[House Report 112-143]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 112-143
======================================================================
SMALL BUSINESS CAPITAL ACCESS AND JOB PRESERVATION ACT
_______
July 12, 2011.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Bachus, from the Committee on Financial Services,
submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 1082]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 1082) to amend the Investment Advisers Act of
1940 to provide a registration exemption for private equity
fund advisers, and for other purposes, having considered the
same, report favorably thereon with an amendment and recommend
that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Small Business Capital Access and Job
Preservation Act''.
SEC. 2. REGISTRATION AND REPORTING EXEMPTIONS RELATING TO PRIVATE
EQUITY FUNDS ADVISORS.
Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3)
is amended by adding at the end the following:
``(o) Exemption of and Reporting Requirements by Private Equity Funds
Advisors.--
``(1) In general.--Except as provided in this subsection, no
investment adviser shall be subject to the registration or
reporting requirements of this title with respect to the
provision of investment advice relating to a private equity
fund or funds, provided that each such fund has not borrowed
and does not have outstanding a principal amount in excess of
twice its invested capital commitments.
``(2) Maintenance of records and access by commission.--Not
later than 6 months after the date of enactment of this
subsection, the Commission shall issue final rules--
``(A) to require investment advisers described in
paragraph (1) to maintain such records and provide to
the Commission such annual or other reports as the
Commission taking into account fund size, governance,
investment strategy, risk, and other factors, as the
Commission determines necessary and appropriate in the
public interest and for the protection of investors;
and
``(B) to define the term `private equity fund' for
purposes of this subsection.''.
Purpose and Summary
Title IV of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) (Public Law 111-203)
requires most advisers to private investment funds--including
advisers to private equity funds--to register with the U.S.
Securities and Exchange Commission (SEC). Private equity funds,
however, neither caused nor contributed to the financial
crisis, and requiring advisers to these funds to register with
the SEC--at an estimated cost of $500,000 per fund--needlessly
diverts capital, time, and effort from investment activities
that could be creating jobs; rather than using these resources
to create jobs, private equity funds will use them to comply
with these new regulatory mandates that impose costs without
reducing systemic risk. To eliminate these unnecessary yet
costly burdens, H.R. 1082, the Small Business Capital Access
and Job Preservation Act, exempts advisers to certain private
equity funds from these new registration requirements. More
specifically, H.R. 1082 exempts advisers to private equity
funds that have not borrowed and that do not have outstanding a
principal amount in excess of twice their funded capital
commitments.
Background and Need for Legislation
Title IV of the Dodd-Frank Act amended the Investment
Advisers Act of 1940 to require advisers to private funds with
more than $150 million under management, including private
equity funds, to register with the SEC. Private equity,
however, was neither a cause nor a contributing factor to the
2008 financial crisis which had its roots in lax mortgage
underwriting and government housing mandates. In order to
comply with the SEC's registration requirements, advisers to
private equity funds will be required to calculate the value
and performance of each of their funds on a monthly basis,
which will in turn require advisers to private equity funds to
calculate the value of each company in which the fund has
invested on a monthly basis as well. Such valuations are time
consuming and costly, and they divert much-needed capital and
effort away from job creation and investment activities. To
eliminate this unnecessary burden, Representative Hurt
introduced H.R. 1082, the Small Business Capital Access and Job
Preservation Act, on March 15, 2011.
On January 26, 2011, the Committee on Financial Services
received testimony from Mr. Andrew Bursky, Chairman of Atlas
Holdings LLC, on the role that private equity firms have played
in preserving existing jobs and creating new ones by providing
capital to struggling companies. As of June 30, 2009, companies
that received backing from private equity investment funds
employed more than 6 million people. Studies show that the
workforces of companies acquired by private equity firms
increased by an average annual rate of 5.7 percent, compared to
1.1 percent for all U.S. companies. The Committee also received
testimony about the costs of registering with the SEC, which
some have estimated to be as high as $500 million industry-
wide, and the lack of systematic risk posed by private equity
funds. Because of the cost of registration and the lack of
systematic risk, Mr. Bursky opined that advisers to private
equity funds should be exempt from SEC registration
requirements.
