Monday, July 18, 2011

House Financial Services Committee Approves Legislation Exempting Private Equity Fund Advisers from SEC Registration

By a voice vote, the House Financial Services Committee approved legislation exempting private equity fund advisers from SEC registration so long as the fund does not employ leverage that is greater than a ratio of 2-1. Specifically, the Small Business Capital Access and Job Preservation Act (H.R. 1082), sponsored by Rep. Robert Hurt (R-VA), exempts advisers to private equity funds that have not borrowed and that do not have outstanding a principal amount in excess of twice their funded capital commitments. The bill was amended in the Committee to limit the exemption to advisers of funds that are levered by less than a 2-to-1 ratio.

By tailoring registration requirements to exempt advisers to private equity funds, said the Committee, the legislation strikes a better balance between the benefits of adviser registration and its costs. The legislation is co-sponsored by House Financial Services Committee Chair Spencer Bachus (R-ALA) and Capital Markets Subcommittee Chair Scott Garrett (R-NJ). It has some bi-partisan support.

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

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.

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.