A revised financial-reform bill introduced by US Senator Christopher Dodd last week, which would exempt private equity and venture capital firms from having to register with the US 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.
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 bill states that an exemption would apply to any advisor 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”. Proskauer said 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 noted 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.