[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE PROPOSALS TO MODERNIZE
BUSINESS DEVELOPMENT COMPANIES
AND EXPAND INVESTMENT OPPORTUNITIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JUNE 16, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-33
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
96-994 WASHINGTON : 2016
________________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas STEPHEN F. LYNCH, Massachusetts
PATRICK T. McHENRY, North Carolina ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan DAVID SCOTT, Georgia
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
STEVE STIVERS, Ohio KEITH ELLISON, Minnesota
STEPHEN LEE FINCHER, Tennessee BILL FOSTER, Illinois
RANDY HULTGREN, Illinois GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida JOHN C. CARNEY, Jr., Delaware
ANN WAGNER, Missouri TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
C O N T E N T S
----------
Page
Hearing held on:
June 16, 2015................................................ 1
Appendix:
June 16, 2015................................................ 41
WITNESSES
Tuesday, June 16, 2015
Arougheti, Michael J., Co-Chairman of the Board of Directors,
Ares Capital Corporation....................................... 3
Brown, J. Robert, Jr., Professor of Law, University of Denver
Sturm College of Law........................................... 11
Foster, Vincent D., Chairman of the Board, President, and Chief
Executive Officer, Main Street Capital Corporation, on behalf
of the Small Business Investor Alliance (SBIA)................. 6
Gerber, Michael F., Executive Vice President, Franklin Square
Capital Partners............................................... 8
Quaadman, Tom, Vice President, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce...................... 9
APPENDIX
Prepared statements:
Arougheti, Michael J......................................... 42
Brown, J. Robert, Jr......................................... 48
Foster, Vincent D............................................ 62
Gerber, Michael F............................................ 73
Quaadman, Tom................................................ 81
Additional Material Submitted for the Record
Garrett, Hon. Scott:
Letter to Chairman Hensarling from Raymond James Insurance
Group, dated June 25, 2015................................. 160
Maloney, Hon. Carolyn:
Written statement of the Consumer Federation of America and
Americans for Financial Reform............................. 161
Written statement of the North American Securities
Administrators Association, Inc............................ 164
Mulvaney, Hon. Mick:
Chart entitled, ``Leverage Across Financial Services
Industries''............................................... 170
Written statement of Prospect Capital Corporation............ 171
Arougheti, Michael J.:
Letter to Chairman Hensarling and Ranking Member Waters from
OTG Management, LLC........................................ 179
LEGISLATIVE PROPOSALS TO MODERNIZE
BUSINESS DEVELOPMENT COMPANIES
AND EXPAND INVESTMENT OPPORTUNITIES
----------
Tuesday, June 16, 2015
U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:17 p.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Neugebauer,
Huizenga, Duffy, Stivers, Fincher, Hultgren, Ross, Messer,
Schweikert, Poliquin; Maloney, Sherman, Hinojosa, Lynch, Scott,
Himes, Carney, and Murphy.
Ex officio present: Representative Hensarling.
Also present: Representative Mulvaney.
Chairman Garrett. Greetings. Good morning. I apologize for
being late.
This hearing of the Subcommittee on Capital Markets and
Government Sponsored Enterprises is hereby called to order.
Today's hearing is entitled, ``Legislative Proposals to
Modernize Business Development Companies--also called BDCs--and
Expand Investment Opportunities.''
Without objection, the Chair has the authority to recess
the subcommittee at any time.
Before we go to our panel, we will have opening statements.
And I yield myself 2\1/2\ minutes.
Again, good morning, and I apologize for being a few
minutes late. Today's hearing will continue our important work
on considering legislative proposals that would modernize our
Nation's securities laws in order to do what? To foster greater
economic activity.
One of these proposals is a discussion draft that is being
circulated right now by the gentleman from South Carolina, Mr.
Mulvaney. And what would it do? It would modernize the
regulation of BDCs, business development companies.
And what are BDCs? Well, BDCs are closed-end investment
funds that have a statutory mandate to invest much of their
capital in small and medium-sized businesses. As new
regulations cause banks and other lenders to pull back from the
small and midsized lending market--and we have heard that in
other hearings--BDCs have played an increasingly important role
in our economy and in that space.
While it has been 35 years since their creation, the
regulatory regime for BDCs has not been meaningfully updated
during that time. Mr. Mulvaney's bill, which includes several
provisions that this committee has previously considered, would
do a couple of things. It would enhance the ability of BDCs to
deploy capital, and therefore create jobs and opportunities, as
well, for literally thousands of businesses, and therefore also
their employees.
Now, aside from that bill, we have a second bill. The
second bill we will consider toady is H.R. 2127, the Fair
Investment Opportunities for Professional Experts Act. And that
was introduced by the gentleman from Arizona, Mr. Schweikert.
What would Mr. Schweikert's bill do? It would amend the
definition of who qualifies as an accredited investor under the
securities laws, and is therefore eligible to invest in certain
private offerings.
And while the Dodd-Frank Act directed the SEC to review the
current income and asset-based definition of what an accredited
investor is, there is still substantial concern that the SEC
could ultimately take action that would limit the number of
Americans eligible to invest in private offerings, a market
that right now has actually grown to over $1 trillion in recent
years.
You see, investing in private companies should not be a
privilege reserved only for the super wealthy. And so, Mr.
Schweikert's bill would allow more Americans to have the
opportunities to secure their financial future.
Taken together, these two commonsense bills would expand
upon the previous work of the subcommittee in this very
important area. And so again, I thank the two sponsors of the
legislation, as well as the witnesses for the hearing today.
And with that, my time has expired. I yield to the ranking
member for 5 minutes.
Mrs. Maloney. Thank you so much, Mr. Chairman. And I thank
all our panelists for being here today. We are examining two
bills today: one to modernize the regulations for business
development companies, or BDCs; and another to revise the
definition of an accredited investor.
The BDC bill is very familiar to all of us in this Congress
because we considered a similar bill in depth in the last
Congress. Since then, I am pleased to say that we have made
some very good progress on this bill, and the draft that we are
considering today reflects input from the Democratic side of
the aisle, the Republican side of the aisle, the SEC, and the
BDC community.
I am hopeful that we all can get to a ``yes'' on this bill,
which would increase the availability of capital for small
businesses. It is an important bill for our economy.
We will also consider a bill by Mr. Schweikert to revise
the definition of an accredited investor. How to draw the line
between someone who is an accredited investor and someone who
is not is one of the most difficult questions in all of
securities law.
An accredited investor is someone who, in the words of the
Supreme Court, can ``fend for themselves and does not need the
protections of the securities law.'' These sophisticated
investors are allowed to buy unregistered securities, which are
often more complex and riskier than public securities.
Unregistered securities are also less liquid than public
securities, which makes these investments in unregistered
securities harder to exit or sell. As a result, these
investments are supposed to be limited to investors who can
legitimately bear the economic risk involved in buying them.
These investors are referred to as accredited investors.
Current law defines an accredited investor primarily by
reference to a person's income or overall net worth. Someone
whose annual income is greater than $200,000 is an accredited
investor. Or if someone's net worth, excluding the value of his
house, is greater than $1 million.
So the question really is, does this strike the right
balance? Is everyone who meets these tests truly able to fend
for themselves?
The SEC's Investor Advisory Committee recommended a new
definition of an accredited investor last year that seeks to
more accurately identify investors with enough financial
sophistication to fend for themselves. And I think this
proposal is a very good starting point for this discussion.
I look forward to hearing a discussion of the benefits and
drawbacks of the Investor Advisory Committee's proposal versus
Mr. Schweikert's proposal. This is an important debate to have.
So I thank Mr. Schweikert for putting it forward. And I
would also like to thank Chairman Garrett for holding this
hearing, and to thank all of our panelists.
Chairman Garrett. The gentlelady yields back. And I thank
the gentlelady for her comments.
At this point, we will turn to our panel. Again, I thank
the panel for being with us today. And I see some familiar
faces. For those other-than-familiar faces, let me just remind
you that you will be recognized for 5 minutes. I think there is
a button there in front of you to tell you the time to start,
and also an indicator in front of you of some sort that will go
down to 1 minute on the timing for that.
We are in a new room now, so we will see just how well the
microphones are working. I used to always have to ask the
people to pull the microphone close to you when you speak. But
we will see how that works here now.
And finally, you will be recognized for 5 minutes, but of
course you have already submitted your testimony, and that will
be made a part of the record. So now we just yield to you for 5
minutes to summarize your testimony.
Mr. Arougheti, welcome to the panel. And we look forward to
your testimony. You are recognized for 5 minutes.
STATEMENT OF MICHAEL J. AROUGHETI, CO-CHAIRMAN OF THE BOARD OF
DIRECTORS, ARES CAPITAL CORPORATION
Mr. Arougheti. Great. Thank you.
Chairman Garrett, Ranking Member Maloney, thank you for the
opportunity to testify today. I am Michael Arougheti, the co-
chairman of the board of directors of Ares Capital Corporation,
a BDC that has invested more than $20 billion in hundreds of
small and medium-sized companies, creating tens of thousands of
American jobs.
By way of reminder, Congress created BDCs in 1980 to
encourage capital flows to small and medium-sized companies at
a time when these businesses had limited options for securing
credit. Now uniquely, the BDC model allows ordinary investors
the ability to participate in capital formation for small
companies, effectively funding Main Street.
Today, similar to 1980, commercial banks continue to exit
the middle-market lending space. Perhaps the most striking
recent example of this is GE Capital's exit from the lending
space. As the seventh largest bank in the United States, this
will surely have a further significant adverse impact on the
small and medium-sized businesses who have traditionally
borrowed from GE Capital, and obviously on the jobs that these
businesses have contributed to the economy.
I am here today to express support for the draft of the
Small Business Credit Availability Act, H.R. 3868, being
offered by Mr. Mulvaney. We believe that the proposed bill will
enable BDCs to more easily raise capital and to make loans to
middle-market companies, while ensuring that BDCs continue to
be appropriately regulated and subject to stringent standards
regarding transparency, and obviously shareholder protection.
I think it is important to note that BDCs are not seeking
any government or taxpayer subsidy or support.
Many of the challenges that we face as BDCs arise out of
our peculiar place in the regulatory framework, regulated as
mutual funds yet operating as operating companies. The draft
bill builds on H.R. 1800 and other bipartisan efforts in the
previous Congress to modernize this regulatory framework, and
to ensure that BDCs can continue to fulfill their original
congressional mandate.
The proposed bill contains five provisions, each of which
we believe will enable BDCs to more effectively fulfill their
congressional mandate.
First, the proposed bill contemplates an increase in the
BDC asset coverage test from 200 percent to 150 percent,
subject to the satisfaction of shareholder-friendly conditions
such as extensive public disclosure and transparency, and
either a shareholder vote or a ``cooling-off period'' following
approval by the independent members of a BDC's board of
directors.
We don't believe that this introduces more risk. Rather, it
will allow BDCs to invest in lower-yielding, lower-risk assets
that don't currently fit their economic model. In fact, the
current asset coverage test may ironically force certain BDCs
to invest in riskier higher yielding securities in order to
meet the dividend requirements of their shareholders.
We also believe that this change will grant borrowers
greater financing alternatives at a reduced cost, and will
benefit shareholders with more conservative and more
diversified portfolios. Further, this change will enable BDCs
to lend to a broader portion of the already underserved middle-
market.
This proposed change would apply to BDCs the same leverage
ratio as small business investment companies, but unlike SBICs,
without putting any government capital at risk. Further, given
that the House Small Business Committee just last week passed
bipartisan legislation increasing the size of the SBIC program,
the proposed change certainly seems reasonable.
It is also extremely modest relative to typical bank
leverage in our country of 10-to-1 and sometimes greater. Under
the current asset coverage test, most BDCs operate at leverage
significantly less than allowed. And any prudent manager would
likely continue this practice if the asset coverage ratio were
to change.
