Wall Street spent months lobbying lawmakers, the SEC, the press —anybody and everybody — over why SEC Chair Gary Gensler’s planned overhaul of the private equity and hedge fund industry would be a colossal mistake. The question now is if Gensler & Co. are willing to confront those arguments in a legal showdown. Later this morning, the SEC will vote on whether to enact new rules for large private equity, hedge funds and credit firms that have emerged as major rivals to commercial banks. Their growing role in the economy, and their power to extract fees and other concessions from their investors, has alarmed progressives like Senate Banking Chair Sherrod Brown (D-Ohio) and Sen. Elizabeth Warren (D-Mass). Imposing reforms on the multitrillion-dollar private investment market would represent a major victory for Gensler, who told POLITICO earlier this year that the rule changes were crafted to empower investors in their negotiations with Wall Street giants. The proposal specifically would require a raft of new disclosures from firms, ratchet up the legal risks for fund managers and, critically, prohibit certain practices and activities. But absent major revisions to scale back those plans, lawsuits from wealthy Wall Street lobbying organizations are all but guaranteed, multiple sources told your MM hosts. Bryan Corbett, president and CEO of hedge fund trade group Managed Funds Association, last week warned that his organization would “consider our full range of options to respond to the rulemaking, including potential litigation,” once it reviews the rule. The American Investment Council, which represents major private equity firms, has also been laying track for a legal challenge for months, repeatedly arguing in comment letters that the agency lacks the authority to “fundamentally alter the longstanding, widely used business arrangements of private funds.” They’ve also enlisted powerful allies in Congress to throw up roadblocks designed to slow the SEC’s progress. Late last year, they successfully lobbied to attach language to a $1.7 trillion government funding bill that urged the agency to take a second look at how the rule would impact smaller investment managers, particularly those owned by women and minorities. Rep. Steve Horsford (D-Nev.), a member of the House Financial Services Committee who chairs the Congressional Black Caucus, pressed the SEC in a letter to consider more economic analysis before finalizing the rule. Key Republicans like Sens. Tim Scott of South Carolina and Bill Hagerty of Tennessee — along with Reps. Bill Huizenga of Michigan and Steve Womack of Arkansas — have also argued to Gensler that the reach of the proposal exceeds the SEC’s grasp. Still, progressives claim that the industry’s rapid expansion over the last decade — fueled by the strong returns it delivered to state retirement systems, college endowments and other institutions — has created unfair advantages that advisers can use to charge higher fees or skirt fiduciary duty, according to the Institutional Limited Partners Association. Now, while the private equity firms and hedge funds prepare for a court battle, Wednesday’s meeting will reveal how much the SEC is willing to do about it. “An entrenched self interest of a particular industry is something that people are willing to spend a lot of resources protecting,” Brandon Rees, deputy director for corporations and capital markets at the AFL-CIO, tells MM. “Oftentimes, that special interest is more concentrated than the general interests of investors — including retirees, who are beneficiaries of the pension plans that invest in private equity.” IT’S WEDNESDAY — If you find anything interesting in the final rule, let us know. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Declan at dharty@politico.com.
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