"Beware the ides of March," the day Senator Chris Dodd introduced his Chairman's Mark on financial reform. The bill says little about private equity underwriters (PEU's) in its 1,336 pages. Private equity was mentioned a handful of times. On page 378 it states:
SEC. 408. EXEMPTION OF AND RECORD KEEPING BY PRIVATE EQUITY FUND ADVISERS.Page 381 authorizes a study for private fund self regulation
Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3) is amended by adding at the end the following:
‘‘(m) EXEMPTION OF AND REPORTING BY PRIVATE EQUITY FUND ADVISERS.—
‘‘(1) IN GENERAL.—Except as provided in this subsection, no investment adviser shall be subject to the registration or reporting requirements of this title with respect to the provision of investment advice relating to a private equity fund or funds. ‘‘(2) MAINTENANCE OF RECORDS AND ACCESS BY COMMISSION.—Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules— ‘‘(B) to define the term ‘private equity fund’ for purposes of this subsection.’’
SEC. 414. GAO STUDY ON SELF-REGULATORY ORGANIZATION FOR PRIVATE FUNDS. The Comptroller General of the United States shall conduct a study of the feasibility of forming a self-regulatory organization to oversee private funds, private equity funds, and venture capital funds, and shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study not later than 1 year after the date of enactment of this Act.
Page 476 defines private equity in relation to restrictions on capital market activity.
(a) DEFINITIONS.—In this section— (1) the terms ‘‘hedge fund’’ and ‘‘private equity fund’’ mean a company or other entity that is exempt from registration as an investment company pursuant to section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1) or 80a-3(c)(7)), or a similar fund, as jointly determined by the appropriate Federal banking agencies; (3) the term ‘‘sponsoring’’, when used with respect to a hedge fund or private equity fund, means— (A) serving as a general partner, managing member, or trustee of the fund; (B) in any manner selecting or controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or management of the fund; or (C) sharing with the fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name.
Pages 479-480 prohibit bank holding companies and deposit insured institutions from having private equity or hedge funds. (This provision may not last according to CNBC's Steve Liesman)
(c) PROHIBITION ON SPONSORING AND INVESTING IN HEDGE FUNDS AND PRIVATE EQUITY FUNDS.— (1) IN GENERAL.—Except as provided in paragraph (2), and subject to the recommendations and modifications of the Council under subsection (g), the appropriate Federal banking agencies shall, through a rule making under subsection (g), jointly prohibit an insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company for purposes of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.), or any subsidiary of such institution or company, from sponsoring or investing in a hedge fund or a private equity fund.
Transactions between banks and their hedge fund or PE divisions won't be backstopped by the taxpayer (pages 481-482):
(e) LIMITATIONS ON RELATIONSHIPS WITH HEDGE FUNDS AND PRIVATE EQUITY FUNDS.— (1) COVERED TRANSACTIONS.—An insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company for purposes of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.), and any subsidiary of such institution or company that serves, directly or indirectly, as the investment manager or investment adviser to a hedge fund or private equity fund may not enter into a covered transaction, as defined in section 23A of the Federal Reserve Act (12 U.S.C. 371c) with such hedge fund or private equity fund.
The very last mention comes on page 482.
(2) AFFILIATION.—An insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company for purposes of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.), and any subsidiary of such institution or company that serves, directly or indirectly, as the investment manager or investment adviser to a hedge fund or private equity fund shall be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1) as if such institution, company, or subsidiary were a member bank and such hedge fund or private equity fund were an affiliate.
Here's my take. PEU's have six months after financial reform passes to influence the definition of private equity, even mobilize activists. They have a year pass while the GAO studies PEU "self regulation." Funny, how the media missed this. PEU customers haven't.
Banks won't segregate their private equity divisions until the definition comes in, if then. Should something bad happen in the meantime, it might be comforting to know deposit insurance won't cover their backsides. At least until I recall how AIG, Fannie Mae and Freddie Mac got billions outside the deposit insurance system.
Add CALPERS $2.8 billion in private equity capital calls, $681 million from The Carlyle Group, and I get a little more nervous. Pensions have over $140 billion invested in PEU's. Should "the risk boys" roll unloaded dice and lose big, pensions could fail. Guess where insolvent pensions land? In the taxpayer pocket.
Senator Chris Dodd and his bipartisan friends gave PEU's a virtual free pass. This was predictable given their bipartisan political connections, red, white and blue. Might retiring Chris Dodd be laughing his way to a new job?
Update: Senator Dodd's Chief Counsel bought financial stocks during the meltdown.
Update 3-22-15: Carlyle Group co-founder David Rubenstein stated in a 2013 Yale interview: Dodd Frank "more or less didn't do anything to private equity ."