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House Republicans question SEC oversight of private equity funds

SEC Chair Mary Jo White testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill July 30, 2013. REUTERS/Jo
SEC Chair Mary Jo White testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill July 30, 2013. REUTERS/Jo

By Sarah N. Lynch

WASHINGTON (Reuters) - Two key Republicans in the U.S. House of Representatives are questioning whether federal securities regulators are spending too much of their time conducting compliance examinations of private equity fund advisers, saying sophisticated investors need less protection.

House Financial Services Committee Chairman Jeb Hensarling and New Jersey Republican Scott Garrett, who chairs the capital markets subcommittee, raised their concerns about the regulatory regime for private equity funds in a letter sent late Thursday to Securities and Exchange Commission Chair Mary Jo White.

"For these advisers, the SEC examination process has proven to be burdensome, costly, inefficient and inflexible," Hensarling and Garrett wrote.

"Subjecting this set of advisers to the examination process does not appreciably further the goals of investor protection or financial stability."

SEC spokesman John Nester declined to comment on the letter, which asks White for a written response to questions concerning the agency's examinations program.

The SEC previously did not have authority to regulate private equity funds, or other private funds such as hedge funds.

But that changed in 2010 with the passage of the Dodd-Frank Wall Street reform law.

The law required private fund advisers with larger sums of money under management to register with the SEC for the first time.

Amid concerns that some large funds could also pose systemic risks to the broader marketplace, Dodd-Frank also requires advisers of larger hedge funds and private equity funds to submit to regulators confidential data about their use of leverage and the makeup of their portfolios.

With this additional regulatory authority has also come more responsibility for the SEC, which must now conduct routine compliance examinations of private fund advisers for the first time.

Earlier this year, the SEC's former head of examinations said one of the agency's top examination priorities for 2013 was to conduct "presence" exams for private fund advisers that had just registered with the SEC for the first time.

Hensarling and Garrett questioned whether private equity funds actually pose any systemic risks to the market, and they also said they feel private equity funds need less regulatory scrutiny because only certain sophisticated investors with a net worth of $1 million, excluding their home, can even invest in them.

The SEC has already been struggling for years to keep up with examinations of registered investment advisers, and often only examines a small portion of them because of limited resources.

Unlike brokerages, no self-regulatory organization exists to help the SEC conduct routine inspections or exams of investment advisers.

Hensarling and Garrett said the SEC should better prioritize its resources by focusing on advisers who cater to less sophisticated, mom and pop investors.

The two lawmakers asked for the SEC to respond in writing to their letter by September 20.

(Reporting by Sarah N. Lynch; Editing by Ken Wills)

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