WASHINGTON (AP) - Private equity firms that sell shares to the public should be designated as investment companies, a category that would have meant more regulation for Blackstone Group, Democratic lawmakers said Wednesday.
Rep. Dennis Kucinich, D-Ohio, said during a House hearing that the Securities and Exchange Commission made a mistake last month when it refused to classify the New York-based Blackstone as an investment firm before it proceeded with its initial public offering.
Such a classification would have required Blackstone to disclose more information about its holdings, set up an independent board of directors and limit the amount of debt it could take on.
Most mutual funds are considered investment companies and are subject to those rules.
Critics of Blackstone's initial public offering, including labor groups such as the AFL-CIO, said it could set a dangerous precedent because the SEC allowed a private equity firm to go public while escaping strict regulation.
If more private equity firms and hedge funds follow a similar route, Kucinich said, ordinary investors will have access to high-risk investments that were formerly restricted to more sophisticated investors. Kucinich chairs a subcommittee of the House Oversight and Government Reform Committee.
Last month, Kucinich and Rep. Henry Waxman, D-Calif., joined the AFL-CIO in asking the SEC to delay Blackstone's public offering as a result of their concerns, but the New York-based firm proceeded with its IPO June 27 and raised $4 billion.
Private equity firms Kohlberg Kravis Roberts&Co. and Och-Ziff Capital Management LLP are both planning initial public offerings later this year, while other firms such as The Carlyle Group are rumored to be considering doing so.
The firms have faced increasing scrutiny in Washington as they engage in ever-larger buyouts, such as Cerberus Capital Management's $7.4 billion purchase of DaimlerChrysler AG's Chrysler unit and Blackstone's $26 billion acquisition of Hilton Hotels Corp.
The Senate Finance Committee held a separate hearing Wednesday on whether the huge earnings of private equity and hedge fund managers should be subject to higher taxes.
Andrew J. Donohue, the SEC's director of the division of investment management, defended the agency's decision in the Blackstone case and said the private equity firm is "more akin to an investment adviser."
The SEC concluded that the value of investment securities held by Blackstone and Fortress Investment Group, the first private equity firm to go public, was less than 40 percent of the firms' total assets --the definition of investment company under federal law, Donohue testified. That's partly because Blackstone sold shares in its management entity, which is separate from its investment funds.
John C. Coffee, a professor at Columbia University Law School, told the House members that there are other ways to increase the oversight of partnerships like Blackstone.
The SEC should urge the New York Stock Exchange and Nasdaq to require partnerships to accept similar corporate governance rules that the exchanges require of other companies, Coffee said, such as an independent board of directors and shareholder voting rights. Partnerships are currently exempt from such rules.