Second, the proposed bill would allow BDCs to issue
multiple classes of preferred stock, and solely for qualified
institutional buyers, eliminate the requirement that holders of
preferred stock have board representation. Had BDCs been able
to raise capital during the post-2008 period by issuing
preferred stock, many more loans could have been made to cash-
starved companies to enable them to retain employees, and in
some instances to remain in business.
Third, the proposed bill directs the SEC to make specific
technical amendments to certain securities offering rules that
make raising capital cumbersome and inefficient. And these rule
changes are not controversial and would merely place BDCs on
equal footing with non-BDCs.
Fourth, the proposed bill would allow BDCs to own
registered investment advisers, which is a technical matter
that is currently prohibited under the 1940 Act. Investments in
IRAs enable money to be raised from third-party investors,
which in turn could be deployed to small and medium-sized
companies.
And fifth, the proposed bill would offer increased
flexibility for BDCs to invest in a subset of entities
currently limited by the 30 percent basket. Importantly, this
provision would not allow the amount of the incremental
increase in the 30 percent basket to be invested in private
equity funds, hedge funds, or CLOs.
So in closing, I am very encouraged by the bipartisan focus
on this very important initiative. And I look forward to
working with Representative Mulvaney and Representatives
Garrett and Maloney and the rest of the committee in moving
these bills forward.
I would also like to applaud the committee's efforts to
revisit the definition of accredited investor, which, like the
BDC regulatory framework that we are discussing today, could
indeed benefit from modernization.
And lastly, as a procedural matter, Mr. Chairman, if I
could, I would like to introduce a letter into the record from
one of our portfolio companies that was referenced in my
written testimony.
[The prepared statement of Mr. Arougheti can be found on
page 42 of the appendix.]
Chairman Garrett. If it is part of your written testimony,
it will be a part of the record.
Mr. Arougheti. Thank you.
Chairman Garrett. Thank you.
From Main Street Capital, Mr. Foster?
STATEMENT OF VINCENT D. FOSTER, CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF EXECUTIVE OFFICER, MAIN STREET CAPITAL
CORPORATION, ON BEHALF OF THE SMALL BUSINESS INVESTOR ALLIANCE
(SBIA)
Mr. Foster. Good afternoon, Chairman Garrett, Ranking
Member Maloney, and members of the Subcommittee on Capital
Markets and Government Sponsored Enterprises. I appreciate the
opportunity to testify today on behalf of the Small Business
Investor Alliance or SBIA. SBIA's members provide vital capital
to small and medium-sized businesses nationwide, resulting in
job creation and economic growth.
My name is Vince Foster, and I am chairman, president, and
CEO of Main Street Capital Corporation, an SEC-registered BDC
based in Houston, Texas. We are named Main Street for a reason.
Main Street is who we are and where we invest.
As our name makes clear, we have invested in over 400 small
and midsized companies. That amounts to more than $4 billion
invested into growing businesses that were not able to
adequately access capital through traditional financing
sources. Like many BDCs, we focus on smaller businesses.
We partner with entrepreneurs, business owners, and
management teams that generally provide one-stop financing
alternatives. Currently, we are backing over 70 lower-middle-
market companies headquartered in 24 States. More than half of
these businesses have revenues of less than $25 million.
To illustrate this diversity, we have funded two of the
fastest growing technology companies in Eugene, Oregon; the
largest privately owned jewelry store chain in the Rocky
Mountains headquartered in Twin Falls, Idaho; one of the
largest Goodyear Tire retailers in the United States
headquartered in Austin, Texas; the leading micro-irrigation
design and installation company in the San Joaquin Valley
headquartered in Delano, California; the leading FBO at the
Indianapolis Airport; one of the largest fully-integrated
precast concrete companies headquartered in San Antonio, Texas;
and one of the only two independent producers of styrene
butadiene rubber in the United States headquartered in Baton
Rouge, Louisiana, just to name a few.
We have also invested in GRT Rubber Technologies
headquartered in Paragould, Arkansas, which was founded in the
1880s and manufactures rubber products including conveyor
belts. And Bridge Capital Solutions, headquartered in
Hauppauge, New York, which operates Long Island's only licensed
commercial check-cashing service, serving small businesses in
New York.
Today, Main Street has small business investments in at
least 15 of the 24 States represented by this committee. And we
are just one of the over 34 BDCs that are a part of SBIA.
Small and medium-sized businesses need growth capital. BDCs
are growing to fill that need. BDC loan balances have tripled
since 2008, and are not slowing. Growing businesses are going
to continue to need more capital. BDCs will benefit from
modernization that small businesses will be the ultimate
beneficiaries of reform.
BDCs are highly regulated and highly transparent. The
public can look up and review every one of our investments.
The BDC industry is not seeking deregulation or any changes
to the Dodd-Frank Act. We have earned investor trust and grown
stronger in the face of economic calamity. We earned our good
name, and we will work to keep it.
What BDCs do need is commonsense modernization. I might
need Mike to help me lift this up. Look at this stack of paper.
This is our SEC filing to issue stock. Hundreds of pages
represent wasted money and manpower.
Here is what CIT, $50 billion versus our $1.5 billion, has
to file to get the same result because they can incorporate
their other SEC filings by reference, but BDCs cannot. Do 4
more inches of paper protect better than half an inch? No one
is protected by the failure to modernize the rules for BDCs.
This discussion draft would fix this absurdity and make a
host of other clearly needed reforms. These reforms are overdue
and worthy of bipartisan support. We encourage the committee to
act promptly.
This committee has clearly worked on a bipartisan basis to
make other reforms and improvements. For example, almost every
BDC in the industry wants the freedom to access the markets by
increasing the regulatory cap on leverage from 1-to-1 to 2-to-
1. Not everyone will make the change, but they want the freedom
to adjust to changes in the market.
The proposal does this in a very smart fashion that adds
meaningful investor protections while adding capacity for
investing. The draft bill makes other smart reforms that can
add investor protections with transparency.
Currently, BDCs can earn registered investment advisers.
But it requires SEC exemptive relief. This means BDCs are
playing by different rules, and the investors are in the dark.
Standardizing the relief makes a level playing field, and
provides clarity for investors. This, too, is a smart reform
that is worthy of bipartisan support.
The bill includes a number of other reforms. Many are
technical, but they matter, particularly for smaller and
growing BDCs.
Every section of this bill shows thoughtful collaboration
and improvements from previous bills. As the committee works
through any fine-tuning on the bill, SBIA would encourage the
committee to continue to keep the process moving and work to
get real reform signed into law this Congress.
I would welcome any questions that you may have for me.
Thank you.
[The prepared statement of Mr. Foster can be found on page
62 of the appendix.]
Chairman Garrett. Thank you.
And later on we will hear from the gentleman from Maine
about whether he has any comments about the less use of paper
products being produced. But we will wait for his comments
later.
Next, from Franklin Square Capital Partners, Mr. Gerber is
recognized for 5 minutes.
STATEMENT OF MICHAEL F. GERBER, EXECUTIVE VICE PRESIDENT,
FRANKLIN SQUARE CAPITAL PARTNERS
Mr. Gerber. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee. Thank you for the
opportunity to testify today. My name is Mike Gerber and I am
an executive vice president with Franklin Square Capital
Partners.
Franklin Square was founded in Philadelphia in 2007 with
the mission of offering institutional quality alternative
investments to mainstream American investors, while leading the
industry in best practices, transparency, investor protection,
and education. To that end, we launched the industry's first-
ever non-traded BDC in 2009. We successfully listed that fund
on the New York Stock Exchange in April of last year to create
liquidity for our investors.
Today, we manage four BDCs and have more BDC assets under
management than any other manager in the industry. Franklin
Square has investors in all 50 States, and we have portfolio
companies in 39 States. Importantly, we have delivered strong
risk-adjusted returns for our investors.
As you all know, the 1980 law that created BDCs was passed
with strong bipartisan support, and was designed to stimulate
investment in U.S. companies by matching mainstream investors'
capital with mainstream businesses. Because BDCs are designed
for retail investors, they are appropriately heavily regulated.
In fact, whether traded or non-traded, BDCs are among the
most highly regulated investment vehicles in the marketplace.
And because of the extensive public filings, some of which you
have seen right here, BDCs are fully transparent to regulators
and investors alike.
Our culture at Franklin Square is to embrace this
regulation. In fact, it is part of how we market ourselves to
financial advisers and investors. Specifically, BDCs register
shares under the 1933 Act, and elect treatment as a BDC under
the 1940 Act. In addition, a BDC is subject to the 1934 Act as
a public company, meaning it must file 10-Qs, 10-Ks, 8-Ks and
proxy statements.
Contained in every Form Q and Form K is a schedule of all
of our investments, along with details such as the name of the
portfolio company, the size of the loan, the rate of the loan,
and the current mark of the investment.
Other key protections include mandatory third-party custody
of all BDC assets; a board of directors, the majority of whom
must be independent; and board approval of key matters such as
management fees and quarterly valuations. In addition, our non-
traded BDCs are also regulated by FINRA and by the blue sky
securities regulators in all 50 States.
Taken together, these laws and regulations ensure that BDCs
are extremely transparent, minimize conflicts of interest, and
provide investors with a high level of protection.
One of the key mandates under the law requires BDCs to
invest at least 70 percent of their assets in U.S. private and
small cap companies. As a result, our BDCs at Franklin Square
provided a significant amount of capital to middle-market job-
creating companies.
Middle-market businesses employ more than 47 million
people, or one out of every three workers in the private
sector. In fact, between 2008 and 2014, middle-market firms
grew jobs by 4.4 percent versus 1.6 percent for big businesses,
and unfortunately a 0.9 percent decline with small businesses.
And now 39 percent of middle-market companies say they
expect to grow and add more jobs in 2015. Middle market lenders
like BDCs, therefore, must be poised to provide the capital
necessary to help fuel this anticipated growth.
Currently, there are 84 BDCs representing approximately $70
billion in investments. At Franklin Square we have deployed $27
billion since inception, including $10 billion in directly
originated loans.
The primary tool offered by Mr. Mulvaney's legislation that
would help BDCs support more job-creating middle-market
companies is the increase in the debt-to-equity ratio from 1-
to-1 to 2-to-1. We believe this increase in leverage is modest
and makes sense for three reasons.
First, BDCs would have more capital available to meet the
demand of middle-market firms, while keeping all of our
investor protections in place. Second, this would permit BDCs,
as Mr. Arougheti explained, to build safer portfolios,
delivering the same or higher returns, while taking on less
risk. And third, even with the proposed increase, 2-to-1
leverage would still be quite low when compared to other
lenders in the capital markets.
For example, banks today are levered anywhere from 8-to-1
to 15-to-1, and hedge funds are levered in the mid-teens to low
20s. We believe it would be good public policy to increase the
lending capacity of BDCs, and promote the more heavily
regulated, more transparent BDC model.
The discussion draft contains several additional provisions
which I address in my written testimony, and I would be happy
to cover in Q&A. I would like to close by thanking
Representative Mulvaney for his work on this legislation. And I
look forward to answering questions from the committee.
[The prepared statement of Mr. Gerber can be found on page
73 of the appendix.]
Chairman Garrett. Thank you.
Now from the Center for Capital Markets Competitiveness,
Mr. Quaadman, welcome back to the panel. You are recognized for
5 minutes.
STATEMENT OF TOM QUAADMAN, VICE PRESIDENT, CENTER FOR CAPITAL
MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE
Mr. Quaadman. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee.
Markets provide investors with the opportunity for return,
and businesses with the potential to grow. Markets must have an
even playing field and certainty in order to achieve these
purposes. But we also live in a global economy.
So this past February, the Chamber released a report
entitled, ``International Markets: A Diverse System is the Key
to Commerce,'' which was written by Professor Anjan Thakor of
Washington University.
And what the report found was two things: first, for
businesses to operate in this global economy, they need to have
diverse forms of financing; and second, capital will go to
those markets that are most efficient, and businesses will go
to where the capital is.
Therefore, in this global competitive environment, we have
to keep in mind that the United States is not the only
destination for capital. Indeed others, including the European
Union today, are currently considering proposals to make their
market-based financing more efficient in order to spur their
capital formation. So these bills and the hearings that the
subcommittee has been holding this year are very timely.
