Private Equity May Face Return of Attention-Getting SEC Fines Under Gensler
Chairman-Designate Gary Gensler is expected to be tougher on investment firms
The largest U.S. financial regulator has turned its focus away from private equity in recent years, but new agency leadership could mean tougher enforcement and heavier fines for buyout firms, attorneys and lobbyists say.
President Biden’s nomination of Gary Gensler to lead the Securities and Exchange Commission has Wall Street firms bracing for stricter oversight. Mr. Gensler, a former partner at Goldman Sachs Group Inc., gained a reputation as an aggressive enforcer while running the Commodity Futures Trading Commission from 2009 through 2013.
Mr. Gensler, who taught at the Massachusetts Institute of Technology’s Sloan School of Management after leaving government, has made few public statements of his views on private equity, however, and it is unclear whether he sees reforming buyout-fund practices as a priority.
Regulatory experts see a likelihood that if Mr. Gensler is confirmed by the Senate, the SEC could return to large, headline-making fines against private equity, which became less common under Jay Clayton, who led the agency from 2017 through 2020. Mr. Clayton last week said he would join the board of buyout firm Apollo Global Management Inc. as a lead independent director.
Mr. Gensler “got a lot done because he made a big splash” leading the CFTC, said Joe Weinstein, head of the securities and shareholder litigation practice at law firm and lobbying group Squire Patton Boggs. “I do think he’s going to try to send a message to whatever subset of the industry he is focusing on.”
From 2014 through 2016, the SEC issued fines for tens of millions of dollars against leading buyout firms including Blackstone Group Inc., KKR & Co. and Apollo, and a Gensler-led SEC may seek to bring similarly large cases to highlight violations by private-equity managers. However, “the question is whether private-equity funds got the message” from cases brought earlier and reformed their practices, said Coates Lear, a partner at Squire Patton Boggs and former senior counsel in the SEC’s enforcement division.
Message-sending fines targeting private equity would mark something of a break with the tenure of Mr. Clayton, who focused more on protecting ordinary investors rather than the institutional investors that back private-equity funds.
Under Mr. Clayton, the SEC issued more frequent but less costly penalties against private-equity firms. The number of enforcement actions the agency announced against private-equity managers reached its annual peak of eight in 2018, twice the number brought in 2016, the last year under previous SEC Chairman Mary Jo White, based on law firm Proskauer Rose LLP’s list of significant SEC enforcement actions against private equity.
The rise was in keeping with an overall increase in SEC penalties against investment advisers under Mr. Clayton. The number of enforcement actions against advisers reached a peak of 191 in 2019, before falling to 87 last year, agency records show.
Yet the sizes of individual penalties against private-equity firms have declined, data show. Between 2015 and 2016, the SEC issued civil monetary penalties of $12.5 million against Apollo and $10 million each against Blackstone and KKR, not including required reimbursements to investors. In Mr. Clayton’s tenure running the SEC, its largest penalty targeting a private-equity manager was a $3 million fine against TPG in 2017.
Individual fines against private-equity managers have more often been in the tens or hundreds of thousands of dollars over the past four years. The SEC hasn’t hit a private-equity manager with a civil monetary penalty of more than $1 million since 2017, Proskauer Rose and Dow Jones data show.
“Enforcement has been pretty active, but not so much with a focus on [the] private funds side,” said Amy Lynch, founder and president of Frontline Compliance and a former SEC examiner. The large number of actions against private equity around 2018 were likely the effect of the agency “cleaning out its pipeline” of cases begun under the Obama administration, she said, since it typically takes two or three years to complete a case.
The SEC declined to comment on its enforcement efforts against private equity. Mr. Gensler didn’t reply to a request for comment.
SEC examiners continue to uncover myriad compliance problems at private-equity firms. Last June, the regulator issued a risk alert saying it has encountered undisclosed conflicts and poor fee-and-expense disclosures in its recent examinations of private-equity and hedge-fund managers.
New SEC leadership likely means private equity will face “broken windows-style policing,” where the agency moves to prosecute even small lapses, said Philip Moustakis, a counsel for law firm Seward & Kissel LLP and a former senior counsel in the agency’s enforcement division. The theory of that type of enforcement is that bringing small cases encourages firms to take compliance more seriously, benefiting investors.
If Mr. Gensler is confirmed, Democrats would hold a three-to-two majority of SEC commissioners, who vote on every enforcement action. That should make the agency more amenable to pursuing penalties over lapses that may have been seen as too marginal to prosecute under the previous regime, Mr. Moustakis said.
But any change won’t be sudden. “The SEC’s enforcement program is like an ocean liner,” Mr. Lear said. “It takes a lot of time to turn, and it will take a couple years to see the impact of any change in philosophy.”