SEC commissioner, deputy director in public flap over private funds

Just as a new regulation requiring private-investment funds to register with Securities and Exchange Commission is about to go into effect, an agency official said that the regulator should consider lifting the mandate on some managers because they cater to sophisticated investors. SEC commissioner Daniel Gallagher said Thursday that the agency should offer exemptive relief to some of the private-equity and hedge funds that the SEC will oversee beginning March 30. The large, opaque funds were put under the SEC's purview by the Dodd-Frank financial reform law as a way to better monitor systemic risk in the financial system. In remarks to the Investment Adviser Association compliance conference in Arlington, Va., Mr. Gallagher argued that SEC registration would raise costs for the private funds, whose investors often have high net worth and are market-savvy. “Not all investors need the full protection of securities laws,” said Mr. Gallagher, a Republican commissioner. “To regulate as if all investors are alike … would be simplistic and counterproductive. This expansion of our regulatory reach will not serve to protect retail investors.” An SEC staff member who spoke later at the IAA conference cautioned that private funds shouldn't count on the SEC's turning them loose. Robert Plaze, deputy director of the SEC's Division of Investment Management, said that the filing deadline was Feb. 14, which puts it “late in the day” for private funds to appeal their registration. “I would not anticipate broad exemptive relief at this point,” Mr. Plaze said. “If there are any changes in the area, it will be done in Congress.” About 1,250 private funds have registered with the agency since January, about 300 more than anticipated, according to Mr. Plaze. As the SEC takes them on, about 3,000 investment advisers with $25 million to $100 million in assets under management will switch from SEC to state registration by this summer. Even as the net number of advisers under the commission's watch declines, the assets under management that SEC-registered advisers control will increase from $43 trillion to about $47 trillion, according to Mr. Plaze. The upward trend is based in part on the size and complexity of the private funds. Mr. Gallagher asserted that the funds are an important mechanism for raising capital and contributing to economic growth. “Capital formation leads to job creation, which we could use right now,” Mr. Gallagher said. “The commission cannot and should not attempt to eliminate risk taking.” Later in his speech, Mr. Gallagher said that the SEC should “find a way to provide more clarity” to the issue of the liability of compliance officers for their firms' actions. In January, the agency dismissed a case revolving around whether the general counsel of a broker-dealer should have fired a rogue broker rather than recommend that broker's supervisors do so. The broker's managers failed to discipline the broker, who was later convicted of securities fraud. The SEC did not resolve whether legal and compliance officials are supervisors, as an SEC administrative law judge ruled in the case. That judge also found that the broker's general counsel had done everything he could to address the firm's situation. Mr. Gallagher, who was forced by the SEC to recuse himself from the January case because of work his previous law firm had done, said that compliance personnel should not be deemed supervisors. The added liability may force them to stay in “dark corners” of a firm rather than lead a “culture of compliance.” “This creates a dangerous dilemma,” Mr. Gallagher said. “We must strive to ensure that the supervisor liability never deters legal or compliance personnel from diving into the firm's real-world legal and compliance problems.”