House approves watered-down bill easing private equity regulation

The private equity industry scored a significant legislative victory on Friday after the House of Representatives passed a bill that would roll back certain regulatory requirements instituted by Dodd-Frank.

The Investment Advisers Modernization Act of 2016, sponsored by Rep. Robert Hurt (R.-Virginia), cleared the House by a vote of 261-145, with 35 Democrats voting in favor of the bill.

The bill, HR 5424, directs the SEC to amend regulations applying to private equity firms and other private investment funds.

Among other things, the bill eliminates a requirement that fund advisers notify their limited partners if stakes in the fund are sold or transferred, such as through a secondary sale. HR 5424 also waives the application of anti-fraud prohibitions for advisers pitching funds to accredited and qualified investors.

An amendment introduced by Illinois Democrat Rep. Bill Foster addressed some of the concerns of HR 5424’s opponents and was approved prior to the final vote. During a debate on the House floor, certain Democrats, including Rep. Carolyn Maloney of New York, applauded Foster’s amendment as a necessary step for the bill’s passage.

Foster’s amendment eliminated proposed exemptions for some firms from explaining their fee structures and investment strategies in their SEC filings. It also removed a portion of the bill that would have exempted certain co-investment vehicles from being subjected to annual fund audits and SEC examinations.

Even with the Foster amendment, however, HR 5424 will face stiff opposition moving forward. In a strongly worded statement earlier this week, President Barack Obama promised to veto the bill. Democratic Sen. Elizabeth Warren, a firebrand liberal and outspoken critic of Wall Street, signaled her opposition on Twitter.

In his remarks on the House floor, Hurt referenced how public pensions benefited from PE investments. While public pensions often speak highly of PE and its returns, major institutions like California Public Employees’ Retirement System and California State Teachers’ Retirement System wrote letters to Financial Services Committee Chairman Rep. Jeb Hensarling (R.-Texas) and ranking member Rep. Maxine Waters (D.-California) in opposition to the bill.

The Institutional Limited Partners Association, which counts both CalPERS and CalSTRS as members, remained opposed to the bill even after the Foster amendment was introduced, according to a letter obtained by Buyouts.

Industry groups representing the interests of private equity firms, including the American Investment Council (formerly the Private Equity Growth Capital Council), Association for Corporate Growth and Small Business Investment Alliance, supported the bill.

“This is a welcome step for midsize private-capital providers who help bolster the U.S. economy by investing in small and midsize American businesses that employee more than 15 million Americans,” ACG President and CEO Gary LaBranche said in a statement.

“The bill’s thoughtful and modest reforms maintain important investor protections while modernizing the regulatory framework for advisers.”

Action Item: The text of HR 5424 can be found here: https://www.congress.gov/bill/114th-congress/house-bill/5424

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 February 11, 2015. Photo courtesy Reuters/Joshua Roberts