House approves Financial CHOICE Act that eliminates GP SEC registration

The House of Representatives on June 8 passed the Financial CHOICE Act, vindicating a years-long effort by Financial Services Chairman Jeb Hensarling (R-Texas) to dismantle the Dodd-Frank Act.

The vote was 233-186, mostly along party lines. The bill is seen as having no chance of passing the Senate, but certain provisions could be carved out and taken up by legislators down the line.

The CHOICE Act would have sweeping effects, affecting the Consumer Financial Protection Bureau, the Volcker Rule, capital controls and the procedure for winding down systemically critical institutions in a crisis. Most relevant for private equity managers is a provision that exempts GPs from having to register with the SEC; registered advisers are subject to compliance exams and reporting requirements.

But established players in the industry might not opt out of registration even if they could, said Rosemary Fanelli, a managing director at Duff & Phelps who works on regulatory affairs and compliance consulting.

“Many of the larger private equity firms that we’ve spoken to do not have any intention of deregistering, even though the obligation to register may be eliminated, and that’s because it is now a market expectation,” Fanelli told Buyouts. “Investors expect to receive certain information, certain kinds of reports. They’re expecting to see internal controls and compliance programs.”

Jeremy Swan, national director of CohnReznick’s private equity and venture capital practice, agreed: “The LPs have gotten used to this. They value the transparency, and I think that will be reflected in some of their requirements for limited-partner agreements going forward.”

These sentiments were supported by the Institutional Limited Partners Association, which reiterated its position that the CHOICE Act would be bad for LPs and their beneficiaries.

“We are disappointed that the House of Representatives passed legislation that eliminates a regulatory structure that has been extremely beneficial to fostering transparency, disclosure and sound governance within the private equity industry,” said ILPA CEO Peter Freire. “We urge the Senate to consider the consequences of moving the CHOICE Act as currently written forward, with these harmful provisions included.”

ILPA added that a survey of its membership found that 92 percent of respondents thought SEC registration and oversight should continue.

Jack Ehnes, CEO of California State Teachers’ Retirement System, a major LP, harshly criticized the CHOICE Act, saying in a statement that it “aims to unwind important shareholder rights, allows for riskier public companies, and decimates the [SEC’s] ability to protect investors.”

The Small Business Investor Alliance, on the other hand, welcomed the bill’s passage, saying it “takes a number of steps to provide the regulatory relief and modernizations our members need to drive more capital into domestic small businesses and promote greater economic growth.”

Action Item: Contact Rosemary Fanelli of Duff & Phelps at +1 212 983 7710.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) questions Housing and Urban Development Secretary Julian Castro during a hearing on “Oversight of the Federal Housing Administration,” on Capitol Hill in Washington on Feb. 11, 2015.  Photo courtesy Reuters/Joshua Roberts