The business development corporations are filling a void
for the midsized businesses and provide an alternative means to
raise capital as other options have dried up over the years. We
want to thank Mr. Mulvaney for introducing the Small Business
Credit Availability Act, and we support it.
While BDCs have only been in operation since 1980, it is
only in the last few years that they have become an attractive
means of capital formation for businesses. Indeed, the Chamber
has supported past bipartisan efforts to increase BDC activity.
And we believe that this bill addresses the concerns that were
raised in prior legislative debates, as well as by the SEC.
This bill will provide greater capital and flexibility
investments while still having BDCs as a regulated entity. BDCs
will increase, but still on a limited basis.
The Chamber also supports robust disclosures and investor
protections of BDCs so that retail investors have both the
opportunity to understand the upside, as well as the risk of
investing in BDCs. We believe that the Mulvaney draft bill
achieves that purpose.
I would also like to address the H.R. 2187, the Fair
Investment Opportunities for Professional Experts Act. We need
to have limits to allow sophisticated investors to invest in
private companies and to access complex investment vehicles. We
need to do this to ensure that unsophisticated investors are
not harmed.
The Chamber supports objective tests such as asset and
income thresholds to determine accredited investors. Mr.
Schweikert has thoughtfully pointed out that there may be some
on the periphery who should be allowed in. And we have some
suggestions on how to improve the bill.
First, those who are licensed and certified to sell
securities should be considered to be a sophisticated investor,
but with caps to ensure that their investments match their
financial wherewithal. Secondly, we understand the intent
behind the FINRA test and think it is an innovative way to get
at the solution. However, the test is also subjective.
We would prefer that the SEC be authorized to study the
issue. What are the characteristics of a sophisticated
investor? What are some of the innovative ways to bring those
in, in a safe manner? And then to have the SEC report back to
this committee as to what those innovations should be. And that
those should be brought in under limited circumstances.
Additionally, we have concerns on the language regarding
the use of financial intermediaries conveying an accredited
investor status to retail investors. While we understand the
intent behind that provision, we are concerned that the
exception will subsume the rule, that it will also place some
unsophisticated investors at harm, as well as increase
liability for financial intermediaries. But we think this is a
good step forward, and we are happy to work with Mr. Schweikert
to make the bill a reality.
The Chamber feels that these bills will enhance the
competitiveness and increase opportunities for return, growth,
and job creation. We look forward to working with the sponsors
of this legislation, both bills, with the subcommittee, and to
improve them as well as to include these vehicles into a JOBS
Act 2.0 that we hope can become law in this Congress. Thank
you.
[The prepared statement of Mr. Quaadman can be found on
page 81 of the appendix.]
Chairman Garrett. Thank you.
Finally, last but not least, Professor Brown. You are
recognized for--
Mr. Brown. ``Jay'' is fine.
Chairman Garrett. There you go.
STATEMENT OF J. ROBERT BROWN, JR., PROFESSOR OF LAW, UNIVERSITY
OF DENVER STURM COLLEGE OF LAW
Mr. Brown. Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee, it is a privilege to be here
today.
In addition to my position at the University of Denver
Sturm College of Law, I also serve as the Secretary to the
SEC's Investor Advisory Committee (IAC). The remarks I make,
however, are my own, and do not necessarily reflect the views
of the other members of the IAC.
With respect to H.R. 2187, the Fair Investment
Opportunities for Professional Experts, and the definition of
accredited investor, let me give a bit of context. The SEC's
definition of accredited investor for individuals was set out
in 1982. While the dollar amounts have largely remained
unchanged, the financial landscape has undergone a tectonic
shift.
The markets have of course grown in complexity. But most
significantly has been the shift from pension plans to defined
contribution plans. Almost everyone with retirement savings
today has a 401(k) or an IRA. The result has been what I
believe is a dramatic increase in individual responsibility for
managing the retirement nest egg.
Likewise, the number of retirees is increasing rapidly.
Every day, 10,000 Baby Boomers reach the age of 65, a trend
that will continue until 2030. Many of these older investors
are unsophisticated and lack, as one study put it, ``even a
rudimentary understanding of stock and bond prices, risk
diversification, portfolio choice, and investment fees.''
With the end to the ban on general solicitations, our
retirees and other investors can now be offered unregistered
investments through indiscriminate forms of mass marketing,
including blast emails, ads on the Internet, infomercials, and
seminars. So imagine our 85-year-old parent or uncle or friend
who gets the unsolicited phone call or the pitch at a free
lunch to invest in pre-IPO shares, or--I am from Colorado--the
marijuana business. If that doesn't work, how about a
children's television network or a company that is making a
grandchild-safe alternative to the Internet?
All of this brings me to the definition of accredited
investor. The definition needs to include those who are
sophisticated and exclude those who are not.
In reforming the definition, I believe there is more
agreement than disagreement. There is agreement that it should
be changed to include the people who are, in fact,
sophisticated. The recommendation of the SEC's Investor
Advisory Committee has set out standards for when this should
occur, basing sophistication on education, experience, and
testing.
The dollar thresholds also need reexamination. It may mean
increasing the amounts. It also may mean changing the way the
amounts are calculated. Maybe some portion of retirement assets
should be excluded from the calculation.
Even people who oppose changes to the numerical thresholds,
I believe, are mostly worried that a sudden increase in the
dollar amount will significantly reduce the number of
accredited investors. But if the definition is reformed
simultaneously to make the income and net worth standards a
better predictor of sophistication and allow individuals to
also qualify on the basis of education, experience, and
testing, I believe that all sides in the debate will benefit.
With respect to H.R. 2187, my written testimony has a more
complete critique. But let me just offer these observations.
First, the draft legislative proposal does not deal with our
85-year-old parent or uncle or friend who is in fact
unsophisticated and qualifies as accredited because of the net
worth test.
Second, the bill treats as accredited whole categories of
individuals, such as lawyers. Lawyers are not invariably
rendered sophisticated as a result of education or practice
area. Extending the definition to persons who are not
sophisticated is of particular concern since these individuals
are not required to meet the numerical thresholds and may not
be in a position to withstand the loss.
Finally, a serious risk is that regulators charged with
implementing this legislation will stop other efforts. The bill
leaves out other groups that ought to qualify as accredited as
a result of experience and education.
The SEC is working on a study in this area that ought to
include some recommendations. The Commission is in a good
position to achieve the grand bargain that I think is needed,
and should be allowed to complete the process without
legislative intervention.
Very quickly with respect to business development
companies, I think that the increase in leverage proposed under
the legislation will raise the risk profile for at least some
of these companies. But disclosure is an appropriate method of
addressing the issue.
My most significant concern is with the changes that would
allow BDCs to redeploy a higher percentage of their assets away
from operating companies to financial firms. In 1980, Congress,
in adopting the legislation creating BDCs, sought to provide
additional funding and managerial advice to operating
companies.
Why these companies? As the House report said then, the
committee is well aware of the slowing of the flow of capital
to American enterprises, particularly to smaller growing
businesses, that has occurred in recent years.
The importance of these businesses to the American economic
system in terms of innovation, productivity, increased
competition, and the jobs they create is of course critical,
hence the need to reverse this downward trend is a compelling
public concern.
I suspect that this is no less true today than it was in
1980, and that these companies remain critically important to
our economy and the creation of jobs. I think that any reform
in this area should not change the framework in a manner that
may disadvantage the very kinds of companies that the
legislation was originally intended to assist.
Thank you again for providing me with the opportunity to be
here today.
[The prepared statement of Professor Brown can be found on
page 48 of the appendix.]
Chairman Garrett. I appreciate your comments.
I thank the panel. And at this point, I will recognize
myself for 5 minutes for questions, and I will go in reverse
order.
And again, I thank the gentleman from Arizona for his work
on the accredited investors change of definition. I guess our
one takeaway from Professor Brown is that lawyers are not
sophisticated. Will we have consensus on that from everybody on
the panel that lawyers are not sophisticated? Okay.
So, moving on from that degree of consensus, on the issue
of accredited investors, isn't it somewhat an issue of fairness
too, as far as having drawn a distinction in class as to who is
allowed to have the opportunity to these investors versus which
class of people in the country don't have the opportunity?
What I was thinking as I heard the professor talk was that
those people that you were defining, the retiree or what have
you, currently probably don't fit into that definition of
accredited investor. But they have the opportunity to do all
sorts of other investments with their money.
Mr. Foster showed the disparity between BDCs and public
companies. And those public companies are available on all the
exchanges and what have you.
And the unsophisticated investor can be making life-
changing investments in all of those. Of course in most of
those investments, you don't necessarily see the rate of return
that you sometimes see in a BDC. I see some nods on that.
So is this--maybe I will throw it out to Mr. Gerber. Is
this an issue of degree of fairness as far so this distinction
that will be allowing those who should be able to have the
opportunity to get into these investments who currently are
precluded simply by law?
Mr. Gerber. Thank you, Mr. Chairman. Just a point of
clarification--
Chairman Garrett. I should probably not have thrown that to
Mr. Gerber.
Mr. Gerber. No, that is okay. But I just think it may be
important to mention this on behalf of the BDCs. To invest in a
publicly traded BDC, a person does not need to be an accredited
investor, number one.
Number two, to invest in a non-traded BDC, investors--that
transaction is regulated by the blue sky laws in each of the
States. And all of the States have their own suitability
standards that apply to whether or not an investor is
appropriate for--
Chairman Garrett. So let me throw it over to Mr. Quaadman
as far as the rest of the investment field.
Mr. Quaadman. Sure. Chairman Garrett, you raise a very good
question, because we have a robust private company market.
Most businesses in the United States are private. So what
we need to do is ensure that we have capital flows into those
private companies to ensure that they have the liquidity to
grow and operate.
What is also important is that with public companies, we
have a vast amount of disclosure with the notion that investors
can go in there and make whatever decisions they want because
they can access the information.
What we want to do with the private companies is ensure
that you have people with the knowledge base and the
wherewithal to go in there and to invest in companies.
Chairman Garrett. Let me stop you there and go back to Mr.
Gerber then because he was saying that these are not--which is
correct. It was with regard to accredited investors in BDCs.
Satisfy for me then that there is enough transparency,
information, and the like for that class of non-accredited or
non-sophisticated in that realm.
Mr. Gerber. With respect to BDCs, as I mentioned in my
testimony, Mr. Chairman, we fall under the 1933 Act, the 1934
Act, and the 1940 Act. So in the BDC context, there is a load
of transparency and a ton of information that is provided to
investors, just the same as a publicly traded company.
Chairman Garrett. So who is it when you are trading in
these and--where has that information actually gotten to? In
other words, where the investment is certainly done through
your broker or what have you, in the securities in the street
name, is that actually getting back to me as the nominal
investor in that situation?
Mr. Gerber. It certainly can be. It is available on the SEC
Web site EDGAR. It is available on all of our Web sites. So it
is easily accessible.
Chairman Garrett. So what about--and I will throw this to
anybody else to talk about the BDCs. What about what is in Mr.
Mulvaney's bill as far as changing the leverage ratio--the
ratio? As far as getting sufficient transparency there back to
the actual investor who may not actually be in the--may not
actually be the street name investor? Anyone who wants to chime
in on that?
Mr. Arougheti. Yes. I think we talked about this proposed
legislation relative to prior attempts to increase the asset
coverage ratio, I think the combination of a form of
shareholder vote and a ``cooling-off period'' provides the
adequate shareholder protection.
So as this bill contemplates, the independent board of
directors would make a determination that they would like to
access the increased asset coverage ratio. And then under the
securities regulations, an 8-K would need to be filed publicly
to make public notice of the intention.
And then obviously the shareholders will have 12 months of
a cooling-off period to effectively vote with their feet. So
even in the event that there wasn't a shareholder vote--
Chairman Garrett. Right.
Mr. Arougheti. --it would give people free time to
determine whether or not they wanted to stay within that
investment.
