Should the Government be Regulating Private Equity?

September 16, 2013 13:13 by Clayton Reeves in   //  Tags: , , , ,   //   Comments (0)
As reported by Reuters, two key Republicans in Congress have questioned whether the SEC is being overzealous and wasteful of taxpayers dollars in conducting compliance assessments of private equity fund advisers. The thinking is that high net worth, sophisticated investors require less regulation than typical investors. In order to even invest in the PE sphere, an individual must have a net worth of $1 million, excluding real estate.  PE firms, meanwhile, are feeling the burden of having to respond to SEC inquiries on their processes.  "For these advisers, the SEC examination process has proven to be burdensome, costly, inefficient and inflexible. Subjecting this set of advisers to the examination process does not appreciably further the goals of investor protection or financial stability," said House Financial Services Committee Chairman Jeb Hensarling and New Jersey Republican Scott Garrett, chair of the capital markets subcommittee. The SEC did not regulate PE funds prior to 2010, when the Dodd-Frank bill was passed. This law introduced new regulation requirements for previously unregulated investment vehicles, such as Private Equity. The "logic" of Congress was that the larger funds could pose systematic risks to the market that could threaten financial stability. Now, the SEC must conduct regular compliance examinations of private fund advisers. Additionally, its debatable whether the SEC has enough financially savvy staff to examine the massively complex investment philosophies of many of these funds.  Hensarling and Garrett suggested that the SEC prioritize its resources by focusing on financial advisers who serve less capitalized, financially inexperienced, mom and pop investors. These investors stand to lose much more in terms of relative wealth from risky investment decisions. PE investors, meanwhile, are generally more diversified in their investments and have PE as a part of a broader portfolio including less risky investments.  Click here to read the entire article.

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