Although some form of legislation requiring US firms to register with the Securities and Exchange Commission is still likely to pass this year, the recent Senate election in Massachusetts may mean that a final bill is more amenable to the private equity industry than previously thought.
The House of Representatives in December passed legislation requiring all private equity and venture capital funds managing more than $150 million to register as investment advisors (RIAs), which would also impose significant new disclosure requirements and lead to costly SEC audits. The bill is currently facing a vote in the Senate, which is considering a proposal to exempt private equity and venture capital fund managers from registering.
Although it is still not known what the final Senate bill will look like, the chances that it will be significantly watered down versus the House version increased following the victory by Scott Brown in Tuesday’s Massachusetts Senate election. Not only did Brown become the first Republican to win a Senate seat in the state since 1952, he now denies the Democrats the 60th vote needed to pass controversial legislation without worrying about a filibuster.
While much of the media focus centred on what effect this will have on the Obama administration’s efforts to pass health care legislation, the impact of Brown’s victory may be felt in other areas of the Democrat agenda like private equity regulation.
“It’s very early to see what will happen, although we do think with this change there will be less push on regulation,” Malcolm Nicholls, partner at Proskauer Rose, said during Thursday’s PEI Media CFOs and COO’s Forum in New York. “I would expect the Senate will probably look at what they have on the table and overhaul it in light of what happened in Massachusetts and make some concessions, and that will get pushed through and I imagine that will happen this year. It’s clear from people we are talking to in Washington that this is coming, it’s just what form is it going to take, and when is it going to happen?”
Nicholls made the remarks during a panel covering how firms should be preparing for registering as investment advisors. Among the issues that were discussed were the emphasis the SEC places on filing Form ADV, particularly the sections for disclosing fees and conflicts of interest, and the large amount of documentation and record-keeping that firms will have to start doing.
When it comes to hiring a chief compliance officer, Nicholls said technically a firm could outsource this function, but practically, the SEC might not approve.
John Malfettone, partner and chief operating officer at Oak Hill Capital, said this role should usually be filled by a COO, CFO or general counsel. He also said that while the SEC may not be adequately staffed to take on supervision of the larger number of firms that current legislation would require, he added that based on his last audit, SEC inspectors have become more efficient and knowledgeable about the private equity industry.
Finally, Robert Cleveland – general counsel for Hamilton Lane – said the biggest challenge for those firms who are not yet registered will be changing their office culture, and made a prediction which likely resonated with the large majority of attendees at the conference who said they were currently unregistered: “People are not ready for what we are going to have to do and all the things that are going to have to happen.”
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