Compliance Bricks and Mortar for April 7

These are some of the compliance-related stories that recently caught my attention.

You Need to Know This: YTD Securities Class Action Lawsuit Filings are Off the Charts by Kevin LaCroix in the D&O Diary

Securities class action lawsuit filings have been going crazy. Securities suit filings during the first quarter 2017 set a pace that if continued would mean an unprecedented number of securities lawsuit by year end. But even more significant than the sheer number of lawsuits is the rate of litigation. The percentage of listed companies sued in the first quarter, if annualized, would mean that U.S. public companies are being sued at four times the long-term historical rate. As discussed below, three factors account for much of the upsurge in securities suit filings. [More…]

Denials and Admissions in Civil Enforcement – Looking Beyond the SEC by Verity Winship and Jennifer K. Robbennolt in NYU’s Compliance & Enforcement blog

Should agencies require admissions of guilt from the targets of civil enforcement? The SEC’s policy of letting enforcement targets settle while neither admitting nor denying allegations provoked judicial rebukes and a public debate. But the SEC is only the tip of the iceberg. Administrative agencies rely heavily on settlement as a key enforcement tool. Admissions of guilt—or, more commonly, declarations that nothing is admitted—form part of these settlement agreements and the underlying negotiations. [More…]

The Easiest Way to Help Save the Planet: Get a Bike

From eradicating health concerns linked to inactivity, to mitigating climate change, to boosting local economies and building community, biking… is an integral part of the solution. It just has some image and infrastructure issues to overcome. [More…]

The One About The Defrauding Pastor

When you run across someone trying to get you to invest risk-free with a high annual return, you know you have run into a fraudster. Unless god is on the side of the investment, there is no such thing as a high-rate, risk-free return.

Apparently, Larry Holley, the pastor of Abundant Life Ministries in Flint, Mich., thought he could cloak his securities in god’s will and pass them off to parishioners.

According to the SEC complaint, Holley and his associate Patricia Enright Gray, used faith-based rhetoric, with references to scripture and biblical figures to pitch fraudulent promissory notes from a real estate company. From February 2015 until recently, approximately 83 individuals invested with pair.

Holley labeled his church as a “place of provision” and “distributors of knowledge, wisdom, wealth & substance.” To be fair to the pastor, it looks he and the church had spent time buying and fixing up homes for those in need. It just seems he crossed the line at some point.

Holley allegedly told prospective investors that as a person who “prayed for your children,” he was more trustworthy than a “banker” with their money. He held financial presentations masked as “Blessed Life Conferences” at churches. As part of the presentation he asked congregants to fill out cards with information on their finances and he promised to pray over the cards.

Apparently, he turned over the financial information to Gray for the hustle and she would have a on-on-one meeting to help them become millionaires. During the consultations, Gray showed prospective investors a large book filled with photographs of what she represented to be some of real estate company’s properties, testimonials from satisfied investors and copies of checks paid to investors.

The real estate company, Treasure Enterprise, did exist and did own some real estate. The company did not invest the money fast enough or profitably enough to meet the payments on the promissory notes. Perhaps the goal was legitimate at first. (I don’t know.) When Treasure missed its investment marks, Holley and Gray could have broken the news to investors. Instead, it looks like they increased their fundraising efforts to cover the shortfall. (Which of course just increases the shortfall.) The pair used payments of the fresh capital to payoff earlier investors in exchange for dropping their complaints to regulators.

As of February 2017, Treasure was past due on approximately 51 promissory notes for 43 investors, totaling nearly $2 million.

The State of Michigan had caught up with them before the SEC. The Michigan Department of Licensing and Regulatory Affairs used a cease and desist order in August for selling unregistered securities, from acting as unregistered agents and from making false or misleading statements in the offer and sale of securities. Unlike the SEC, Michigan can put them in jail.

Sources:

No BitCoin ETF

I’ve said before that BitCoin is the Dutch Tulips of investments. The blockchain approach to recordkeeping is an interesting use of decentralized computed power for recordkeeping, but BitCoin units are less interesting. The main users are less than scrupulous users looking for ways to avoid things like anti-money laundering rules.

Many bankers/traders see BitCoin as a way to make money. All of those transactions and lack of regulation seem ripe for profit-making.