Chairman Garrett. Okay. Great. Thanks. I appreciate that.
I have some other questions with regard to the testing
requirements, but I will throw it to the gentlelady from New
York.
Mrs. Maloney. Thank you, Mr. Chairman, for calling the
hearing. And I thank all the panelists.
I would like to ask Mr. Arougheti about the additional
leverage that the BDC bill would allow. Of course, we are still
talking about very low levels of leverage.
The bill would only increase the maximum leverage ratio
from 1-to-1 to 2-to-1. But it is still a higher leverage. What
would your company do with the higher leverage that this bill
would permit?
Mr. Arougheti. I think, as Mr. Gerber said in his
testimony, it is not abundantly clear that every company will
actually take advantage of the incremental asset coverage
ratio.
I think one of the wonderful things about the BDC industry
is that it services all types of companies from venture finance
companies all the way through two larger middle-market
companies. And even on this panel you have companies who focus
on the lower middle-market with more equity orientation through
to folks like ourselves who focus more on larger market senior
secured loans.
So what Ares would likely do would be to increase the scope
of its lending activities, probably become more senior secured
and therefore less risky in our investment positioning, and use
the increment to leverage, back to Mr. Gerber's commentary, to
drive the same, if not higher returns to our investors but
taking less risk at the asset level.
Mrs. Maloney. So how much of the additional money would go
to increase investments in the so-called 70 percent bucket for
small businesses? It would give you more money to--more
liquidity to put out to these smaller businesses.
Mr. Arougheti. Right. So, all of that capital should
theoretically find its way to small business.
Maybe addressing at least for Ares the 30 percent basket as
we use it has two concentrated positions in it today. One is
called the senior secured loan program, which is a joint
venture that we had with GE Capital that we used to actually
make middle-market loans. And the second is in the form of a
company that we call Ivy Hill Asset Management, which similarly
is in the business of making middle-market loans.
So at least from the Ares strategic perspective, we have
been using our ``30 percent basket'' to in fact make middle-
market loans to small companies.
Mrs. Maloney. I would like to ask you and also Mr. Foster
about the discussion draft of the BDC bill, which would allow
BDCs to invest more of their assets in finance companies. And
as Mr. Foster testified, the intent of the first BDC bills was
to direct these monies towards goods and services that are
really underfinanced and need this help.
Are you concerned that this change could change how BDCs
are viewed by investors and analysts? And what is your feeling
about being able to invest more in finance companies as opposed
to goods and services?
And I would like first to hear from Mr. Foster and Mr.
Arougheti. But also any comments from anybody else on the panel
on this question of allowing the finance companies.
Mr. Foster. Sure.
The BDCs in the SBIA have generally been polled by the
staff. And in general there is a consensus with respect to the
BDCs, the 34 BDCs in the SBIA--not 100 percent, but a general
consensus is that this additional flexibility would be nice. It
is not a priority at all.
And I don't think many of us would take advantage of it. We
personally would not take advantage of it. I think you would do
so at your own risk to the degree you alienated some of your
shareholders or what have you by changing your business plan.
On the other hand, we are permanent vehicles for capital.
And there is a constantly changing array of investment
opportunities out there. And the credit cycle goes up and down.
So to me, it is kind of like the swimming pool in the
backyard. I really don't use it, but it is nice to know it is
there if I ever want to use it. And I think that is the general
consensus of the SBIA.
Mrs. Maloney. Mr. Arougheti, do you--
Mr. Arougheti. Yes. I think about this two ways, one just
in the context of modernization.
And as we sit here today talking about legislation that was
passed 35 years ago, while many things are still similar in
terms of the capital void for middle-market companies, the
structure of the financial markets has changed. And things like
small ticket leasing, things like factoring, things like
receivables financing, all exist today in a way that they
didn't exist 30 years ago.
So as one example in our portfolio, we have a leasing
company that makes office equipment leases to small business--
Mrs. Maloney. Okay. My time has almost expired and I would
like to hear Mr. Foster's reaction to it, too. I only have 7
minutes left. Excuse me--Mr. Brown's--
Mr. Brown. My biggest concern is that there will be funds
redirected away from operating companies and to these financial
firms.
I don't know if financial firms need the funds in the same
way that operating companies do. But there is a defined need
here for operating companies. And I think before the
legislation allows for the redirecting of funds away from those
companies, it should have a stronger empirical basis for
determining that, which is a more appropriate use of funds.
Chairman Garrett. Thank you.
The gentleman from Texas is recognized for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. Thanks for holding
this hearing.
Mr. Arougheti, Mr. Brown had said that increasing the
leverage ratio would be harmful to--has the potential to be
harmful to the investors. But what I heard you saying is that
you would use that leverage in a way that enhances shareholder
value, wouldn't you?
Mr. Arougheti. Yes, I would. I believe, and I think it is
just common knowledge in the investment business that the
introduction of leverage could amplify risk the same way it
could amplify returns.
So I would be remiss to say that there is not the
possibility that it could theoretically improve risk. But what
I believe Mr. Brown also said is that the benefits, provided
there is adequate disclosure, which this legislation provides
for, far outweigh those potential risks.
One thing I think is worth highlighting is that the
structure of the market already accommodates the leveraging of
lower risk assets.
In fact, within the BDC industry, where we borrow from
banks they give us a schedule of investments identifying how
much they are willing to leverage our various investments. And
from that list, starting with common equity all the way up
through senior secured loans, what you will see is a market's
unwillingness to leverage equity investments and a market's
willingness to leverage senior secured loans well in excess of
the proposed 2-to-1.
So, outside of the BDC construct, the idea of risk-based
leverage is pretty well-established. And even within the BDC
framework, the existing leverage facilities are already in
place to accommodate that changing leverage requirement if the
1-to-1 overlay were widened.
Mr. Neugebauer. So, if this bill passes and becomes law,
you don't see this big rush out to all these companies to
leverage up because basically it is going to--you have a
business model and there is certain amount of opportunity out
there to determine how you can best fund that.
Mr. Arougheti. Yes. I think that is exactly right. And
again, one of the things that we have seen over the last decade
is that BDCs have grown.
As I mentioned, there are various business models. There
are certain BDCs who lend exclusively to venture-backed
companies who may be pre-revenue or pre-cash flow. And those
will attract a certain amount of de minimis leverage.
And then there are people like ourselves who would probably
be moving into lower risk senior secured leverage and attract a
different balance sheet profile. So I think that is one of the
nice things about the bill.
Mr. Neugebauer. So do you see this, the growing of the BDC
market increasing as the--as we see the diminished
participation in the banking community?
Mr. Arougheti. Yes, I do. I think the growth in the BDC
market has been significant, but not nearly enough to keep pace
with the growing capital void. So I would hope that this
legislation would in fact spur capital formation.
Mr. Neugebauer. And from the panel--these are some
thoughtful ideas--are there other things in that space that we
need to be thinking about that is under-addressed in this
legislation that would encourage the BDC activity and help--
more importantly help small businesses access capital?
Mr. Foster, you look like you--
Mr. Foster. Thank you. Yes. The first thing that is going
to happen, all three of us, our investment grade rated by the
S&P, we are the most creditworthy of the BDCs out there.
And the first thing we are likely going to do if the
legislation passes is sit down with the rating agencies and
talk about their reaction, if any, to it. And they probably
won't have a reaction--just because we can have more leverage
doesn't mean they are going to allow us to have more leverage.
And I don't think any of us are going to take on more leverage
if it means a ratings downgrade.
Similarly, like Mr. Arougheti said, we will sit down with
our banks and say what, if anything, are you willing to provide
us now that we have the ability to have slightly more leverage?
And so there is a lot of self-correcting mechanisms, the way we
all operate, where you are not going to see a huge amount of
immediate leveraging.
You are going to sit down with your constituents. You are
going to figure out what makes sense. But I think the
shareholders are the winners at the end of the day. And I think
that there are businesses out there that we can't reach that we
are going to be able to reach. But I think that it will be
selective and I think it will take some time.
Mr. Neugebauer. Mr. Quaadman?
Mr. Quaadman. Sure, Chairman Neugebauer. Just two points I
wanted to make with that.
One is if this bill were to pass, become law, we would see
the activity move forward. I think this is also a great example
of something that should be taken up by Mr. Hurt's
retrospective review bill that was raised in the last hearing,
that the SEC can come back in 5 years and take a look at the
activity to see if anything needs to be changed, or how BDC
activities can be changed more to become a better capital
formation facilitator in the marketplace.
The other point I just wanted to raise, too, and this goes
back to the last question with the 50 percent cap, my
recollection is with the previous bills that were under
consideration the last Congress, there was no such cap. So this
50 percent cap in the Mulvaney bill actually provides a low or
potentially lower level to financial companies, which I think
actually helps operational companies in that regard.
Mr. Neugebauer. Thank you, Mr. Chairman.
Chairman Garrett. The gentleman's time has expired.
The gentleman from California?
Mr. Sherman. Thank you.
Mr. Brown, one definition that would be added is for
accredited investors or those who have retained or used the
services of various advisers. As you understand the
legislation, would that mean that an investor could just retain
the advice of an adviser who is affiliated with, selected by,
or compensated by the issuer?
Mr. Brown. I don't think there is anything in the
legislation that prevents that. It defines categories and all
you have to be is in one those categories of people in order to
be considered someone who can provide the services that
transform you into an accredited investor.
Mr. Sherman. So, if I had a product I wanted to get
investors in, and let's say I have a perverse interest in
selling to those who couldn't even afford the risk, I could
just have a CPA or lawyer on staff and say you could advise
each investor, and I will pay you to do it. And/or you will
earn a commission with regard to the investment.
I don't see any of the other witnesses anxious to
contradict that. So I hope we would correct that in the
legislation and say that if you are going to be an accredited
investor because you have a good adviser, that adviser better
not be affiliated with, selected by, or compensated by the
issuer. Nor should his or her compensation depend upon whether
the investor chooses to make the investment.
We have--back when I was in the business world, which was a
long time ago, we established this million-dollar rule; a
million dollars now isn't even a good house in many parts of my
district. And this $200,000 income used to be those who were
really rolling in money.
I would point out that even Members of Congress would be
making $200,000 if we hadn't legislated to prevent ourselves
from getting cost-of-living increases. And I would hope that we
would take a look at this.
If we are going to liberalize the rule by saying well, you
are going to get good advice, you don't have to be a
millionaire. We would realize in today's world a millionaire is
somebody who has at least a couple million bucks.
To say that somebody is a millionaire because they have a
net worth of a million ignores the inflation over the last 20
or 30 years. As to leverage for the BDCs, what we have in our
economy now is all the money is locked in banks and other very
risk-averse investors.
If you want to get a prime loan or a prime plus 1 loan, you
can get 10 banks to bid on it. You get all the money and they
beg you to take more and you say no. If the U.S.--if the German
government wants to borrow money, you have to pay them to take
it.
So, those that are--the money is locked up. And if we can
get some of that money lent to BDCs and then through BDCs,
extend it to the companies that really need it and that are
growing and that--or might grow. And then have some risk; that
is moving the money from this little sheltered world where it
only gets lent to sovereign governments and et cetera and gets
out.
Which is why I am a bit reluctant to--I think Mr. Brown
commented on this--to see the BDC money then go to financial
institutions. It is the financial institutions that already
have enough money.
Does anyone here--I will address this to Mr. Foster, but
anybody, have any economic analysis that said not as good for
investors? And you do have to be here just for your investors.
But that it is good for the economy to create another pipeline
so that investment money goes to those in the financial sector.
Mr. Foster. Sure. Well, yes. We have investments. And Mr.
Arougheti has one too. We have--and probably Mike as well. We
have investments in leasing companies that might have to occupy
a small role in our 30 percent bucket. And would it be nice to
not have to worry about that if another leasing company came in
because the leasing company's equipment leasing companies, they
are helping operating businesses, right. So just because--
Mr. Sherman. And in a lot of ways, they are your business.
