[House Report 115-646]
[From the U.S. Government Publishing Office]


115th Congress    }                                     {       Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                     {      115-646

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



 
                 SMALL BUSINESS CREDIT AVAILABILITY ACT

                                _______
                                

 April 24, 2018.--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

                        [To accompany H.R. 4267]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4267) to amend the Investment Company Act of 
1940 to change certain requirements relating to the capital 
structure of business development companies, to direct the 
Securities and Exchange Commission to revise certain rules 
relating to business development companies, and for other 
purposes, having considered the same, report favorably thereon 
without amendment and recommend that the bill do pass.

                          Purpose and Summary

    On November 7, 2017, Representative Steve Stivers 
introduced H.R. 4267, to amend the Investment Company Act of 
1940 to modernize the regulatory regime for Business 
Development Companies (``BDCs''). BDCs are investment vehicles 
designed to facilitate capital formation for small and middle-
market companies. The legislation requires the SEC to 
streamline the offering, filing, and registration processes for 
BDCs to eliminate significant regulatory burdens. This 
legislation also increases a BDCs' ability to deploy capital to 
businesses by reducing the BDC's asset coverage ratio--or 
required ratio of assets to debt--from 200% to 150% if certain 
requirements are met.

                  Background and Need for Legislation

    The goal of H.R. 4267 is to help fuel capital formation for 
small- and middle-market businesses that have difficulty 
obtaining bank and other traditional financing by providing 
BDCs some relief from a static regulatory regime that has not 
been significantly updated in more than 30 years since BDCs 
were created. In turn, these small- and middle-market 
businesses will have greater opportunity to grow and create 
jobs.
    By 1980, many banks had pulled back from lending to small 
businesses after the banks suffered significant losses related 
to oil and real estate in the 1970s. Private equity and venture 
capital firms offered an alternative source of credit to small 
businesses, but they could not provide this credit to small, 
growing businesses because the Investment Company Act 
prohibited their securities from being owned by more than 100 
persons. Thus, in 1980, Congress amended the Investment Company 
Act of 1940 to authorize the creation of BDCs to facilitate 
private finance investment in small- and middle-market 
businesses.
    BDCs are closed-end funds that make investments in small 
and developing businesses and financially troubled firms. BDCs 
were created as a means of making capital more readily 
available to small, developing, and financially troubled 
companies that are not able to access public markets or other 
forms of conventional financing. By law, BDCs must invest at 
least 70% of their assets in so-called ``eligible assets.'' The 
most common eligible assets are private and small public 
companies in the U.S. with $5-to-$150 million in annual 
revenues. This so-called middle market sector of the economy is 
responsible for one-third of the private sector GDP, and these 
businesses produce $10 billion in revenues annually. 
Investments in such businesses must be privately negotiated, 
and the BDC is required to offer managerial assistance to these 
companies to meet specific business challenges.
    While BDCs are a type of closed-end fund, they have greater 
flexibility than other investment companies in dealing with 
businesses in which they have invested and in issuing 
securities and compensating their managers. Further, BDCs do 
not need to register as investment companies under the 
Investment Company Act. Nonetheless, BDCs still must register 
their securities under the Securities Exchange Act of 1934 
(Exchange Act) and are subject to the full reporting 
requirements under the Exchange Act, including the requirements 
to file Forms 10-K, 10-Q, and 8-K.
    Recently, BDCs have invested in small- and medium-sized 
companies that provide vital services to the American public, 
including companies involved in disease treatment and 
prevention, education, information technology security, 
agriculture, and construction. Many BDCs specialize in 
financing acquisitions made by private equity firms. While wide 
variation exists among BDCs in the size of their investments, 
the companies they invest in and the industries in which they 
concentrate all share a common investment objective of making 
it easier for small- and medium-sized companies to obtain 
access to capital.
    Today, funding from BDCs has become more important for 
small- and medium-sized businesses, as the stifling regulatory 
environment resulting from the regulatory overreaction to the 
financial crisis has restricted bank and other traditional 
financing options for these companies. Specifically, lending to 
small and medium-sized companies from commercial banks has 
fallen off due to the regulatory constraints and compliance 
burdens imposed by the Dodd-Frank Act, and BDCs now find 
themselves in a position similar to the one at their creation 
over 30 years ago--i.e., addressing the unmet capital needs of 
small businesses. BDCs also are addressing important capital 