The Subcommittee on Capital Markets and Government
Sponsored Enterprises held a legislative hearing on H.R. 1082
on March 16, 2011. During that hearing, the Subcommittee
received testimony from Ms. Pamela Hendrickson, Chief Operating
Officer of The Riverside Company. Ms. Hendrickson supported
H.R. 1082 and testified about the costs of registration, the
lack of systematic risk posed by private equity funds, and the
jobs created by such private equity funds. Ms. Hendrickson
explained that private equity funds are not highly
interconnected with other financial market participants; thus,
the failure of a private equity fund would be highly unlikely
to trigger cascading losses that would lead to a financial
crisis. Ms. Hendrickson also explained that private equity
funds do not pose a systematic risk because they consist of
many diversified investments.
H.R. 1082, the Small Business Capital Access and Job
Preservation Act, exempts from the new registration
requirements mandated by Title IV of the Dodd-Frank Act those
advisers to private equity funds that have not borrowed and do
not have outstanding a principal amount in excess of twice
their funded capital commitments.
Hearings
On March 16, 2011, the Subcommittee on Capital Markets and
Government Sponsored Enterprises held a hearing entitled
``Legislative Proposals to Promote Job Creation, Capital
Formation, and Market Certainty,'' to consider H.R. 1082 and
four other bills. The following witnesses testified:
Mr. Kenneth A. Bertsch, President and CEO,
Society of Corporate Secretaries & Governance
Professionals
Mr. Tom Deutsch, Executive Director,
American Securitization Forum
Ms. Pam Hendrickson, Chief Operating
Officer, The Riverside Company
Mr. Damon Silvers, Policy Director and
Special Counsel, AFL-CIO
Mr. David Weild, Senior Advisor, Grant
Thornton, LLP
Mr. Luke Zubrod, Director, Chatham Financial
Committee Consideration
The Subcommittee on Capital Markets and Government
Sponsored Enterprises met in open session on May 3 and 4, 2011,
and ordered H.R. 1082 favorably reported to the full Committee
by a vote of 19 yeas to 13 nays (Record vote no. CM-27).
The Committee on Financial Services met in open session on
June 22, 2011 and ordered H.R. 1082, as amended, favorably
reported to the House by voice vote.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto.
There were no record votes taken on amendments or in
connection with ordering H.R. 1082 reported to the House. A
motion by Chairman Bachus to report the bill, as amended, to
the House with a favorable recommendation was agreed to by
voice vote.
During consideration of H.R. 1082, the following amendments
and motion were considered by the Committee:
1. An amendment offered by Mr. Himes, no. 1a, to an
amendment offered by Mr. Himes, no. 1, to strike the text of
the amendment and insert text to limit the exemption to private
equity funds with a leverage ratio less than 2:1 was agreed to
by voice vote.
2. An amendment offered by Mr. Himes, no. 1, as amended by
an amendment offered by Mr. Himes, no. 1a, to limit the
exemption to private equity funds with a leverage ratio less
that 2:1 was agreed to by voice vote.
3. A motion offered by Mr. Garrett to move the previous
question on H.R. 1082, was agreed to by voice vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance related goals and objectives for this
legislation:
The purpose of H.R. 1082, the Small Business Capital Access
and Job Preservation Act, is to exempt advisers to private
equity funds that have not borrowed and do not have outstanding
a principal amount in excess of twice funded capital
commitments from their registration requirements as mandated by
Title IV of the Dodd-Frank Act. Title IV of the Dodd-Frank Act
amended the Investment Advisers Act of 1940 to require advisers
to private funds with more than $150 million under management,
including private equity funds, to register with the SEC.
Requiring advisers to private equity funds to register with the
SEC, at an estimated cost of more than $500,000 per fund,
needlessly diverts capital, time, and effort from activities
that create jobs and imposes unnecessary costs on private
equity funds that will not reduce systemic risk.
New Budget Authority, Entitlement Authority, and
Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
July 8, 2011.
Hon. Spencer Bachus,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1082, the Small
Business Capital Access and Job Preservation Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Dubary Brea
and Susan Willie.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 1082--Small Business Capital Access and Job Preservation Act
H.R. 1082 would amend the Investment Advisers Act of 1940
by exempting investment advisors to private equity funds from
registering with and reporting to the Securities and Exchange
Commission (SEC) for a fund with outstanding debt that is less
than twice the amount investors have committed to the fund.
