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House passes Choice Act to scale back PE regulation

The US House of Representatives has cleared the Financial Choice Act, which would scale back a number of core regulations and exempt private equity firms from SEC registration and certain reporting requirements.

The US House of Representatives passed the Financial Choice Act of 2017 on 8 June, which would diminish the oversight of the Securities and Exchange Commission over the private equity industry.

Following the passing of the bill, the Institutional Limited Partners Association (ILPA) sent out a written statement, expressing disappointment over the move.

ILPA chief executive Peter Freire said the legislation “eliminates a regulatory structure that has been extremely beneficial to fostering transparency, disclosure and sound governance within the private equity industry.”

Freire said the organisation is urging the US Senate to “consider the consequences of moving the Choice Act as currently with harmful provisions included.”

ILPA strongly opposes the Choice Act, a bill introduced by US lawmaker Jeb Hensarling in 2016. At that time he pitched it as a bill that would “relieve financial institutions from regulations”.

In April, ILPA submitted a letter to the House of Representatives Financial Services Committee asserting that sections 858 and 859 of the bill will hurt limited partners and their beneficiaries by removing regulatory oversight.

Under the Choice Act, the Volcker rule, which states investment banks can only hold 3 percent of Tier 1 capital in private investments, will be repealed.

It also affects private fund managers and their operations, by exempting them from registering with the Securities and Exchange Commission as well as reporting obligations related to the Investment Advisors Act.

In a March 2017 survey of its membership, ILPA confirmed that LPs remain in strong favour of SEC registration and oversight of the private equity industry with 92 percent of respondents indicating that such regulations should continue.

The LPs also indicated in the survey that the SEC provides additional assurances and protections which would otherwise be difficult or impossible to obtain.