needs for middle-market businesses, as 79 BDCs exist in the 
U.S. with over $80 billion in outstanding loans to middle-
market businesses. Of these, 53 are publicly traded BDCs, 
allowing retail investors a chance to purchase shares in the 
growth of middle-market America.
    Despite the important role that BDCs play in helping to 
fund small- and medium-sized businesses, the static BDC 
regulatory regime has prevented BDCs from playing as large a 
role as they might otherwise. The BDC regulatory regime has not 
been significantly updated in over 30 years since Congress 
authorized the creation of BDCs in 1980. Currently, BDCs are 
limited in the amount they can borrow, as their debt to equity 
ratio is capped at a 1:1. Modernizing the regulatory regime for 
BDCs will allow them to amplify financing for small- and 
medium-sized businesses at a time when these companies are 
struggling to access capital to support growth and job 
creation. Even a modest increase in the leverage ratio, though 
still below that of many other financial institutions, would 
enable BDCs to deploy significantly more capital to small- and 
mid-sized businesses, while still generating returns to their 
shareholders. To this end, H.R. 4267 allows BDCs--via board or 
shareholder vote to modestly increase their debt-to-equity 
ratio to 2:1.
    Additionally, BDCs currently are unable to take advantage 
of streamlined offering rules that apply to traditional 
operating companies. In 2005, the SEC adopted rules that 
significantly modernized and streamlined the registration, 
communications, and offering processes for traditional offering 
companies. These reforms have been very successful, and many 
companies rely on them today. These reforms were primarily 
designed to: (1) streamline the securities registration 
process, especially for large reporting issuers referred to as 
WKSIs; (2) liberalize the flow of information from issuers to 
investors before and during offering periods; and (3) implement 
a new model for prospectuses based on electronic availability 
of the prospectuses, instead of physical delivery. The SEC 
excluded registered closed-end funds and BDCs from these 
reforms due to these funds being governed by a different, but 
parallel, regulatory framework. The SEC, to date, has not 
considered similar reforms to registered investment companies.
    Like other companies that regularly raise capital through 
securities issuances, BDCs rely on pre-filed ``shelf 
registration'' statements, which are securities filings that 
allow companies to position themselves to issue additional 
securities. Because shelf registrations contain financial 
information that becomes outdated as companies publicly report 
more recent financial information, most companies incorporate 
subsequent financial reports in their shelf registrations by 
reference. BDCs, however, are prohibited from incorporating 
subsequent financial information by reference and instead must 
manually update their shelf registration statements each time 
they report new quarterly information (which slows a BDC's 
ability to issue additional securities and makes it more 
expensive by requiring a BDC to hire lawyers, accountants, and 
printing firms to continually update its shelf-registration 
statements). To date, BDCs also have been barred from the 
benefits associated with being a WKSI, which includes taking 
advantage of more flexible rules relating to communications 
with investors and the registration process.
    To address these problems, H.R. 4267 provides parity on 
securities offering and related rules between BDCs and other 
operating companies, thereby streamlining disclosure 
requirements and reducing burdensome, duplicative regulatory 
paperwork for BDCs--while still ensuring that investors receive 
relevant and necessary disclosures. Specifically, this bill 
directs the SEC to revise its rules to allow BDCs to 
incorporate by reference and to permit BDCs to qualify as 
WKSIs. These reforms would allow BDCs to raise capital in the 
same efficient manner as traditional operating companies, which 
would thus permit them to invest more of their dollars in 
small- and mid-sized businesses, as opposed to excessive 
compliance costs on outdated securities offering rules.
    Finally, consistent with this legislation, in its October 
2017 report on Capital Markets, issued pursuant to President 
Trump's February 3, 2017 Executive Order 13772, the Department 
of the Treasury included a recommendation that the SEC revise 
its securities offering reform rules to permit BDCs to utilize 
the same provisions available to other issuers who file Forms 
10-K, 10-Q, and 8-K.

                                Hearings

    The Committee on Financial Services held a hearing 
examining matters relating to H.R. 4267 on April 26, 2017, 
April 28, 2017 and November 3, 2017.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
November 14, 2017, and November 15, 2017, and ordered H.R. 4267 
to be reported favorably to the House without amendment by a 
recorded vote of 58 yeas to 2 nays (Record vote no. FC-112), 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. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 58 yeas to 2 nays 
(Record vote no. FC-112), a quorum being present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of 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. 4267 
will increase access to capital for small and middle-market 
businesses and facilitate job creation by modernizing the 
regulatory regime for BDCs.

   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.

