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Private Equity Firms Escape Financial Reforms

Friday, 21 May 2010 | 12:43 AM ET

Private equity firms scored a big victory on Capitol Hill on Thursday.

The House and Senate versions of the financial reform billrequire hedge-fund advisers to register with the Securities and Exchange Commission. Both versions exempt venture capital firms from registration. A little noticed change in the version passed by the Senate on Thursday night, however, would also exempt private equity firms.

If that exemption survives the reconciliation process, it will mean that private equity funds would not have to register with the Securities and Exchange Commission. Instead, the bill simply calls for the SEC to determine what sort of records it would like private equity firms to file.

The venture capital community fought hard and publicly for its exemption. The exemption of private equity firms, however, went into the Senate bill with much less fanfare.

In fact, the main private equity lobbying group publicly supported registration. In a testimony to a Senate panel last July, a spokesman for the Private Equity Counsel urged the Senators to require registration.

“[W]e are mindful that excluding any asset class from the new regulatory regime could contribute in some way to diminished confidence in the effectiveness of the new regulatory regime and therefore we support the casting of a wide net,” said Mark Tresnowski, managing director and general counsel of Chicago-based Madison Dearborn Partners.

There’s a possibility that this loophole might grow wider. The Senate bill leaves it to the SEC to define what counts as a venture capital fund and a private equity fund. This creates the potential for some hedge fund managers to attempt to game the system by influencing the SEC’s decision or remodeling themselves to fit whatever legal definitions the SEC puts forth.

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