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Private equity framed as a strip and flip scheme in Gensler SEC hearing

The SEC under President Biden is expected to take a more aggressive role in regulating and punishing bad practices across corporate American, including private equity.

The one time private equity was mentioned in a confirmation hearing on Tuesday for Gary Gensler, President Joe Biden’s nominee for SEC chairman, it was characterized by Sen. Elizabeth Warren essentially as a strip and flip scheme.

“Is there any reason why a company that rakes in millions and millions of dollars from buying up small businesses and closing them down shouldn’t have to disclose their general practices to their investors?” Warren asked Gensler.

Gensler explained that private equity firms are required to share information about their fees, conflicts and a description of their business model with their limited partners, mandated by the Investment Advisers Act.

The characterization of private equity was not a good sign for the challenges the industry will face from Washington. The SEC under President Biden is expected to take a more aggressive role in regulating and punishing bad practices across corporate American, including private equity.

SEC this week laid out its examination priorities for 2021 that include focusing on GPs giving preferential treatment to certain LPs; portfolio valuations; adequacy of disclosure and compliance with regulatory requirements of cross-trades, principal investments or distressed sales; and conflicts involving GP-led fund restructurings and secondaries deals involving staple components.

The Senate Banking Committee is chaired by Ohio Democrat Sen. Sherrod Brown, who has in the past been critical of private equity.

At Tuesday’s hearing, senators questioned Gensler, a former Goldman Sachs executive, mostly about whether the market is rigged against retail investors, as well as diversity and inclusion, and climate change considerations in corporate America.

Republicans focused many of their questions on whether the government should be involved in mandating greater adherence to ESG principles, or whether companies should work out such issues on their own.

Sen. Warren sponsored a bill in 2019 called the “Stop Wall Street Looting Act,” which calls for fundamental changes to how private equity operates. That bill mostly fell by the wayside after introduction, but several sources told Buyouts in past interviews they expect the bill, or the ideas in the bill, will get a fresh hearing in the Biden government.

Senators have to Friday to submit additional written questions.