Why CFOs and compliance officers are about to get a whole lot busier

Is the US Congress directing the SEC to over-regulate?

Former SEC Chairman Harvey Pitt says the agency may be stretched too thin to effectively monitor private equity firms – which could make the future even more complicated for industry CFOs and compliance officers.

Private equity firms are racing to meet a September deadline for registration as investment advisors with the US Securities and Exchange Commission. But, it doesn’t end there. Private equity managers are continuously facing new reporting and disclosure requirements from the SEC.

Is it necessary due diligence or over-regulation?

“My own belief is that private equity firms are the engine of economic growth and we are now imposing restrictions on them simply for the sake of restrictions,” said former US Securities and Exchange Commission Chairman Harvey Pitt. “My concern is that we will lose this engine of growth.

He was speaking to nearly 350 delegates at the annual Private Equity International CFOs and COOs Forum held last week in New York. Pitt, who chaired the SEC between 2001 and 2003 and previously was general counsel for the regulatory agency, said he believed the SEC lacked the resources to effectively monitor private equity once the registration process is complete.

And he is not alone.

“At the minute, the agency is focused on registration, but what about the day after [the compliance deadline]?” asked a fund formation lawyer based in New York. “It’s a little joke in our circle. Who will be watching? How can they effectively watch [thousands] of new registrants? We’ll wait and see.”

Pitt said SEC staffers may find themselves stretched too thinly. “Congress has told the SEC to go out and regulate the free world and much of the not-so free world, and then has not given them the (financial) resources to do just that,” he said.

Aside from registration, the SEC has continued to focus on private equity disclosure and reporting issues. Just this week the agency proposed tougher disclosure rules for private fund managers, adding more work for private equity firms.

If the SEC’s latest proposal is adopted, hedge and private equity fund advisors with $1 billion or more in assets would need to provide information on the types of assets in each of their funds' portfolios. They would also have to provide certain information relevant to the risk profile of the fund, and the extent to which the fund has a policy of complying with all or aspects of the Investment Company Act's principal rule concerning registered money market funds.

But, whether it’s over-regulation or necessary scrutiny is irrelevant for private equity firm CFOs and COOs. It’s clear that the SEC isn’t going to become less interested in regulating and monitoring the alternative investment fund industry – and indeed, an agency that isn’t equipped to do so properly could cause even more headaches for GPs. Private equity CFOs and compliance officers, therefore, can expect busy months (and years) ahead. And firms without the resources in place to deal with future SEC initiatives will find the road ahead even more challenging.