House vote nears on CHOICE Act and private equity SEC registration

The Financial CHOICE Act, including a provision that would exempt private equity firms from registering as financial advisers with the SEC, is set to reach the House floor next week.

With the legislation expected to pass along party lines, observers are turning their attention to the Senate, where it faces tougher prospects. The bill could be broken up, giving certain provisions another chance at becoming law.

H.R. 10 would undo several key components of the Dodd-Frank Act. The Consumer Financial Protection Bureau would be reined in and renamed the Consumer Law Enforcement Agency; the orderly liquidation authority for winding down complex financial institutions in crisis would be eliminated; the Volcker Rule and Durbin Amendments would be repealed; and banks that maintain a leverage ratio of at least 10 percent would be exempted from a number of regulations.

For PE managers, the most relevant proposal concerns SEC registration under the Investment Advisers Act of 1940. Dodd-Frank compelled firms to sign up, subjecting them to regulatory exams and reporting requirements. That change has led to many enforcement actions: According to a 2014 speech by Andrew Bowden, then director of the SEC’s Office of Compliance Inspections and Examinations, inquiries into how fees and expenses are handled by private equity advisers identified “violations of law or material weaknesses in controls over 50 percent of the time.”

The industry pushed back, advocating the Investment Advisers Modernization Act of 2016 (H.R. 5424), which called for maintaining federal exams of PE firms but lifting some reporting burdens. Amendments mostly defanged that bill, removing proposed exemptions for some firms from explaining their fee structures and investment strategies in their SEC filings, among other things.

The private equity lobbying group American Investment Council strongly favored that legislation and also backs the Financial CHOICE Act.

“The AIC has consistently supported legislation to improve the regulatory environment for private equity investment advisers, and the Financial CHOICE Act moves in the right direction on several fronts,” said the group’s general counsel, Jason Mulvihill, in a statement to Buyouts.

“Overly burdensome, costly, ill-tailored, and unnecessary regulatory hurdles should be eliminated, or at a minimum scaled back, wherever possible. The Financial CHOICE Act would improve the regulatory environment while maintaining SEC oversight.”

The Institutional Limited Partners Association, on the other hand, has come out against the relevant sections of the bill (namely 858 and 859). The group’s CEO, Peter Freire, has written that “SEC registration and examination has been critical to fostering a transparent, level playing field where private equity funds are held accountable for their reporting and compliance procedures.”

The deadline for legislators to amend the bill is tomorrow. The House reconvenes on Tuesday.

Action Item: Contact the AIC: info@investmentcouncil.org

The U.S. Securities and Exchange Commission headquarters in Washington on June 24, 2011.  Photo courtesy Reuters/Jonathan Ernst