Dodd bill maintains exemptions and unanswered questions

A recent bill introduced by US banking committee chairman Christopher Dodd maintains previous SEC registration exemptions by the Senate for private equity and venture capital funds, but could also lead to multiple state regulator oversight for smaller firms.

A revised financial-reform bill introduced by US Senator Christopher Dodd earlier this week, which would exempt private equity and venture capital firms from having to register with the Securities and Exchange Commission, also appears to shift some of the US regulatory burden from the SEC to states.

The bill is similar to legislation that Dodd – the chairman of the Senate Banking Committee – introduced last year which differed from a version in the House of Representatives, which calls for all private equity funds with more than $150 million in assets under management to register as investment advisors. Under both of Dodd’s proposals, only hedge funds with more than $100 million in assets would have to register.

Such an approach would take into account the industry’s view that hedge funds pose a greater systemic risk to the economy than do private equity and venture capital. It also isn’t the first time Dodd has supported the industry against potential harmful regulation, as he sent a letter to the SEC in February warning about the effect that a proposed placement agent ban could have on smaller investment funds.

According to law firm Proskauer Rose, the bill still leaves open the question of how the SEC would define what private equity and venture capital firms are for the purposes of regulation. Current language in the ball states that an exemption would apply to any adviser providing “investment advice relating to a private equity fund or funds”, while the venture capital provision only applies to investment advice relating to “a fund”. The firm writes it is not clear yet whether this difference in language was intentional.

It may also be difficult task for the SEC to distinguish between private equity funds and hedge funds, especially as the distinction for those that invest in distressed debt can be blurry.

Proskauer also notes that advisers registered at the federal level are not required to register with US state securities regulators. But by increasing the registration threshold from $25 million to $100 million, this may force some managers with less than $100 million in assets to de-register with the SEC, leaving them subject to registration in multiple states.

While Dodd’s version must still be reconciled with the House’s, one factor in its favour is that it would not stretch the SEC’s already limited resources by adding an undue amount of regulatory responsibilities.