Congress guts private equity regulations it doesn’t understand
FORTUNE — The U.S. House of Representatives yesterday voted to gut the only real piece of private equity regulation contained in Dodd-Frank: A requirement that firms with more than $150 million in assets under management register as investment advisors with the SEC. Technically a bipartisan vote of 254-159, with 36 Democrats joining 218 Republicans.
For now, this seems to be cosmetic. Bill sponsor Robert Hurt (R-VA) hasn’t yet found any sponsors for a Senate version and, even if he does, there is no guarantee it would even get to the floor. Partially because most Democrats are opposed, and partially because there is no larger financial reform package on the table for this to be stuck into. And, even if it did pass the Senate, the Obama Administration has signaled its intent to veto.
All of that said, some notes:
1. For the record, I continue to believe two things about PE registration requirements: (1) They needn’t have been passed in the first place, given private equity’s inability to create systemic risk and because the actual requirements provide virtually no investor protections. (2) All of the PE industry teeth-gnashing over the requirement is unwarranted. Yes, it is a bit inconvenient, particularly if served with an actual examination. But, at most, it’s a small compliance cost that really is only problematic to those firms on the extreme low end of the AUM threshold.
2. As one might expect, private equity industry groups applauded the vote. Interesting timing, however, given the recent discussion of PE firms potentially being required to register as broker-dealers. A big industry argument against a broker-dealer classification is that the current regulatory regime (i.e., registration) provides adequate oversight. But if registration is removed… Well, you see where I’m going with this.
3. There were two proposed changes to the bill, both of which were voted down. One was an amendment from Rep. Maloney (D-NY), which would have kept the registration requirement in place, but charged the SEC with creating a simpler process for firms with between $150 million and $1 billion in AUM. Another came from Rep. Horsford (D-NV). It would have ended the registration requirement, save for PE firms whose portfolio companies outsource U.S. jobs overseas. Really just sounded like he wanted an excuse to make a speech about legislative priorities — since he barely referenced his unworkable proposal. Moreover, if Horsford believes that registration increases transparency and reduces systemic risk — as he claimed — then why would it be okay to remove those safeguards just because a PE firm doesn’t outsource jobs?
4. My big takeaway from all of this, however, is that the bill’s primary sponsor, Rep. Hurt, has no idea what he’s talking about when it comes to private equity. In his floor speech, he talked about Vitamin Shoppe Inc. (VSI), a company once backed by private equity that went public before the registration rules took effect. Here is what his office told me about the example:
“Vitamin Shoppe is a private equity success story and has grown from a small specialty retailer to a national chain with 400 stores and 2,500 new jobs. If this Dodd-Frank rule had been in place at the time Vitamin Shoppe was looking for investment capital, private equity would have been discouraged from the partnership.”
Really Congressman? The private equity firm that backed Vitamin Shoppe was a PE unit of Bear Stearns, back in 2002. In other words, it was one of the PE firms best equipped to deal with compliance issues — because it had an entire Wall Street bank behind it. Moreover, there is zero evidence that registration is retarding PE investment in any way. In fact, private equity fundraising and investment activity are both substantially higher than either 2002 (when Vitamin Shoppe was funded) or 2010 (when Dodd-Frank was passed).
Hurt also suggested that some people at PE-backed companies could lose their jobs due to registration compliance costs, as if PE firms pay portfolio companies employees and auditors out of the same pot. They don’t. The former comes off a company’s balance sheet, which is populated by such things as revenue and debt. The latter comes from management fees a private equity firm charges its investors. One has absolutely nothing to do with the other.
If you want to argue undue burden without offsetting benefit, fine. But don’t lie on the House floor about how the current rules are making it harder for companies to get equity funding — a canard amplified by the bill’s misleading name: The Small Business Capital Access and Job Preservation Act.
Rep. Hurt’s office declined to elaborate on his comments.
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