Tag: Small Business Capital Access and Job Preservation Act

Small Business Capital Access and Job Preservation Act

Capitol Hill

Congress, or at least the the House Financial Services Committee, is proposing some relief for private equity funds. The Committee approved the Small Business Capital Access and Job Preservation Act, along with three other pieces of legislation.

The bill would exempt private equity fund managers from the registration and reporting requirements of the Investment Adviser Act. The big hurdle in the bill for the exemption is that the fund has not borrowed a principal amount in excess of twice its invested capital commitments.

That’s a terrible standard. In the early days of a fund, it may draw down on its subscription line of credit for fees and expenses before it invests its first dollar in a transaction. That means the fund will have borrowed more than twice its “invested” capital. Many private equity funds would not be able to pass this test. Dropping the word “invested” would make the exemption useful.

The other big hurdle missing in the bill is the definition of private equity. The bill leaves it up to the Securities and Exchange Commission to define a private equity fund for purposes of the bill. The bill gives the SEC 6 months to craft the definition.

The bill is notable, but I suspect it has little chance of becoming law.


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Will Private Equity Fund Managers Get a Registration Exemption?

Early versions of Dodd-Frank had an exemption from registration for private equity fund managers, just as there is one for venture capital fund managers. Perhaps there is some hope that the private equity exemption will once again surface?

Don’t count on it.

Although I appreciate the efforts of Congressmen Hurt, Cooper, Garrett, Himes, and others. They wrote a January 30 letter to the Securities and Exchange Commission urging the SEC to “delay the March 30, 2012 registration deadline and to exempt advisers to private equity funds that are not highly leveraged at the fund level from the new registration requirements.” They point out that The Small Business Capital Access and Job Preservation Act has a new registration exemption for private equity. Unfortunately, it’s been sitting dead since it was passed by the House Financial Services Committee in June 2011.

The congressmen’s argument:

In addition, [the Congressmen] believe that requiring registration by private equity fund advisers not only misdirects resources at private equity firms but also at the Commission. As a result of private equity fund adviser registration, the Commission will have hundreds of new firms to oversee and inspect. The Commission’s resources will thus be diverted away its core responsibilities of protecting retail investors and other new oversight priorities that can contribute in a meaningful way to financial stability.

It’s a nice argument, but too late. The registration deadline is March 30, but the filing deadline is February 14. Private equity firms already have their resources allocated or are very far along in gathering them up.

I’ve heard some whispers from limited partners indicating they are concerned that private equity is fighting against SEC registration under the Investment Advisers Act. Although it’s a good regulatory scheme for hedge funds, there are many items in the scheme that is a poor fit for private equity. The insider trading requirements and custody rule are at the top of my list.

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Private Equity Exemption Bill Moves Ahead

The Small Business Capital Access and Job Preservation Act, H.R. 1082, took another step forward this week when it was approved by the House Committee on Financial Services. It still has a long way to go before coming law so this is no time to stop getting your compliance infrastructure in place.

The bill still defers the definition of “private equity fund” to the Securities and Exchange Commission and gives the SEC six months to come up with that definition. Even assuming the bill passes and passes quickly, you would not know if you fit into this exemption until very close to the March 30, 2011 filing deadline under the Investment Advisers Act.

The bill has been revised and now imposes a leverage limitation.

“provided that each such fund has not borrowed and does not have outstanding a principal amount in excess of twice its invested capital commitments.”

I think that limitation would prohibit the use of a subscription secured credit facility by a private equity fund if they wanted to take advantage of this exemption. That borrowing is used prior to calling capital and to provide liquidity without calling capital. It makes it easier for the fund manager to smooth out capital calls to investors.

Beyond that facility, It’s not clear to me whether that limitation would include debt at the portfolio level. In reading the minority view at the end of the committee report (.pdf), they think the leverage limitation excludes leverage in the portfolio companies.

Unfortunately, the committee report comes across as very partisan and attacks Dodd-Frank as a whole. To me that would only seem to decrease the likelihood that the House as a whole will take the bill seriously.

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Will Private Equity Fund Managers Register or be Exempt?

The SEC extended the deadline for private fund managers to register with the Securities and Exchange Commission as investment advisers from July 21, 2011 to March 30, 2012. That’s a long enough period of time for legislation to intervene and grant a new exemption for private equity fund managers.

Dodd-Frank has a new exemption for venture capital fund managers.  There was an exemption for private equity fund managers in early drafts of the legislation, but that exemption never made it into the final law.

Now the Republican-controlled House is trying to re-create the exemption.

The Small Business Capital Access and Job Preservation Act was approved by a House Committee on Financial Services.

“Given the costs of registration and compliance, subjecting private equity advisers to this regulation diverts capital, time, talent and effort from activities that result in job creation. By tailoring registration requirements to exempt advisers to private equity funds, the bill strikes a better balance between the benefits of adviser registration and its costs.”

The bill is not without its critics. The North American Securities Administrators Association sent a comment letter to the committee.

First, NASAA attacks the failure to define the term “private equity fund.” The bill delegates this task to the SEC. This was the same approach used for venture capital fund managers in Dodd-Frank. However that common label is better understand than the broad range of investment strategies and risks that fall under the private equity label.