One tactic has been to set up an ETF to track BitCoin prices. Much a like a gold ETF means you don’t need a safe and security guard for gold bars. A BitCoin ETF would allow you profit on runaway BitCoin prices without having to get involved with all of the technical stuff of BitCoin.

I should say, at least people are trying to set up a BitCoin ETF. Two requests have been denied recently. The decisions from the Securities and Exchange Commission state that they fail to “to prevent fraudulent and manipulative acts and practices” and fail “to protect investors and the public interest.” In an identical statement for the two rejections:

The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter.  First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.

One problem that surfaces is that is hard to pin the value of BitCoin. The Chinese exchanges for BitCoin have become a separate market from the US. Even in the US, there are different exchanges with different values. Each of the rejected ETF planned to use a different measure for the ETF value.

The linchpin in the SEC’s denial is the lack of regulation. The very thing that attracts user to BitCoin, the lack of government oversight, is the main reason the SEC rejects the ETFs.

For the commodity-based EFTs approved so far, there have been well-established, significant, regulated markets for trading futures on the underlying commodity. Those are gold, silver, platinum, palladium, and copper.

BitCoin is not to the SEC’s liking.

Sources:

Compliance Bricks and Mortar for March 31

It’s been a busy week, getting information and drafting for the Form ADV filing. I have a big stack of stories to read and write, but these are some of the compliance-related stories that recently caught my attention.

United’s Policy Management Lessons by Matt Kelly in Radical Compliance

Compliance officers who want a glimpse of your future, look no further than the spectacle that unfolded Sunday morning at Denver International Airport: a tale of policy management mismanaged, reputation risk, and plenty of commentary on social media.

Some day, some way, a headache like this will be yours. This time the lucky company was United Airlines. Let’s taxi into this teachable moment. [More…]

The myth of the 70,000-page federal tax code by Dylan Matthews in Vox

The US tax code is definitely complicated at points, so it’s no wonder that the claim that it is 70,000 pages long has become a widely cited factoid, most recently in messaging from Republicans on the House Ways and Means Committee, the committee that’s leading the Republican effort to simplify and reform income taxes:

The only problem with this claim is that it’s clearly false. As of 2014, the tax code was only about 2,600 pages long. [more…]

SEC Private Equity Enforcement: A More Aggressive Approach by Andrew J. Lichtman and Howard S. Suskin in the Compliance & Enforcement blog sponsored by NYU Law’s Program on Corporate Compliance and Enforcement

Over the last several years, the Securities and Exchange Commission (“SEC”) has targeted private equity funds for various fee allocation arrangements and conflicts of interest.  Rather than describing the fee practices as fraudulent, which would require a showing of scienter, the SEC has concluded that the private equity advisers committed disclosure violations.  However, a recent proceeding in which the SEC secured a settlement based on both breach of fiduciary duty and fraud may foreshadow a more aggressive approach.  Some context first. [more…]

Why the SCCE and HCCA Don’t Care by Adam Turteltaub in the SCCE’s Compliance & Ethics Blog

With a combined membership of over 17,000 dues-paying individuals, the SCCE and HCCA are, obviously the go-to resource for compliance professionals. And, it’s also the go-to resource for vendors wanting to reach compliance professionals.

And, from time to time, those vendors will ask for an endorsement, to offer special discounts to our members, or want their product or work formally recognized. Inevitably, and to them dismayingly quickly, we say no. [More…]

Private Real Estate and Regulatory Assets Under Management

It’s that time of the year again. Real estate fund managers registered with the Securities and Exchange Commission are working on their Form ADV filings. I’m hearing a few questions about the right way to calculate Regulatory Assets Under Management.

The instructions to Form ADV Part 1 Appendix B provide three steps on page 9:

First, is the account a securities portfolio?
Second, does the account receive continuous and regular supervisory or management services?
Third, what is the entire value of the account?

Form ADV deems a “private fund” to be a “securities portfolio.” If you’ve gotten this far you’ve already given up on dealing with subtleties of the “private fund” definition and accepted that your real estate fund is a private fund. That gets you past the first step.

For fund managers, the second question is relatively easy since fund management falls squarely into management services.

That leaves us with the third step. The instructions provide:

In the case of a private fund, determine the current market value (or fair value) of the private fund’s assets and the contractual amount of any uncalled commitment pursuant to which a person is obligated to acquire an interest in, or make a capital contribution to, the private fund.

