Accept your SEC fate

Waves were made when an SEC Commissioner argued some private equity firms perhaps don’t need oversight, but from a legal and investor relations perspective, GPs shouldn’t hold their breath hoping for an exemption

What if, days out from having to register with the SEC, your firm was made aware the agency is working on language that offers you an exemption? It might seem on first thought a no-brainer to take advantage of the opportunity, but now imagine explaining your exemption to investors who may wonder why some of your peers in the industry will be supervised while your firm is not. Not exactly an easy conversation considering more than a handful of LPs have expressed their appreciation of a watchdog standing guard in the private equity universe. 

Earlier this month, SEC Commissioner Daniel Gallagher said in a speech the agency should exercise its “exemptive authority to mitigate the unintended consequences of [Dodd-Frank] rulemaking” – a way of saying certain private funds made available only to sophisticated investors need not have the same protections as funds marketed to retail investors. Some GPs may have for the first time wanted to buy a regulator a beer and give a friendly slap on the back for his support.  

However, most firms have already registered, and so Gallagher’s message is likely arriving too late. And as mentioned, at this point any firm awarded an exemption could raise LPs’ eyebrows wondering why the firm would spend time and resources implementing an airtight compliance programme only to pull out later when the opportunity presented itself. 

From a legal standpoint, industry sources said the Commissioner is right in theory, but the SEC is bound by Congressional intent, and the agency is reading Dodd-Frank to mean private equity firms must register. The SEC, unsurprisingly, declined to comment on Gallagher’s views, which were expressed as his own, and not necessarily representative of the agency’s thinking on the matter. But one Washington DC-based lawyer said the SEC may consider a more tailored (somewhat lighter-touch) approach to private equity registration as a half-way compromise to the points Gallagher raises, when the ‘Congressional intent’ behind Dodd-Frank isn’t so fresh in people’s memories. 

From an industry vantage, it is nice to know that at least one of five SEC commissioners is sympathetic to the cost and ‘fairness’ argument of SEC registration. And perhaps that sympathy will trickle down to other areas of the agency responsible for, what at this point in time, seems the industry’s inevitable oversight.