The House of Representatives plans Wednesday to vote on a bipartisan bill that would exempt private equity firms from registering with the Securities and Exchange Commission, a measure that is expected to garner the backing of many Democrats in addition to most, if not all, Republicans.
The bill would roll back a provision in the Dodd-Frank financial reform law that requires large, midsized and small private equity firms to register with the SEC and open up their books to periodic surprise examinations.
Instead, the SEC would need to produce a more comprehensive definition of the term private equity firm and buyout shops would be required to maintain records that the agency could access periodically.
Backers of the registration requirement argue it deters fraud while giving the SEC and other financial regulators a larger window into whether big buyout shops pose a systemic risk to the markets.
However, opponents, including the bill's lead sponsor, Rep. Robert Hurt, R-Va., insist that private equity firms don't pose a threat to the economy and significant compliance costs associated with SEC registration negatively impact buyout shop investment and the flow of capital to small businesses.
Scott Gluck, an attorney at Venable LLP in Washington, said the rule requires many smaller private equity funds that service the middle market to register with the SEC even though they do not contribute to systemic risk. He added that registration costs as much as tens of thousands of dollars annually. This is a significant burden, especially for small or midsized private equity firms that don't have the resources of larger funds, he added.
Gluck, who said he expects the bill to garner significant bipartisan support, noted that private equity funds have a structure that is very similar to that of venture capital firms, which were deemed to be safe enough to be exempted from registration. The only difference is that private equity firms invest in more mature companies while VC funds invest in early-stage companies.
The bill, which was co-sponsored by Hurt and Rep. Jim Himes, D-Conn., was approved in June by the House Financial Services committee with the backing of all member Republicans and eight Democrats in a vote of 38-18.
However, no companion legislation exists in the Democratic-controlled Senate. The Senate Banking Committee, the panel with jurisdiction over any Dodd-Frank revisions, has no plans to consider changes to the statute.
The SEC in 2011 adopted a rule requiring hedge funds and private equity funds to register with the agency. The rule, which took effect in 2012, requires hedge fund and private equity managers with more than $150 million in assets, or with 15 or more clients in the United States, to register with the agency. Funds with between $100 million and $150 million can choose to register with a state or the SEC. The House bill would not change hedge funds' registration requirements.
The SEC conducts surprise examinations of these managers, who are required to file reports about their funds and on any conflicts of interest. However, in reality, funds are not examined that frequently. The House vote is set to take place after an SEC investor advisory committee last month recommended that Congress approve legislation allowing the commission to collect new user fees from hedge funds, private equity firms and other investment managers so it can conduct more-frequent surprise examinations on the money managers.
The committee is seeking budget money so the SEC can conduct more-frequent periodic exams at funds, noting that more than 40% of SEC-registered funds have never been examined. The 11,000 funds registered with the SEC are examined roughly once every 13 or 14 years, which the panel said is "inadequate to detect or deter fraud."
The committee predicted the agency could collect $100 million to $270 million a year in fees, an amount that could provide enough money for 25% of all registered funds to be examined annually, rather than the current mere 8%.
Geoffrey F. Aronow joined Sidley Austin LLP as a partner in the global securities and derivatives enforcement and regulatory practice. For other updates launch today's Movers & shakers slideshow.
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