The first question is what to do about the subscription credit facility. As far I can tell: nothing. That leaves the likelihood that the fund RAUM is slightly high. Draws from the credit facility will be repaid with capital calls. So any investments still financed by the facility will be double counted. The value of the investment is in the value of the fund assets, but the capital has not been called to fund the investment and will be added as part of the uncalled capital.

The second question is what portion of the value of the real estate should be included as a fund asset. Some fund managers are using the gross value of all of the real estate. Others are using the net value after deducting the mortgage debt.

I’ve heard mixed messages from the SEC on which is the preferred method. One thing is clear is that the SEC wants consistency on how you come to the value and that you don’t act in a way that is deceptive.

The argument on using the net is that it better equates to the true fund value. The mortgage debt is generally isolated to the investment, so it is not fund-level debt. The fund is not leveraged.

As a comparison, it would seem strange for a private equity firm to use the gross value of a portfolio company in its fund valuation. I have not heard from any private equity fund managers that are adding the portfolio company level debt into the firm’s RAUM.

Many funds use the Investment Company Guidelines for real estate fund accounting. Those Guidelines call for the net value to be shown on the fund’s balance sheet. The Form ADV instructions say that if you calculate fair value in accordance with GAAP or another international accounting standard for financial reporting purposes you are expected to use that same basis for purposes of determining the fair value of your assets under management.

The SEC wants the registered adviser to use the same method in calculating assets under management that it uses to report its assets to clients or to calculate fees for investment advisory services. That would all seem to lead back to the equity capital in the real estate investments and not the gross value of all of the real estate investments. Investors generally look to the return on equity and capital, not the gross value of the real estate assets.

The third question is what to do about non-fund real estate investments, like direct investments,  separate accounts and joint ventures.  The general consensus seems to be that can they fall outside the scope of RAUM.

While there is still debate over whether a real estate fund is a “private fund”, these type of dirt investments generally seem to fall far away from that definition. There are few, if any, structural entities that would make one think that it is investing in a securities. There is little in the way of cash holding that may end up in a money market fund or other security investment. That means these “dirt” investments would not be a securities portfolio and don’t make it past step one in the RAUM analysis.

I’ve seen a few real estate managers address the RAUM mismatch in Form ADV Part 2. Item 5 states RAUM, then add in other measures of assets under management and how they got to those amounts. That extended assets under management would include the “dirt” investments.

I’m curious to heard what methods you are using.

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Compliance Bricks and Mortar for March 24

These are some of the compliance-related stories that recently caught my attention.

Women in banking To err is human, to get fired for it … female by Tanaya Macheel in American Banker

One of the latest studies of gender differences in financial services finds female advisers accused of wrongdoing are 20% more likely to lose their jobs than male advisers accused of wrongdoing. The women also are 30% less likely to be rehired than the men within a year following the incident, even though the women are less likely than the men to commit another offense, according to the study’s findings. The infractions cover a wide range, including misrepresenting or omitting key facts and committing fraud. But even controlling for factors like the severity of the offense — as well as qualifications and experience level — women fared worse than men. The study identified Wells Fargo Advisors as the biggest offender, saying its female advisers were 25% more likely to experience a “job separation” after misconduct than their male counterparts. That figure is about 20% for Morgan Stanley’s female advisers and close to 15% for those from Bank of America Investment Services and JPMorgan Securities. The report is titled “When Harry Fired Sally.” You can access it here. [More…]

Trump’s SEC Pick Set for Tense Reunion With Elizabeth Warren by Benjamin Bain and Elizabeth Dexheimer in Bloomberg

Two decades ago, Warren was a little-known law professor at the University of Pennsylvania. Clayton was a Penn law student at the same time. She went on to become the finance industry’s most relentless critic, while he made millions as a lawyer representing big banks and hedge funds. Their paths will cross again Thursday at Clayton’s Senate confirmation hearing, where Warren will be among the most outspoken lawmakers questioning his work on behalf of the industry. [More…]

Anthem’s Blow Against Corporate Trust by Matt Kelly in Radical Compliance

This isn’t an abstract problem. Distrust in institutions is growing, with real consequences for corporations and compliance officers charged with keeping them on a trustworthy path.

