Republicans move to reduce SEC oversight

If the Financial Choice Act is passed, private equity managers may no longer be required to register as investment advisers with the SEC.

The chair of the Financial Services Committee Jeb Hensarling has introduced a Republican proposal that would reduce regulatory oversight of the private equity industry.

“There is a better way forward and it’s called the Financial CHOICE Act; an acronym standing for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs,” said Hensarling at the hearing for the proposed act.

Under the act, which would serve as an alternative to the Dodd-Frank Act, private equity managers would no longer be required to register as investment advisers with the Securities and Exchange Committee and may instead qualify as exempt investment advisers.

“The ‘Financial Choice Act’ outlines a more appropriate regulatory balance for private equity. It also correctly highlights that private equity is not a source of systemic risk. This proposal is further evidence that many key policymakers recognize that the industry should receive regulatory relief moving forward,” a spokesman for the American Investment Council told pfm.

After the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, there has been a significant increase in SEC scrutiny of private equity managers. Managers are required to register with the SEC as investment advisers and are currently subject to inspections and civil enforcement actions initiated by the SEC’s Division of Enforcement, as well as examinations conducted by the Office of Compliance Inspections and Examinations.

Inspections are also getting tougher as the regulator’s knowledge of private equity and that of its examiners’ deepens. “The SEC learns from SEC exams,” said one delegate at Private Equity International’s Private Fund Compliance Forum.

If the act is passed it may help to reduce SEC oversight of private equity managers, however, “if private equity managers become investment advisers exempt from SEC registration, they will still be required to comply with certain anti-fraud provisions and SEC rules,” said Kenneth Berman, a regulatory and compliance lawyer at Debevoise.

Private equity managers would still be subject to certain anti-fraud provisions outlined in Section 206 of the Advisers Act, and may also be subject to certain rules such as the “pay to play rule” which limits investment advisers who manage public pensions and other types of government investment funds from making political contributions to officials who choose fund advisers.

This is the second law proposed in recent months aimed at lessening the regulatory burden on the private equity industry. The Investment Advisers Modernization Act, which proposes updates to the Investment Advisers Act 1940 and would lift the regulatory burden on several areas that limit GPs such as advertising, was recently approved by US House Committee on Financial Services. The bill is now waiting to be brought before the House of Representatives for a vote.