September 14, 2016
Photo: (CC BY 2.0)

Late last week, the US House of Representatives passed the “Investment Advisers Modernization Act” (HR 5424), a bill backed by the private equity industry that would reduce disclosures by private equity managers to the Securities and Exchange Commission (SEC).[i]


Recent media coverage:


New York Times: “Private Equity Tries to Chip Away at Dodd-Frank With House Bill”

Bloomberg: “House Votes to Make Private Equity Life Easier Amid Fines”


Specifically, HR 5424 would:

  • Substantially reduce the information private equity managers are required to provide to the SEC annually on Form PF.[ii]
  • Ban the SEC from applying anti-fraud protections to sales literature distributed to the general public by private funds.[iii]
  • Create a new exemption from requirements that private equity managers have an annual independent audit of their funds and securities holdings.[iv]

In 2014, Andrew Bowden, then Director of the SEC’s Office of Compliance Inspections and Examinations noted that in its first round of examinations of private equity managers the agency had found “violations of law or material weaknesses in controls over 50% of the time” in how managers handled fees and expenses.[v]

Since then, the SEC has brought more than ten enforcement cases against some of the largest firms in the private equity industry and reached settlements totaling more than $150 million.[vi]

As such, it is troubling that following SEC investigations and settlements, the private equity industry is pushing to reduce the information it provides to the SEC annually. Further, HR 5424 is practically an invitation for private equity managers to make false and misleading statements to the public.[vii]

Institutional investor groups including the Institutional Limited Partners Association (ILPA) and the Council of Institutional Investors (CII) along with some state pension funds have opposed the legislation.

In a September 6 letter ILPA noted “we believe this bill marks a step in the wrong direction for institutional investors, for their millions of beneficiaries, and for the private equity industry.”[viii]

According to CII’s September 7 letter HR 5424 “rolls back important transparency and reporting requirements that we and many of our members believe are critical to investor protection.”[ix]

The North American Securities Administrators Association in June wrote that the bill “is in fact little more than an effort to shield advisers to private funds from the scrutiny of SEC registration and examination oversight.

In addition to HR 5424, on Tuesday, September 13 the House Financial Services Committee marked up another bill, the Financial Choice Act (HR 5983), which would go even further, exempting private equity managers from registration and reporting to the SEC.[x]

One of the main groups lobbying for HR 5424 is the American Investment Council (AIC) (formerly the Private Equity Growth Capital Council).[xi] The AIC’s board includes representatives from KKR, the Carlyle Group, TA Associates, Providence Equity Partners, GTCR, TPG Capital, Apollo Global Management, Madison Dearborn Partners, Crestview Partners, New Mountain Capital, KPS Capital Partners, the Blackstone Group, Arclight Capital Partners, and Pantheon.[xii] A full list of the American Investment Council’s members is below.

Today and tomorr0w the AIC will be meeting in Washington DC for its annual meeting.[xiii]

If you invest with a one or more of the AIC’s member firms (below list), you may want to consider contacting those firms to ask:

  • Does the manager support the AIC’s efforts to reduce the information private equity firms provide to the Securities and Exchange Commission?
  • Given recent SEC settlements that have resulted in private equity managers refunding fees to limited partners, is supporting HR 5424 and its reduced disclosure to the SEC contrary to the managers’ fiduciary duty to your fund?
  • Why should private funds be exempt from anti-fraud protections that other investment companies are subject to (under 17 CFR 230.156)?
  • If HR 5424 is enacted, how will the manager change its sales literature or other communications with (Fund) in light of exemptions of private funds from anti-fraud protections (under 17 CFR 230.156 and 17 CFR 275.206(4)-1)?
  • If HR 5424 is enacted, does the manager intend to utilize the independent audit exemption contained in the bill?
  • Has the manager provided funding the American Investment Council from either funds or portfolio companies? (i.e. are investors in effect paying for the American Investment Council’s efforts?)





[i] HR 5424, Sec 3(b)

[ii] HR 5424, Sec 3(b)

[iii] HR 5424, Sec 4

[iv] HR 5424, Sec 3(c)(2)(B)

[v] “Spreading sunshine in private equity,” Andrew J. Bowden, Director, Office of Compliance Inspections and Examinations, May 6, 2014.

[vi] “SEC must keep bearing down on private equity,” Financial Times, Aug 26, 2016.

[vii] HR 5424, Sec 4

[viii] ILPA letter to Maxine Waters, Sept 7, 2016.

[ix] CII letter on HR 5424, Sept 7, 2016.

[x] HR 5983, Sec 450

[xi] PEGCC LD-2 disclosure form, 2Q16; “Private Equity Tries to Chip Away at Dodd-Frank With House Bill,” New York Times, Sept 8, 2016.

[xii], accessed Sept 12, 2016.

[xiii], accessed Sept 12, 2016.