House OKs Bill to Exempt Private Equity Registration — Again

NEW YORK (The Deal) -- A mostly Republican group of House lawmakers on Thursday evening voted to approve a package of bills including a measure that would exempt most private equity firms from registering with the Securities and Exchange Commission.

The package of bills, which faces a White House veto threat, was approved by a 253 to 163 vote, with 32 Democrats backing it. The private equity measure included in the package, which is opposed by SEC Chairman Mary Jo White, passed the House in December with a vote of 254-159, with 36 Democrats backing it.

If approved, the buyout shop legislation would roll back a provision in the Dodd-Frank financial reform law that requires private equity firms to register with the SEC and open up their books to periodic surprise examinations. Since 2012, these firms have been required to register with the SEC and also produce reports to the agency, which include disclosures about fund governance and conflicts.

The measure would instruct the SEC to produce a more comprehensive definition of the term "private equity firm," and require many private equity funds to only maintain records that the agency could access periodically. However, without much Democratic support it is unlikely it will have much of a chance of passage in the near future.

Rep. Robert Hurt, R-Va., a key sponsor of the buyout shop measure, told The Deal outside of the House of Representatives in the Capitol that registration of private equity funds is an unnecessary burden, especially on the smaller funds. He argued that many other fund managers, such as venture capital advisers, are not required to register.

"We know that other advisors of similar funds are not required to be registered and we feel that they [private equity] shouldn't be treated any differently," said Hurt. "Sometimes people say this won't have a direct effect on investments but I would beg to differ: When you have paperwork costs anywhere within the structure that is time and money that it is tied up when they could be doing an analysis of potential acquisitions." Hurt noted that he represents a rural Virginia district where many people are employed at companies backed by private equity sponsors.


However, Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, in an interview with The Deal, argued that since private equity firms have had to register and open up their books to the SEC the agency has discovered "pay to play" schemes, insider-trading and a misappropriation of assets at buyout shops. "That means that they [SEC] were right in wanting to have more oversight," said the California Democrat.

In a June 18 letter to the House Financial Services Committee, the SEC's White said the markets would "not be well-served" by narrowing the scope of the commission's oversight of private equity fund managers. In the letter she noted that since fund managers have had to register, the SEC has brought enforcement actions against private equity funds and their advisory personnel involving unlawful "pay to play" schemes, insider trading, conflicts of interest, valuation, and misappropriation of assets.

In addition, Andrew Bowden, the SEC's director the agency's Office of Compliance Inspections and Examinations, told private equity fund managers in May in New York that the agency has identified what it believes to be violations of law or material weaknesses in controls around fees and expenses at more than 50% of the buyout shop fund managers the agency had reviewed up until that time. Bowden said that was a "remarkable" statistic.

White told Senators on Sept. 8 that she anticipates that the agency's staff in October will complete a two-year initiative to conduct "risk-based" exams of private fund managers, which were shorter in duration than typical SEC exams and have been designed to inform funds of their obligations. As of September, the SEC has conducted 340 exams of newly registered managers.

Waters said she acknowledged that buyout shops argue that registration is an onerous and difficult burden. However, she argued that the industry has some "favoritism in the law" and that they should "be happy" that Congress never moved to revise tax policy when it comes to so-called "carried interest," - the profits received by fund managers.


Currently, carried interest gets treated as capital gains with a top basic rate of 20% as opposed to the top ordinary income rate of 39.6%. Democrats have sought to hike taxes on hedge fund managers and private equity firms in previous years but have failed to garner the support of enough Republicans for approval.

Hurt acknowledged that his buyout shop measure doesn't have a companion provision under consideration in the Senate but added he was hopeful that there would be some "positive action" on the bill after the November mid-term elections. However, Waters said there was no likelihood of it being approved, adding that the package was a "recycling of ideas" that Republicans will seek to use to campaign on.

"They put it all together and call it jobs and campaign on the fact that they are creating jobs," Waters said. "You can see in some of what they are doing what kind of difficulty they have in accepting that Dodd-Frank is law. They are constantly attempting to overturn it and weaken the SEC."

Also included in the package is a provision that would exempt most M&A brokers who handle private deals that are less than $1 million in value, from registering with the SEC, a move that would significantly reduce their compliance costs. Critics argue that the costs of registration, which include fees and costs associated with the hiring of a compliance officer, have made it difficult for M&A brokers to stay in business. That provision passed the House in January by a vote of 422 to 0.

More from Mergers and Acquisitions

Could Spotify Be Next on Amazon's Wish List?

Could Spotify Be Next on Amazon's Wish List?

Sprint, T-Mobile Might Have to Do More Than Make Promises to Get Deal Approved

Sprint, T-Mobile Might Have to Do More Than Make Promises to Get Deal Approved

Xerox Received Interest From HPQ Before Fuji Deal: Sources

Xerox Received Interest From HPQ Before Fuji Deal: Sources

Divestitures at Newell Expected in Weeks: Wells Fargo

Divestitures at Newell Expected in Weeks: Wells Fargo

In Biopharma M&A, 'Where There's Real Innovation There's Someone Willing to Pay'

In Biopharma M&A, 'Where There's Real Innovation There's Someone Willing to Pay'