Dodd-Frank might be only the beginning, warns Deborah Prutzman, CEO of the Regulatory Fundamentals Group, a startup dedicated to helping buyout executives navigate the new world of regulatory compliance. The 2010 financial reform law, formally the Dodd-Frank Wall Street Reform and Consumer Protection Act, has only begun to take effect, but Prutzman said she anticipates a half dozen areas are likely to be the focus of increased scrutiny.
One is director liability, including the roles of buyout executives on the boards of portfolio companies as well as on the fund itself. Another is internal governance, such as the infrastructure that GPs provide for investor diligence, as well as exam preparation, compensation and succession issues.
Taxes, including the treatment of carried interest and capital gains, also are likely to emerge as an issue of greater focus, Prutzman said. “We’ll see which way that goes after the election.”
She also mentioned anti-bribery laws, which could affect international dealmaking, firms’ marketing practices and a potential rise in antitrust scrutiny. That last already has started to come to light by way of a lawsuit by shareholders alleging collusion among buyout shops in some of the big take-private deals of the last decade. Details of their correspondence came to light earlier this month after a judge released a version of the private complaint that included emails among executives concerning prospective deals.
Regardless of the areas where the government may choose to bear down, buyout executives, long accustomed to operating free from review or oversight, are likely to find themselves ill-prepared for the increased scrutiny, Prutzman said. “This is the most complex regulatory environment they’ve ever known.”
Nor is it the government alone that will demand greater accountability. Now that the industry has encountered the glare of national publicity, the result of Mitt Romney’s run for the Oval Office, the general public and the media are likely to keep a closer eye on practitioners in the future, she said. Also likely: Greater diligence by prospective investors, demanding answers to questions (such as director liability on portfolio company boards) that may not have received much attention in the past.
Prutzman, an attorney who has been a partner at law firms Paul, Weiss, Rifkind, Wharton & Garrison and Arnold & Porter, began developing the online service, the Regulatory Fundamentals Group, in 2009 to provide guidance to buyout shops and hedge fund managers in business-oriented language. “It was very clear to me in 2007 and 2008 there was going to be a break in the way the financial services industry worked,” she said.
The service’s templates take managers through common processes they will have to deal with. RFG’s approach is role based, she said, so that a marketing team for instance would receive information about fundraising regulations, which applies to their work, but not reporting requirements, which might be someone else’s responsibility. The service also provides updates on regulatory changes and proposals, and the group also offers conventional consulting services.
The fallout of the financial crisis means that buyout firms and their clients will face a world that has permanently changed, Prutzman said. “Everybody in the industry needs to understand these issues.”
Telephone: 212/537-4058
E-Mail: dprutzman@regfg.com
Blog: http://regfg.com/blog/
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