Three Ways Private Equity Firms Can Prepare for Dodd-Frank

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Yes, we know that Dodd-Frank Act is so last year, but because of the law’s gradual implementation, many on Wall Street are only just beginning to realize how it will change the way they do business. Private equity fund managers in particular are realizing that Dodd-Frank is going to demand a lot from them. Whatever you may think of the law’s fairness or effectiveness, many fund managers see it as an unwelcome house guest. Here are three ways that PE firms can prepare for its arrival.

Get Registered

Dodd-Frank will require investment advisors in private equity firms with assets exceeding $150 million to register with the SEC, according to this report by Fulbright & Jaworski L.L.P. These requirements are part of the SEC’s effort to collect information and records about fund activity, including off-balance sheet leverage, risk exposures, trading and investment positions and side arrangements.  Dodd-Frank initially required this registration to take place by July 21, but have extended the deadline until March of 2012.

Get Organized

With an impending demand from the SEC for more information, firms are starting to bring on employees and create the schedules and task lists necessary to meet these requirements. Others are looking to acquire electronic reporting systems to easily track the data necessary. And a few firms, according to this post by the Rimon Law Group, are looking to out-source the entire reporting responsibility by getting third-party appraisals for their monthly valuations. But many doubt that appraisers can meet that kind of tight deadline.

Get Communicating

All of this added reporting responsibility on valuations and corporate governance will certainly test any private equity firm’s communications channel. Firms must ensure that they share information openly when it needs everyone’s attention, and that they are keeping secure anything that is confidential or sensitive. Add to that the temptation some firms might feel to take advantage of a “Limited Private Fund Exception,” which allows foreign general partners to manage an unrestricted quantity of investors’ dollars without the same level of SEC oversight.

Dodd-Frank remains a very controversial law, and one that will certainly create a lot of headaches for private equity managers. But the scrutiny it brings on PE firms can have a benefit. It might be the impetus some firms need to get a better organization, oversight and communication place. What do you think? Will Dodd-Frank ensure that PE firms are better-managed and organized? 

 Photos of former Sen. Christopher Dodd and U.S. Rep. Barney Frank are from the websites of the U.S. Senate and House, respectively.