                 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, March 16, 2018.
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. 4267, the Small 
Business Credit Availability Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 4267--Small Business Credit Availability

    Summary: H.R. 4267 would direct the Securities and Exchange 
Commission (SEC) to amend certain regulations that affect 
business development companies (BDCs)--companies that operate 
like mutual funds to invest in the stocks of small private 
companies and that offer significant managerial assistance to 
issuers. H.R. 4267 would raise the limits on the amount of 
leverage allowed to a BDC if it met certain requirements. The 
bill also would eliminate the exclusion of a BDC from 
qualifying as a well-known seasoned issuer (WKSI).\1\
---------------------------------------------------------------------------
    \1\Under current law, the SEC allows certain public companies, 
called WKSIs, to use streamlined registration and reporting procedures 
when issuing securities.
---------------------------------------------------------------------------
    The staff of the Joint Committee on Taxation (JCT) 
estimates that enacting H.R. 4267 would reduce federal revenues 
by $33 million over the 2018-2028 period; therefore, pay-as-
you-go procedures apply. Enacting the bill would not affect 
direct spending.
    Using information from the SEC, CBO estimates that 
implementing H.R. 4267 would cost less than $500,000 to amend 
certain regulations affecting BDCs and WKSIs. However, the SEC 
is authorized to collect fees sufficient to offset its annual 
appropriation; therefore, CBO estimates that the net effect on 
discretionary spending would be negligible.
    CBO estimates that enacting H.R. 4267 would not affect 
direct spending and would not increase on-budget deficits by 
more than $5 billion in any of the four consecutive 10-year 
periods beginning in 2028.
    H.R. 4267 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
    Estimated cost to the Federal Government: The estimated 
budgetary effect of H.R. 4267 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       By fiscal year, in millions of dollars--
                                                             -------------------------------------------------------------------------------------------
                                                               2018   2019   2020   2021   2022   2023   2024   2025   2026   2027  2018-2022  2018-2027
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  DECREASES IN REVENUES
 
Estimated Revenues..........................................      *      *     -1     -3     -5     -6     -6     -6     -4      *       -15        -33
--------------------------------------------------------------------------------------------------------------------------------------------------------
Components may not sum to totals because of rounding; * = between -$500,000 and zero.

    Basis of estimate: For this estimate, CBO assumes that H.R. 
4267 will be enacted near the end of fiscal year 2018, that the 
necessary amounts will be appropriated near the start of each 
year, and that spending will follow historical patterns for the 
SEC.

Revenues

    JCT estimates that revenue losses under H.R. 4267 would 
result from a shift in business lending and taxable income from 
C corporations to BDCs, which are pass-through entities for tax 
purposes. Specifically, H.R. 4267 would allow BDCs to take on 
additional debt, increasing the amount they can borrow to a 
maximum of $4 for every $6 in assets. Under current law, a BDC 
can borrow up to $3 for every $6 it holds in assets.
    Generally, the income of interests in pass-through entities 
(such as BDCs) that are owned by individual taxpayers is 
treated as personal income. That income is subject only to the 
individual income tax, and it is taxed at the personal income 
tax rate of the businesses' owners. In contrast, taxable income 
from C corporations is subject to the corporate income tax, and 
it can be taxed again at the individual level after 
distribution to shareholders or investors. JCT estimates that, 
by effectively shifting income from C corporations to BDCs, the 
bill would reduce tax revenues by $33 million over the 2018-
2027 period.

Spending subject to appropriation

    Using information from the SEC, CBO estimates that 
implementing H.R. 4267 would cost less than $500,000 each year 
to amend certain regulations affecting BDCs and WKSIs. However, 
the SEC is authorized to collect fees sufficient to offset its 
annual appropriation; therefore, CBO estimates that any net 
effect on discretionary spending from implementing the bill 
would be negligible, assuming appropriation actions consistent 
with that authority.
    Pay-As-You-Go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget-reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in revenues that are subject to those 
pay-as-you-go procedures are shown in the following table.

CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4267, THE SMALL BUSINESS CREDIT AVAILABILITY ACT, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL
                                                              SERVICES ON NOVEMBER 15, 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       By fiscal year, in millions of dollars--
                                                             -------------------------------------------------------------------------------------------
                                                               2018   2019   2020   2021   2022   2023   2024   2025   2026   2027  2018-2022  2018-2027
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
 
Statutory Pay-As-You-Go Impact..............................      0      0      1      3      5      6      6      6      4      0        15         33
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Increase in long-term direct spending and deficits: CBO and 
JCT estimate that enacting H.R. 4267 would not affect direct 
spending and would not increase on-budget deficits by more than 
$5 billion in any of the four consecutive 10-year periods 
beginning in 2028.
    Mandates: H.R. 4267 contains no intergovernmental or 
private-sector mandates as defined in the Unfunded Mandates 
Reform Act.
    Estimate prepared by: Federal Costs: Stephen Rabent; 
Federal Revenues: Staff of the Joint Committee on Taxation; 
Mandates: Jon Sperl.
    Estimate approved by: H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      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

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    Duplication of Federal Programs

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed 
rulemakings: The Committee estimates that the bill requires one 
directed rulemaking.
    H.R. 4267 requires the SEC to revise its rules to allow a 
BDC that has filed an election pursuant to section 54 of the 
Investment Company Act of 1940 to use the securities offering 
and proxy rules that are available to other issuers that are 
required to file reports under section 13(a) or section 15(d) 
of the Exchange Act.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section cites H.R. 4267 as the ``Small Business Credit 
Availability Act.''

