To many, the Trump administration has sounded the death knell of much financial regulation. But not for Mary Jo White. A month after leaving the US Securities and Exchange Commission, the agency's former chairwoman is positive her legacy will remain intact.
Sitting down with sister publication pfm in late February, White said regulatory oversight in private equity isn't likely to change much. Issues in the asset class – such as valuations and fee and expense allocations – will continue to be discussed and scrutinised, but the problems should be fewer.
“In terms of the industry's changes in practices, policies and procedures in these areas, that's ongoing, although I think lots of progress has been made there.”
Of course, enforcement is not confined to the SEC; it's also the responsibility of other government entities such as the Department of Justice. And, White adds, enforcement should be a bipartisan issue.
For White, the core provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 are part of an important reform in the aftermath of the financial crisis, the lessons of which the financial industry should not forget.
“Maintaining the strong reforms does not mean that you refrain from reviewing it all to determine whether you can design something more efficient but that still strongly protects the system and investors.”
Dodd-Frank gave the SEC the power to monitor the private equity industry for the first time.
A year after it came into force, the regulator, under former chair Mary Schapiro, introduced further provisions, including a requirement for private fund advisors to register with the agency and guidelines for specific exemptions to the requirement.
To go backwards on Dodd-Frank's core reforms, White says, would be “a huge mistake”.
“I think you have to very carefully proceed before you deregulate.”
This is perhaps not surprising, given that White championed the post-crisis laws governing private equity and other sub-sectors of finance when she took the helm at the agency in April 2013. Under her leadership, the regulator achieved a record number of enforcement cases – more than 2,850 actions and judgements – and a record amount of financial recoveries from such cases, totalling more than $13.8 billion.
She notes that the regulator wasn't all about enforcement, however. Through the Dodd-Frank Act, the SEC had new responsibilities affecting the private funds industry. And when there are new authorities in a space, some previously unidentified issues are bound to come up.
In October 2012, the agency announced its examiners in the National Exam Program would conduct “presence exams” – risk-based examinations of newly registered private fund advisors.
“A lot of what the SEC does isn't really enforcement; it's examining for compliance and bringing about corrections, not enforcement. The National Exam Program was really an effort to have us get to know each other in the private equity space,” White says.
It was also an opportunity to educate fund managers on the requirements, she says, adding that several issues were identified as a result – mostly dealing with fees and expenses disclosures, conflicts of interest disclosures and allocations of fees and expenses. But for the most part, the violations did not rise to the level of what the agency would call 'knowing fraud'.
“Many of them were acting on the basis of advice of counsel, and acting pretty consistently with industry practice.”
The SEC's approach under White was a mix of guidance, exams, education and enforcement. Although her tenure saw the number of enforcement actions reach new highs, not many were aimed specifically at private equity players.
“I think we're talking about around 11 cases [in private equity], but they were significant ones,” White says. “As the first enforcement cases involving a private equity firm, they were important for their impact.”
They were indeed headlining actions. In October 2015, the SEC slapped a $39 million fine on the industry's largest firm by assets, Blackstone.
The regulator had charged that the New York-based firm failed to fully disclose to its investors the benefits received by Blackstone Management Partners I, II and III from accelerated monitoring fees and legal fee discounts.
In response, Blackstone, without admitting or denying the charges, paid $26.2 million in wrongful gains plus $2.6 million of interest and a $10 million civic penalty, according to the regulator's announcement at the time.
Other large managers fined by the SEC within a year of the Blackstone case include KKR, for alleged misallocation of broken-deal expenses; and Apollo Global Management, for allegedly misleading investors about fees and interest payments and failing to detect a former senior partner's allocation of personal expenses to Apollo funds.
And these moves are unlikely to stop.
“It's still ongoing – rulemaking, enforcement, basically building the frameworks for the future regulation of the asset management industry,” White says, “which is a big part of what the SEC does.”