This week the House will vote on a bill to roll back much of the Dodd-Frank Act. Important to our audience is a provision to exempt private equity and hedge fund managers from SEC registration.
This should be good news since compliance costs have soared in the industry since passage of Dodd-Frank, which required private funds managing north of $150 million in assets to register as investment advisors. Firms cite hundreds of thousands in new annual compliance costs to meet the heightened registration and reporting rules that come with SEC oversight. At least one independent study found evidence that Dodd-Frank is forcing smaller advisers out of the market. Firms will also weigh the benefit of sidestepping the SEC’s spotlight and avoiding the chances of being subject to a surprise exam. Big name firms like Blackstone and KKR have been already been dinged for questionable fee charges and other alleged violations that have sent a compliance shock wave through the industry at large.
On the other hand, a repeal could create problems for private debt managers whose funds flourished as banks retreated from traditional lending, according to PEHub. “The running theory is that banks would reemerge as competition to so-called shadow-banking arms run by asset managers. More competition could pressure returns for investors in private debt funds. Weaker returns lead to smaller fundraises, which leads to reduced fee revenue. This worst-case scenario ends with private debt managers wondering how their golden goose got cooked by a billionaire Republican president.”
Institutional investors have also come out strongly in favor of the additional layer of oversight afforded by SEC registration. In April, the Institutional Limited Partners Association, a LP trade body, sent a letter to the bill’s chief sponsor explicitly opposing the registration exemption provision. The California Public Employees’ Retirement System (CalPERS) reacted to a similar bill last year by stating that it “would undermine the significant gains achieved under Dodd-Frank by diminishing transparency into private funds and restricting the SEC’s ability to protect investors.”
Fund managers considering the exemption option may therefore wish to involve the limited partner advisory committee early on in the decision-making process. This week’s vote will determine if those types of difficult conversations may soon be needed.