Monday, May 16, 2011

Legislation Exempting Private Equity Fund Advisers from SEC Registration Marked Up and Approved by House Panel

The House Capital Markets Subcommittee has marked up and approved the Small Business Capital Access and Job Preservation Act, HR 1082, which would exempt advisers to private equity funds from SEC registration under the Investment Advisers Act. ). The legislation was approved by a 19-13 vote, with some bi-partisan support. The bill will now be taken up by the full Financial Services Committee, which is expected to send it to the House floor with a favorable recommendation.

The legislation directs the SEC to define the term private equity fund and also directs the SEC to adopt rules requiring private equity fund advisers to maintain records and provide the SEC with reports the Commission deems necessary after considering fund size, governance, risk and investment strategy. The legislation was introduced by Rep. Robert Hurt (R-VA); is co-sponsored by House Financial Services Committee Chair Spencer Bachus (R-ALA) and Capital Markets Subcommittee Chair Scott Garrett (R-NJ).

The Dodd-Frank Act requires most advisers to private investment funds to register with the SEC, including advisers to private equity funds. Rep. Hurt said that the legislation is designed to give private equity firms the same exemption that venture capital firms enjoy under Dodd-Frank.

Committee members are concerned with the private equity registration requirement. They do not see private equity firms as a source of systemic risk. Rep. Gary Peters (D-MI) said that private equity firms are not generally liquid and not highly leveraged, and thus do not pose a systemic risk. It makes no sense to treat private equity firms the same as large hedge funds, he posited. Rep. Hurt fears that the over-regulation of private equity firms could lead to less job creation. He believes that the registration requirement imposes an undue burden on private equity firms. At recent hearings, he asked if the SEC could postpone the private equity regulations until Congress can take further action.

Recently, the Financial Services Committee heard testimony regarding the role private equity firms play in preserving existing jobs and creating new ones by providing capital to struggling and growing companies. Pam Hendrickson, COO of Riverside testified that private equity firms invest in businesses and people, not publicly-traded securities. Private equity firms only make money for their investors and partners when the companies they acquire grow, increase earnings, create more jobs and become more successful. She also noted that the registration of private equity firms under Dodd- Frank will not accomplish the Act’s stated purpose of helping identify and reduce systemic risk in the U.S. financial system. But it will impose an undue burden on private equity firms, especially small and mid-sized firms, in terms of both money and time.