I explored this in a recent post on the NAVEX Global blog. We have the Edelman Trust Report, an annual survey of public trust in various institutions: it shows trust declining for all types of institutions, including businesses and governments, around the world. We also have the PwC CEO Survey of 2017: it cites organizational trust as an emerging risk for businesses, and noted that companies able to foster trust will have a competitive advantage in the future. [More…]

Why the Securities and Exchange Commission’s Administrative Law Judges are Unconstitutional by Linda D. Jellum in NYU’s Compliance & Enforcement

I answer these and other questions are in my recent article,[27] explaining why the SEC ALJs’ appointment violates the United States Constitution and why there is no easy fix. Further, I note that it is not just the SEC ALJs’s appointment process that is constitutionally infirm. In addition, the SEC ALJs, indeed all ALJs, are subject to multiple for-cause removal protections. In 2010 in Free Enterprise Fund v. Public Company Accounting Oversight Board, the Supreme Court held that dual for-cause removal provisions violate separation of powers.[28] Possibly, the Supreme Court will refuse to extend its holding in Free Enterprise to ALJs given the potential impact on the administrative state. However, if the Court meant what it said and if the case is to have any relevance beyond the agency involved, then the multiple for-cause removal provisions affecting the SEC ALJs specifically and all ALJs generally will need to be fixed. The constitutional challenges raised in these cases are far from inconsequential. Thousands of ALJs may be subject to unconstitutional appointment and removal provisions. Thus, the shadow of Free Enterprise looms large. [More…]

12b-1 Fees: It Is Time To Bid Them Farewell? in Kitces.com

From its start in 1980, the 12b-1 fee was controversial – a distribution charge assessed against current mutual fund investors, that the fund company can use to market the fund to new investors. In other words, the mutual fund got to use investor dollars (rather than its own money) to grow the fund’s assets under management (AUM).

In theory, this use of the mutual fund investor’s own money to market the fund company’s products was supposed to be good for the investor, because it would help grow and scale the fund and bring down its operating expense ratio. However, several decades later, subsequent analysis is finding that while mutual funds that charge 12b-1 fees are successful at incentivizing salespeople to bring in more assets under management, the 12b-1 fee isn’t living up to its promise of helping to scale up and bringing down the expense ratio as the mutual fund grows. [More…]

Cyclists Break the Law to Stay Safe, Study Finds by Joe Lindsey in Bicycling

The study (“Scofflaw Bicycling: Illegal But Rational”), just published in the Journal of Transport and Land Use, details when, how, and why cyclists decide to break traffic laws. The authors, an engineer and sociologist from the University of Colorado and an urban planning professor at the University of Nebraska-Lincoln, set out to study the subject of cyclist misbehavior, which they say has surprisingly scant research.  [More…]

 

The Republican Agenda and Private Real Estate

Since President Trump is deep in private real estate, maybe there will be some good things coming to the industry during his administration. 

There were six major themes that President Trump campaigned on the most:

  1. Immigration and the wall
  2. Trade fairness
  3. Tax changes
  4. Healthcare changes
  5. Dodd-Frank changes
  6. De-regulation in general

Other than immigration, President Trump has proven himself to prefer to make policy through the 140 characters in Twitter, instead getting deep into the policy weeds. We need to look to Congress for a legislative blueprint, since President Trump does not seem to have one.

What does the Republican leadership in Congress want do? Specifically what do Paul Ryan in the house and Mitch McConnell in the Senate?

What can they convince the House and Senate to do? 

That is the big question right now with the American Health Care Act. The Republican house is torn between those who think the bill goes too far and those who think it doesn’t go far enough. Many campaigned on just the repeal part. Many others learned that what their constituents didn’t like about Obamacare is that is too expensive. The American Health Care Act only does one of those.

Speaker Ryan has promised a vote on the Republican healthcare bill on Thursday to coincide with the 7 year anniversary of the Affordable Care Act. We’ll see if Speaker Ryan is able to shepherd this very unpopular bill through the House and get enough votes.

Then what?

Most likely tax reform. Speaker Ryan published his “A Better Way” white paper in June of 2016. Unlike the American Health Care Act, legislators have been able to look at this already. Here are some of the highlights. 

