By a vote of 261-145, the House of Representatives today approved H.R. 5424 – the Investment Advisers Modernization Act. This little-noticed and cryptically named piece of legislation would be a huge gift to the $4 trillion private equity fund industry, but one that would put the rest of us at risk. It would “modernize” the private equity world by rolling back the clock and eliminating important elements of fund oversight and fraud protection.

H.R. 5424 would reduce the amount of information that private equity and hedge fund managers have to disclose either to investors or to the Securities and Exchange Commission (SEC). They don’t disclose enough information as it is. But thanks to some modest requirements imposed on them by the Dodd-Frank Act, we know more now than we used to, and nothing we’ve learned so far has been reassuring.

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Two years ago, in a first round of post-Dodd-Frank scrutiny, the SEC found “violations of law or material weaknesses in controls” in how more than half of all fund managers handled fees and expenses. The SEC has since brought more than ten enforcement actions against private equity funds, reaching settlements totaling more than $150 million. The deceptions in which various funds have been implicated include charging 10 years of fees for "monitoring” a company that a fund owned only for a few years (that was Apollo, an industry giant that has agreed to pay $52.7 million in penalties for various shady practices); sticking investors with the cost of a senior partner’s personal expenses (Apollo again); and failing to disclose conflicts of interests and payments to companies owned by firm principals (Fenway Partners).

It is hard to imagine why anyone not directly employed in the private fund industry would want to let it become even more slippery and opaque than it already is. Yet H.R. 5424 would do just that by, for example, eliminating the SEC’s ability to apply anti-fraud protection to sales materials distributed by funds; and allowing ads to include cherry-picked testimonials or recommendations – a practice long associated with dishonesty.

Some of the people who stand to be damaged by HR 5424 are wealthy individual investors. But far too many are teachers, firefighters, police officers, hotel workers, housekeepers, cooks, and other workers, public and private, whose retirement savings are heavily invested in private equity  funds.

Last year a coalition of 13 state Treasurers, Comptrollers, and public pension funds sent a letter to the SEC calling for better enforcement and disclosure of fee practices by private equity funds. Two of the country’s largest pension funds, CalPERS and CalSTRS, strongly oppose this bill, as do a wide range of investor groups and labor unions, including the Council of Institutional Investors, the AFL-CIO, and UNITE HERE.

One of the major lessons of the 2008 financial crisis concerned the risks created by non-bank capital market players and the need to bring them under closer regulatory oversight. This bill would do the opposite.

Given the growing role that private equity plays in our economy and the retirement security of millions of Americans, more, not less, needs to be done to ensure that private equity managers are honest and transparent. The last thing we need is for Congress to pass legislation that, in the words of a strong statement issued by the White House earlier this week, would “enable private fund advisers to slip back into the shadows.”

Jim Baker is Deputy Director of Research for UNITE HERE.


The views expressed by authors are their own and not the views of The Hill.