Under current law, investment advisors are exempt from
registering and reporting to the SEC if they advise only
venture capital funds that meet certain qualifications. The
legislation would direct the SEC to define the term private
equity and to adopt rules requiring that advisors to private
equity funds maintain records and provide any reports that the
commission deems necessary after considering fund size,
governance, risk, and investment strategy.
Based on information from the SEC, CBO estimates that
implementing H.R. 1082 would not have a significant impact on
spending subject to appropriation. Enacting H.R. 1082 would not
affect direct spending or revenues; therefore, pay-as-you-go
procedures do not apply.
H.R. 1082 contains no intergovernmental or private-sector
mandates as defmed in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, or tribal
governments.
The CBO staff contacts for this estimate are Susan Willie
and Dubary Brea. This estimate was approved by Peter H.
Fontaine, Assistant Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 1082 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section provides a short title to the bill of ``Small
Business Capital Access and Job Preservation Act.''
Section 2. Registration and reporting exemptions related to private
equity funds advisors
This section amends Section 203 of the Investment Advisers
Act of 1940 and exempts advisers to private equity funds that
have not borrowed and do not have outstanding a principal
amount in excess of twice its funded capital commitments from
registration requirements as mandated by Title IV of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Public
Law 111-203).
This section also requires the SEC to issue rules to (1)
define a private equity fund, (2) to set forth what records
that exempt advisers shall be required to maintain, and (3) to
determine what reports exempt advisers shall be required to
provide to the SEC.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
INVESTMENT ADVISERS ACT OF 1940
* * * * * * *
TITLE II--INVESTMENT ADVISERS
* * * * * * *
REGISTRATION OF INVESTMENT ADVISERS
Sec. 203. (a) * * *
* * * * * * *
(o) Exemption of and Reporting Requirements by Private Equity
Funds Advisors.--
(1) In general.--Except as provided in this
subsection, no investment adviser shall be subject to
the registration or reporting requirements of this
title with respect to the provision of investment
advice relating to a private equity fund or funds,
provided that each such fund has not borrowed and does
not have outstanding a principal amount in excess of
twice its invested capital commitments.
(2) Maintenance of records and access by
commission.--Not later than 6 months after the date of
enactment of this subsection, the Commission shall
issue final rules--
(A) to require investment advisers described
in paragraph (1) to maintain such records and
provide to the Commission such annual or other
reports as the Commission taking into account
fund size, governance, investment strategy,
risk, and other factors, as the Commission
determines necessary and appropriate in the
public interest and for the protection of
investors; and
(B) to define the term ``private equity
fund'' for purposes of this subsection.
* * * * * * *
MINORITY VIEWS
The Wall Street Reform Act brought many firms out of the
``shadow'' financial system and into the daylight by requiring
hedge fund and private equity fund advisors with more than $150
million of assets under management to register with the
Securities and Exchange Commission (SEC) as investment advisers
and provide information about their trades and portfolios.
Under the Act, the SEC will share this data with the Financial
Stability Oversight Board (FSOC) and will report to Congress
annually on how it uses this data for the protection of
investors and the preservation of market integrity.
H.R. 1082 would expand the registration exemption to
include all private equity fund advisors. The amended bill now
limits the exemption to advisors of funds that are levered by
less than a 2-to-1 ratio. As a witness at the hearing on this
bill noted, however, debt issued by purchased companies is
itself an element of risk. Information about these companies is
precisely the type of data that should be available to the FSOC
to analyze.
We believe that the amendment by Mr. Himes improved the
bill by narrowing the exemption, but because the amendment
addressed leverage only at the funds themselves and not at the
underlying companies, H.R. 1082 would limit the ability of the
FSOC to monitor systemic risk in the financial system, and
would prevent the SEC from protecting investors in private
equity funds.
Barney Frank.
Emanuel Cleaver.
Gary Ackerman.
Andre Carson.
Luis V. Gutierrez.
Al Green.
Wm. Lacy Clay.
Brad Miller.
Michael E. Capuano.
Stephen F. Lynch.
Carolyn B. Maloney.
Ruben Hinojosa.
Melvin L. Watt.
Gwen Moore.
Maxine Waters.