Section 2. Expanding access to capital for Business Development 
        Companies

    This section provides for an increase in BDCs' ability to 
deploy capital to businesses by reducing their asset coverage 
ratio, or required ration of assets to debt, from 200% to 150% 
if certain requirements are met. Further, after a board or 
general partner vote to take advantage of the new asset 
coverage ratio, the non-traded BDC must provide its 
shareholders with the ability to redeem 100% of their shares 
over the course of the year (25% per quarter). Alternatively, 
both traded and non-traded BDCs can immediately reduce their 
asset coverage ratio after a majority shareholder vote.

Section 3. Parity for Business Development Companies regarding offering 
        and proxy rules

    This section requires the SEC to revise its rules to allow 
BDCs to use the streamlined securities offering provisions 
available to other registrants under the Exchange Act, such as 
the ability to be a WKSI, use shelf offerings, and communicate 
directly with shareholders. If the SEC does not act within one 
year to codify its order or update its rules, the provisions 
shall take effect and shall remain effective until the SEC 
acts.

         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 (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

         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 (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

                     INVESTMENT COMPANY ACT OF 1940


TITLE I--INVESTMENT COMPANIES

           *       *       *       *       *       *       *



                  transactions with certain affiliates

  Sec. 57. (a) It shall be unlawful for any person who is 
related to a business development company in a manner described 
in subsection (b) of this section, acting as principal--
          (1) knowingly to sell any security or other property 
        to such business development company or to any company 
        controlled by such business development company, unless 
        such sale involves solely (A) securities of which the 
        buyer is the issuer, or (B) securities of which the 
        seller is the issuer and which are part of a general 
        offering to the holders of a class of its securities;
          (2) knowingly to purchase from such business 
        development company or from any company controlled by 
        such business development company, any security or 
        other property (except securities of which the seller 
        is the issuer);
          (3) knowingly to borrow money or other property from 
        such business development company or from any company 
        controlled by such business development company (unless 
        the borrower is controlled by the lender), except as 
        permitted in section 21(b) or section 62; or
          (4) knowingly to effect any transaction in which such 
        business development company or a company controlled by 
        such business development company is a joint or a joint 
        and several participant with such person in 
        contravention of such rules and regulations as the 
        Commission may prescribe for the purpose of limiting or 
        preventing participation by such business development 
        company or controlled company on a basis less 
        advantageous than that of such person, except that 
        nothing contained in this paragraph shall be deemed to 
        preclude any person from acting as manager of any 
        underwriting syndicate or other group in which such 
        business development company or controlled company is a 
        participant and receiving compensation therefor.
  (b) The provisions of subsection (a) of this section shall 
apply to the following persons:
          (1) Any director, officer, employee, or member of an 
        advisory board of a business development company or any 
        person (other than the business development company 
        itself) who is, within the meaning of section 
        2(a)(3)(C) of this title, an affiliated person of any 
        such person specified in this paragraph.
          (2) Any investment adviser or promoter of, general 
        partner in, principal underwriter for, or person 
        directly or indirectly either controlling, controlled 
        by, or under common control with, a business 
        development company (except the business development 
        company itself and any person who, if it were not 
        directly or indirectly controlled by the business 
        development company, would not be directly or 
        indirectly under the control of a person who controls 
        the business development company), or any person who 
        is, within the meaning of section 2(a)(3) (C) or (D), 
        an affiliated person of any such person specified in 
        this paragraph.
  (c) Notwithstanding paragraphs (1), (2), and (3) of 
subsection (a), any person may file with the Commission an 
application for an order exempting a proposed transaction of 
the applicant from one or more provisions of such paragraphs. 
The Commission shall grant such application and issue such 
order of exemption if evidence establishes that--
          (1) the terms of the proposed transaction, including 
        the consideration to be paid or received, are 
        reasonable and fair and do not involve overreaching of 
        the business development company or its shareholders or 
        partners on the part of any person concerned;
          (2) the proposed transaction is consistent with the 
        policy of the business development company as recited 
        in the filings made by such company with the Commission 
        under the Securities Act of 1933, its registration 
        statement and reports filed under the Securities 
        Exchange Act of 1934, and its reports to shareholders 
        or partners; and
          (3) the proposed transaction is consistent with the 
        general purposes of this title.
  (d) It shall be unlawful for any person who is related to a 
business development company in the manner described in 
subsection (e) of this section and who is not subject to the 
prohibitions of subsection (a) of this section, acting as 
principal--
          (1) knowingly to sell any security or other property 
        to such business development company or to any company 
        controlled by such business development company, unless 
        such sale involves solely (A) securities of which the 
        buyer is the issuer, or (B) securities of which the 
        seller is the issuer and which are part of a general 
        offering to the holders of a class of its securities;
          (2) knowingly to purchase from such business 
        development company or from any company controlled by 
