Last year, the Securities and Exchange Commission proposed new rules for the industry that it may adopt as soon as this month, the Wall Street Journal reported, citing people familiar with the matter. It would be a major change for private funds, which have, until now, enjoyed loose regulation. The private market has burgeoned and drawn investors because of its lack of regulation compared to the public market, which has become increasingly regulated over time, Steven Kaplan, a private equity researcher at the University of Chicago, said.

“The proposed rule will fundamentally alter the fruitful, longstanding relationships between private funds and their sophisticated investors, who will find it harder to deliver for beneficiaries,” Bryan Corbett, CEO of the Managed Funds Association wrote in a statement to Fortune. “Many investors will experience higher fees and decreased transparency. Others will have reduced access to investment opportunities.” 

Kaplan largely concurred, saying, “you might decrease the returns or increase fees.” He also offered a hedged prediction: “And you’ll have more concentration among the larger players.”

The SEC declined Fortune’s request for comment.

Here’s just how much is at stake—and why the private funds sector is fighting this change so hard they’ve even set up a nonprofit entity entirely devoted to forestalling the change.

An embattled sector

The rules, called The Private Funds Proposal, would require private equity firms and hedge funds to conduct annual audits of their financial statements and report quarterly investment performance to clients. They would provide guidelines about providing disclosures to clients, and would also increase firms’ liability for negligence and mismanagement, and ban the now common practice of giving “side letters,” or preferential terms, to high-profile investors. 

Private funds in this sector manage the money of wealthy individuals, pension funds, and universities. They are now the most popular place to park big money, as they have brought bigger returns on investments than the public market, including stocks and mutual funds, in recent years.

In 2020 the private funds industry leapfrogged over the commercial bank sector, with nearly $3 trillion more in gross investment assets. But the SEC and policymakers think it may be time to rein private funds in, fearing that a lack of transparency could allow firms to overcharge investors and lie about the valuations of their portfolios.

The private fund sector is opaque, as currently there are no guidelines for funds to value their holdings, report investment performance to their clients, and disclose the fees that they charge clients. They’re also under no requirement to disclose information about their clients, including their identities, or information about how the firms raise money.

“The private equity firms in the past, some of them have not been so clear [on disclosures] and that was a mistake on their part,” Kaplan, one of the foremost scholars on private funds, said. “If the rules say they have to disclose but give some guidance as to what is okay, that would actually be a benefit without a lot of costs.”

But Kaplan thinks the audit requirements are “in some sense irrelevant” and an unnecessary cost. Because the firms only get paid upon selling something, interim reports between sales are a waste of money, he said. 

The new rules are mainly being pushed by Democrats, who outlined their arguments in a May letter. Signed by eight Democratic senators, the letter said that more guardrails are needed to prevent bad practices. Because private funds directly compete with banks, they deserve to be overseen and regulated in similar ways, they said.

“Troublingly, there is limited data on fund size and fund activities, and almost no data on the fees assessed by those funds,” the letter, co-signed by Sen. Elizabeth Warren and her colleagues, reads. “Investors need increased transparency, more informative and useful data, and prohibitions on abusive and conflicted practices.”

Tighter regulations could be a blow to the industry just as it starts to feel the effects of last year’s financial downturn. For the first time since the financial crisis in 2009, private equity funds have reported negative annual returns for the year ending March 31. The sector’s deal volume also decreased 26% and its deal count fell 15%, to $2.4 trillion and 60,000 respectively, according to consulting firm McKinsey.

Private funds are pushing back aggressively on the proposed rules. In the 18 months since the regulations were first suggested, the industry has banded together on a lobbying effort against the regulations. As part of the lobbying push, several funds, including Millennium Management and HBK Capital Management, created a nonprofit to head off the proposed rules, the Wall Street Journal reported. 

Millennium Management and HBK Capital Management did not respond to Fortune’s requests for comment. The nonprofit, the National Association of Private Fund Managers, declined to immediately comment through a representative. 

In an April 2022 letter from the nonprofit, the industry argued to the SEC that it has a precedent of loose regulation, and that the SEC has no authority to adopt the new rules because private funds have long been exempted from such restrictions by Congress. The rules would also discriminate against private funds compared to other money managers like those that represent retail investors, the letter claims.

“Because the Proposed Rules result in unsupported discriminatory treatment of private funds and their advisers, they are arbitrary and capricious,” the letter reads. “This is wholly contrary to the previously expressed positions of the Commission that private funds were appropriate only for certain sophisticated clients and, given that such funds were not available to retail investors, private funds did not need to be subject to the same restrictions as public funds.”

But the senators argue that if transparency rules had been in place earlier, the damage done by previous crises like FTX’s collapse could’ve been reduced. FTX was a leading cryptocurrency exchange once valued at $32 billion before it imploded in November after alleged criminal mismanagement and a large volume of withdrawals caused it to file for bankruptcy. While the proposed new rules wouldn’t have prevented the fraud and money laundering at the exchange, investors at firms that invested in FTX could have accessed “critical detail” that could have served as a “starting place to question those values” that underlaid the fraud, the senators said.

For large firms, the proposal will be an annoyance but not an existential crisis, according to Kaplan. “The Blackstones of the world” can afford to hire new teams of lawyers and accountants to tackle the regulations, but small private funds might not, and it will become harder for new firms to enter the market because of increased fixed costs, he said. So could the proposal kill the private funds industry? No—but it may decimate it, shrinking the sector and populating it with a few larger firms.