Mr. Foster. Yes. We--
Mr. Sherman. They are financing the same people you are
financing.
Mr. Foster. Yes. But I think our members think that the 30
percent bucket is adequate to deal with those. We welcome it.
It would be nice if it were bigger. But I just don't see it as
a priority to--
Mr. Sherman. Should all financial--
Chairman Garrett. The gentleman's time--
Mr. Sherman. My time has expired.
Chairman Garrett. Mr. Huizenga is now recognized for 5
minutes.
Mr. Huizenga. Thank you, Mr. Chairman.
And actually I will kind of continue on the line of
questioning that my friend from California had. And I might
add, while I might question your judgment on things on
occasion, politically I would view you as a qualified investor.
I would hope that reasonably educated people who can go do this
would be able to go in and make these types of decisions.
So I am kind of curious about this--sort of this fiduciary
issue that seemed to be the pursuit, and about compensation.
And Mr. Gerber, when the little exchange was happening you had
a very contemplative look on your face. I am curious if you
were looking to try to respond to that or any of the others.
And then Mr. Quaadman, you had mentioned that from your
perspective, quickly, at the end of I think it was Mr.
Neugebauer's questioning about you believe that this could help
operational companies. And I wanted to expand on that a little
bit.
And then Mr. Arougheti, you had talked a little bit about
adequate protection. So that is kind of that direction I would
like to go.
And Mr. Gerber, I don't know if you care to lead off, if
you had something to say about that fiduciary element?
Mr. Gerber. I am not sure exactly which period of the
discussion you are referencing. But I think what--
Mr. Huizenga. I think it was like the time of compensation
for someone who was giving advice, where that compensation
would come from.
Mr. Gerber. Yes. The thought that was crossing my mind at
the time, because there are some related issues between these
two bills, and the gentleman from California was asking
questions about conflicts of interest. And that has come up
with some of the provisions in the BDC legislation as well
where there could theoretically be an adviser-issuer conflict.
And that is something that Congressman Mulvaney has tried
to address in the BDC legislation by ensuring that the SEC
would have an opportunity to review those types of conflicts.
And I think that is an improvement over the legislation, the
BDC legislation.
And again, it is not a priority for Franklin Square, but it
is something that we think is important to consider on behalf
of the industry and on behalf of investors in the BDC industry.
And we were pleased to see that addressed in Mr. Mulvaney's
draft legislation.
Mr. Quaadman. Sure. Chairman Huizenga, the point I was
trying to make is in the previous BDC legislation that was
considered in the last Congress, there was no such 50 percent
cap on financial companies. So, theoretically, a lot more than
just 50 percent could have gone in.
The current draft actually provides a ceiling. So
theoretically, with that ceiling you would have a certain
amount that would have to go to operational companies.
Frankly, if you take a look at the BDC model historically,
they are going to be investing in operational companies anyway.
But I think this creates a ceiling where there hadn't been one
before.
Mr. Huizenga. And the vast majority of your investments,
right, the gentleman that actually are involved in the BDCs
here, they do go into operational companies. Correct?
Mr. Gerber. Absolutely.
Mr. Quaadman. Okay. Mr. Arougheti, you had the microphone
there for a second. Why don't you talk a little bit about the
adequate protections that you thought were in there for those
investors? And that seems to go back a little bit ago, so I
don't know if you remember uttering that, but I do--
Mr. Arougheti. Yes. It is interesting because I think
people have been focused appropriately on regulation and
shareholder protection.
I will just reiterate some of the things that Mr. Gerber
said in his testimony that as far as financial services models
go, you can't get more transparent than a BDC.
We have a quarterly schedule of investments where we
delineate every investment in the portfolio. If you juxtapose
that with a bank balance sheet, as an example, it would be very
difficult for anybody in this room to actually open up a public
filing for a bank and figure out exactly what they own.
Now, they are under a completely different regulatory
regime, so that is not to say that they are bad investments.
But I think it is important that we always get re-grounded in
the transparency and the regulatory framework under which we
operate.
Vis-a-vis the increase in leverage, a very positive change
in the new legislation being introduced is this idea of
shareholder protection through a cooling-off period.
I personally believe that the investor community will
welcome this change and it will actually create a significant
amount of renewed interest in the BDC space from both retail
and institutional investors.
But the idea of giving the retail investor the opportunity
over a prolonged period of time to vote with their feet I think
is a very innovative way to give them the adequate protection
that certain people are trying to give them.
Mr. Huizenga. Okay. Any concerns, anybody, about whether
there might be leveraged money allowed to be leveraged again in
this if you were changing that ratio? That had been--someone
had brought up to me that sometimes these investors into the
BDCs are using leveraged money.
So my time has expired. But thank you.
Chairman Garrett. Thank you.
Mr. Hinojosa is now recognized for 5 minutes.
Mr. Hinojosa. Thank you, Chairman Garrett. And thank you,
Ranking Member Maloney, for holding this hearing.
It seems to me that when it comes to innovation the United
States is the envy of the world. And we are the envy not only
because our economy values and rewards entrepreneurship and
hard work, but because our markets are transparent, safe, and
liquid.
My first question goes to Professor Brown. The discussion
draft of the Small Business Credit Availability Act creates
multiple classes of preferred stock, each with different
shareholder rights. With different characteristics and rights,
do the new classes of preferred stock pose risk to retail
investors?
Mr. Brown. I think that there are advantages to multiple
classes of preferred stock. And of course operating companies
today have that authority.
I think that this draft legislation eliminates some
investor protections that are associated with preferred shares.
And I think that is of concern. I think the idea that this
legislation would limit the purchase of those shares to
qualified institutional buyers is a helpful way to approach
that.
My concern is actually not with the purchase of preferred
shareholders, but the common shareholders. This bill would
strip away the obligation to have voting rights on those
shares. But it would also allow for things like super-voting
stock, at least as I read the legislation.
There is no legislation of voting rights anymore if this
bill passes as is. So in theory, a board of directors could
transfer voting rights away from the common stockholders and to
the preferred shareholders.
I actually have a suggestion in my testimony as a way that
I think that should be fixed. I don't think that authority
should be allowed.
Mr. Hinojosa. Mr. Brown, as you know, H.R. 2187 would
classify brokers, investment advisers, accountants, and lawyers
as accredited investors. The legislation assumes that these
persons or entities by nature of their profession are
sophisticated enough to understand the private securities
offerings under Regulation D. Do you have any concerns for
these classes of persons being deemed sophisticated under the
law?
Mr. Brown. Congressman, I sure do. And as I mentioned in my
testimony, I know lawyers, obviously the best. I teach them. I
am around them all the time. They are not an inherently
sophisticated group of people, at least when it comes to
investments.
The education--we have plenty of lawyers in this room. In
your law school education, you are not taught about the
intricacies of complex investments. We are lucky if students
take corporations or securities at all. And then those courses
don't really prepare you.
So unfortunately, the way this is drafted right now it
doesn't take into account age. It doesn't take into account
experience. And really you can't really rely on education as a
way of saying that they are sophisticated. So I am concerned
about those categories.
Mr. Hinojosa. Thank you.
My next question is to Vincent Foster.
Pursuant to Section 413 of Dodd-Frank, the SEC is currently
working on a study of whether it needs to redefine its current
accredited investor definition. Rather than jumping in with a
legislative fix, do you think we should wait to see how the SEC
comes out on any changes to the definition?
Mr. Foster. I don't think the SBIA really has a position on
that because we are dealing exclusively with either SBIC funds
that have as their investors accredited investors, or SEC-
registered companies that have as their investors retail and
institutional shareholders, which is accompanies by extensive
disclosure and generally full liquidity for the shares. And so
I don't think we really have a position on that.
Mr. Hinojosa. Okay.
Next question is for Mr. Arougheti. In your testimony you
have indicated that commercial banks and other traditional
financing sources continue to retrench the business of
providing loans to small and medium-sized companies. Can you
elaborate on your prepared testimony and provide us some
insights into why you think this retrenchment is happening? And
what, if anything should be done to ensure that those small and
medium-sized businesses have adequate access to capital?
Mr. Arougheti. Sure. I will try to be brief. It looks like
we are pressed for time. But I think it is important to put
this in historical--I'm sorry, Mr. Chairman. Should I--?
Chairman Garrett. You can finish.
Mr. Arougheti. To put it in a historical context, because
the shift from banks to nonbanks, or what we would call
parallel banks, has actually been occurring for about 25 years.
And it started in the late 1980s with a big wave of bank
consolidation in this country.
So I just think it is important that we clear the
misperception that this is a post-Great Recession issue. This
has been happening in this country for 25 or 30 years. I think
it has accelerated post the Great Recession for a whole host of
market-based and regulatory reasons. But I don't think there is
any one issue.
I think something that has gotten some discussion is also
just talent. I think a lot of the folks like ourselves who are
classically trained within bank credit programs have frankly
fled the banking industry and now reside in firms like BDCs.
And I think that is part of it.
Mr. Hinojosa. Thank you. I yield back.
Chairman Garrett. Thank you.
Mr. Stivers, you are recognized for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
Chairman Garrett. Thank you.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate you
holding this hearing on this very important issue of access to
capital and capital formation in our economy. And as the Chair
of the Middle Markets Caucus, I know how important middle-
market companies are, not only in Ohio, but throughout our
country.
They represent about 200,000 businesses, about a third of
our economy. They employ 47 million Americans, and BDC loans in
that middle-market marketplace have tripled, in fact, over the
last--since 2008, I believe, so a lot of money. Currently BDCs
net about, I think, and somebody can correct me if I am wrong
about this, $70 billion of outstanding middle-market loans.
So my first question is for Mr. Arougheti. Can you please
help this committee and everybody understand how this bill
would help impact capital access to these very important
middle-market firms by allowing BDCs to have greater access to
capital and leverage?
Mr. Arougheti. Sure. I think a real-life example, but just
to understand why BDCs are so attractive as capital providers.
We are permanent capital vehicles. So we have many of our
portfolio companies who view us as their bank, their lender of
choice. And we try to service them throughout their entire
lifecycle.
So we have 250 portfolio companies, a number of whom we
have been lending to for 10-plus years in a whole variety of
different ways. It all comes down to scale and product
capability.
And the broader our product set, i.e., if we can service
those same clients and customers with senior secured asset
based loans that currently don't meet the economic requirements
of the BDC, that will be a good thing for those underlying
companies.
To the extent that the banks can provide some of that
marginal credit, I think that is a good thing as well, because
that just promotes more competition and more healthy cost of
capital to the investors. But I think it is really about the
increasing mandate that the asset coverage test would provide
us.
Mr. Stivers. I appreciate that. And clearly BDCs add value
to the economy, are adding a lot of value to these middle-
market companies that are in many cases family-owned, and in a
lot of cases fast-growing and employing as I said 47 million
Americans. So I want to thank all of you for your willingness
to do that.
I do want to quickly hit on transparency and protections
because I think that is important. With regard to transparency,
I think, Mr. Gerber, you said it really well when you talked
through the quarterly reports you have to do where you do a
whole review of your portfolio by company, by amount. No bank
does that. No other financial institution in the capital
markets has that kind of transparency, do they?
Mr. Gerber. That is right, Congressman. And I think that is
one of the reasons why we are all very comfortable making the
recommendations we are making. It is because of the power of
the transparency behind the model of the BDC.
And you are right. When you compare us to other lenders,
even if we were to go to 2-to-1 leverage, it would still be far
less leverage.
And I think Mr. Arougheti addressed this in his comments,
far less leverage than the other lenders against which we
compete. And I mentioned it earlier as well. Banks are anywhere
from 8-to 15-to-1. Hedge funds are in the mid-teens. We are
just talking about 2-to-1. But it is 2-to-1 in a far more
transparent model.
So as Mr. Arougheti said, you cannot go to a bank's balance
sheet or filing and find a schedule of investments like you can
in a BDC. And we all know you certainly can't do that in a
private fund, whether it is a private credit fund or a hedge
fund that is engaging in lending.
