[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.

                                  
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