gensler does appear to favor a more activist role for the SEC. If there is one consistent theme since Gensler took up office in April 2021, it is that he’s determined to push for more transparency over fees and costs, go after conflicts of interest, and push back against financial market activity that he considers detract from the wider economy. The pace of activity in terms of speeches, commentaries and consultations has been brisk. For example, late in 2021 Gensler said that the SEC was taking a closer look at retail trading apps such as Robinhood and the sector of special purpose acquisition companies (SPACs).