So it is the most transparent form of lending in the
marketplace. And we are--even if we go to 2-to-1, it is one of
the lowest levels of leverage.
Mr. Stivers. And I would like to just give you a second to
expand upon that because today you are absolutely the lowest
leverage at zero. But if you went to 2-to-1 leverage, that
would be between 4 and 10 times less leverage than your
competitors in the marketplace employ.
Mr. Gerber. That is right.
Mr. Stivers. Thank you.
And the last thing I do want to hit on is protections with
regard to accredited investors. We all did laugh at the lawyer
joke. And I think we should cut all their bills by about 50
percent because of how unsophisticated they are.
But I do think that--I was in the investment adviser
business. If you pass a Series 7, you are pretty sophisticated,
I would argue. If you pass--my sister is an accountant and
their exams are really hard. You are pretty sophisticated if
you are an accountant.
We can all debate the attorneys, I will give you that. But
clearly most people in those professional educations are way
more sophisticated than just being worth a million dollars--
would you say that makes somebody more sophisticated than just
being worth $1 million, regardless of how they got it, Mr.
Gerber?
Mr. Gerber. I don't consider myself an expert on this one--
Mr. Stivers. Okay.
Mr. Gerber. --Congressman.
But what I would like to say to you is that when you just
look at arbitrary numbers, I don't think you are getting into a
substantive consideration. And I think the proposal before us
is driving at the notion that we ought to be considering
something other than just arbitrary numbers.
And I don't know that anybody on this panel would disagree
that sometimes the substance of someone's background may be
more meaningful in terms of their level of sophistication than
just the assets that they have in their possession.
Mr. Stivers. Thank you.
Thank you all. I am out of time. I yield back the balance
of my time. But thanks for being here.
Chairman Garrett. Thank you. The gentleman yields back.
The gentleman from Massachusetts, Mr. Lynch, is recognized
for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman. And I want to thank the
members of the panel. You have been helpful.
Let's drill down on that a little bit, though. Under the
terms of the bill right now, H.R. 2187, a personal injury
attorney with no other requirements would be able to self-
certify as an accredited investor. Isn't that right, Mr.
Quaadman?
Mr. Quaadman. I believe you are correct, and that is one of
the reasons why we said there should be an SEC study to see
exactly what those characteristics are.
Mr. Lynch. Right.
Mr. Quaadman. So we think Mr. Schweikert is going down the
right path. But maybe it is also good to have the SEC look at
it and then report back as to what some of those substantive
different changes should be.
Mr. Lynch. Right. I totally agree.
And I think for the CPA side of this, someone who does your
taxes once a year doesn't necessarily know what we are talking
about in many cases--27 of these BDCs are private, they are
non-traded. So they are rather opaque investments.
And I don't think the average tax attorney or personal
injury attorney, excuse me, would necessarily be able to drill
down and make a good determination whether or not that
investment is right for themselves or for others.
The bill also says that as long as you hire a registered
broker-dealer, that allows you to make that investment as well
in a BDC that might not have the information public. Mr. Brown,
does that create a problem?
Mr. Brown. I certainly believe that it does.
If we go back to my 85-year-old parent or uncle or friend,
and we were to say if they happen to have a lawyer who maybe
was their estate planner or a CPA, as you say, who was doing
their tax returns, and those two people gave them some
investment advice, is that person really suddenly transformed
into someone who is sophisticated just by virtue of the
relationship? Not necessarily.
Mr. Lynch. Okay. I want to ask you something else.
Professor Brown, as you are aware, Congress passed and the
regulators have finalized the Volcker Rule to prohibit banks
from using their taxpayer-backed deposits to make proprietary
trades. The final rule accomplished this by requiring banks to
divest from certain assets.
However, BDC funds were excluded from that definition. And
for purposes of defining affiliation as well, BDCs were not
considered to be affiliated with a bank so long as the bank's
ownership of the fund was under 25 percent.
Recently, Goldman Sachs took a BDC public. They retained a
20 percent share in the company. Credit Suisse has also formed
a BDC. I am not sure what their retention is. Should we be
concerned now that even before the Volcker Rule is effective we
are already tinkering with an asset class that may enable banks
to reengage in proprietary trading?
Mr. Brown. I can say that it concerns me. And my concern
is--there are a couple of them. But one of the ones is that
banks, when they form these other entities, especially when it
is the big commercial banks, the market just judges them
differently.
Sometimes the market thinks that the big bank is making an
implicit guarantee of backing that company even if they only
own less than 25 percent.
Mr. Lynch. Right.
Mr. Brown. That other company gets a break on--the company
can borrow at a cheaper rate. I might be able to do things that
other BDCs can't do. So I worry very much when banks get into
space like this that it may dramatically change the nature of
that market. And it frankly may give them a competitive edge
that other BDCs don't have.
Mr. Lynch. Okay. Thank you very much.
Mr. Chairman, I yield back.
Chairman Garrett. Thank you. The gentleman yields back.
The gentleman from Arizona, Mr. Schweikert, the author of
the legislation before us today, is now recognized.
Mr. Schweikert. Thank you, Mr. Chairman. And we will walk
through a couple of the things, and maybe if one or two of the
misunderstandings and then work through--work a little
backwards from there.
First of all, I think for all of us here there is an
understanding that we have both the societal problem and some
other mechanical problems. My understanding is that of our 318
million population right now we have only about 600,000
Americans who have gone through the process who are qualified
investors.
We know that half of our Baby Boom population is moving
into retirement with very, very little savings. So part of our
goal here is how do we move more of our population into the
investment class, and do it in a safe and rational fashion? And
so I actually have been working on this bill for a while, but
quite open to any brilliant suggestion.
I do want to go over a couple of things, just because one I
think was sort of a misunderstanding, a misstatement. Under
current legislation right now, under a current law 506, if you
are the lawyer, if you are the CPA, if you are the registered
broker-dealer, you get to certify someone as being a qualified
investor. It doesn't make you a qualified investor.
The second part of that is the way the bill is drafted
right now, if you were to hire one of those people for
guidance, it would allow you to invest in some of these
products. Maybe that is where it needs to be tightened up.
And my first question, Mr. Chairman, and it was actually to
Mr. Brown, just one quick one. You are actually on the SEC's
committee that has been somewhat looking at the definitions of
qualified investor?
Mr. Brown. Yes, sir, I am.
Mr. Schweikert. Would I be pushing the limit of getting too
complicated and too, I will use the word ``sophisticated,'' to
also look at it as saying a 30-year-old who just happened to do
really well that year who has $50,000 of risk capital is a lot
different than your 80-year-old mother example?
Would you be also willing to support an idea that also
would put some time as part of one of the kind of
counterbalancing--or age as one of the counterbalancing
factors?
Mr. Brown. Absolutely. And when I read your draft, there is
no question in my mind that was a good-faith effort to try to
address a problem that the Investor Advisory Committee agrees
is there, which is how to let people who are sophisticated in
fact, actually sophisticated, irrespective of the dollar
amounts, to invest. The definition should allow for that.
We are in complete agreement. I should say I am, but the
committee's recommendation.
I do think, for example in the testing area, in your
language in the bill I think there should be a provision in
that says the test only lasts for so long. I think if somebody
is 30 and then they--I don't want them to have taken it once
and then at 80, that is fine. There should be some--
Mr. Schweikert. But for those of us who do really well on
multiple guess tests, we like that.
Mr. Quaadman, what would you suggest in the world of--is it
a--would you be comfortable with a world where a broker-dealer
could provide advice to someone to invest in what today is
limited to only qualified investors? And if not, how would you
tighten it up? What would make you comfortable?
Mr. Quaadman. My concern there is you could take an
unsophisticated investor and effectively use the accredited
investor patina of the broker-dealer and then transfer it over
to that unsophisticated investor. And that is why I think there
are some issues where, even though there is advice that has
been given, the unsophisticated investor, just by definition,
may not necessarily understand the risks that are involved.
Mr. Schweikert. If we created sort of an A-B test in the
legislation, something that also demonstrates some risk capital
or something of that nature, would that create a--
Mr. Quaadman. Yes, and that is where I think we need to get
to is that you need to ensure that the investor has a level of
knowledge where they can understand what the risks are that
they are undertaking. And then you also want to have something
else underneath to make sure that the risks that they are
taking are commensurate with their financial experience.
And you can take the flipside too, because if you take a
look at the bright line test, right, what is interesting
there--because I talked to somebody who was at the SEC in 1982.
They picked those tests because they couldn't really figure
anything else out at the time.
Mr. Schweikert. Mr. Chairman, in the last 30 seconds, and I
think all of us have come across this experience, I have a very
good friend, P.H. Dean Electrical Engineering had some friends
that had started a business. He is an absolute international
expert in this subject, except he wasn't allowed to invest in
it.
How do we reward people, both from their risk tolerance,
where they are in their lifecycle of investing, but also their
knowledge base, and get rid of the sort of arbitrary that you
have made it in like--you get to continue to make it in life.
Because you are on this side of the ledger, you don't get to
participate. We are quite open to any brilliant ideas that will
come our way.
With that, I yield back, Mr. Chairman.
Chairman Garrett. The gentleman yields back. I am looking
forward to more brilliance from Arizona on the legislation
then.
We now go to Connecticut. And Mr. Himes is recognized for 5
minutes.
Mr. Himes. Thank you, Mr. Chairman.
And I thank you all for being here for the duration. I am
encouraged by what is a robust and substantive bipartisan
conversation.
I do have, though, a couple of--and by the way I appreciate
Mr. Mulvaney's offer. I have a couple of concerns that I would
like to have addressed here. The first and most important
pertains to the levels of leverage that would be permitted
under the Mulvaney proposal.
Specifically if you start to do the math on the 30 percent
bucket where, as you know, there are plenty of firms out there
that are holding equity tranches in CLOs which themselves are
seven, eight, nine, 10 times levered.
When you start to do the math on going to 2-to-1 leverage
in these instruments, on investments in financial companies
which may themselves have 3 or 4 times leverage, investing in
instruments which themselves may have 7, 8, 9 times leverage,
you pretty quickly get to some pretty stratospheric leverage
numbers. It is not hard to get up into the sort of 70x leverage
numbers if you just work through that math.
And of course if you then expand the 30 percent bucket into
50 percent, you have conceivably, and I understand that there
will be some prudence exercised by some players in the
industry, but you potentially have a very highly leveraged
vehicle here.
So I wonder--and let me just start with Mr. Gerber since he
is in the business. And then I would welcome comments. But am I
right to be concerned that if we permit this degree of
leverage, you have essentially a very, very volatile
instrument?
I don't need to tell you that at 50x leverage, a tiny
fluctuation in the value of underlying asset puts this
instrument completely underwater and eliminates the investment
of a lot of retail investors for whom this product is created.
So, Mr. Gerber, make me feel more comfortable on that issue.
Mr. Gerber. I will make my best effort. I think in the
question you are raising, there are really two issues that are
distinct, but at the same time, when brought together you have
to consider it as a whole. So on one hand, it is increasing
leverage going from 1-to-1 to 2-to-1 in our debt-to-equity
ratio.
On the other hand, it is the redefinition of an eligible
portfolio company, moving something out of the 30 percent
basket that we talk about into the 70 percent basket. And I
think what you are getting at is if you combine the two, what
is happening to a term that we all are familiar with, effective
leverage.
You are looking at three of the BDCs in the space that have
lowest levels of effective leverage. And you can--different
people have different ways of defining effective leverage and
doing different calculations. And I think when you look at any
lender, whether you are looking at a hedge fund or you are
looking at a bank, you have to ask the same questions.
And so what you are essentially looking at is the
multiplier effect, if you will. And in our--
Mr. Himes. Well, that is the math I was doing. And again, I
get that you guys are prudent, but--
Mr. Gerber. Yes. But if I may just finish--
Mr. Himes. On the less prudent side--I want to check my
math first.
Mr. Gerber. Yes.
Mr. Himes. Again, you could very quickly see very high
degrees of leverage in this instrument.
