Read the pdf here.
May 3rd, 2011
Dear Representative,
On behalf of Americans for Financial Reform, we are writing to urge you to oppose H.R. 1082, to amend the Investment Advisers Act of 1940 to provide a registration exemption for private equity fund advisers. Americans for Financial Reform is an unprecedented coalition of over 250 national, state and local groups who have come together to reform the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, religious and business groups as well as prominent economists.
During the legislative process, AFR was a strong proponent of the provisions of Dodd-Frank that will require advisers to hedge funds and private equity funds to register with the Securities and Exchange Commission. H.R. 1082 would exempt private equity fund advisers from registration under the Investment Advisers Act of 1940. Exempting such advisers would deny investors in these funds the protections of investing with a registered investment adviser including access to basic disclosures that are comparable across funds; ability to review information about the advisers’ business practices, fees, and conflicts of interest; and investing with an adviser that is subject to the fiduciary duty arising out of case law interpreting the Investment Advisers Act. It would also deny the SEC the authority to conduct periodic and special examinations, which are necessary to identify and punish improper activities.
The Dodd-Frank Act includes an exemption for advisers to private funds that have less than $150 million in assets under management in the United States. AFR opposes any attempt to increase the de minimis exemption below which private equity fund advisers would not be required to register with the SEC including the proposal to increase the de minimis exemption to $5 billion. According to Private Equity International, there are fewer than 45 U.S.-based private equity fund advisers that have raised $5 billion or more in the last five years.[1] There are more than 1,800 private equity funds in the U.S. It would be unacceptable to limit the investor protections that go along with registration under the Investment Advisers Act to 45 of the 1,800 private equity fund advisers in this country.
Fraud and abuse can occur at any fund, regardless of size. A 2008 study by BDO Consulting 2008, top executives at 37 percent of leading US private equity firms state that they have been exposed to corporate fraud through their investments. Of those exposed, 59 percent have
faced instances of fraud worth $1 million or more.[2] There have been recent, prominent examples of alleged fraud among private equity advisers managing less than $5 billion.[3] Given the very real concerns about inappropriate activities in smaller private equity funds, it would be unacceptable to deny investors in these funds the protections of the Investment Advisers Act or to deny the SEC the ability to identify and punish improper activities.
We are also concerned that amendments to the Dodd-Frank Act will provide an opportunity for those who oppose financial regulation to make damaging changes to this landmark legislation. The proposals under consideration during the mark-up of the Subcommittee on Capital Markets and Government Sponsored Enterprises go far beyond technical amendments and are an attempt to reverse significant steps taken in the legislation. We should not chip away at the first meaningful steps toward re-regulating our financial markets after 30 years of deregulation led to the worst financial crisis since the Great Depression. AFR, therefore, urges you to oppose H.R. 1082 and all attempts to weaken the Dodd-Frank Act.
Sincerely,
Americans for Financial Reform
[1] Since the average investment duration for a private equity fund is often 7 to 10 years, this is not an exact proxy for how many private equity advisers would be covered. It gives a sense, however, of how few private equity advisers would actually be regulated by the SEC if all fund advisers with less than $5 billion under management were exempt.
[2] BDO Consulting Corporate Anti-Fraud Study.
[3] See e.g. U. S. Securities and Exchange Commission v. Onyx Capital Advisors, LLC, Roy Dixon, Jr. and Michael A. Farr, in the United States District Court for the Eastern District of Michigan (filed April 22, 2010). U. S. Securities and Exchange Commission v. Private Equity Management Goup Inc.; Private Equity Management Group, LC; and Danny Pang in the United States District Court for the Central District of California (filed April 24, 2009).