        such business development company, any security or 
        other property (except securities of which the seller 
        is the issuer);
          (3) knowingly to borrow money or other property from 
        such business development company or from any company 
        controlled by such business development company (unless 
        the borrower is controlled by the lender), except as 
        permitted in section 21(b); or
          (4) knowingly to effect any transaction in which such 
        business development company or a company controlled by 
        such business development company is a joint or a joint 
        and several participant with such affiliated person in 
        contravention of such rules and regulations as the 
        Commission may prescribe for the purpose of limiting or 
        preventing participation by such business development 
        company or controlled company on a basis less 
        advantageous than that of such affiliated person, 
        except that nothing contained in this paragraph shall 
        be deemed to preclude any person from acting as manager 
        of any underwriting syndicate or other group in which 
        such business development company or controlled company 
        is a participant and receiving compensation therefor.
  (e) The provisions of subsection (d) of this section shall 
apply to the following persons:
          (1) Any person (A) who is, within the meaning of 
        section 2(a)(3)(A), an affiliated person of a business 
        development company, (B) who is an executive officer or 
        a director of, or general partner in, any such 
        affiliated person, or (C) who directly or indirectly 
        either controls, is controlled by, or is under common 
        control with, such affiliated person.
          (2) Any person who is an affiliated person of a 
        director, officer, employee, investment adviser, member 
        of an advisory board or promoter of, principal 
        underwriter for, general partner in, or an affiliated 
        person of any person directly or indirectly either 
        controlling or under common control with a business 
        development company (except the business development 
        company itself and any person who, if it were not 
        directly or indirectly controlled by the business 
        development company, would not be directly or 
        indirectly under the control of a person who controls 
        the business development company).
For purposes of this subsection, the term ``executive officer'' 
means the president, secretary, treasurer, any vice president 
in charge of a principal business function, and any other 
person who performs similar policymaking functions.
  (f) Notwithstanding subsection (d) of this section, a person 
described in subsection (e) may engage in a proposed 
transaction described in subsection (d) if such proposed 
transaction is approved by the required majority (as defined in 
subsection (o)) of the directors of or general partners in the 
business development company on the basis that--
          (1) the terms thereof, including the consideration to 
        be paid or received, are reasonable and fair to the 
        shareholders or partners of the business development 
        company and do not involve overreaching of such company 
        or its shareholders or partners on the part of any 
        person concerned;
          (2) the proposed transaction is consistent with the 
        interests of the shareholders or partners of the 
        business development company and is consistent with the 
        policy of such company as recited in filings made by 
        such company with the Commission under the Securities 
        Act of 1933, its registration statement and reports 
        filed under the Securities Exchange Act of 1934, and 
        its reports to shareholders or partners; and
          (3) the directors or general partners record in their 
        minutes and preserve in their records, for such periods 
        as if such records were required to be maintained 
        pursuant to section 31(a), a description of such 
        transaction, their findings, the information or 
        materials upon which their findings were based, and the 
        basis therefor.
  (g) Notwithstanding subsection (a) or (d), a person may, in 
the ordinary course of business, sell to or purchase from any 
company merchandise or may enter into a lessor-lessee 
relationship with any person and furnish the services incident 
thereto.
  (h) The directors of or general partners in any business 
development company shall adopt, and periodically review and 
update as appropriate, procedures reasonably designed to ensure 
that reasonable inquiry is made, prior to the consummation of 
any transaction in which such business development company or a 
company controlled by such business development company 
proposes to participate, with respect to the possible 
involvement in the transaction of persons described in 
subsections (b) and (e) of this section.
  (i) Until the adoption by the Commission of rules or 
regulations under subsections (a) and (d) of this section, the 
rules and regulations of the Commission under subsections (a) 
and (d) of section 17 applicable to registered closed-end 
investment companies shall be deemed to apply to transactions 
subject to subsections (a) and (d) of this section. Any rules 
or regulations adopted by the Commission to implement this 
section shall be no more restrictive than the rules or 
regulations adopted by the Commission under subsections (a) and 
(d) of section 17 that are applicable to all registered closed-
end investment companies.
  (j) Notwithstanding subsections (a) and (d) of this section, 
any director, officer, or employee of, or general partner in, a 
business development company may--
          (1) acquire warrants, options, and rights to purchase 
        voting securities of such business development company, 
        and securities issued upon the exercise or conversion 
        thereof, pursuant to an executive compensation plan 
        offered by such company which meets the requirements of 
        [section 61(a)(3)(B)] section 61(a)(4)(B); and
          (2) borrow money from such business development 
        company for the purpose of purchasing securities issued 
        by such company pursuant to an executive compensation 
        plan, if each such loan--
                  (A) has a term of not more than ten years;
                  (B) becomes due within a reasonable time, not 
                to exceed sixty days, after the termination of 
                such person's employment or service;
                  (C) bears interest at no less than the 
                prevailing rate applicable to 90-day United 
                States Treasury bills at the time the loan is 
