Rob Morris Leads Charge For SEC Registration Repeal

Call Rob Morris an accidental political activist.

Morris, the managing partner of buyout shop Olympus Partners, wrote a letter last fall to Rep. Spencer Bachus, after studying provisions of the Dodd-Frank financial reform law that would require private equity firms to register as investment advisers. Morris, whose firm is based in Stamford, Conn., had no experience dealing with Washington, D.C., and no connections to the Alabama Republican who was expected to become the chairman of the House Financial Services Committee after the GOP took the House last November. It was just that the registration provision struck him as a waste, he told Buyouts as the committee staged a hearing in March to discuss the rule’s repeal. “It was of no benefit to anybody. I dislike the foolish spending of money.”

But as he penned that original letter, he had no optimism about changing government policy, he said. It was more of a constituent gripe. “I viewed it in my mind like writing the ex-girlfriend one last letter, and I would never hear from the person.”

So he was surprised when his assistant came into his office one December day after Bachus was named chairman-designate to say two lawyers from Washington were on the phone. Morris’s initial thought was that he was being arrested, he joked. But it turned out that these callers were two Financial Services Committee staffers, and he spent two hours on the phone with them that day, talking in detail about the registration provision.

This kind of high-profile activity is something of a departure for Morris and Olympus, which, like many buyout shops, tends to operate quietly, and frequently in obscure markets. Olympus’s last big news, in November, was that it had sold Ann’s House of Nuts, a Columbia, Md.-based maker of store-brand snack nut and trail mix products, to Gryphon Investors. The firm managed to do a deal at the nadir of the financial crisis in 2009, buying Holopack International Corp. from The Hansen Corporate Group, a German maker of packaging materials. (Holopack, renamed Ritedose Corp., makes single-use dispensers for oral pharmaceuticals such as asthma inhalers.) Perhaps its most prominent recent deal was last May, when Olympus bought Churchill Financial Holdings LLC, a commercial finance provider that had been beaten up in the crisis, from Irving Place Capital.

But if Morris was surprised to be hearing from the Washington lawyers at all, he was perhaps even more surprised that they were apparently serious about his complaint. So he launched into what by now has become a smooth routine, telling them that the provisions governing a registered Investment Adviser simply don’t apply to the business model of a buyout shop. It was, he said, a classic case of putting a square peg in a round hole. “It’s like asking your lawyer to get medical malpractice insurance, in a way.”

For instance, a registered investment adviser must have a qualified custodian to hold its securities (Morris has taken to using lingo like that). This makes sense, he agreed, for a company that actively buys and sells the shares of publicly traded companies. This protects a company like Fidelity Investments, for instance, from theft, whether by outsiders or insiders.

Olympus, by contrast, owns roughly a dozen companies, each with a stock certificate representing unregistered shares, and those certificates sit in a safe in the firm’s office, he said. “If you walked in here with a gun and a mask, all you could use them for is to wipe the sweat off your brow, because they’re useless.” There is no value, he argued, in having a third party bank hold those certificates so it could report that they were still safe.

But the committee staffers knew the history of the legislation, noting that the Private Equity Growth Capital Council, the industry’s representative in the capital, had not raised objections when the registration provision was inserted into Dodd-Frank during the conference committee’s reconciliation of competing House and Senate bills. Morris’s response, and what he described as the “a-ha” moment for the staffers, was when he countered that the council represents the industry’s biggest firms, which are already registered. “It’s like me being all right with the federal income tax. It doesn’t cost them anything. They’re already doing it.” (The council, which has provided some behind-the-scenes help in the repeal effort, has since begun to cultivate a broader membership.)

Morris was encouraged by the outcome of the conversation—the staffers said they would follow up with a future call—he said, thinking, “Gee, maybe there’s something we can actually do about this.”

Grass Roots Effort

Morris began to reach out to contacts at other buyout shops, both larger and smaller, to begin to build momentum for a repeal campaign.

But if the repeal effort was going to succeed, its organizers quickly realized they would need to open a second front in the campaign—an attempt to persuade the Securities and Exchange Commission to delay implementation of the requirement. At least five players in the industry—executives from Olympus, Sentinel Capital Partners, Atlas Holdings LLC, Cortec Group and Brockway Moran & Partners—have sent comment letters to the SEC

Although the letters take various tacks, they all encourage the agency to use its discretionary authority to delay the implementation. And while Morris would not speculate on the prospects of the effort with the SEC, he did note that Chairwoman Mary Schapiro recently told the Senate Banking Committee that the agency needs at least 400 more people, and more money, in order to take on its various new responsibilities under Dodd-Frank. This at least gives him optimism that an SEC delay might be a possibility.

In the meantime, Olympus and other firms are proceeding with the process of preparing for registration. Morris noted that the deadline for registration is early July, and working backward from there, the firm must be fully compliant 45 days before that, making it effectively June 1 to have everything in place. Since it takes two months to do the work to become compliant, a firm must begin by the first of April to hire the necessary law firm, accounting firm, custodian for securities, to begin interviewing for a chief compliance officer, and the like.

“We’re not just going through the motions. We’re going through the motions of writing checks,” he said. In his comment letter to the SEC, Morris estimated that the firm’s out-of-pocket expenses to total $500,000 to $600,000 just to become compliant. In an interview, he estimated the compliance officer alone would probably cost $200,000-plus. He had no estimate on what the firm has spent so far. “I don’t know yet. I haven’t gotten the invoices.”

Nor has he put together a time sheet for the effort he has put into “my new hobby,” talking to people in Washington, counterparts at other firms, journalists and the like. “It’s not something I had had on my day planner to do in 2011, but when there’s something you can do to help your business, you do it. You find the time,” he said. “It’s in my best interest, on behalf of my investors, to spend some amount of time in this three-month time period to head it off so I don’t have to spend a whole lot of time for the next five years, or forever.”