Leslie Pratch, Ph.d.: Financial Regulatory Reform's Impact On Private Equity

In June, 2009, the Obama administration proposed a comprehensive restructuring of the federal government's supervision and regulation of the financial industry. Timothy Geithner announced several proposals that, if adopted, would affect not only public companies but also private equity funds, venture capital funds, and funds of funds. The proposals are included in a white paper entitled "Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation." The white paper sets forth a number of specific proposals intended to achieve five key objectives: 1. Promote robust supervision and regulation of financial firms; 2. Establish comprehensive supervision of financial markets; 3. Protect consumers and investors from financial abuse; 4. Provide the government with the tools it needs to manage financial crises; and 5. Raise international regulatory standards and improve international cooperation. Without acknowledging the distinction between hedge funds and other private investment pools, such as private equity funds and venture capital funds, the white paper proposes that "all advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed some modest threshold should be required to register with the Securities Exchange Commission ("SEC") under the Investment Advisers Act." Requiring registration of fund managers, the white paper argues, will allow the SEC to collect data that would permit an informed assessment of whether such funds have become too large, leveraged, or interconnected to be allowed to function unregulated for financial stability purposes. The white paper also proposes that any investment fund advised by an SEC-registered adviser (which, under the administration's proposal, would include most private equity funds and venture capital funds) be subject to: 1. Recordkeeping requirements; 2. Requirements with respect to disclosures to investors, creditors, and counterparties; and 3. Regulatory reporting requirements. Although some of the reporting requirements may vary depending on the type of investment fund, the white paper asserts that all funds should be required to report to the SEC, on a confidential basis, (a) the amount of assets under management, (b) borrowings, (c) off-balance sheet exposures, and (d) other information necessary to assess whether the fund or fund family is so large, highly leveraged, or interconnected that it poses a threat to financial stability.