Friday House Conservatives Granted Private Equity Firms A License To Defraud Their Customers

As we get closer to November, we've been spending more time warning readers about the consequences of electing Blue Dogs and New Dems-- the Republican wing of the Democratic Party-- to Congress. Thursday we singled out the 2016 poster child for the Republican wing of the party, corrupt California Blue Dog/New Dem Lou Correa, as he marches into Congress with the almost unanimous backing of the Democratic Party establishment. Correa's record is stunningly right-wing but none of our politicians are warning the low-info voters in his district DESPITE the fact that the general election will pit Correa against a progressive Democrat, Bao Nguyen, not a Republican!

Friday there was another example of what happens when the Democratic Party gets infiltrated by these New Dems and Blue Dogs. The Republicans are loudly touting how they passed the BIPARTISAN Investment Advisers Modernization Act of 2016. The vote was 261-145. 142 Democrats (joined by 3 mainstream Republicans) voted against it, but 35 Democrats-- basically the Wall Street owned New Dems-- crossed the aisle to vote with the GOP. I'll get into the bill itself in a moment, but these are the bad Dems who voted with the GOP Friday. (The dollar amount next to their names is the amount of bribes they've taken from the financial sector so far this cycle alone.)

• Pete Aguilar (New Dem-CA)- $310,370
• Brad Ashford (New Dem-NE)- $290,300
• Don Beyer (New Dem-VA)- $230,750
• John Carney (New Dem-DE)- $164,550
• Jerry Connolly (New Dem-VA)- $179,211
• Jim Cooper (New Dem-TN)- $79,280
• Jim Costa (New Dem-CA)- $122,133
• Henry Cuellar (New Dem-TX)- $156,350

• John Delaney (New Dem-MD)- $526,100
• Suzan DelBene (New Dem-WA)- $166,790
• Elizabeth Esty (New Dem-CT)- $218,125
• Bill Foster (New Dem-IL)- $533,405
• Gwen Graham (New Dem-FL)- $261,816
• Denny Heck (New Dem-WA)- $365,813
• Jim Himes (New Dem-CT)- $873,700
• Derek Kilmer (New Dem-WA)- $246,750
• Ron Kind (New Dem-WI)- $465,364
• Ann Kirkpatrick (New Dem-AZ)- $196,930
• Rick Larsen (New Dem-WA)- $53,600
• Sean Patrick Maloney (New Dem-NY)- $804,293
• Seth Moulton (New Dem-MA)- $576,347
• Ed Perlmutter (New Dem-CO)- $622,012
• Scott Peters (New Dem-CA)- $383,629
• Collin Peterson (Blue Dog-MN)- $112,950
• Jared Polis (New Dem-CO)- $161,050
• Mike Quigley (New Dem-IL)- $177,000
• Kathleen Rice (New Dem-NY)- $505,830
• Dutch Ruppersberger (MD)- $123,950
• Kurt Schrader (New Dem-OR)- $180,125
• David Scott (New Dem-GA)- $572,490
• Terri Sewell (New Dem-AL)- $625,950
• Kyrsten Sinema (New Dem-AZ)- $879,087
• Juan Vargas (New Dem-CA)- $397,799
• Marc Veasy (TX)- $120,180
• Filemon Vela (Blue Dog-TX)- $101,350

OK, so now, what is this Investment Advisors Modernization Act of 2016? Modernization sounds good-- even progressive-- no? No, not in the Orwellian sense it's being used. Alan Grayson, who of course, voted against it, told us yesterday that "basically, the bill dictates to the SEC how to protect, or not to protect, investors. It repeals by statute investor-safety regulations that, in some cases, date back half a century. One would have to think that in general, the SEC knows more about how to safeguard investors than Congress does. The SEC should be applauded, not hogtied, for protecting investors from predators." As Yves Smith pointed out at Naked Capitalism last June, this bill, if Obama signs it, "would allow the hedge fund and private equity industry, which are rich enough to pay for the few parking-ticket-level fines the SEC hands out, to escape from virtually all enforcement efforts. Worse, it would considerably weaken protections meant to stop Madoff-type frauds, and leave retail investors exposed." Yves was concerned in June that a dozen of the bad Democrats-- again, these New Dems-- on the House Financial Services Committee had voted in favor of the bill, the effect of which is to condone embezzlement in the already corrupt financial sector. It's worth noting that when the vote was taken inside the far less public confines of the Financial Services Committee, 3 of Congress' most corrupt Wall Street shills voted for the bill, but because of the impending election were too scared to vote for it Friday:

