The House of Representatives voted in June to approve the Financial CHOICE Act, which will roll back key parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act. While the bill in its current form is thought to have little chance of passing the Senate, it is worth considering its implications as it is likely that some form of repeal will be passed.
The most talked about parts of the repeal bill concern banks, including a focus on reversing the Volcker Rule and reducing the authority of the Consumer Financial Protection Bureau. However, the bill also includes a section to reduce registration and reporting requirements on private equity firms.
Although the language in the repeal bill purports to provide relief to private equity firms from certain requirements, it does not really move the needle. The principal reason for this is that the repeal bill does not alter the SEC’s reporting requirements that were promulgated under Dodd-Frank.
PE firms’ requirements under Dodd-Frank
Dodd-Frank established the Financial Stability Oversight Council to monitor risks to the US financial system. FSOC may determine that a non-bank financial company be subject to the supervision of the Board of Governors of the Federal Reserve System if its activities pose a risk to US financial stability or in the event of its material financial distress.
To support FSOC, Dodd-Frank amended section 204(b) of the Advisers Act to ensure that the SEC establish reporting and record-keeping requirements for advisors to private funds. The new measures may include filing reports of information that is in the public interest, for investor protection or for the assessment of systemic risk by FSOC.
As a result of Dodd-Frank, in 2012 the Securities and Exchange Commission and the Commodity Futures Trading Commission jointly adopted new rules for the registration of advisors to private funds, as well as new reporting requirements (Form PF). Private equity firms were included in these requirements.
Section 858 of the repeal bill (“Exemption of a reporting by private equity fund advisors”) amends Section 203 of the Investment Advisers Act by adding an exemption for Private equity fund advisors:
“(1) Except as provided in this subsection, no investment advisor shall be subject to the registration or reporting requirements of this title with respect to the provision of investment advice relating to a private equity fund. (2) […] the Commission shall issue final rules (A) to require investment advisers described in paragraph (1) to maintain such records and provide to the Commission such annual or other reports as the Commission, taking into account fund size, governance, investment strategy, risk, and other factors, determines necessary and appropriate in the public interest and for the protection of investors; and (B) to define the term “private equity fund” for purposes of this subsection.”
In addition, section 859 of the bill eliminates the Dodd-Frank requirement for reporting to support FSOC’s mission to monitor systemic risk. Specifically, it amends section 204(b) of the Investment Advisers Act by striking language pertaining to reporting for “the assessment of systemic risk,” as well as striking references to FSOC.
Continued Reporting Obligations of PE Firms
The effect of the repeal bill is that private equity funds do not need to register with the SEC, but the SEC can define “private equity fund.” Private equity funds that are exempt from registration must still report annually to the Commission. The reporting is “necessary and appropriate in the public interest and for the protection of investors,” but not necessarily for assisting FSOC with the monitoring of systemic risk.
The SEC has already defined “private equity fund,” and it turns out that some fall under the SEC’s definition of a hedge fund. Even with the repeal bill they would still need to be SEC registered and would still report on Form PF.
In short, little would change for private equity funds that become exempt from registration, as private equity firms, regardless of size, already submit Form PF on an annual basis, and the SEC is unlikely to eliminate certain questions on Form PF that were only for the monitoring of systemic risk.
While the bottom line is that PE firms will experience little relief from the Financial CHOICE Act, it is important that they examine the Act to make sure they understand its nuances.
Jeanette Turner is managing director and chief regulatory attorney of Advise Technologies, a leading provider of regulatory compliance software and related solutions and services for a global investment management clientele, including private equity firms, hedge funds, fund administrators, mutual funds and ETF providers.