Sunday, February 23, 2014

SEC on PEU Deal Fees: Decision Looming

Bloomberg reported yesterday:

The U.S. Securities and Exchange Commission is considering granting private-equity firms a reprieve after they collected billions of dollars in deal fees without being registered to do so, according to a person with knowledge of the matter. 

The SEC staff is weighing a special exemption for private-equity firms to continue collecting deal fees in the future, said the person, who asked not to be named because the deliberations aren’t public. An exemption would mean the agency is unlikely to pursue enforcement action over past deals, the person said. A final decision hasn’t been made and the agency could still require the firms to register or seek sanctions for past deals. 
The issue arose nearly a year ago:

The issue first flared up last April when David Blass, chief counsel for the SEC’s trading and markets division, said in a speech that private-equity firms’ routine practice of taking transaction fees appeared to “fall within the meaning of the term ‘broker.’” 

The speech set off a flurry of calls from fund managers to securities lawyers to understand whether the speech raised issues for them and what new regulatory obligations may await.

Since Blass’s April speech, the industry has pressed for an exemption, arguing that investment advisor rules provide sufficient protections for investors, making the added broker-dealer requirements -- registration with a self-regulatory organization, training for staff and additional SEC inspections -- unnecessary.
This theme continued in August 2013:

John Ramsay, the acting direct of the SEC’s Division of Trading and Markets, said that the group is continuing to look at broker-dealer registration matters as they relate to the private fund sector.

Ten days ago DealBook ran a story on Stephen Luparello, the man likely to replace Ramsay, who will return to the private sector.

(Luparello) works in the securities department at Wilmer Hale, a go-to firm for Wall Street banks.
Recall that BP hired WilmerHale to smooth waters after their summer long Oil Spew in the Gulf of Mexico.

Luparello's bio (on WilmerHale's website) states:

Stephen Luparello is a partner in the Securities Department, and a member of the Broker-Dealer Compliance and Regulation, and Litigation and Enforcement Practice Groups. He joined the firm (WilmerHale)  in 2012 after a 16-year career with the Financial Industry Regulatory Authority (FINRA), where he most recently served as Vice Chairman.

During his time as vice chairman, Mr. Luparello was responsible for all aspects of FINRA’s examination, enforcement, market regulation, international and disclosure programs. He also served as a primary staff representative to the Board, alongside the CEO, and to its outside constituencies, including the Securities and Exchange Commission (SEC), Congress, industry groups, media and other regulators. Mr. Luparello was part of the team to oversee the merger of NASD and NYSE Regulation programs, and assisted with the consolidation of their rulebooks into the FINRA Rulebook.

Prior to joining the FINRA, Mr. Luparello briefly worked for the Commodity Futures Trading Commission, where he served as Chief of Staff to Chairman Mary Schapiro. He also spent nine years at the Securities and Exchange Commission, serving as branch chief in the Office of Inspections in the Division of Market Regulation, and prior to his departure, as Counsel to the Commissioner, where he advised on regulatory and enforcement matters.
To show how small the appointee group is in Washington, D.C., Luparello once worked with John Ramsay, the man he is to replace.  Two different times the pair served Mary Schapiro in staff roles.  All are self-regulation proponents from inside the financial industry. 

Dealbook article on Luparello's likely appointment -- 2-13-14
SEC announces Luparello's appointment -- 2-20-14
Bloomberg on SEC likely waiving PEU Deal Fees -- 2-22-14
These appear to be smoke signals to the PEU class that their deal fees are safe.

To think they could've just gone down the street or met at the White House.  Time will tell if this is the correct interpretation.

Will the private industry trade group, which I peg as PECKER, get its way?  PECKER stands for Private Equity Capital Knowledge Executed Responsibly.  Anyway joke delivered, their head lobbyist had this to say:

“Private equity investment advisers perform a fundamentally different service than broker-dealers, and should not be required to register as such.  Layering broker-dealer regulations on private equity will be of no meaningful benefit to investors and would levy significant costs on private equity firms.” 
Translation:  PEU's aren't done being served by Uncle Sam, in this case Stephen Luparello. 

The decision on whether to give the industry a pass is being deliberated by SEC staff, not the presidentially appointed five-member commission, the person said. SEC staff are authorized to issue rule exemptions without putting it to a commission vote.

Luparello could ensure a fine future for himself and his family with this one decision.  Also, watch where John Ramsay lands post public service.  That may be another indicator of how pervasive private equity has become.  It's PEUbiquitous.