Financial reform in the wake of the severe financial crisis of 2009 has been a significant step in improving financial stability and reducing the likelihood of similar meltdowns in the future. The economy still has not fully recovered; yet misguided efforts to water down recent reforms are already underway. Congressman Jeb Hensarling has proposed an amendment to the Highway Trust Fund bill that would do precisely this. Passage of the amendment would roll back reforms designed to protect the financial system in a context — the highway bill — that does not allow full debate in Congress and fails to provide an opportunity for citizens to make their views heard.
The Dodd-Frank financial reform act has proven its effectiveness in improving transparency and rooting out bad, possibly fraudulent, behavior by financial actors. The provisions of Dodd-Frank that subject larger private equity funds to regulatory oversight have been particularly important in this regard. Private equity fund advisors are lightly regulated in comparison with publicly-traded firms and advisors to mutual and other funds that trade shares of stock. Yet SEC examinations of PE fund advisors have found a shocking number of violations of the advisor-investor relationship, in which the funds were essentially picking the pockets of their investors.
One of the provisions of the Hensarling amendment would have the effect of excluding some of the larger PE funds from SEC oversight. It would allow private equity funds to exclude Small Business Investment Companies (SBICs) from the assets under management when determining whether the fund must register with the SEC. It would thus allow some PE funds that are currently required to register to escape regulatory oversight. In view of recent findings in SEC examinations of private equity fund advisors, this seems like an especially misguided roll back of financial reform.
Attaching amendments to unregulated legislation that weaken the financial system and undermine investor protections sets a dangerous precedent and undermines the democratic process.