LPs to the SEC: Please don’t leave!

LPs don’t want the SEC pulling back from its scrutiny and enforcement of the private equity industry.

That’s the sense I get from sources who have been unanimous in their assertions that limited partners are happy with the job the agency has done in regulating the industry. The SEC’s presence has helped accelerate the pace of disclosure and transparency in PE.

The concern is that under President-elect Donald Trump the SEC will take a looser stance on financial regulations, including private equity. Said one LP: “I am somewhat concerned but sincerely hope we don’t course-correct. The SEC has made great strides and raised the spidey senses of the GP bad actors, hopefully setting the foundational elements for much better behavior going forward.”

The industry is watching to see who Trump names as chairman of the agency to get a better sense of what regulations could look like going forward, Buyouts reported this week. Chairwoman Mary Jo White said Nov. 14 that she would step down from the SEC when President Barack Obama leaves the White House.

It’s of course not at all clear whether anything about PE regulation will change. Everything is in a speculative state at the moment.

“New leadership will naturally play a large role in the direction and enactment of private equity regulation,” says James Maloney, spokesman for the American Investment Council, the industry’s primary lobbying organization.

“I expect tailored and thoughtful modifications to come from the incoming regulatory regime. The private equity industry should expect rules that properly fit our general business model.”

If the SEC were to pull back on PE scrutiny, LPs might have to take a more active role in self-regulating, one industry source told me.

This could mean LPs taking a harder stance with GPs on issues like transparency about fees and expenses as a requirement before commitment. If under Trump the Dodd-Frank financial reform act gets rolled back and firms no longer have to register as investment advisers, LPs could ask their GPs to register anyway.

The feeling is the industry has come so far along this path of transparency, it would be a mistake to walk back any of the progress. Here’s hoping no matter what sorts of changes come from Trump’s leadership, GPs don’t take a step backward.

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky