PE exemption bill picks up steam

Private equity funds hoping to avoid the compliance costs, reporting requirements and surprise examination visits that come with Securities and Exchange Commission registration have moved one step closer to realizing that goal. 

The House Financial Services Committee approved 38 to 18 a bill exempting private equity funds levered at a ratio of less than 2:1 (a test the overwhelming majority of private equity funds meet) from SEC registration. The legislation now moves to the Republican-controlled House floor where it is expected to be met favorably, according to industry sources. 

Two amendments were defeated prior to the committee’s approval of the bill, titled the Small Business Capital Access And Job Preservation Act. One amendment would have restricted general solicitation freedom afforded by the JOBS act, which has yet to be implemented, to firms registered with the SEC. The second amendment would have provided a “registration-lite” process for firms managing between $150 million to $1 billion in assets under management. 

Multiple industry compliance officers speaking with PE Manager have reserved enthusiasm for the bill’s passage into law.  

“The real test is whether or not the bill can pass a Senate controlled by Democrats without a veto threat from President Obama,” said one compliance officer speaking on the condition of anonymity. 

One industry insider close to Capitol Hill said, “continuing the bill’s bipartisanship support is possible in the Senate”, adding that “efforts are already underway to achieve that goal”.

Maxine Waters, the top Democrat on the Financial Services Committee, aired investor protection concerns during the bill’s mark-up.  

“If private equity firms only cater to highly sophisticated investors that don’t need certain protections, why then does one of the largest sophisticated investors in the country oppose the bill?”, asked Waters citing a letter from the California Public Employees' Retirement System (CalPERS), a major private equity investor. 

A June 2011 letter written by CalPERS senior portfolio manager and director for corporate governance, Anne Simpson, said exempting private equity funds from SEC registration would deprive investors of “the timely and accurate information they need to ascertain the suitability of an investment fund given their financial objectives and risk tolerance”. 

Republicans argue private equity firms do not represent a systemic risk to the economy, the underpinning of Dodd-Frank legislation requiring firms to register. 

“This debate I recall, was really focused on systemic risk, not so much investor protection,” said committee chairman Jeb Hensarling during markup. “On investor protection, if CalPERS doesn’t want to invest in private equity, then CalPERS can vote with its feet with its big fat checkbook.” 

During mark-up, Hensarling and his Republican colleagues stressed the accredited status of private equity investors, who are in other words sophisticated institutions less in need of oversight protection. Moreover the SEC has broad enforcement powers against market fraud and abuse regardless if firms were registered, noted Hensarling.