                made;
                  (D) at all times is fully collateralized 
                (such collateral may include any securities 
                issued by such business development company); 
                and
                  (E)(i) in the case of a loan to any officer 
                or employee of such business development 
                company (including any officer or employee who 
                is also a director of such company), is 
                approved by the required majority (as defined 
                in subsection (o)) of the directors of or 
                general partners in such company on the basis 
                that the loan is in the best interests of such 
                company and its shareholders or partners; or
                  (ii) in the case of a loan to any director of 
                such business development company who is not 
                also an officer or employee of such company, or 
                to any general partner in such company, is 
                approved by order of the Commission, upon 
                application, on the basis that the terms of the 
                loan are fair and reasonable and do not involve 
                overreaching of such company or its 
                shareholders or partners.
  (k) It shall be unlawful for any person described in 
subsection (l)--
          (1) acting as agent, to accept from any source any 
        compensation (other than a regular salary or wages from 
        the business development company) for the purchase or 
        sale of any property to or for such business 
        development company or any controlled company thereof, 
        except in the course of such person's business as an 
        underwriter or broker; or
          (2) acting as broker, in connection with the sale of 
        securities to or by the business development company or 
        any controlled company thereof, to receive from any 
        source a commission, fee, or other remuneration for 
        effecting such transaction which exceeds--
                  (A) the usual and customary broker's 
                commission if the sale is effected on a 
                securities exchange;
                  (B) 2 per centum of the sales price if the 
                sale is effected in connection with a secondary 
                distribution of such securities; or
                  (C) 1 per centum of the purchase or sale 
                price of such securities if the sale is 
                otherwise effected,
unless the Commission, by rules and regulations or order in the 
public interest and consistent with the protection of 
investors, permits a larger commission.
  (l) The provisions of subsection (k) of this section shall 
apply to the following persons:
          (1) Any affiliated person of a business development 
        company.
          (2)(A) Any person who is, within the meaning of 
        section 2(a)(3) (B), (C), or (D), an affiliated person 
        of any director, officer, employee, or member of an 
        advisory board of the business development company.
          (B) Any person who is, within the meaning of section 
        2(a)(3) (A), (B), (C), or (D), an affiliated person of 
        any investment adviser of, general partner in, or 
        person directly or indirectly either controlling, 
        controlled by, or under common control with, the 
        business development company.
          (C) Any person who is, within the meaning of section 
        2(a)(3)(C), an affiliated person of any person who is 
        an affiliated person of the business development 
        company within the meaning of section 2(a)(3)(A).
  (m) For purposes of subsections (a) and (d), a person who is 
a director, officer, or employee of a party to a transaction 
and who receives his usual and ordinary fee or salary for usual 
and customary services as a director, officer, or employee from 
such party shall not be deemed to have a financial interest or 
to participate in the transaction solely by reason of his 
receipt of such fee or salary.
  (n)(1) Notwithstanding subsection (a)(4) of this section, a 
business development company may establish and maintain a 
profit-sharing plan for its directors, officers, employees, and 
general partners and such directors, officers, employees, and 
general partners may participate in such profit-sharing plan, 
if--
          (A)(i) in the case of a profit-sharing plan for 
        officers and employees of the business development 
        company (including any officer or employee who is also 
        a director of such company), such profit-sharing plan 
        is approved by the required majority (as defined in 
        subsection (o)) of the directors of or general partners 
        in such company on the basis that such plan is 
        reasonable and fair to the shareholders or partners of 
        such company, does not involve overreaching of such 
        company or its shareholders or partners on the part of 
        any person concerned, and is consistent with the 
        interests of the shareholders or partners of such 
        company; or
          (ii) in the case of a profit-sharing plan which 
        includes one or more directors of the business 
        development company who are not also officers or 
        employees of such company, or one or more general 
        partners in such company, such profit-sharing plan is 
        approved by order of the Commission, upon application, 
        on the basis that such plan is reasonable and fair to 
        the shareholders or partners of such company, does not 
        involve overreaching of such company or its 
        shareholders or partners on the part of any person 
        concerned, and is consistent with the interests of the 
        shareholders or partners of such company; and
          (B) the aggregate amount of benefits which would be 
        paid or accrued under such plan shall not exceed 20 per 
        centum of the business development company's net income 
        after taxes in any fiscal year.
  (2) This subsection may not be used where the business 
development company has outstanding any stock option, warrant, 
or right issued as part of an executive compensation plan, 
including a plan pursuant to [section 61(a)(3)(B)] section 
61(a)(4)(B), or has an investment adviser registered or 
required to be registered under title II of this Act.
  (o) The term ``required majority'', when used with respect to 
the approval of a proposed transaction, plan, or arrangement, 
means both a majority of a business development company's 
directors or general partners who have no financial interest in 
such transaction, plan, or arrangement and a majority of such 
directors or general partners who are not interested persons of 
such company.

