[House Report 113-276]
[From the U.S. Government Publishing Office]


113th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    113-276

======================================================================



 
         SMALL BUSINESS CAPITAL ACCESS AND JOB PRESERVATION ACT

                                _______
                                

 November 22, 2013.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 1105]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 1105) 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 without amendment and recommend 
that the bill do pass.

                          Purpose and Summary

    Title IV of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Dodd-Frank Act) (Pub. L. No. 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. 1105, 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. 1105 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

    Introduced by Rep. Robert Hurt, H.R. 1105, the Small 
Business Capital Access and Job Preservation Act, would exempt 
advisers to certain private equity funds from the new 
registration requirements imposed by Title IV of the Dodd-Frank 
Act. Title IV imposes new registration and reporting 
requirement on hedge funds and private equity firms. 
Specifically, Title IV requires investment advisers to private 
investment funds to register with the SEC under the Investment 
Advisers Act of 1940. Private funds are defined as those funds 
that would be investment companies under the Investment Company 
Act of 1940. H.R. 1105 would exempt from SEC registration 
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. In the 112th Congress, 
Rep. Hurt introduced a similar bill, H.R. 1082, which the 
Committee reported by a voice vote on June 22, 2011.
    As Marc A. Reich, the President of Ironwood Capital, a 
private equity firm, testified on May 23, 2013, ``H.R. 1105 
strengthens the ecosystem of the private equity marketplace by 
reducing overregulation that threatens capital access for small 
businesses. This bill will help private equity funds by 
removing unnecessary regulatory burdens that are tying up 
precious resources and wasting investor capital which would 
otherwise be directed towards growing small businesses.''
    Under the Dodd-Frank Act, private fund advisers with assets 
under management of less than $150 million qualify for a 
limited exemption from registration if they comply with 
recordkeeping and reporting requirements to be established by 
the SEC. The Dodd-Frank Act also exempts ``family offices'' 
from registration, as those are defined by SEC rule. Lastly, 
advisers registered with the Commodity Futures Trading 
Commission (CFTC) as commodity trading advisers are exempt from 
registration, unless the business of the adviser becomes 
predominantly securities-related after the Dodd-Frank Act takes 
effect.
    As a result of Title IV's registration requirements, 
advisers to private funds must maintain records and file 
reports with the SEC, which are made available to other 
regulators, including the Financial Stability Oversight Council 
(FSOC). The records are required to include the amount of 
assets under management and use of leverage, counterparty 
credit exposure, trading and investment positions, valuation 
policies and practices, types of assets held, side 
arrangements, trading practices, and other information deemed 
necessary by the SEC in consultation with the FSOC for the 
public interest or the assessment of systemic risk.
    As Tom Quaadman from the Center on Capital Markets 
Competitiveness at the U.S. Chamber of Commerce testified at a 
May 23, 2013, hearing before the Subcommittee on Capital 
Markets and Government Sponsored Enterprises,

    Private equity financing is an important form of financing 
for smaller businesses that are trying to grow. In fact, 
between 1995 and 2010, over 23,000 companies, employing 3 
million people, were backed by private capital. These firms 
grew jobs at a rate of 64% compared to other companies which 
only grew jobs at a rate of 18%. It should also be noted that 
private equity financing was not a cause of the financial 
crisis and that business models utilizing private equity 
financing do not pose interconnected risk to the economy. Yet, 
the Dodd-Frank Act requires that private equity firms must 
register with the SEC. This places upon the private equity 
firms onerous reporting requirements through form PF, including 
the valuation of privately held portfolio companies, as well as 
expensive custodial requirements for untradeable legend 
equities. Requirements such as these are not only costly; they 
are designed for public company investors, not investors in 
privately held companies. Thus, the requirements are also a 
mismatch for the investment model.

    H.R. 1105 does not alter the Securities and Exchange 
Commission's authority provided by Section 404 of the Dodd-
Frank Act to require that all private fund advisers maintain 
records and make them available to the SEC for the protection 
of investors or for the assessment of systemic risk by the 
Financial Stability Oversight Council. Title IV directs the SEC 
to periodically examine the records of private fund advisers, 
and it authorizes the SEC to conduct additional examinations as 
the SEC deems necessary. Private fund investment advisers are 
required to safeguard client assets over which they have 
custody, and assets must be verified by independent 
accountants. Taking into account the public interest and the 
economy, the SEC must increase the financial threshold for 
accredited investors, and is required to adjust that threshold 
every four years in the interests of investor protection.

                                Hearings

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing on H.R. 1105 on May 23, 2013.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
June 19, 2013, and ordered H.R. 1105 to be reported favorably 
to the House without amendment by a recorded vote of 38 yeas to 
18 nays (recorded vote no. FC-21), a quorum being present.

                            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.
    1. An amendment by Rep. Velazquez to limit the registration 
exemption provided by the bill to advisers of funds that do not 
make use of the modification of rules required by section 
201(a) of the Jumpstart Our Business Startups Act (JOBS Act) 
was not agreed to by a recorded vote of 24 yeas to 28 nays 
(recorded vote no. FC-19).


    2. An amendment by Rep. Maloney to strike the registration 
exemption provided by the bill and insert in its place a 
requirement that the SEC devise a simplified procedure for 
registration of investment advisers to qualifying funds was not 
agreed to by a recorded vote of 26 yeas to 30 nays (recorded 
vote no. FC-20).


    3. A motion by Chairman Hensarling to report the bill (H.R. 
1105) to the House with a favorable recommendation was agreed 
to by a record vote of 38 yeas to 18 nays (recorded vote no. 
FC-21).


