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SEC Commissioner’s Comments Reignite Registration Debate

U.S. Securities and Exchange Commissioner Daniel Gallagher, speaking at a conference today, gave hope to private equity professionals that their firms might be eligible for an exemption from a new rule that requires most firms to register with the regulatory agency.

But a senior-level source close to the regulatory agency subsequently told Buyouts, in so many words: Not so fast.

Upwards of 2,000 private equity firms with $150 million or more in assets are scheduled to be registered with the agency by March 30, as mandated by the 2010 Dodd-Frank financial reform law which aims to prevent systemic shocks to the economy. Executives from several firms fought tooth and nail over the last year or so to pull back the provision, arguing it is too costly, misguided and disruptive to their core purpose of investing money in businesses.

Speaking to compliance professionals at the Investment Adviser Association in Arlington, Va., Gallagher said the agency can use its authority to exempt certain investment advisers, such as private funds, from registering even if Dodd-Frank directs them to do so, sister news service Reuters reported. Specifically, the SEC still has authority under other laws to exempt advisers from registration if the exemption is “necessary or appropriate in the public interest,” among other things, Gallagher said.

Using the commission’s authority to exempt certain advisers from registration “should not become an effort to undercut or frustrate congressional intent,” Gallagher said. But while the SEC must pay attention to language from Congress, there will be circumstances in which the agency should grant relief from registration requirements, he said.

Gallagher is the newest commissioner on the five-member panel, appointed by President Barack Obama on Nov. 7. He is one of two Obama appointees, the other three having been appointed by President George W. Bush (Obama subsequently re-appointed two of them).

Gallagher’s comments soon gave hope to some private equity executives who’ve fought against the registration comments.

“Either he didn’t get the memo to shut your mouth, or someone’s blessed [his comments],” said Rob Morris, a managing partner of Stamford, Conn.-based Olympus Partners. “Some of the Republican appointees were already supportive of this notion. If you have Democratic support, then maybe you have a chance to get something rational done here.”

Morris later tempered his enthusiasm, saying he expected the “status quo” to prevail.

In a follow-up conversation with Buyouts later the same day, the senior source close to the agency shared an interpretation of the rule and the agency’s power that was vastly different from Gallagher’s. The SEC’s job, the source said, “is to implement what Congress does, not question it or overturn it.”

Practically speaking, the source said that even if the agency wanted to offer exemptions, it’s simply too late because most firms have already applied to be registered advisers (though the nominal date is March 30, the agency required 45 days to evaluate applications, making the real deadline Feb. 14).

The agency does have the power to offer exemptions, the source said, but it would be “unwise” to abuse it.

“It has to be consistent with the policies and procedures intended by Congress,” the source said. The way staff at the SEC reads the law, he added, “Is that Congress intended them to register.”

The source went on to characterize Gallagher’s comments as “one commissioner expressing his personal views.”

Reuters correspondent Suzanne Barlyn contributed to this report.