• Patrick Murphy (New Dem-FL)- $1,795,561
• Gregory Meeks (New Dem-NY)- $424,800
• Joyce Beatty (OH)- $382,250

Maxine Waters (D-CA) is the ranking Democrat on the Financial Services Committee and she noted that the measure is a "bad bill that would put Americans’ savings and investments at risk by opening the door to further abuses in the private equity industry... When it comes to private equity funds and hedge funds, it is clear that more regulation is needed, not less. Yet this bill takes us in the wrong direction." As Jim Baker from Unite Here explained in an OpEd at The Hill right after the bill passed the House-- and just after the news broke about Wells Fargo ripping off its customers for millions of dollars-- this bill is simply "a license to defraud."

Giving big Republican campaign contributors on Wall Street this kind of license to defraud, is the heart and soul of Paul Ryan's #BetterWay repackaged austerity garbage that he claims he endorsed Trump for.

This little-noticed and cryptically named piece of legislation would be a huge gift to the $4 trillion private equity fund industry, but one that would put the rest of us at risk. It would “modernize” the private equity world by rolling back the clock and eliminating important elements of fund oversight and fraud protection.

H.R. 5424 would reduce the amount of information that private equity and hedge fund managers have to disclose either to investors or to the Securities and Exchange Commission (SEC). They don’t disclose enough information as it is. But thanks to some modest requirements imposed on them by the Dodd-Frank Act, we know more now than we used to, and nothing we’ve learned so far has been reassuring.

Two years ago, in a first round of post-Dodd-Frank scrutiny, the SEC found “violations of law or material weaknesses in controls” in how more than half of all fund managers handled fees and expenses. The SEC has since brought more than ten enforcement actions against private equity funds, reaching settlements totaling more than $150 million. The deceptions in which various funds have been implicated include charging 10 years of fees for "monitoring” a company that a fund owned only for a few years (that was Apollo, an industry giant that has agreed to pay $52.7 million in penalties for various shady practices); sticking investors with the cost of a senior partner’s personal expenses (Apollo again); and failing to disclose conflicts of interests and payments to companies owned by firm principals (Fenway Partners).

It is hard to imagine why anyone not directly employed in the private fund industry would want to let it become even more slippery and opaque than it already is. Yet H.R. 5424 would do just that by, for example, eliminating the SEC’s ability to apply anti-fraud protection to sales materials distributed by funds; and allowing ads to include cherry-picked testimonials or recommendations-- a practice long associated with dishonesty.

Some of the people who stand to be damaged by HR 5424 are wealthy individual investors. But far too many are teachers, firefighters, police officers, hotel workers, housekeepers, cooks, and other workers, public and private, whose retirement savings are heavily invested in private equity  funds.

Last year a coalition of 13 state Treasurers, Comptrollers, and public pension funds sent a letter to the SEC calling for better enforcement and disclosure of fee practices by private equity funds. Two of the country’s largest pension funds, CalPERS and CalSTRS, strongly oppose this bill, as do a wide range of investor groups and labor unions, including the Council of Institutional Investors, the AFL-CIO, and Unite Here.

One of the major lessons of the 2008 financial crisis concerned the risks created by non-bank capital market players and the need to bring them under closer regulatory oversight. This bill would do the opposite.

Given the growing role that private equity plays in our economy and the retirement security of millions of Americans, more, not less, needs to be done to ensure that private equity managers are honest and transparent. The last thing we need is for Congress to pass legislation that, in the words of a strong statement issued by the White House earlier this week, would “enable private fund advisers to slip back into the shadows.”

UPDATE-- Ted Lieu Urges Obama To Use His Veto Pen

This morning Ted told us that "Rather than fund Zika or pass a budget, the Republican controlled House prioritized reducing SEC regulations on private fund investment advisors and rolling back parts of Dodd-Frank. Are you kidding me? The lack of regulations on Wall Street last decade nearly collapsed our economy. Doing the same thing again and expecting a different result is one definition of insanity. We should not be rolling back regulations on Wall Street. Fool us once, shame on you. Fool us twice, shame on us. I urge the President to veto this dangerous legislation."