                      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 states that H.R. 1105, 
among other things, exempts investment advisers to certain 
qualifying private equity funds if the adviser maintains 
records and provides reports to the SEC pursuant to applicable 
regulation.

   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:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, July 9, 2013.
Hon. Jeb Hensarling,
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. 1105, 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 contact is Susan Willie.
            Sincerely,
                                         Robert A. Sunshine
                              (For Douglas W. Elmendorf, Director).
    Enclosure.

H.R. 1105--Small Business Capital Access and Job Preservation Act

    H.R. 1105 would exempt investment advisers from the 
Security and Exchange Commission's (SEC's) registration and 
reporting requirements when they provide advice to a private 
equity fund with outstanding debt that is less than twice the 
amount of capital that has been committed to and invested by 
the fund. The bill would direct the SEC to adopt rules 
requiring exempt advisors to maintain records and provide 
reports to the commission as deemed necessary based on the 
fund's size, governance, risk, and investment strategy. Under 
current law, investment advisers do not have to register or 
report to the SEC if they advise only venture capital funds 
that meet certain qualifications.
    Based on information from the SEC, CBO expects that 
implementing H.R. 1105 would not have a significant effect on 
the agency's workload. Therefore, we estimate that implementing 
the bill would not have a significant effect on spending that 
is subject to appropriation. Further, the SEC is authorized to 
collect fees sufficient to offset its annual appropriation; 
therefore, CBO estimates that the net budgetary effect of 
implementing H.R. 1105 would be negligible. Enacting H.R. 1105 
would not affect direct spending or revenues; therefore, pay-
as-you-go procedures do not apply.
    H.R. 1105 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
governments.
    The CBO staff contact for this estimate is Susan Willie. 
The estimate was approved by Theresa Gullo, Deputy 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. 1105 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    Duplication of Federal Programs

    Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013), 
the Committee states that no provision of H.R. 1105 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013), 
the Committee states that H.R. 1105 directs the SEC to issue 
rules to require investment advisers exempted from registration 
by the bill to maintain records and file reports with the SEC 
and to define ``private equity fund'' for purposes of the bill.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This Section cites H.R. 1105 as the ``Small Business 
Capital and Job Preservation Act.''

Section 2. Registration and reporting exemptions relating to private 
        equity funds advisors

    This section amends section 203 of the Investment Advisers 
Act of 1940 by adding at the end of section 203 a provision 
exempting investment advisers to qualifying funds from the 
registration and reporting requirements of title IV of the 
Dodd-Frank Act provided that such investment advisers maintain 
records and file periodic reports with the SEC in accordance 
with rules that the SEC shall prescribe.

         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 ON H.R. 1105

    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act brought many firms and pools of capital 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 shares this data with the Financial 
Stability Oversight Board (FSOC) and reports to Congress 
annually on how it uses this data for the protection of 
investors and the preservation of market integrity.
    Today, private equity fund advisers have registered with 
the SEC, and have been making systemic risk reports for more 
than a year. As registered investment advisers, private equity 
firms must provide advice that is the best interest of the 
investor, basic disclosures about an employee who violated 
securities laws, the adviser's business practices, its fees, 
and any conflicts of interest. In addition, registered advisers 
must have a compliance program, a code of ethics and a chief 
compliance officer for each fund manager. While we recognize 
that complying with such requirements does have a cost and that 
some disclosures and registration requirements could be 
streamlined, we believe the benefits of reduced systemic risk 
and increased investor protection outweighs these costs.
    H.R. 1105 exempts private equity fund advisors levered by 
less than a 2-to-1 ratio from both making these systemic risk 
reports, as well as from the investor protections of adviser 
registration. In practice, because private equity firms 
leverage the purchased companies, and not the fund, all private 
equity funds would likely be exempted. As we have heard before, 
this year, one witness testified that the leverage at the 
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.
    Additionally, H.R. 1105 would exempt private equity fund 
advisers just as the SEC seeks to finalize a provision of the 
Jumpstart Our Business Startups Act of 2012 (JOBS Act) that 
permits general solicitation and advertising of private equity 
funds and other private securities. Investor advocates have 
raised strong concerns that the pensions of hard working 
Americans, as well as individual retirees, would now be 
targeted to invest in these funds. Removing investor 
protections related to private equity funds just as this 
provision of the JOBS Act goes into effect is short-sighted.
    During consideration of H.R. 1105, Democrats offered two 
improvements to the bill, but both were rejected by 
Republicans. Ms. Velazquez offered an amendment to limit the 
exemption to firms that did not use public solicitation. Ms. 
Maloney's amendment would have eliminated the exemption, and 
instead required the SEC to adopt simplified disclosure and 
registration requirements for smaller private equity firms, 
striking a balance between industry cost concerns on the one 
hand, and systemic risk mitigation and investor protection on 
the other. Both were rejected on a party-line vote.
    As a result, because H.R. 1105 limits the ability of the 
FSOC to monitor systemic risk in the financial system, and 
prevents the SEC from protecting investors in private equity 
funds, we oppose the bill.

                                   Maxine Waters.
                                   Stephen F. Lynch.
                                   Carolyn B. Maloney.
                                   Michael E. Capuano.
                                   Al Green.
                                   Wm. Lacy Clay.
                                   Joyce Beatty.
                                   Keith Ellison.
                                   Daniel T. Kildee.
                                   Denny Heck.
                                   Melvin L. Watt.

                                  
