- Rep. Hurt bill targets specific disclosure, reporting requirements
- HR 5424 unlikely to get taken up in Senate
- CalPERS, ILPA declare their opposition
Private equity’s lobbying arm scored an important victory earlier this month when the U.S. House of Representatives passed the Investment Advisers Modernization Act of 2016, which would eliminate certain disclosure requirements instituted by post-financial crisis reforms.
The bill, sponsored by Rep. Robert Hurt (R.-Virginia), is unlikely to get taken up in the Senate, sources told Buyouts. But its specific targeting of individual regulations and rules provides a glimpse at how industry lobbyists, including the American Investment Council and Association for Corporate Growth, may approach legislative efforts moving forward.
“We very, very much took a rifle-shot approach. We tried to be very open and very collaborative on this,” ACG President and Chief Executive Gary LaBranche told Buyouts. “We know that regulation is here to stay. We know we’re in an era of transparency and reporting. Our goal is to make that reasonable as possible.”
Unlike a previous industry-backed House bill, which would have exempted many private equity firms from SEC scrutiny, HR 5424 made several specific changes relating to how firms are regulated and what they’re required to disclose.
Under the bill, PE firms would no longer have to notify investors if a fund’s limited-partnership group changes, as it would in the event of a secondary sale. HR 5424 also waives the application of anti-fraud prohibitions for advisers pitching funds to accredited and qualified investors.
Targeting specific regulations helped attract more support from Democrats, particularly after an amendment introduced by Illinois Democratic Rep. Bill Foster cut some of the bill’s more controversial language.
Initial versions of HR 5424 eliminated rules that would have exempted firms from having to detail fee structures and investment strategies in public SEC filings. Prior to the House vote, James Maloney of the American Investment Council told Buyouts the amendment was designed to “shore up” Democratic concerns that the bill might go too far in eliminating certain regulations.
In debate on the House floor, Democrats said the Foster amendment cleared ground for the bill’s eventual passage. 35 House Democrats supported the bill over President Barack Obama’s public threat of a veto.
“If you pinpoint the exact policy [and] why it shouldn’t apply to smaller PE funds and make that argument — and make it well — it settles well up on the Hill,” said Chris Walters, senior director of governmental and regulatory affairs for the Small Business Investor Alliance, which also supported the bill.
“This [bill] is much more modest and common sense. … It’s definitely something we would want to be part of in the future.”
Of course, appetite remains for broader rollbacks of Dodd-Frank regulations as well. Financial Services Committee Chairman Rep. Jeb Hensarling (R.-Texas) recently stewarded the the Financial Choice Act through committee. Hensarling also supported HR 5424.
Among other things, Hensarling’s bill would repeal the Volcker Rule, which limited banks’ ability to sponsor private equity and hedge funds. On Sept. 13, the bill survived the Financial Services Committee by a 30-26 vote split almost entirely down party lines.
LPs take notice
Even more modest efforts can expect some degree of opposition, particularly from investors who found the SEC’s findings at firms like Apollo Global Management and Blackstone Group eye-opening.
In a letter to California Rep. Nancy Pelosi and Speaker of the House Paul Ryan, California State Teachers’ Retirement System cited Apollo’s recent $52.7 million settlement with the SEC as an example of the improprieties regulation can uncover. The $193.4 billion retirement system opposed Hurt’s bill on the ground that it “undermines investor protection and trust.”
California Public Employees’ Retirement System, which manages $301.2 billion on behalf of more than 1.8 million members, opposed the bill on similar grounds. The Institutional Limited Partners Association campaigned against the the bill as well, even with Foster’s amendment.
“There’s a reasonable case to be made for carefully considered modifications to existing rules,” Jennifer Choi, ILPA’s managing director for industry affairs, told Buyouts.
“But where’s the balance between making selective exemptions, and winding back the progress that has been made in improving disclosures to investors and securing SEC access to information so they can ensure investors aren’t being mistreated?”
Rep. Robert Hurt (R.-Virginia). Photo courtesy of Rep. Hurt’s office.
Correction: An earlier version of this story indicated Rep. Carolyn Maloney voted in favor HR 5424. She did not.