A reprieve for private equity?

An early version of the Senate’s financial reform legislation exempts private equity from registration as an investment adviser – a carve-out which could save firms hundreds of thousands of dollars.

A ray of hope amid the regulatory gloom appeared this week with the release of US Senator Christopher Dodd’s discussion draft for financial regulation reform. The draft included much of the same language as the House’s Investment Adviser Registration Act, but with one important addition: an explicit carve-out for all private equity and venture capital fund managers.
The exemption seems to indicate that US lawmakers are beginning to agree that perhaps private equity does not, in fact, present a systemic risk to the economy – a point that managers and lobbying groups like the Private Equity Council have been belaboring for weeks.
It would be good news indeed if private equity GPs were exempt from registration: the costs associated with being a registered investment adviser can run up to $300,000 once you factor in the salary of a new chief compliance officer. But before GPs start jumping up and down with glee, it’s important to remember that the draft legislation is still in its infancy. The draft still needs to be modified and approved by the Senate Finance Committee, sent to the Senate floor for a full vote, then reconciled in committee with whatever bill emerges from the House. If Dodd’s pro-PE sentiment isn’t shared by his counterparts in the House, that reconciliation could be a lengthy one.
Even if private equity GPs don’t have to register, they won’t escape heightened disclosure rules. Both the House and the Senate have included language in their draft legislation that would give the Securities and Exchange Commission the authority to require managers to submit whatever information the SEC deems necessary to a “systemic risk regulator”. At the end of the day, Dodd’s exemption might not mean much if GPs are required to submit reams of detailed information about their operations to the SEC.
The registration exemption isn’t the only part of Dodd’s bill that was a departure from the House version. As Jesse Kanach, an associate at law firm Shearman & Sterling writes in “Battle of the bills”, the two version differ in their treatment of family offices, venture capital firms, custody of client assets, non-US advisers with US clients, and standards for accredited investors, among other items.