More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The House of Representatives passed Wednesday by a 254 to 159 vote H.R. 1105, the Small Business Capital Access and Job Preservation Act, which would exempt private equity fund advisors from registration and reporting requirements with the Securities and Exchange Commission.
H.R. 1105 would exempt private equity fund advisors from registration provided that the funds have not been borrowed and don't have an outstanding principal amount that is more than twice their invested capital commitments.
The Obama administration told the bill’s sponsor, Rep. Robert Hurt, R-Va., and its 12 co-sponsors Tuesday that it would veto the bill, arguing it “effectively provides a blanket registration and reporting exemption for private equity funds, undermining advances in investor protection and regulatory oversight implemented” by the SEC under Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
A Senate Banking Committee spokesman told ThinkAdvisor that he was not aware of a Senate companion bill to H.R. 1105.
The administration said the bill’s passage was a “step backwards” from the disclosure requirements that Congress laid out in Dodd-Frank to allow regulators to assess potential systemic risks. H.R. 1105 “would deny investors access to important information intended to increase transparency and accountability and to minimize conflicts of interest,” the administration told Hurt.
Private equity funds are already subject to less stringent reporting requirements than other types of private funds and to an annual, rather than quarterly, filing requirement, the administration argued.
In addition, private fund advisors with less than $150 million in assets under management are exempted from registration and subject only to recordkeeping and reporting requirements.
However, Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, said after the House vote that “many of us would argue on a bipartisan basis that part of the act that requires small-business investors who are private equity advisors to register with the SEC is perhaps one of those provisions that is in need of reform.”
This is a provision, he said, that “many of us believe was aimed at Wall Street but it ends up hurting Main Street.”
Requiring “smaller firms that invest in entrepreneurs and in small businesses face yet one more significant regulatory cost, regulatory burden; more red tape,” Hensarling said. He noted recent testimony of one small-business investor before his committee that said registration would cost his company “$200,000 every year” on compliance.
Hensarling quoted the testimony: “While for some larger firms this is an insignificant cost, for a medium-sized firm such as ours that offers capital to small businesses, it is a significant expense.”
Rep. John Delaney, D-Md., voted against the bill, stating that as a former founder of two financial services institutions and a former CEO of a publicly traded company, he views the private equity industry “as a large, important and growing part of the U.S. financial markets."
He continued: "Certain information is needed from larger market participants (many of which provided the information prior to Dodd-Frank) so that we can continue to improve investor protection and to monitor macro-trends in our markets.”
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