Hedge funds and private-equity firms have created bogus service providers to boost fees they charge to portfolio companies and investors, U.S. Securities and Exchange Commission Chair Mary Jo White told lawmakers.
Private funds also have mis-assigned some fees and expenses to companies in which they hold stakes, White said today at a House Financial Services Committee hearing on her agency’s 2015 budget request. More than half of about 400 private-equity firms examined by SEC staff inflate fees and expenses charged to companies in which they hold stakes, according to a person familiar with the matter.
White’s comments are part of her argument to gain support for the agency’s $1.7 billion spending plan, which faces opposition from House Republicans. The 2010 Dodd-Frank Act boosted the number of private-equity and hedge-fund advisers under SEC oversight by more than 50 percent.
“The funding we are seeking is fully justified by our existing and growing responsibilities to investors, companies and the markets,” White said in her prepared remarks.
White faced questions from lawmakers about criticism of the SEC’s oversight of stock markets and automated trading strategies. The agency has faced a surge of pressure since Michael Lewis’s book “Flash Boys” depicted a stock market in which high-frequency traders profit by preying on slower investors.
“We could not be doing a more intensive review of all of the issues,” White said, adding that she couldn’t disclose when the SEC would issue recommendations for new rules.
While Republicans praised White for conducting a comprehensive review of market rules and activity, they questioned her proposal for a larger budget. The agency’s budget has increased 80 percent in the last decade, said Representative Jeb Hensarling, the Texas Republican who leads the Financial Services Committee.
Several Democrats said the agency deserves more funding and asked White to lay out a plan for addressing claims that the stock market is rigged because high-speed traders have an advantage over other investors.
“The SEC’s most important function is providing confidence for investors and the general public that there is a level playing field,” said Representative Michael Capuano, a Massachusetts Democrat. “In the last several months, lots of things have happened to call that into question.”
White also faced pressure from Republicans to give public companies relief from a requirement to report whether their products contain minerals from the Democratic Republic of Congo. A U.S. appellate court ruled April 14 that the disclosure requirement violates companies’ free-speech rights.
The SEC will issue guidance “today or tomorrow” that advises companies how comply with the “portions of that rule that have been clearly upheld by the court’s decision,” she said.
Republicans praised White for her decision last year to seek public comment on a study issued by a Treasury Department office that described potential systemic risks posed by asset managers. An umbrella group of regulators, the Financial Stability Oversight Council, has studied whether asset managers BlackRock Inc. (BLK) and Fidelity Investments should be designated as systemically important, which would subject them to stricter regulation under the Federal Reserve.
Asset managers should be analyzed differently because they invest on behalf of others and don’t put their own capital at risk, White said.
“You have to make certain you are distinguishing that when you look at any systemic risk issue,” she said. “We are not talking about positions on the balance sheet. We are talking about acting as agents in the space they act in.”
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