           *       *       *       *       *       *       *


                           capital structure

  Sec. 61. (a) Notwithstanding the exemption set forth in 
section 6(f), section 18 shall apply to a business development 
company to the same extent as if it were a registered closed-
end investment company, except as follows:
          [(1) The asset coverage requirements of section 
        18(a)(1) (A) and (B) applicable to business development 
        companies shall be 200 per centum.]
          (1) Except as provided in paragraph (2), the asset 
        coverage requirements of subparagraphs (A) and (B) of 
        section 18(a)(1) (and any related rule promulgated 
        under this Act) applicable to business development 
        companies shall be 200 percent.
          (2) The asset coverage requirements of subparagraphs 
        (A) and (B) of section 18(a)(1) and of subparagraphs 
        (A) and (B) of section 18(a)(2) (and any related rule 
        promulgated under this Act) applicable to a business 
        development company shall be 150 percent if--
                  (A) within five business days of the approval 
                of the adoption of the asset coverage 
                requirements described in clause (ii), the 
                business development company discloses such 
                approval and the date of its effectiveness in a 
                Form 8-K filed with the Commission and in a 
                notice on its website and discloses in its 
                periodic filings made under section 13(a) of 
                the Securities Exchange Act of 1934 (15 U.S.C. 
                78m(a))--
                          (i) the aggregate value of the senior 
                        securities issued by such company and 
                        the asset coverage percentage as of the 
                        date of such company's most recent 
                        financial statements; and
                          (ii) that such company has adopted 
                        the asset coverage requirements of this 
                        paragraph and the effective date of 
                        such requirements;
                  (B) with respect to a business development 
                company that issues equity securities that are 
                registered on a national securities exchange, 
                the periodic filings of the company under 
                section 13(a) of the Securities Exchange Act of 
                1934 (15 U.S.C. 78m(a)) include disclosures 
                reasonably designed to ensure that shareholders 
                are informed of--
                          (i) the amount of indebtedness and 
                        asset coverage ratio of the company, 
                        determined as of the date of the 
                        financial statements of the company 
                        dated on or most recently before the 
                        date of such filing; and
                          (ii) the principal risk factors 
                        associated with such indebtedness, to 
                        the extent such risk is incurred by the 
                        company; and
                  (C)(i) the application of this paragraph to 
                the company is approved by the required 
                majority (as defined in section 57(o)) of the 
                directors of or general partners of such 
                company who are not interested persons of the 
                business development company, which application 
                shall become effective on the date that is 1 
                year after the date of the approval, and, with 
                respect to a business development company that 
                issues equity securities that are not 
                registered on a national securities exchange, 
                the company extends, to each person who is a 
                shareholder as of the date of the approval, an 
                offer to repurchase the equity securities held 
                by such person as of such approval date, with 
                25 percent of such securities to be repurchased 
                in each of the four quarters following such 
                approval date; or
                  (ii) the company obtains, at a special or 
                annual meeting of shareholders or partners at 
                which a quorum is present, the approval of more 
                than 50 percent of the votes cast of the 
                application of this paragraph to the company, 
                which application shall become effective on the 
                date immediately after the date of the 
                approval.
          [(2)] (3) Notwithstanding section 18(c), a business 
        development company may issue more than one class of 
        senior security representing indebtedness.
          [(3)] (4) Notwithstanding section 18(d)--
                  (A) a business development company may issue 
                warrants, options, or rights to subscribe or 
                convert to voting securities of such company, 
                accompanied by securities, if--
                          (i) such warrants, options, or rights 
                        expire by their terms within ten years;
                          (ii) such warrants, options, or 
                        rights are not separately transferable 
                        unless no class of such warrants, 
                        options, or rights and the securities 
                        accompanying them has been publicly 
                        distributed;
                          (iii) the exercise or conversion 
                        price is not less than the current 
                        market value at the date of issuance, 
                        or if no such market value exists, the 
                        current net asset value of such voting 
                        securities; and
                          (iv) the proposal to issue such 
                        securities is authorized by the 
                        shareholders or partners of such 
                        business development company, and such 
                        issuance is approved by the required 
                        majority (as defined in section 57(o)) 
                        of the directors of or general partners 