Mr. Gerber. Yes. I think so. And that is why you hear some
expressions of concern up here at the panel. And I think that
is one of the areas of legislation where we still have some
more work to do as an industry. And the members of the
committee, and I think we are all committed to doing that work
together.
But what I wanted to mention is earlier when Mr. Arougheti
was talking--and I referenced this concept as well about--would
all of the BDCs be able to access more leverage, and the answer
is no, they won't. And they won't whether it is because of the
rating agencies that Mr. Foster talked about.
They won't because of the covenants that the banks
require--I'm sorry, the regulators require the banks to have in
their loans to us. They won't because the analyst community and
the investor community is going to look at the substance of
those portfolios.
And so if you see mission creep, if you will, or if you see
growth in the overall BDC in fin co investments, you are going
to see downgraded ratings. You are going to see BDCs
potentially violating existing covenants.
So there are these natural governors in place. And I think
as we work through this language and think about the full
impact of it, we have to keep in mind those natural governors
that are in the system.
Mr. Himes. Could the industry--and I don't have a lot of
time--live with a modification whereby those investments in
companies--in the small businesses for which this instrument
was created, were allowed to lever 2-to-1 as is proposed, but
in the 30 percent bucket or in the financial bucket, the 1-to-1
ratio obtained. Is that a reasonable proposal?
Mr. Gerber. Yes. I think we have heard that. I think it
would be somewhat complicated to sparse it out like that, money
is fungible. So I think in effect what you really would be
saying is instead of going to 2-to-1, you are going to 1.75 and
1, or something along those lines. But whether or not there is
a practical way to ensure that any increase in leverage isn't
being applied to some subset of investments, I think would be
somewhat difficult.
Chairman Garrett. Thank you.
Mr. Himes. Thank you. Thank you, Mr. Chairman.
Chairman Garrett. Mr. Poliquin is recognized for 5 minutes.
Mr. Poliquin. Thank you, Mr. Chairman, very much. I
appreciate it.
And thank you gentlemen for all coming today. If we all as
a country look at the state of our economy, where it has gone
and where it is going, in the last 5 or 10 years, my
understanding is that about 80 percent of the new job hires in
this country were in the small-to medium-sized business space.
So we want to make sure that we do everything humanly possible
to help our small businesses grow.
I just looked at a survey a short time ago saying something
like 42 percent of business executives believe that the lack of
financing is one of the key reasons that they just don't have
the confidence to hire more workers and grow their business.
So I know that Dodd-Frank is a smothering regulation that
is reducing the available credit among lots of players in your
space. And so I salute you folks for trying to fill that void.
I just heard something, Mr. Gerber, a short time ago that I
want to drill down with you a little bit if I may, something
that for a non-traded BDC like you folks that the information
that is provided tends to be opaque. Now, we want to make sure
that investors who are investing in these sort of financial
products, that they have all the information they need to go
forward. Could you address that, sir?
Mr. Gerber. Sure. Thank you, Congressman.
It is often a misconception with non-traded because when
you hear the term non-traded, it just sounds different. But
non-traded BDCs follow all the same regulatory processes and
procedures as traded BDCs.
So, non-traded BDCs are in the 1933 Act, the 1934 Act, and
the 1940 Act. We have all the same public disclosures as traded
BDCs. At Franklin Square we manage both traded and non-traded
BDCs. And we manage more non-traded BDCs than any other
manager. And I can just tell you the hours that our legal staff
and accounting folks put into those filings is significant.
But just because we are non-traded does not mean we are
opaque. It does not mean that we are not providing the same
level of disclosure that traded BDCs provide. We absolutely do.
Mr. Poliquin. Okay. So contrary to what was said here today
by a member of this committee is that an investor will have the
same type and same amount and detailed information if I am
buying a traded or non-traded BDC, is that correct, sir?
Mr. Gerber. That is, and actually more. And let me explain
to you why. Because when a firm like Franklin Square
distributes a non-traded BDC, we also fall under FINRA and blue
sky regulations.
So, all 50 States are regulating our products. We are
filing in all 50 States. We have to meet the suitability
standards in all 50 States. The advisers and brokers that put
their clients in our funds have to get a wet signature from
their clients, our investors.
So the reality is the non-traded investor probably has more
opportunity to understand the investment than even an investor
in our traded BDC. So it is I would say even heightened for the
non-traded investor--more disclosure, more transparency.
Mr. Poliquin. Thank you for clarifying that, Mr. Gerber. I
appreciate it very much.
Mr. Gerber. Thank you.
Mr. Poliquin. You bet.
Now, I want to pivot a little bit here. And we only have a
couple of minutes left. I will start with you, Mr. Arougheti.
You folks, and all you folks in the financial industry
space live under this net, this Dodd-Frank net, which was
intended for a small number of money center banks that really
have tentacles throughout our economy that could cause a
problem if something happens, but are certainly not designed
for everybody.
I want to know if you could wave a wand, what one
regulation now within the Dodd-Frank net would be best to
remove, repeal, or reform such that you folks are able to grow
your portfolio companies and hire more workers?
Mr. Arougheti. Yes. I will answer.
We are not Dodd-Frank-regulated, so for us we are not
focused on Dodd-Frank. As we have said numerous times, we are
heavily regulated under the 1933 Act, the 1934 Act, and the
1940 Act. I think Representative Mulvaney has done a wonderful
job putting forward legislation that would actually advance the
industry.
Mr. Poliquin. What about you folks possibly being regulated
by the DOL or by the Federal Reserve or the SEC? How does that
make you feel?
Mr. Arougheti. It comes with a different set of regulations
and a different set of opportunities. So as I highlighted
earlier, if we were a bank and we were levered 10-to 15-to-1
and we took depositor money we would be subject to a separate
set of regulations versus the 1940 Act closed-end fund who is
taking retail and institutional investments.
So again, I, for better or worse haven't put myself in that
theoretical construct. We are focused on the regulatory regime
that we are subject to.
Mr. Poliquin. Okay.
Mr. Foster, do you want to add anything to that?
Mr. Foster. Sure. I asked our lead investment bank Raymond
James if the DOL rule that is about to come out would impact
them because a lot of our shareholder are individuals but they
invest through IRAs and 401(k)s. And they canvassed their
system and did not think it would be significant. But you think
it could be.
Mr. Poliquin. Thank you.
Mr. Quaadman, would you like to respond in my waning
seconds here?
Mr. Quaadman. Yes. Just to--investment advisers are
extremely concerned about the fiduciary duty role that it is
going to have a very significant impact on their ability to
invest.
In fact, we issued a study last week that 9 million small
businesses in the United States are going to be prevented or
severely crimped in their ability to provide retirement
vehicles for their employees if that rule goes through.
Mr. Poliquin. Thank you, Mr. Chairman, for the additional
time. I yield back. Thank you.
Chairman Garrett. Thank you. The gentleman yields back.
Mr. Carney is recognized for 5 minutes.
Mr. Carney. Thank you, Mr. Chairman, and Ranking Member
Maloney for holding this hearing today. And thank you to Mr.
Mulvaney and Mr. Schweikert for these proposals.
I would like to--I have to admit I don't know a lot about
BDCs. And so I found your testimony very interesting. And I
just have really two questions.
One is to you, Mr. Foster. On page five, I would like to
understand a little bit about how these BDCs are operating in
my area. I am the Representative from the State of Delaware,
the whole State, which is a very small place.
But I notice on here that it has a pretty big number under
it on your map on page five, particularly relative to States
that are much, much larger. Can you explain that? Is that a
function of our fact that we are the State to incorporate your
business? Does that have anything to do with that? Or is that a
function of greater BDC activity in my State?
Mr. Foster. I can't really explain why there is--I guess it
says a billion five--
Mr. Carney. Yes. We are doing better than New Jersey--
Mr. Foster. Oh yes.
Mr. Carney. --Connecticut and Maryland, just about.
Mr. Foster. Maybe one of the two Michaels--
Mr. Carney. Anybody else? Mr. Gerber, you are from our
region, right?
Mr. Gerber. Yes. I think what Mr. Foster wanted to say is
it is the excellent representation in Congress that is driving
the heavy investment--
Mr. Carney. All right.
Mr. Gerber. I think you hit the nail on the head.
Mr. Carney. Flattery will get you everywhere.
Mr. Gerber. At Franklin Square we have a portfolio company,
it is U.S. coatings acquisition. I do think it is in part
because of the corporate laws in Delaware and the number of
firms that are headquartered there--
Mr. Carney. It is more a question that these are domiciled
in some kind of way.
Mr. Gerber. I think that is exactly right. Now in our case,
our investment has more to do with just the work that is done
at the portfolio company. But I think the phenomenon you
referenced is--
Mr. Carney. Can you--obviously you are located in our
region. Is most of your activity in the region?
Mr. Gerber. No. As I mentioned, sir, earlier in my
testimony, we have deployed capital in 39 of the 50 States. And
between the 3 of us, our entire industry, we have invested in
companies in all 50 States. I think it probably depends on the
scale of the BDC. In our case we have the largest platform. We
have national reach. So we are sourcing deals all over the
country.
Mr. Carney. I think this is a pretty reasonable approach to
updating regulations from BDCs. I do share Mr. Himes' concern
about the leverage question.
So I would like to kind of follow up where he left off,
which was, is there a way--Mr. Gerber, you started to respond
to how you might consider addressing that concern. Would you
like to follow up on that, or Mr. Arougheti, or Mr. Foster,
would you like to address that?
Mr. Arougheti. I will make a couple of comments.
Mr. Carney. Please.
Mr. Arougheti. And it harkens back to some of my earlier
comments--
Mr. Carney. It just gives us a little heartburn.
Mr. Arougheti. Yes. I think anybody here would struggle to
actually get leverage on the types of investments that you are
expressing concern over.
So first and foremost, the draft legislation, as I read it,
excludes CLOs. And Representative Himes--
Mr. Carney. He mentioned that.
Mr. Arougheti. --mentioned CLOs. That is excluded.
However, Ares is actually one of the larger CLO managers in
the broadly syndicated market. And getting leverage on a CLO
equity investment is not possible in the market. So it goes
back to some of the natural governors that exist in both the
banking sector and the investment grade bond sector that
regulate what can and can't be leveraged.
So if we put together a portfolio that was 50 percent CLO
equity, even though it is excluded, but for arguments sake, if
we did and we took that portfolio to the rating agencies and
the bank, we would not have an investment grade rating and we
would not be able to get a loan on it. So--
Mr. Carney. There are market-based controls on that, is
that what you are saying?
Mr. Arougheti. Yes. Market-based, bank and capital markets.
Mr. Mulvaney. Will the gentleman yield for a second?
Mr. Carney. Sure. Absolutely.
Mr. Mulvaney. Very briefly, and I appreciate the question,
just because I was hoping to get to this while Mr. Himes was
still here. But the draft legislation specifically excludes
investments in CLOs, hedge funds, and private equity. So some
of the examples he gave would not have been permitted under the
draft legislation.
Mr. Carney. Great. Anybody else?
Mr. Foster. I will add, I think it is--we have given some
thought to it. I think it is theoretically attractive to
provide the 1-to-1 to the 70, but not the 30. But if the 30
gets bigger, then the bill begins to lose its effectiveness.
And I do--I am concerned because most of us are on--all of
us are owned primarily retail investors. And they get 1-to-1 or
they get 2-to-1. But when you start explaining the baskets and
how we are going to report that to them and how we are going to
monitor it, and what it does to this, I don't think it is a
practical solution.
Mr. Carney. So maybe what we could do is get some feedback
to those Members who have concerns. I am looking at the sponsor
just to give us some level of comfort. That is great.
I yield back. Thank you.
Chairman Garrett. Thank you. Thank you, gentlemen.
It looks like our last two questioners are Mr. Hultgren and
then Mr. Mulvaney. And then we vote, I think.
Mr. Hultgren. Thank you, Mr. Chairman.
Thank you all for being here.
Chairman Garrett. But not on your bill. You looked as if we
are ready to vote on your bill, but no, on the Floor.
