File this under things Mitt Romney probably didn’t want to happen: The Securities and Exchange Commission is taking a wide-angle look at the private equity industry, reports DealBook. In late 2011, the agency notified several firms that they’d be conducting an “informal inquiry” into their practices. But the firms, which remain anonymous, shouldn’t feel especially singled out. The inquiry is aimed at the whole industry, and determining whether relatively common practices around valuation and performance-reporting (and the inflation thereof) at private equity firms are in violation of securities law.
PE has largely escaped harsh scrutiny until now “in part because private equity clients — typically pension funds and the investment arms of foreign governments — are considered to be more sophisticated than average investors.” That seems like an odd excuse — isn’t a higher level of complication more reason for scrutinizing something? — and the S.E.C. has finally decided that’s the case.
The S.E.C inquiry appears less focused on big-picture questions like private equity’s effect on jobs or the companies that it buys. Instead, the commission wants to deepen its understanding of more arcane issues like firms’ fee structures and how they value investments.
Handling the inquiry is the S.E.C.’s enforcement division, which drew criticism for its ineffectiveness as a regulator in the period leading up to the financial crisis. The agency has recently taken a more aggressive public stance, vowing to root out misconduct on Wall Street.
Or, then, the new scrutiny is partly driven by old ghosts.