  • Biggest change is the Border Adjustment Tax (unlikely to affect real estate directly.
  • Fewer tax brackets
  • Top rate of 33% for individuals 
  • Limit pass-through income from partnerships and LLCs to 25%
  • Lower corporate tax rate to 20%
  • Eliminate deductibility of interest expenses.
  • Individuals only taxed on half of their dividend and capital gains
  • Immediate cost recovery for investments instead of a depreciation schedule. (not clear on real estate)
  • Net Operating Losses can be carried forward and be adjusted for inflation
  • Eliminate the Alternative Minimum Tax,
  • Eliminate the estate tax
  • Eliminated Obamacare taxes (the last one is the healthcare bill)

President Trump mentioned removing favorable treatment of carried interest during the campaign. That is not Speaker Ryan’s blueprint. It’s been threatened before and survived.

After that, or during that, is financial de-regulation. Chairman Jeb Hensarling of the House Financial Services Committee has been working hard on his Dodd-Frank off-ramp for the last six years pushing bits of legislation through his committee and on to the House floor. The  Financial Choice Act has been floating around for a year and packages that work into one package.

“As the dust begins to settle on the post-crisis response, however, there has been a growing recognition that financial regulation has become far too complex and too intrusive and places too much faith in the discretion and wisdom of bank regulators.”

Here are some highlights:

  • Pitch is to help community banks.
  • Adjust capital requirements – removing Basel requirements
  • Make credit more available
  • New Bankruptcy code for financial institutions
  • Repeal FSCO’s Systemically Important Financial Institution designation powers
  • Reform Consumer Financial Protection Bureau
  • Federal Reserve Reform
  • Repeal the Volker Rule
  • Repeal Dodd-Frank registration requirements for private equity firms
  • Expand definition of accredited investor: Same income and net worth tests, but adds financial services experience or some sort of qualifying experience.

As much as the Republicans are campaigning against de-regulation the Financial Choice Act does not define “private equity firms” and requires the SEC to promulgate a new regulation to define it. SEC registration was on the edge during Dodd-Frank, The house version of the bill and the Senate version of the bill took opposite approaches on whether to subject private equity firms to SEC registration. During hearings, private equity kept being equated to leveraged buyouts that bankrupted companies and put people out of work to enrich corporate raiders.

 

I presented the above to PartnerConnect East 2017 yesterday. 

 

Sources:

A Better Way” white paper

Compliance Bricks and Mortar – St. Patrick’s Day Edition

Since I work in Boston and my office is next to the Black Rose, it’s hard to ignore St. Patrick’s Day. And yes, the Black Rose was already full of drinking patrons at 9:00 am. Getting past all the Irish cheer, these are some of the compliance related stories that recently caught my attention.

Super Hedge Fund by Sharon Hannes in Harvard Law School Forum on Corporate Governance and Financial Regulation

Activist hedge funds revolutionized corporate America and generated both excitement and criticism alike. This article suggests that a novel market mechanism, a “super hedge fund,” would maintain the benefits of hedge fund activism, while curbing its downsides. The super hedge fund would not really be a fund but, rather, a contractual arrangement among a broad group of institutional investors and a task force of financial experts. The task force would pool together the potency of the institutional shareholders in a sophisticated manner and then unleash its sting on target corporations. [More…]

Besides greed, what motivates insider traders? by Andrew Snyder

Insider trading is strikingly similar to espionage: stealing information for personal gain or spying for the benefit of another entity. The magnitude of a tipper passing confidential company information and a government insider such as Edward Snowden who hands over national classified secrets are incomparable, but what’s similar is who’s doing the lying, cheating, stealing and why they’re doing it. [More…]

“And” Or “Or” – This Ninth Circuit Opinion Highlights The Difference by Keith Paul Bishop in California Corporate Securities Law

“And” and “or” are classified as conjunctions. They are classified as such because they yoke together words, phrases, clauses and sometimes even sentences. They are not interchangeable, however, as illustrated by the recent opinion by the Ninth Circuit Court of Appeals in Zetwick v. County of Yolo, 2017 U.S. App. LEXIS 3260 (9th Cir. Cal. Feb. 23, 2017). [More…]

Connecting Fraud, Pressure, and Culture by Matt Kelly in Radical Compliance

My theme was fitting the fraud triangle to your organization’s risks—and as sometimes happens, I stumbled into an insight while speaking that was so useful, I wanted to share here.

First, let’s remember the fraud triangle itself. That’s the device auditors use to help think about how fraud might strike an organization. It has three legs: rationalization, opportunity, and pressure.

