The US government, in requiring private investment firms to register with the Securities and Exchange Commission, should be mindful that new rules could foist a prohibitive cost burden on smaller firms, according to lobbying organisation the Private Equity Council.
“Registration will result in new regulatory oversight for many private equity firms. There are considerable administrative and financial burdens associated with record-keeping and audits as registered investment advisors,” said Mark Tresnowski, managing director and general counsel with Madison Dearborn Partners, who was representing the PEC in front of a Senate subcommittee Wednesday.
“These could be especially problematic for smaller firms,” he said.
The PEC believes private equity firms of a certain size should be required to register with the SEC, even though private equity does not pose “systemic risks” to the financial markets. “We are mindful of the fact that excluding any asset class from the new regulatory regime could contribute in some way to diminishing confidence in the effectiveness of the new regulatory regime and therefore we support the casting of a wide net,” Tresnowski said.
These could be especially problematic for smaller firms.
Tresnowski was testifying about a proposed federal financial overhaul that would include registration requirements with the SEC for private investment firms with assets under management that exceed “some modest threshold”. These firms would be required to report any information on their funds necessary for the government to determine if they pose a threat to the financial stability of the US.
One bill sponsored by Senate Banking Subcommittee Chairman Jack Reed would require registration for funds that manage more than $30 million in assets, one of several similar measures that have been introduced in the Senate this year.
Private equity has “more than $450 billion” in committed capital ready to invest, Tresnowski said, and will play a major role in bringing the US economy out of its downward spiral, he said. Public policy should support private equity’s role, “especially during the current crisis, and refrain from imposing additional burdens that could hamper these activities or redirect them to other economies”, he said.
Tresnowski’s testimony is important because the PEC represents the views of 12 of the biggest private equity firms in the world, including Kohlberg Kravis Roberts, TPG, Permira, Apollo and The Carlyle Group.
“While PEC members are among the most visible and well-known in private equity, each with more than $10 billion in assets under management, the committee should bear in mind that there are more than 2,000 private equity firms doing business in the US,” Tresnowski said. “The overwhelming majority of these are local firms doing small transactions that rarely attract much attention, and yet help power local, state and the national economy.”
Along with considering the burden the rules could place on smaller firms, the government should also ensure the rules do not force firms to share “highly sensitive business and financial information beyond that required to carry out the systemic risk oversight function”, Tresnowski said.