House Republicans blast SEC on private funds, say focus should be on RIAs

Congressmen claim that the agency is protecting fat cats at expense of ordinary investors

By Mark Schoeff Jr.

Sep 13, 2013 @ 2:45 pm (Updated 3:36 pm) EST

RIA, private funds, regulation, SEC, securities and exchange commission

The Securities and Exchange Commission's emphasis on regulation of private investment funds threatens to diminish its oversight of registered investment advisers, according to House Republicans.

Under the Dodd-Frank financial reform law, the SEC has taken on about 1,500 additional advisers to private-equity and hedge funds. The Dodd-Frank measure requires that private funds with more than $150 million in assets under management register with the SEC so that the agency can better monitor any systemic risk the funds pose to the financial system.

Private funds must file a so-called Form PF that provides details about their funds' trading practices and leverage. The SEC also has launched so-called “presence exams” that are targeted at high-risk areas of private-fund operations.

In a Sept. 12 letter to SEC Chairman Mary Jo White, two leading Republicans overseeing the agency asserted that it is reviewing private funds to strengthen protection of their investors — who must meet certain high income and asset thresholds to buy shares — rather than to determine systemic risk.

“The attention the SEC has paid to enhancing the regulatory scrutiny afforded to sophisticated investors suggests that the SEC has prioritized the protection of 'millionaire and billionaire' investors over 'mom and pop' investors,” wrote Rep. Jeb Hensarling, R-Tex., and Rep. Scott Garrett, R-N.J. Mr. Hensarling is the chairman of the House Financial Services Committee. Mr. Garrett is chairman of the panel's Capital Markets Subcommittee.

The lawmakers told Ms. White that the SEC needs to focus its efforts on reviewing registered investment advisers. Ms. White has testified before the committee this year that the SEC examines annually approximately 8% of registered investment advisers and that 40% have never been examined.

“Many registered investment advisers provide investment advice to investors who are often less sophisticated and have fewer resources to conduct due diligence on their investment advisers and the quality of their investment advice,” Mr. Hensarling and Mr. Garrett wrote. “Before the SEC expends valuable and limited resources to protect sophisticated and institutional investors in private funds — the investors who need such protection the least — the SEC should prioritize the protection of less sophisticated investors who need such protection the most.”

The SEC declined to comment.

An investment adviser advocate said that he hopes the SEC's Office of Compliance Inspections and Examinations will employ presence exams to increase its coverage of registered investment advisers.

The “OCIE has given a high priority to presence exams for private equity and hedge fund advisers,” said Neil Simon, vice president of government relations at the Investment Adviser Association. “We believe this program should be extended to investment advisers and not limited to the new registrants.”

Mr. Hensarling and Mr. Garrett wrote that the SEC examination process is “burdensome, costly, inefficient and inflexible” for private funds, which they argued “create thousands of jobs and provide financing to struggling companies.”

The legislators have been private-equity champions, leading the House panel to approve a bill this year that would exempt private fund advisers from SEC registration if their funds had low debt levels. They've also pushed the SEC to implement a regulation that would allow private funds to advertise to the public.

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