For years following the 2010 Dodd-Frank financial reform law that required most private equity firms to register with the Securities and Exchange Commission, private equity firms have been developing more robust compliance practices, despite the feeling among some in the industry that the legislation was designed for managers of publicly traded securities.
Now, however, there is new federal legislation in the House of Representatives that would no longer require private equity firms to register as investment advisors with SEC. Delegate CEO Robert Borden discusses the consequences of deregistering in a recent Fund Fire article.
“Some fund managers may see dropping SEC registration as a net plus if they don’t face client blowback,” he says. “If their client base has investors that don’t care about compliance and registration, they may do it.” However, that decision isn’t without consequences. “For fund managers that seek capital from large public pensions, investment consultants and big foundations, deregistering may put them at a competitive disadvantage,” Borden says.
Even if the pending legislation, called the Financial Choice Act, becomes law, many private equity firms may not be inclined to discard their ramped-up compliance practices and move away from transparency, when the industry as a whole is moving toward more transparency.
“They’ve lived through the trauma to become registered,” Borden says. “Once you’ve gotten registered and gone through an SEC exam, the hard part is done. You’ve gotten the ‘Good Housekeeping seal of approval.’ Why would you now get rid of it?”
To learn more, the full Fund Fire article is available here.