GOP reform rollback to start with nixing of PE advisers' registration

By Mark Schoeff Jr.

May 3, 2011 @ 3:58 pm (Updated 3:59 pm) EST

Republicans on a House committee are poised to begin their effort to roll back parts of the Dodd-Frank financial reform law by targeting a provision requiring private equity advisers to register with the Securities and Exchange Commission.

The House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises appeared to be ready to approve the bill — one of seven it is considering on today.

Votes on the bills — several others of which would undo parts of Dodd Frank — were postponed until late this afternoon. If the subcommittee approves the bills, they would be taken up by the full committee later.

Although Democrats on the panel criticized the legislative package as an attempt by Republicans to roll back Dodd-Frank even before it has been implemented, the private equity registration bill drew bipartisan support.

In the Dodd-Frank law, advisers to private equity and hedge funds have to register with the SEC. Supporters of the provision said that SEC oversight of private funds would give the agency better insight into systemic risks in the financial markets.

The author of the bill that would repeal the provision, Rep. Robert Hurt, R-Va., said he was trying to help spur job creation by increasing the flow of capital to small businesses, which he said would be crimped if private equity advisers had to endure the regulatory burden and increased costs related to SEC registration.

Private funds would have to churn out “copious amounts of paperwork for the SEC” and would have to value the firms in their investment portfolios on a monthly basis — a difficult task when assessing nonpublic companies, he said.

Mr. Hurt argued that private equity funds do not represent a systemic risk because they do not rely on debt and are not subject to margin calls. Rather, they invest in businesses sucn as manufacturing enterprises.

“Private equity did not cause the financial crisis,” Mr. Hurt said.

Rep. Jim Himes, D-Conn., said that private equity funds act a lot like venture capital funds, which are exempt from SEC registration under Dodd-Frank.

“Private equity entities do not employ leverage any more than venture capitalists do,” he said.

Mr. Himes praised private equity funds for staying in falling markets when others are fleeing.

“They are countercyclical investors,” he said.

Despite Mr. Himes' support, the ranking Democrat on the subcommittee opposes Mr. Hurt's bill. Rep. Maxine Waters, D-Calif., said that putting private equity under the SEC's aegis would better protect public pensions in part because it would subject private equity advisers to a fiduciary duty.

“This bill could put [pension] funds at risk,” Ms. Waters said.

Mr. Hurt, however, said that the standard of care is already high for private funds.

“Advisers to private-equity funds owe a fiduciary duty regardless of whether they are registered with the SEC,” Mr. Hurt said.