Mr. Mulvaney. I thought you could pull some strings, Mr.
Chairman. I usually look at you in a confused fashion most of
the time--that is nothing new.
Chairman Garrett. That is kind of a normal look.
Mr. Hultgren. Thank you all. I appreciate you being here. I
do want to thank all of you for your input and the work that
you are doing.
Thanks, Mr. Gerber, for your clarification too. I think
there were some inaccuracies that I had heard in some
statements on the other side with some of the non-traded BDCs,
and some statements that those were less than transparent. And
I really appreciate you clearing that up, that there is an
incredible amount of transparency and accountability available
there. And that was very helpful.
I want to shift gears just a little bit if that is all
right. And I think I will address this first one to Mr. Gerber,
but then also, Mr. Foster and Mr. Quaadman, I would appreciate
your thoughts on this as well, and maybe Mr. Arougheti, as
well.
But I have heard a great deal about access to capital, and
its role in creating jobs. I wonder, could you tell me a little
bit more about the reality of how your business, Mr. Gerber,
helps with job creation in the middle-market?
Mr. Gerber. Sure. In its really most basic form companies
are coming to us, looking to grow or looking to stay in
business and in need of capital. And when we provide that
capital, and as Mr. Arougheti explained, sometimes because of
the permanent nature of our funds we can be long-term partners
and provide managerial assistance to these firms.
We are helping them stay in business and we are helping
them grow. And it does have a direct impact on jobs. In your
State, Congressman, Franklin Square alone has 10 portfolio
companies. We have deployed over $380 million. And to firms
that represent over 33,000 jobs.
Across our entire portfolio we have invested in over 300
companies, representing more than a million jobs. And you heard
earlier in our testimony and some of the comments from some of
the members of the subcommittee, we are lending primarily to
small middle-market all the way up to large middle-market
firms.
And they now represent a third of the private sector
workforce. So there is a direct correlation between the work
that we do in deploying capital and the growth of the middle-
market and the job creation in the middle-market.
Mr. Hultgren. That is fantastic. I appreciate it. The
number one thing we continue to talk about is job creation and
how do we get this economy growing, and growing more quickly.
And so that is great news, especially for my State of Illinois.
We are looking for good news, so it is nice to hear about jobs
being created there.
Mr. Quaadman, any thoughts from your membership on what you
are hearing as far as access to capital, and specifically this
tool that really is potentially beneficial on both ends,
certainly from the investor side but also from the recipient of
access to capital?
Mr. Quaadman. Yes. We are seeing very severe problems in
terms of access to capital, primarily with small businesses and
larger businesses. Part of it is the slow implementation of
Basel III, which is slowly drying up bank loans. But we are
also going to see if total loss absorbency coverage goes
through in 2019.
That is actually going to siphon hundreds of billions of
dollars of capital out of the global markets. So what we are
seeing is we are seeing this slow combination of events
happening where logically, each of these different regulatory
initiatives would make sense by themselves.
When you put them together, they have very dramatic
impacts. And what we have seen, and this is a Census Department
report I had mentioned, I think in April, that we are seeing a
net destruction of firms in the United States over the last 6
years.
So we are not seeing the smaller firms being created at the
same rate that we used to. So the BDC legislation is good that
we are helping the middle-market companies and the like. So,
but we need to help the smaller guys as well.
Mr. Hultgren. Yes. And it is something that is really part
of my heartbeat is I just believe so strongly that really the
foundation of this country is the ability for someone to have
an idea, be passionate about it, have some gifts and talents
that they want to put into this, but also to have partners that
could come alongside where they can get access to capital to
turn that into truly the American dream. We talk about that,
but this is the reality.
But so, Mr. Foster and Mr. Arougheti, any other thoughts on
this as far as job creation with this--
Mr. Arougheti. I think one additional comment which I don't
think we have mentioned before is that by regulations, BDCs are
actually required to provide managerial assistance to their
portfolio companies, which is often overlooked, but also
contributes to the strategic value that we add to middle-market
companies.
So to put that in perspective, within Ares Capital
Corporation we sit in on, or sit on the boards of directors of
over half of our portfolio companies. So our portfolio
companies look at us as their bank or their lender of choice.
But I think they also look at us as a strategic adviser as they
grow their business.
Mr. Hultgren. That is great I don't think that was
something that I understood fully: the value that could come
from that, and learning from other companies that are
succeeding. Quite honestly, learning from successes and
failures can be certainly beneficial to these small and medium-
sized companies, as well.
Mr. Foster, any last thoughts?
Mr. Foster. Sure. And a good example is we specialize in
change control transaction with retired business owners. The
kids aren't in the business, they are too small for a public
company to buy, too small for private equity.
We will come in there and arrange a change control
transaction. And then in the last 10 years prior to retirement,
the last thing they want to do is open up a new plant. So very
frequently we are able to come in and regain a growth
trajectory. And if it wasn't for us, not only are you creating
jobs you might not even retain those jobs.
Mr. Hultgren. My time has expired. Thank you all very much.
Thank you, Mr. Chairman. I yield back.
Chairman Garrett. Thank you. And to have the last word, Mr.
Mulvaney, the sponsor of the underlying legislation.
Mr. Mulvaney. Thanks, Mr. Chairman. Thanks as well to Mrs.
Maloney for the work she has done on this bill with me, along
with a couple other Members.
And thank you, Mr. Carney, for sticking around because I
want to address a couple of housekeeping things.
First, Mr. Chairman, I have a statement from Prospect
Capital Corporation, which is a BDC that has done business in
my district. And they would like to enter a statement into the
record. So I would like to do that without objection if I may,
please.
Chairman Garrett. Without objection, it is so ordered.
Mr. Mulvaney. Thank you.
Mr. Carney, we talked before and I think we addressed some
of that stuff about specifically excluding it. But we will
continue to talk. But one of the things I will point out when
we have these discussion is that while everybody gets a little
bit nervous every time we talk about levering up or increasing
anybody's leverage, I direct your attention to the screen. Even
with the proposed changes, this is still going to be the least
levered of any of the major investment facilities that we sort
of have oversight on this committee.
So it is still a very, very small thing. And all of the
rest of the financial matters that you see on the board have
the same issues that Mr. Himes may have raised. So if we want
to start worrying about layering on leverage, maybe the place
to start is on the left side of that graph and not the right
side of that graph. Thank you. You can take that down.
Regarding the buckets, it strikes me--and Mr. Himes raised
this as well. While I understand his point about perhaps his
suggestion of not allowing it in the financial services area,
part of the reason we are doing this is because small and
medium-sized financial institutions are having difficulty
getting the capital.
So that is actually one of the expected uses in my
district. I am a very rural area. We are heavily community-
banked. And we are trying to figure out a way to provide them
with additional sources of capital.
Plus, it strikes me that a well-run community bank or small
financial institution would probably carry less leverage than
some of the operating companies that Mr. Himes mentioned. So I
don't think it is a connection between leverage and the bill.
I think it comes down to, can we make smart, safe, sound
capital available to as many people as possible? That is the
purpose of the bill. And I see no reason to arbitrarily limit
it to having financial institutions getting one level of
leverage into operating companies, for lack of a better word,
getting another.
Mr. Lynch mentioned go-around on Volcker. I will throw this
to the panel because it strikes me, gentlemen, that if I was--
you mentioned Goldman Sachs. I can't remember the European bank
you mentioned that was thinking about doing this. If I wanted
to get around Volcker, there are a lot better ways to do it
than invest in BDCs aren't there, Mr. Gerber?
Mr. Gerber. As Mr. Arougheti said, Volcker doesn't apply to
us. But I do think that when we see banks investing in BDCs, it
is actually a positive consequence to some degree to the
Volcker Rule in that those assets are no longer on the bank's
balance sheet. And they are now being invested in a far more
transparent environment than in a merchant banking private
operation.
So, from our perspective, we don't--Volcker doesn't apply
to us. But in looking at it, it doesn't seem to us to be an
end-run around Volcker.
Mr. Mulvaney. Right. And that is a good point that I don't
think that lots of folks are familiar with; when you say
Volcker doesn't apply to you, that is not by accident. The Rule
actually specifically excludes you folks under the rationale
that these industries are already so heavily regulated and so
transparent that there was no reason to apply Volcker to you
folks.
And again, I would suggest that if I am Deutsche Bank or
Goldman Sachs and I want to go around Volcker, I can put my
money in a hedge fund and do it right away. I don't have to go
through the hassle of going through the BDC application.
Dr. Brown, you mentioned something at the very outset of
your testimony about operating companies versus financial
institutions. And again, I don't want to change your words. But
I thought you said something to the tune of the operating
companies need it more than the financial institutions. Or--
Mr. Brown. No, I don't think I quite said that, although
who knows, I could have misspoken. What I really said was I
haven't seen the empirical data that says the financial
companies need it.
What we know is the operating companies do need it. And I
am afraid of the bleed of funds away from operating companies
to financial companies and hurting those companies.
And I would just add, Congressman, that the comment that
was made earlier about these operating companies getting not
only the funds, but getting the managerial assistance, I don't
know whether the financial companies need the managerial
assistance in the same way I think a lot of these operating
companies do.
So I think if that these operating companies can't access
as easily these BDCs, I think that is a problem for the
operating company.
Mr. Mulvaney. Two things to consider, Mr. Brown, and to my
colleagues of both parties.
Number one, it seems that the need for the product would be
dictated by the market and not by some empirical research.
Either it is there or it is not there. But perhaps more
importantly to your point, if these gentlemen want to take an
equity position or a debt position in a community bank in my
district, I know where the money is going, which is to the
local businesses.
So it is just another way to get the money to the operating
companies. That is what the community banks and the small
financial institutions and small investment operations in my
district do. So if the demand is there within the operating
business community, I think it probably--capital should be able
to find a way there.
Lastly, Mr. Brown, I will close with this. I have 14
seconds.
You mentioned some concern about the different levels of
stock, the different classes of stock, the preferred stock. And
I guess I can only ask it this way.
Wouldn't those concerns that you raised here today apply to
any company that offers preferred stock? Because a lot of
publicly traded companies that I could buy this afternoon offer
preferred stock. Aren't your concerns equally applied to them
as they would be to BDCs?
Mr. Brown. Well, of course, not investment companies, but
operating companies, yes.
Mr. Mulvaney. Right. But if I am an investor, I am either
going to invest in BDCs or I am going to invest in Norfolk
Southern Railway and they might have a preferred stock and the
BDCs might have a preferred stock. And the concerns that you
raise would apply equally to me as investor as between BDC and
Norfolk Southern.
You said the board of directors could change the voting
rights, they could change the payouts. They could, think about
me as an unsophisticated investor, might get caught in that.
That applies anyway, right, in the market.
Mr. Brown. You are absolutely right. The legal authority
exists irrespective of the company because it is the authority
of the board of directors. But what I would say right now, is
there are protections in the Investment Company Act of 1940
that don't exist for other companies. So we are talking about
removing something that is there that does not apply to
operating companies.
Mr. Mulvaney. Fair enough. Gentlemen, I appreciate the
additional 50 seconds, and for the right to participate in the
hearing since I am not on the subcommittee. Thank you, Mr.
Garrett.
Chairman Garrett. Thank you. And welcome to the
subcommittee.
So I said that was going to be the last word, but, no, I am
not going to say the last word. I am going to give the last
word to the gentlelady from New York.
Mrs. Maloney. A vote has been called. But very briefly,
thank you to all of the panelists. And I ask unanimous consent
to place two letters into the record: one from the North
American Securities Administrators Association; and one from
the Consumer Federation of America and Americans for Financial
Reform.
And I look forward to continuing to work with you, Mr.
Mulvaney, to see if we can get a product that has unanimous
bipartisan support. Getting capital out is important. Thank
you.
Chairman Garrett. Without objection, is is so ordered. And
again, thank you to the witnesses.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, this hearing is adjourned. And again, thank
you to the panel.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
A P P E N D I X
June 16, 2015
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]