United States Senators Elizabeth Warren (D-Mass.), Tammy Baldwin (D-Wisc.), and Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, along with Representatives Mark Pocan (D-Wisc.), and Pramila Jayapal (D-Wash.) unveiled the Stop Wall Street Looting Act last week. I don’t think there is any chance it will become law. But it will create talking points and speeches as we continue on what will be an endless election campaign.
I took a few minutes to traipse through the bill to see if anything caught my eye.
Most of the provisions attack “private funds” and the bill uses the same definition of a “private fund” that was added to the Investment Advisers Act by Dodd-Frank:
a company or partnership that (i) would be considered an investment company under Section 3 of the Investment Company Act of 1940 but for the application of paragraph (1) or (7) of subsection (c) of such section 3; …(iii) is not a venture capital fund, as defined in 17 C.F.R. section 275.203(l)-1…
Title I imposes a piercing of the liability shields of private funds by making them jointly and severally liable for all liabilities of portfolio companies, including debt, government fines, WARN Act violations, ERISA withdrawal liability and unfunded pensions.
That doesn’t just stop “looting”; that ends the private fund business. If you can’t isolate liabilities, it makes investing nearly impossible. With the fund manager responsible for the debts of the portfolio companies, the manager will have trouble obtaining third-party capital for the portfolio companies. That capital would have to underwrite not only the target, but also the fund manager and all of its other portfolio companies.
The isolation of corporate liability has been the core of capitalism for a few centuries allowing tremendous growth in technology, manufacturing. It allows you to make riskier bets knowing that only your invested capital is at risk.
The bill relies on that murky definition of “private fund.” I would fear that conglomerate operating companies could get pulled into the definition.
Assuming the private fund business found a way to continue after Title I, Title II stops certain activities labeled as “looting.”
The portfolio company can’t make a capital distribution to the private fund during the first two years after a change in control. Another section bans monitoring fees by imposing a 100% tax on monitoring fees.
Section 204 attacks excessive debt by reducing the ability to deduct interest if the debt to equity ratio for a portfolio company exceeds 1.
Title III imposes greater worker protection and limits executive compensation during bankruptcy, gives greater rights under the WARN Act, and gives priority to gift cards in bankruptcy.
Title IV tries to close the “carried interest loophole.” Of course, it’s not a loophole; it’s a feature of partnership taxation for all types of partnerships and the disparate treatment of ordinary income and capital gains.
In the case of an “investment services partnership interest”, any net capital gain is treated as ordinary income and net capital losses are treated as ordinary losses. The definition of “investment services partnership interest” is broad enough to capture any type of partnership, not just private equity funds, but also real estate funds, hedge funds and venture capital funds. It’s probably broad enough to beyond that as well.
Title V creates a whole new disclosure regime for private funds. Here are some of the disclosure highlights:
- names of each limited partner in the fund
- debt held by the fund
- Gross performance
- Performance net of fees
- Income statement
- balance sheet
- cash flow statements
- Total amount of debt of each portfolio company
- Disclosure of all fees paid to the fund manager
All of that information would be publicly available.
It’s obvious that the bill’s proponent are lumping all private funds into the category of highly leveraged buyout firms. There is a broad spectrum of funds with different investing styles, different levels, different uses of debt and different fee structures. In my view, this bill would kill the entire private fund industry.
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