Legislator tries again for PE exemption

Representative Robert Hurt has introduced legislation that would exempt private equity fund managers from registration and reporting requirements instituted by Dodd-Frank.

The Small Business Capital Access And Job Preservation Act (HR 1105) would remove regulations that require private equity firms funds to register as investment advisors with the US Securities and Exchange Commission (SEC), provided the fund is levered at ratio of less than 2:1, according to a spokesperson from Representative Hurt’s office.   

Robert Hurt

A similar bill introduced by Hurt in 2011 failed to make it through the US House of Representatives, according to a legislation tracking website. 

Prior to the passage of Dodd-Frank in 2010, many private equity firms were not legally required to register as advisors, which allowed them to operate without the same regulatory oversight to which other financial entities were subjected. Dodd-Frank closed what the SEC dubbed a “regulatory gap” by extending registration requirements to include private equity and hedge fund managers, though venture capital firms were specifically excluded. The law compelled firms to register by 30 March, 2012. 

In a statement released by Hurt’s office, the Republican Congressman asserts that registration requirements “inhibit private equity firms from investing private capital into small businesses”. 

That argument was given sympathy by at least one of five SEC commissioners. Last March SEC Commissioner Daniel Gallagher said GPs should not be regulated in a “one size fits all” approach. Gallagher said at the time that his agency should exercise its “exemptive authority to mitigate the unintended consequences of [Dodd-Frank] rulemaking,” arguing that private funds made available only to sophisticated investors need not the same protections as funds marketed to retail investors.

“Fewer businesses are starting and more are failing – and the lack of access to private capital is negatively impacting our economy by limiting job growth and stifling investment,” Hurt said in a statement. “In order for our economy to grow and for our small business owners and family farmers to be able to create the jobs that we need, we must remove unnecessary regulations that tie up private capital and create economic uncertainty.”

The offices of the bill’s co-sponsors, Democrats Jim Cooper and Jim Himes and Republican Scott Garrett, did not respond to a request for comment. 

Although Dodd-Frank does not specifically prevent firms from completing investments, industry sources have argued that registration forces firms to dedicate resources to compliance and reporting that could go towards development of investment opportunities. 

“Private equity firms operate off of a fixed 2 percent management fee. For mid-sized and smaller firms with limited 

resources and personnel, it stands to reason that resources otherwise directed towards investment are directed towards compliance instead,” commented one industry source. “Private equity should not be included in the registration requirement for the exact same reason that VC is not included in the requirement.”

Industry group and lobbying organization The Private Equity Growth Capital Council applauded Hurt’s legislation. PEGCC president Steve Judge called registration requirements “complicated and unnecessary” in a statement, adding that they create an unfair burden for the industry. 

The PEGCC has supported Hurt in the past. The PEGCC’s political action committee donated $10,000 to Hurt’s 2012 reelection campaign. The political action committee also donated between $2,500 to $7,500 to Garrett, Himes and Cooper’s respective reelection campaigns, according to opensecrets.org.