Momentum builds in Congress to lighten PE’s regulatory load: panel

  • Certain aspects of rules regime aren’t relevant to PE
  • One is audits of holding companies used solely to filter capital from fund to acquisition
  • Some Congress members say PE should be treated like VC

While a wholesale rollback of private equity registration is unlikely, the industry is trying to chip away at irrelevant details of the regulatory regime, according to speakers at the Association for Corporate Growth’s 2017 Middle Market Public Policy Forum.

A number of members of Congress are seeking to provide regulatory relief to the PE industry, said Rosemary Fanelli, chief regulatory strategist at Duff & Phelps, who spoke on the panel at the event in late September.

Some politicians feel that private equity funds should be treated more like venture capital funds and less like hedge funds, Fanelli said.

“This is not a political climate where we’ll see a full exemption,” she said. Instead, efforts are focused on lightening the regulatory load on PE, like obligating firms to make limited disclosures rather than full registration, she said.

Any efforts along these lines would likely be opposed by far-left members of Congress, so easing some of the PE regulatory burden would require recruiting pro-business moderate Democrats. One Democrat with that profile, Kyrsten Sinema, D-Arizona, spoke at the ACG event about rolling back regulations that don’t make sense.

“The system is burdening businesses up and down, from small to medium businesses to large” organizations, Sinema said. SMEs “don’t have space in budgets to hire tons of non-revenue-generating positions to meet regulatory demand.”

PE was relatively untouched by regulation until the Dodd-Frank Financial Reform Act of 2010, which required most private equity firms to register with the SEC as investment advisers. Since scrutiny of the industry began in earnest in 2012, firms have been working through compliance with the rules regime.

But certain aspects of regulation don’t apply to PE, said April Evans, partner, chief financial officer and chief compliance officer at Monitor Clipper Partners.

Many pieces of regulation “don’t work in private equity, don’t fit our business model,” Evans said. “There is no risk to our investors. At the end of the day the SEC’s mission in life is to protect individual investors. We’re not retail; we have sophisticated institutional investors.”

One example is an audit requirement for holding companies that private equity firms form to make investments, Evans said.

For tax reasons, PE firms form holding companies to buy companies. Those holding companies do nothing except siphon capital from the PE fund into the target company, Evans said. “And yet, there’s a requirement for an audit,” she said. “It’s a waste of time, effort and it’s our investor money getting wasted.”

Another example Evans provided involved a requirement that PE firms tracking employees’ personal trading activity keep watch for insider trading. This is not a huge concern for private equity firms, especially in the middle market, which invests primarily in private companies.

“My firm, my tiny firm, maintains the personal brokerage accounts of our employees because we’re required to track their trading activity,” Evans said. “It’s nonsense. We’re actually creating risk rather than eliminating risk.”

Action Item: Read more about ACG’s event here:

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