unquote" regulation update: Dodd-Frank

The Dodd-Frank Wall Street Reform and Consumer Protection Act limits banks' commitments to alternative investment funds to 3% of Tier 1 capital (the "Volcker Rule"). The legislation also forces a compliance regime on private equity funds exceeding $100m in assets under management and requires advisers to such funds to register with the Securities and Exchange Commission (SEC).

The new provisions could hamper transatlantic investment activity for both US investors in Europe, and European investors in the US.

However, the act could have differing effects in Europe's many jurisdictions. Julio Veloso, a partner of Spanish law firm Broseta, and also a member of the legal and fiscal committee of ASCRI, says Spanish PE firms do not need to be worried about these latest changes in the Dodd-Frank Act: "I believe only a very minor number of companies will be affected by the Dodd-Frank Act in Spain. It's just not as relevant here."

However, Simon Havers, of Baird Capital Partners Europe, sees problems for British firms: "Dodd-Frank is undoubtedly going to reduce transatlantic investments. Local capital for local firms seems to be a growing trend, even though it¹s not good for the end consumer."

KEY FACTS

– Latest stance signed into law on 21 July, 2010.
– Requires advisers to register with the SEC if PE fund in question manages more than $100m.
– Requires strict compliance, documentation and reporting measures:
The SEC is entitled to share all documentation submitted with the Financial Stability Oversight Council (FSOC).
The Volcker Rule limits banks¹ investments in PE funds to 3% of Tier 1 capital.
Venture capital funds [according to the SEC¹s definition] are exempt.

However, DLA Piper has previously told unquote" that industry fears are overblown.

Perhaps the most substantial impact on European private equity and venture capital will be on investments from those overseas, and the US regulations are likely to depress the number of American LPs investing in European funds.

A number of GPs, like Charles Diehl of French firm Activa Capital, are outraged by the actions of US regulators. "People investing in private equity are the most sophisticated investors in the world. They don't need additional protection and should be allowed to invest in the vehicles they choose," says Diehl. "Regulators should not be telling them what to invest in."

Diehl's argument relates to the classification of alternative investments as a homogenous asset class, treating PE, venture capital and hedge funds on equal terms despite their differing investor bases. To counter the industry's clamour for appropriate treatment of different types of funds, the SEC will set up a specialised unit solely dedicated to alternative investments to drive expertise within the organisation.

For the moment, however, the PE industry should relax, says Koos Teule, of Gilde Buyout Partners: "It's annoying to do the paperwork, but I don't think the SEC will actively look at European firms just yet. They have other problems to deal with."

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• Topics
• Regulation
• SJ Berwin
• BVK
• BVCA
• ASCRI
• EU Commission
• Activa Capital
• Baird Capital Partners Europe Ltd
• Gilde Investment Management