Not so fast on private equity registration

June 23, 2011, 10:12 PM UTC

Private equity funds might not have to register with the SEC after all.

The SEC yesterday approved a new definition of “venture capital” funds, to legally distinguish such vehicles from private equity or hedge funds. Those qualifying as “venture capital” would be exempt from new registration requirements established by the Dodd-Frank financial reform bill. Everyone else would have to file.

Or would they?

Just as the SEC was announcing its rules, the House Financial Services Committee passed legislation that also would exempt private equity fund managers from needing to register. It’s called H.R. 1082, and would require that the SEC define “private equity” within the next six months, so as to maintain registration requirements on hedge funds and other sorts of private investment funds (outside of “venture capital” funds, of course).

Following the Committee vote, bill sponsor Rep. Robert Hurt (R-VA) said:

“With far too many 5th District Virginians and Americans remaining out of work, our top priority continues to be supporting policies that will help spur job creation. This bipartisan bill will help restore confidence and certainty to the marketplace by reducing unnecessary government mandates so that our small businesses can access capital more easily and more jobs can be created and preserved. I was glad to see that this bill was approved by the full Financial Services Committee with both Republican and Democrat support, and I look forward to the bill’s consideration by the full House of Representatives.”

To be honest, I don’t have a clue as to what Rep. Hurt is talking about.

Forcing private equity funds to register with the SEC would have virtually no impact — positive or negative — on small business. Unless you consider private equity firms to be small businesses, in which case some might have to hold off hiring an analyst to cover registration-related expenses (which actually could create “small business” jobs at corporate law firms).

Moreover, the extra expense of registration would not be taken out of capital earmarked for investment. Instead, it would come from the management company.

Finally, the bill actually introduces less “certainty” to the marketplace. Without the bill, everyone would be certain of registration requirements. Now, such requirements are uncertain until the bill either becomes law or is officially scrapped.

All of that said, I actually do support Hurt’s legislation. Private equity has never caused a financial crisis and, by the siloed nature of its portfolios, is unlikely to ever do so. As such, forcing PE funds to register would put needless burden on both the funds and on the short-staffed SEC.

It would be interesting, however, to see how the SEC chooses to define “private equity.” Will it basically transpose its “venture capital” definition, allowing PE funds to maintain a “basket” of investments in non-traditional investments like public equities or debt. Or would it be stricter, so as to prevent hedge funds from claiming the exemption? And what about private equity managers like Blackstone Group (BX) or Apollo Global Management (APO) that also manage non-PE funds? Would all of their funds be required to register, as it seems would happen to VC funds managed by larger, diversified organizations?

Lots of questions. Maybe we should just wait to see if the bill becomes law, and then revisit…