PE Finds Hope In Ruling Striking Proxy Access

Some professionals in private equity fighting to repeal a rule in the Dodd-Frank financial reform law calling for most firms to register with the Securities and Exchange Commission say a recent court ruling striking down an unrelated new SEC rule could present another avenue to repeal the registration requirement.

A federal appeals court rejected a rule from the regulatory agency in July that would have made it easier for shareholders to fire company directors and install their own candidates for board of directors. The court determined that the SEC had not conducted a thorough enough analysis of the rule’s economic impact. On Sept. 6, the SEC announced it would not dispute the ruling.

Though the ruling was unrelated to the registration requirement in Dodd-Frank, some industry participants believe that the same argument—that the SEC did not properly analyze the economic impact of registering thousands of private equity firms—could just as easily be applied to their complaint that registration would place an undue economic and personnel burden on smaller private equity firms.

“I think it opens another door if we’re unsuccessful with the legislation,” said Rob Morris, a managing partner of mid-market buyout shop Olympus Partners and a vocal opponent of the registration rule.

Morris was referring to legislation the House Financial Services Committee passed in June, the “Small Business Capital Access and Job Preservation Act,” which would repeal the registration requirement. The bill now awaits a full vote House of Representatives. “I’ve certainly talked about the implications of this” with others from the industry fighting to repeal the rule, he said.

The rule, intended to curb systemic risk, calls for firms with $150 million or more in assets to register as investment advisers to March 30, 2012. Critics argue that registering—which will require firms to develop compliance policies, file annual paperwork, keep tighter records and potentially undergo SEC examinations—is misguided, putting undue compliance burdens on smaller firms that they say pose no threat to the larger economy.

“One could argue in the future that the SEC registration rule should be thrown out because the SEC did not adequately analyze the economic consequences of that regulation,” a lobbyist for the industry wrote in an e-mail. “Still, I think it is really speculative at this point whether a court given a particular case challenging SEC registration would rule the same way. It is always possible, but far from guaranteed.”