New rule regimes loom for real estate

This week, the clock is ticking on two pieces of US legislation that would have huge impacts on private equity and real estate managers, while the deadline nears for the AIFM directive in Europe.

The US House of Representatives and Senate have one week to reconcile their versions of the financial reform bill, which includes requiring private equity and private equity real estate firms to register with the Securities and Exchange Commission. Carried interest tax legislation, however, is less likely to see a vote this week.

Negotiators had set a goal to finish work on reconciling the separate versions of the financial reform bills before President Obama goes to Canada on Friday for a summit.

Last week, negotiators were making headway.

On 14 June, in a joint session, the Senate accepted key amendments from the House including the provision to strike the Senate exemption of investment advisors to private equity and private equity real estate firms from registering with the SEC. Venture capital firms, however remain exempt from SEC registration, but will be required to keep records and provide reports to the SEC.

Under the new regulations, private equity firms will need to establish formal compliance policies to outline how they would deal with potential conflicts of interest. Registration also means firms need to designate or hire a compliance officer, as well as face regular inspections by the SEC.

The reconciled bill should come to a vote by Thursday, according to a source familiar with the process. “They want to get this done before Friday. I think the private equity pieces have been agreed on and aren't that surprising. Venture got the reprieve we all expected. The negotiations are focused on derivatives now,” said the source.

In addition to SEC registration for private equity and private equity real estate firms, the so-called Volcker rule will also likely be included in the reconciled bill, said the source. The Volcker rule would ban banks from trading their own holdings – restricting banks from participating directly in private equity, private equity real estate and hedge funds.

As for raising the tax on carried interest, the American Jobs and Closing Tax Loopholes Act of 2010, has stalled yet again in the Senate.

US Senators on 16 June voted down legislation in a 45 to 52 vote against raising the tax. Sources say that the Financial Reform bill is the top priority in the Senate right now, with climate change legislation on the way and confirmation hearings for Elena Kagan for the US Supreme Court. Insiders are unsure when the next vote could come to pass.

As for regulatory developments in Europe, discussions between the European Parliament's Committee for Economic and Monetary Affairs (Econ), the Economic Financial Affairs Council (Ecofin) and the European Commission, are underway regarding the Alternative Investment Fund Managers Directive.

Their third meeting was held last week and the European Parliament is expected to vote on the final legislation on 6 July.

The AIFM Directive includes the controversial “third country” rules that will determine how and where private equity and private equity real estate managers could market their funds in the EU.