The state of regulation – timeline

The constraints prompted by the global financial crisis could be on the chopping block. In Part II of this regulation special, pfm examines whether a rollback is likely, and what it would mean for the industry.

Click here for part I.

Just as US GPs made peace with post-crisis regulation, a potential rollback reared its head. When Donald Trump was on the campaign trail in 2016, he pledged to dismantle parts of Dodd-Frank, calling it a “disaster”. In June, the House of Representatives voted to approve the Financial CHOICE Act, which would repeal key parts of the legislation, although it has yet to pass the Senate.

Consensus within the industry, however, is that a complete rollback of private funds legislation is highly unlikely. Furthermore, whether aspects of Dodd-Frank are rolled back is immaterial, sister publication Private Equity International’s sources agreed, because investors are used to the new normal and will not accept less information.

“Whether private equity remains as intense a focus for the regulators, the industry standards that have evolved have set a bar that’s now going to be applicable regardless,” says Blackstone’s chief legal officer John Finley. “LPs have certain expectations as to the way in which the industry operates, and that’s not really going to change.”

StepStone’s Jason Ment, its general counsel and chief compliance officer, also doesn’t see LPs letting the industry off the hook on things they have come to expect, such as using the Institutional Limited Partners Association fees and expenses template and disclosing net returns as well as gross.

“Most of the larger LPs now have an operational due diligence team, which focuses on various non-investment functions, including compliance; five years ago that wasn’t the case,” John Malfettone, the senior managing director and chief compliance officer at Clayton, Dubilier and Rice, says. “We just finished a fundraise last year, and I probably had three or four dozen meetings with LPs.”

LPs also regularly conduct operational monitory reviews to make sure managers are following their policies. “Because you only get examined once every few years, you spend a lot more time on compliance with your limited partners than you do with the SEC and that’s probably the way it should be,” Malfettone says.

And the regulator appears to be shifting its focus to be more balanced across hedge funds, private equity and other private funds, according to a client note from Proskauer. In several recent speeches, chairman Jay Clayton has highlighted retail investor protections as a particular emphasis for the agency.

“In the industry itself we’ve shown that we accept being registered as a reality, and we are at the front line of trying to have more dialogue with investors and regulators to continually improve the current framework – not completely tear it down,” says Joshua Cherry-Seto, the chief financial officer and chief compliance officer of Blue Wolf Capital.