Earlier this year we speculated that President Trump’s promised rollback of the Dodd-Frank Act, which instituted new registration and reporting requirements for PE funds, could be a positive sign. Such a rollback has yet to fully materialize, although some initial steps have been taken.
Over the past year, President Trump has referred to the impending repeal of the Dodd-Frank Act and has passed executive orders easing certain aspects of its reforms. On June 12, Treasury Secretary Steven Mnuchin released a 150-page report recommending, among other things, the president should be allowed to fire the head of the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation should be relieved of its responsibility to oversee banks’ liquidation plans and the Federal Reserve’s stress tests of the largest banks should be made more transparent.
Meanwhile, President Trump has also been embroiled in a legal battle concerning the Consumer Financial Protection Bureau, Dodd-Frank’s watchdog of the consumer financial markets. To grant the CFPB independence from the Oval Office, the Act said the CFPB’s deputy director would serve as acting director in the event of a vacancy. When director Richard Cordray resigned on November 24, the White House named Office of Management and Budget Director Mick Mulvaney (who had voted in favor of disbanding the CFPB while serving in Congress) as acting director, prompting a lawsuit from deputy director Leandra English to enjoin Mulvaney from the post.
On June 8, the House of Representatives passed a bill to repeal the Dodd-Frank Act, although the Senate has shown little interest. Despite the above developments, many restrictions remain in place, including those placed on PE funds under amendments to the Investment Advisers Act. This makes continued compliance with those restrictions essential.
According to the SEC, its enforcement efforts with respect to PE funds have concentrated on three inter-related areas: investment advisors that receive undisclosed fees and expenses; investment advisors that impermissibly shift and misallocate expenses; and investment advisors that fail to adequately disclose conflicts of interest, including conflicts arising from fee and expense issues. Within this rubric there have been some significant enforcement actions against high-profile PE firms, such as First Reserve Management, WL Ross, KKR, and Blackstone.
The reluctance of the Senate to repeal the Dodd-Frank Act means that the legislation may be around for the foreseeable future. Harsh enforcement penalties for PE funds that fail to adhere to its regulations is still very much a reality. Companies that have a poor compliance record are likely enforcement targets for the SEC, which has dedicated resources (such as the Investment Management Division and the Office of Compliance Inspections and Examinations) to investigating the PE industry.
Even if there is no repeal of the Dodd-Frank Act, it is apparent that the PE-related concerns it was meant to deal with are compliance issues, such as undisclosed or misallocated expenses and conflicts of interest. According to the SEC, it has observed that over 50 percent of examined PE funds have compliance issues under Dodd-Frank. PE firms need to understand that, with or without Dodd-Frank, compliance with the types of concerns noted by the SEC is essential.