New York: Some US lawmakers want to relax oversight of the $2.4 trillion (Dh8.8 trillion) private equity industry just as its biggest players face record fines.
Apollo Global Management LLC, Blackstone Group LP and KKR & Co. have been scrutinised by regulators and penalised in recent months for failing to reveal some fee practices to clients. Disclosures about how those firms are compensated could be rolled back under a proposal scheduled to be voted on Friday by the House of Representatives.
The bill, introduced in June by Robert Hurt, a Virginia Republican, would limit fee disclosures made to certain investors, such as pension funds. It would also make advertising to wealthy investors easier for fund managers. While it isn’t likely to get the sufficient number of votes in the Senate to pass, the bill could eventually be included in a broader package, like when a watered down requirement for banks’ swaps trading became part of year-end spending legislation.
The White House said in a statement on Tuesday that President Barack Obama’s staff would advise him to veto the private equity measure if it’s passed by Congress. Democratic presidential candidate Hillary Clinton has also weighed in, retweeting a post by one of her top advisers that urged lawmakers to reject the legislation because it “puts workers’ retirements at risk”.
The Securities and Exchange Commission has gone after private equity firms more forcefully than ever before in the 40-year-old industry’s history. Apollo settled allegations last month that it made misleading disclosures about fees, agreeing to pay a $12.5 million penalty and $40 million in disgorgement and interest. Blackstone and KKR agreed last year to separate settlements over how they informed investors of fund costs, paying $10 million in fines apiece and almost $50 million in combined disgorgement and interest. The firms haven’t admitted or denied wrongdoing.
Monitoring fees
Private equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the money with a profit in a cycle lasting about 10 years. The firms typically charge an annual management fee of 1 per cent to 2 per cent of the funds and keep 20 per cent of investment profits.
Among the issues the SEC has found is what’s known as accelerated monitoring fees. Monitoring fees, which private equity firms charge companies they own annually for advisory work, were accelerated into lump-sum payments when a company was sold or taken public ahead of schedule, even when future work wouldn’t be performed. The regulator found that Apollo and Blackstone didn’t adequately disclose the practice to clients.
The proposed legislation would “roll back the clock” to the years before private equity firms were subject to “elementary oversight measures that numerous documented abuses have shown to be necessary for investor protection,” the Consumer Federation of America and Americans for Financial Reform wrote in a joint letter in June. “It would act to return private funds to the shadows.”
Private equity firms had to beef up disclosures following the 2010 Dodd-Frank Act, which gave the SEC oversight of managers of private investment funds. About 1,800 firms have registered since the law’s enactment, the House Financial Services Committee said.
Pension funds
The firms are required to provide brochures to current and prospective clients as part of the forms they use to register with the SEC. The forms must include descriptions of the firms’ services, fees, disciplinary history, conflicts of interest and background information on key executives.
Under the proposal, firms wouldn’t have to disclose that information if the client is a pooled investment vehicle, such as a pension fund, and has received similar information through other documents, like a fund prospectus.
SEC regulations prohibit advertisements with testimonials about a firm or references to recommendations that have been profitable. The bill would allow that kind of marketing if it’s made to investors who exceed certain income or wealth thresholds.
“These thoughtful modifications show a commitment to improving the regulatory structure for private funds and we look forward to seeing this bill advance,” Mike Sommers, the chief executive officer of the American Investment Council, an industry lobbying group in Washington, said in an email. “The bill would make the regulatory process more efficient and effective for both regulated entities and the regulators.”
The American Investment Council represents the largest private equity firms, including Blackstone, Apollo, KKR, Carlyle Group LP and TPG, as well as more than 30 others.
The California Public Employees’ Retirement System and the California State Teachers’ Retirement System, the two biggest US pensions, oppose the measure. Information provided by private equity firms under required disclosures has helped purge the industry of certain inappropriate fee practices, CalSTRS CEO Jack Ehnes wrote in a June letter.
The House Financial Services Committee approved the bill by a 47-12 vote on June 16 after adopting an amendment to delete provisions in the introduced version that would have created additional exemptions from record-keeping and reporting requirements. A majority would be required to pass the measure in the upcoming vote.