My contention is that for each leg of the fraud triangle, an opposite force exists.

[More…]

Image: Copyright: xmocb / 123RF Stock Photo

The Case of the Security Guard with Ketchup on his Hands

With the flow of announcements from the Securities and Exchange Commission, odd things will catch my eye for further review. For the insider trading case against Todd David Alpert, it was because the SEC said that he “worked as a security professional at the home of a Heinz board member.” A tilt of my head left me wondering what kind of securities professional was working at the home of a board member.

That was me confusing “security professional” with “securities professional.” Of course, I realized that “security professional” was a fancy term for security guard. But by the time I realized my mistake, I was deep into the complaint against Todd David Alpert.

Once I realized he was a security guard I immediate thought of the railroad insider trading case. I was ready to give Mr. Alpert credit for leveraging his position. I assumed he had identified the comings and goings from his post and tied that into what was going on behind the scenes.

I was thinking of the defenses from the railroad workers noticing the action in the railyards or counting cars at WalMart.

Then my jaw dropped.

The problem was the board member. The unnamed board member would forward emails to the Mr. Alpert in his role as a security professional, and ask him to print the email and attachments.

The Board Member forwarded an email regarding the potential Heinz acquisition with a direction to “print now”. The attachments to the email contained materials that would be discussed on an upcoming Heinz board of directors’ call, including a copy of the revised acquisition proposal letter, which included the word “CONFIDENTIAL” in boldface and stated that the proposed price for Heinz for $72.50 per share.

From the timeline presented in the case, Mr. Alpert read the attachment and quickly bought Heinz stock and options.

I can’t believe the board member was forwarding this incredibly sensitive information to the security guard to print. Who was this board member that was too lazy or incompetent to print a document on his own?

I pulled up the list of board of directors to see.  I couldn’t pull the pieces together. Then I got distracted when I saw that Lynn Swann, the ex Pittsburgh Steeler was on the board. One of those 12 does not know how to print email attachments.

Sources:

Financial Choice Act

Congress is currently occupied with health care. That is just one item on the agenda for the Republican leadership in Congress and President Trump. All have mentioned in one way or another to undo some of the evils of Dodd-Frank.

The big questions is how long will it take to move the American Health Care Act through Congress and deliver a bill that President Trump will be willing to sign. The second question is whether Congress will be able to move forward with any other legislation while dealing with health care.

Whenever Congress is ready to work on other legislation, Jeb Hensarling, Chairman of the House Financial Services Committee, has a law he is ready to move forward: The Financial Choice Act.

The Financial Choice Act is the bill that he sees as undoing many of the evils of Dodd-Frank.

“As the dust begins to settle on the post-crisis response, however, there has been a growing recognition that financial regulation has become far too complex and too intrusive and places too much faith in the discretion and wisdom of bank regulators.“

It has many of the things you might expect: repealing the Volker Rule, adjusting bank capital requirements, limiting the powers of the Consumer Financial Protection Bureau, limiting the powers of the Financial Stability Oversight Council, limiting regulatory limits on community banks.

Two items struck me as particularly relevant to private funds: SEC Registration and the definition of accredited investor.

Section 452 changes the definition of “Accredited Investor.” It keeps the two current brightline tests of income and net worth. I think those are key tests given the illiquid nature of private placements. It fixes those standards and removes Dodd-Frank’s requirement that the SEC adjust the amounts every four years.

The bill adds in a third test, allowing anyone licensed as a broker or investment adviser to also be an “accredited investor.” It adds a fourth test, allowing the SEC to create a regulatory regime for individuals to prove that the knowledge, education or job experience to allow them to invest in private placements.

We have seen from SEC Acting Commissioner Piwowar that he on board with opening up the definition of accredited investor.

The bigger change for private equity funds and probably for real estate funds is that it exempts “private equity fund” managers from the registration and reporting obligations of the Investment Advisors Act.

As you might expect, the bill does not take the time to define “private equity fund.” It gives the SEC six months to issue a rule for the definition.

The arguments are that private equity should be treated like venture capital. Private equity does not pose systemic risk. Private equity investors are generally sophisticated. The SEC would be more effective focusing its exam efforts on retail investment advisers.

Obviously this bill is a long way from being enacted. These two small provisions could easily be eliminated from the final law during the legislative process. I expect health care is going to bog down Congress for a long time.

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