Will Private Equity Fund Managers Register or be Exempt?

The SEC extended the deadline for private fund managers to register with the Securities and Exchange Commission as investment advisers from July 21, 2011 to March 30, 2012. That’s a long enough period of time for legislation to intervene and grant a new exemption for private equity fund managers.

Dodd-Frank has a new exemption for venture capital fund managers.  There was an exemption for private equity fund managers in early drafts of the legislation, but that exemption never made it into the final law.

Now the Republican-controlled House is trying to re-create the exemption.

The Small Business Capital Access and Job Preservation Act was approved by a House Committee on Financial Services.

“Given the costs of registration and compliance, subjecting private equity advisers to this regulation diverts capital, time, talent and effort from activities that result in job creation. By tailoring registration requirements to exempt advisers to private equity funds, the bill strikes a better balance between the benefits of adviser registration and its costs.”

The bill is not without its critics. The North American Securities Administrators Association sent a comment letter to the committee.

First, NASAA attacks the failure to define the term “private equity fund.” The bill delegates this task to the SEC. This was the same approach used for venture capital fund managers in Dodd-Frank. However that common label is better understand than the broad range of investment strategies and risks that fall under the private equity label.

Second, NASAA is concerned that the bill is unclear as to what, if any, reporting requirements would be required for this new defined group of private equity fund advisers. The bill exempts “private equity” from the registration and reporting requirements. That means venture capital would have some reporting obligations, but private equity would not. NASAA believes that the proposed exemption contained in Section 203(o)(1) would likely have the unintended consequence of depriving the SEC of regulatory information critical for assessing risk and protecting investors.

Third, NASAA observed that the bill’s scope appears to cover all investment advisers who advise “private equity funds.” The exemption is not limited to those who solely advise private equity funds. Theoretically, an adviser could set up a private equity fund and cover all of its operations that would otherwise be exempt.

I have an interest in this bill so my opinion is biased. I think many private equity fund managers are a poor fit under the requirements of the Investment Advisers Act. Registration and reporting will impose a regulatory burden that will do little to reduce risk or protect investors.

However, the bill is taking such a blatantly partisan and over-broad approach to a sensible exemption. It also seems to be packaged with the Small Company Capital Formation Act (H.R. 1010) and the Burdensome Data Collection Relief Act (H.R. 1062). The Small Company Capital Formation Act would raise the regulatory thresholds for exemption for registration with the SEC from $5 million to $50 million. The Burdensome Data Collection Relief Act repeals the obligations under Section 953(b) of Dodd-Frank for public companies to disclose the ratio of executive compensation to the median compensation of all corporate employees.

Two other bills, the Asset-Backed Market Stabilization Act and the Business Risk Mitigation and Price Stabilization Act were originally introduced with these three, but I haven’t seen any further action of those two.


Image of Washington DC – Capitol Hill: United States Capitol is by Wally Gobetz