A vote in the Republican controlled U.S. House of Representatives on Wednesday 4th December moved in favour of moving many private equity firms out of regulations set up in the wake of the global financial crisis.
The Dodd-Frank Wall Street Reform, passed in 2010, states that funds and advisors managing assets in excess of $150million are to register with the Securities & Exchange Commission (SEC); doing this makes private equity funds subject to increased regulation and scrutiny from the commission.
Crucially, such a level of regulation often serves to put off investors who do not want to deal with the bureaucracy attached to the process, which can make investing slow and ultimately lead to missed equity opportunities. Such a move from the United States has long been in the pipeline, and follows recent comments from European MEP Philippe de Backer when he admitted that the European Union were looking at relaxing regulations across the continent.
Although 30 Democrat Representatives voted in favour, it is still unlikely that the bill in its current form will be written into U.S. law, with indications being that President Obama will use his power of veto if it were to pass the Democrat controlled Senate.
A statement released by the White House, carried on Reuters newswire, said, that any move to relax regulations “represents a step backwards from the progress made to date, given that private equity fund advisers have been filing reports with the SEC for over a year.”The SEC themselves, for the record, are also against any changes to the existing regulations, and believe private equity markets and the U.S. economy as a whole benefits from Dodd-Frank being in action.
In contrast, Republicans argue that regulation is better aimed at the bottom end of the investment markets and should be used to protect inexperienced or low level investors. Republican Representative Scott Garrett told Reuters, “The Dodd-Frank Act has imposed enormous burdens on private equity firms, forcing most fund advisers to spend millions of dollars complying with new SEC registration and reporting requirements.”
This vote came on the same day a Bloomberg report said several Wall Street groups are to take legal action against another regulatory body, the Commodity Futures Trading Commission. Although not directly linked to private equity, the outcome of this case is likely to influence financial sectors across the United States.
It could also inspire similar action from private equity funds and advisors should regulation not be relaxed, although the SEC has recently won a number of high-profile cases against hedge funds and has openly admitted they will be taking a closer look at private equity funds as their primary focus in 2014.
Given that start-ups traditionally move from Europe to the U.S. in search of better private equity opportunities, the failure of the U.S. to reform regulations along with an apparent willingness within Europe to do so could end the days of European businesses heading across the Atlantic in search of investment and even start seeing increased movement in the opposite direction.