Republicans look to ease PE regulatory burden

In one of the first big moves from the newly formed 114^th Congress, Representative Michael Fitzpatrick (R-PA.) introduced the Promoting Job Creation and Reducing Small Business Burdens Act (HR 37) last week, a bill that proposes significant changes to the Dodd-Frank Act.

The bill fell 16 votes short of passing in the House of Representatives under the expedited “suspension of the rules” procedure that requires a two-thirds vote, but will be up for another vote under normal procedure this week.

Similar to a provision previously introduced by Republican Robert Hurt (a co-sponsor of HR 37) that would remove a Dodd-Frank requirement that large fund managers register as investment advisors with the US Securities and Exchange Commission (SEC), the bill would exempt GPs from registering as broker-dealers with the commission. Such registration currently is required for firms that receive fees for investment banking activities, like providing merger advice or selling debt securities. Representative Hurt’s bill stalled in a Democratically-controlled Senate after passing in the House of Representatives in 2014.

In the spring of 2013 the SEC fired a warning shot that it would be looking into transaction fees charged to private equity-backed companies, and whether it represented unlicensed broker-dealer activity.

At the time, SEC attorney David Blass floated the argument that GPs charging transaction fees are doing the job of an investment bank and should be regulated as such. Marketing and IR staff that receive extra compensation for helping execute fund commitments were also put under the SEC’s scope.

Later in 2014 a SEC no-action letter clarified that private business brokers do not necessarily need to be licensed to pitch deals, while formal guidance on private equity broker-dealer registration may arrive in the coming months. While the SEC has cited broker-dealer registration as a problem in deficiency letters, the commission has yet to bring any enforcement action on the matter. The bill would remove that threat.

The bill would also extend the deadline of the “covered funds” provision of the Volcker Rule by another two years, giving all banking entities until July 21, 2019 to exit any investments in hedge funds and private equity funds. The deadline was just extended from 2015 to 2017 by the Federal Reserve in late December.

The bill will also loosen regulations on derivatives, allowing Wall Street firms that own commercial businesses such as oil or gas operations to trade derivatives privately instead of in central clearinghouses.

Given its strong response under the fast-tracked rules, the bill is likely to pass under the normal rules, which only require a simple majority. It is unclear whether the Senate will approve the bill, but President Obama is likely to veto it, should the bill reach his desk. Government data site GovTrack predicts there is a 7 percent chance the bill will be enacted.