Engage or pay

Personal trading disclosure requirements and other rules are hitting mid-market firm budgets especially hard, resulting in the need for industry to speak with regulators more often, argues Bertram Capital partner David Hellier. 

With the implementation of Dodd-Frank, all middle market private equity firms with more than $150 million in assets under management are required to register with the SEC.  But here’s the rub: a firm with a $250 million fund suddenly had the same compliance requirements as a multi-billion dollar fund.  

Middle market private equity funds can’t take the risk of not having a buttoned up compliance process. Not only does the SEC demand it, but the limited partners who invest in our funds want to know we have processes and best practices in place. This is not just in our reporting – the requirements also impact how we market our firms (i.e. websites, brochures, press releases, presentation materials), our process for valuing our portfolio companies, how we manage and retain the information we collect (emails, texts, internal documents), and disclosing and submitting our personal trading records every quarter to name a few areas.

As an example, we now have a full-time director of compliance to develop and maintain best practices in our firm with respect to SEC compliance.

Two particular areas of concern are:

1) The personal trading disclosure requirement. This rule is in place to deter insider trading. However, most middle market PE firms invest only in privately held companies, so there is significant time and money complying with this provision and arguably little to no public benefit.

2) The lack of clarity around the provision in the JOBS Act allowing middle market PE firms to conduct general solicitations. The rules were proposed more than two years ago, but have not been finalized, which creates significant uncertainty about what is and isn’t allowable. For example, what you can say in press releases, what you can put in announcements and what can and can’t go on the firm’s website. In addition, we need to take care to insure what is communicated is not misinterpreted. Many private equity firms, including ours, use disclosure statements in any communication that is outbound in nature.  While many private equity firms do have stringent processes and policies in place, there are firms who have not either invested the time and resources to establish a best practices approach or they decide there is sufficient lack of clarity in the interpretation around what constitutes a general solicitation, creating an inherently uneven playing field. 

Additionally, a particular area of concern is the communication of returns when a deal closes. Most private equity firms do not release deal return information on private transaction either from an internal policy standpoint and/or due to general solicitation rules. However, some firms disclose such private transaction return data which potentially gives them a marketing edge when developing investors for their fund. 

One way the middle market private equity industry is working to create more clarity around these issues and provide a coherent voice in Washington for the industry, is through the formation of PERT, the Private Equity Regulatory Task Force, which is part of the Association for Corporate Growth (ACG). The mission of PERT is summarized by the concept of “FACE”: 

Facilitate communication and coordination among fund professionals;

Advocate before federal regulators and policymakers on behalf of middle-market private equity;

Create a network of peers to develop and share best practices;

Educate private equity professionals and key stakeholders (management partners, investors, lenders, etc.) on regulatory issues that have a direct impact on them and our funds.

As more middle market firms join and support this valuable initiative, we believe we can create a better defined playing field as well as mitigate the excessive costs the new regulations have brought to the industry that is a value and job creator in the US economy.

David Hellier is an ACG New York Board Member and business development partner at Bertram Capital, a mid-market private equity firm.