Second, NASAA is concerned that the bill is unclear as to what, if any, reporting requirements would be required for this new defined group of private equity fund advisers. The bill exempts “private equity” from the registration and reporting requirements. That means venture capital would have some reporting obligations, but private equity would not. NASAA believes that the proposed exemption contained in Section 203(o)(1) would likely have the unintended consequence of depriving the SEC of regulatory information critical for assessing risk and protecting investors.

Third, NASAA observed that the bill’s scope appears to cover all investment advisers who advise “private equity funds.” The exemption is not limited to those who solely advise private equity funds. Theoretically, an adviser could set up a private equity fund and cover all of its operations that would otherwise be exempt.

I have an interest in this bill so my opinion is biased. I think many private equity fund managers are a poor fit under the requirements of the Investment Advisers Act. Registration and reporting will impose a regulatory burden that will do little to reduce risk or protect investors.

However, the bill is taking such a blatantly partisan and over-broad approach to a sensible exemption. It also seems to be packaged with the Small Company Capital Formation Act (H.R. 1010) and the Burdensome Data Collection Relief Act (H.R. 1062). The Small Company Capital Formation Act would raise the regulatory thresholds for exemption for registration with the SEC from $5 million to $50 million. The Burdensome Data Collection Relief Act repeals the obligations under Section 953(b) of Dodd-Frank for public companies to disclose the ratio of executive compensation to the median compensation of all corporate employees.

Two other bills, the Asset-Backed Market Stabilization Act and the Business Risk Mitigation and Price Stabilization Act were originally introduced with these three, but I haven’t seen any further action of those two.

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Image of Washington DC – Capitol Hill: United States Capitol is by Wally Gobetz
CC BY-NC-ND 2.0

Will Private Equity be Exempted from Registration?

In earlier versions of Dodd-Frank, when it was being formulated in the House committee, there was an exemption for private equity fund managers from registration under the Investment Advisers Act. It also had an exemption for venture capital fund managers. Only the venture capital exemption managed to survive.

Of the many attempts to cut back on Dodd-Frank, at least one bill is slowly moving forward. The Small Business Capital Access and Job Preservation Act, H.R. 1082, would exempt advisers to private equity funds from SEC registration under the Investment Advisers Act.

The bill is straightforward:

Except as provided in this subsection, no investment adviser shall be subject to the registration or reporting requirements of this title with respect to the provision of investment advice relating to a private equity fund or funds.

It still leaves you with issue of how to define “private equity fund or funds.” The SEC would have 6 months to define the term. Even if the SEC extends the deadline for registration and even if this bill gets passed quickly, that would leave a very narrow window for a private equity fund manager to determine if they need to register.

The first contingency seems destined. Most fund manager CCOs that I’ve talked to are not expecting the July 21 deadline to be in place. Everyone is expecting the deadline to be extended into the first quarter of 2012. They’re just wondering what is taking the SEC so long to make it official.

The bigger question is whether this bill be passed quickly and whether it will be passed at all. Certainly there is some legislative support for the exemption. It had been in earlier versions of Dodd-Frank. The risks of private equity are not the same risks as hedge funds. On the other hand, the some Congressional testimony about the bill focused on the leverage buyout sector of private equity. Many associate this high leverage business model with all of private equity.

The bill was forwarded by the Subcommittee on Capital Markets and Government Sponsored Enterprises to the full House Committee on Financial Services. It still has a long way to go and its future is uncertain. Continue moving forward with implementing your compliance program.

For those of you who need a brush-up on the legislative process, Schoolhouse Rocks still tells it best:

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The Small Business Capital Access and Job Preservation Act

With the House of Representatives’ change in political control, the Republicans are taking some steps to cut back on Dodd-Frank. Earlier this week the House Committee on Financial Services distributed a press release about five potential bills that would revise the financial service legislation:

  • The Asset-Backed Market Stabilization Act
  • The Small Company Capital Formation Act
  • The Small Business Capital Access and Job Preservation Act
  • The Business Risk Mitigation and Price Stabilization Act
  • The Burdensome Data Collection Relief Act

Besides the sensationalist graphics, the Small Business Capital Access and Job Preservation Act caught my attention because it is targeted at private equity fund managers:

The Financial Services Committee has received testimony regarding the role private equity firms play in preserving existing jobs and creating new ones by providing capital to struggling and growing companies.  The Dodd-Frank Act requires most advisers to private investment funds to register with the SEC, including advisers to private equity funds. The Small Business Capital Access and Job Preservation Act exempts advisers to private equity funds from the registration requirements. The draft legislation will be sponsored by Representative Robert Hurt.

It sounds like a nice bill. But I’m skeptical that it could enacted before the July 21 deadline for private equity fund managers to register under Dodd-Frank (assuming it could pass at all).

The Committee is holding testimony on Wednesday, March 16 at 2 p.m. in room 2128 Rayburn. Scheduled to appear are:

  • Kenneth A. Bertsch, President and CEO, Society of Corporate Secretaries & Governance Professionals
  • Tom Deutsch, Executive Director, American Securitization Forum
  • Pam Hendrickson, Chief Operating Officer, The Riverside Company
  • David Weild, Senior Advisor, Grant Thornton, LLP
  • Luke Zubrod, Director, Chatham Financial

The text of the proposed legislation is just in the form of discussion drafts and I  have not been able to find copies. I’m sure much will hinge on the definition of “private equity fund managers” just as Dodd-Frank created a new category of venture capital fund managers.

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