                        in such company on the basis that such 
                        issuance is in the best interests of 
                        such company and its shareholders or 
                        partners;
                  (B) a business development company may issue, 
                to its directors, officers, employees, and 
                general partners, warrants, options, and rights 
                to purchase voting securities of such company 
                pursuant to an executive compensation plan, 
                if--
                          (i)(I) in the case of warrants, 
                        options, or rights issued to any 
                        officer or employee of such business 
                        development company (including any 
                        officer or employee who is also a 
                        director of such company), such 
                        securities satisfy the conditions in 
                        clauses (i), (iii), and (iv) of 
                        subparagraph (A); or (II) in the case 
                        of warrants, options, or rights issued 
                        to any director of such business 
                        development company who is not also an 
                        officer or employee of such company, or 
                        to any general partner in such company, 
                        the proposal to issue such securities 
                        satisfies the conditions in clauses (i) 
                        and (iii) of subparagraph (A), is 
                        authorized by the shareholders or 
                        partners of such company, and is 
                        approved by order of the Commission, 
                        upon application, on the basis that the 
                        terms of the proposal are fair and 
                        reasonable and do not involve 
                        overreaching of such company or its 
                        shareholders or partners;
                          (ii) such securities are not 
                        transferable except for disposition by 
                        gift, will, or intestacy;
                          (iii) no investment adviser of such 
                        business development company receives 
                        any compensation described in section 
                        205(a)(1) of title II of this Act, 
                        except to the extent permitted by 
                        paragraph (1) or (2) of section 205(b); 
                        and
                          (iv) such business development 
                        company does not have a profit-sharing 
                        plan described in section 57(n); and
                  (C) a business development company may issue 
                warrants, options, or rights to subscribe to, 
                convert to, or purchase voting securities not 
                accompanied by securities, if--
                          (i) such warrants, options, or rights 
                        satisfy the conditions in clauses (i) 
                        and (iii) of subparagraph (A); and
                          (ii) the proposal to issue such 
                        warrants, options, or rights is 
                        authorized by the shareholders or 
                        partners of such business development 
                        company, and such issuance is approved 
                        by the required majority (as defined in 
                        section 57(o)) of the directors of or 
                        general partners in such company on the 
                        basis that such issuance is in the best 
                        interests of the company and its 
                        shareholders or partners.
        Notwithstanding this paragraph, the amount of voting 
        securities that would result from the exercise of all 
        outstanding warrants, options, and rights at the time 
        of issuance shall not exceed 25 per centum of the 
        outstanding voting securities of the business 
        development company, except that if the amount of 
        voting securities that would result from the exercise 
        of all outstanding warrants, options, and rights issued 
        to such company's directors, officers, employees, and 
        general partners pursuant to any executive compensation 
        plan meeting the requirements of subparagraph (B) of 
        this paragraph would exceed 15 per centum of the 
        outstanding voting securities of such company, then the 
        total amount of voting securities that would result 
        from the exercise of all outstanding warrants, options, 
        and rights at the time of issuance shall not exceed 20 
        per centum of the outstanding voting securities of such 
        company.
          [(4)] (5) For purposes of measuring the asset 
        coverage requirements of section 18(a), a senior 
        security created by the guarantee by a business 
        development company of indebtedness issued by another 
        company shall be the amount of the maximum potential 
        liability less the fair market value of the net 
        unencumbered assets (plus the indebtedness which has 
        been guaranteed) available in the borrowing company 
        whose debts have been guaranteed, except that a 
        guarantee issued by a business development company of 
        indebtedness issued by a company which is a wholly-
        owned subsidiary of the business development company 
        and is licensed as a small business investment company 
        under the Small Business Investment Act of 1958 shall 
        not be deemed to be a senior security of such business 
        development company for purposes of section 18(a) if 
        the amount of the indebtedness at the time of its 
        issuance by the borrowing company is itself taken fully 
        into account as a liability by such business 
        development company, as if it were issued by such 
        business development company, in determining whether 
        such business development company, at that time, 
        satisfies the asset coverage requirements of section 
        18(a).
  (b) A business development company shall comply with the 
provisions of this section at the time it becomes subject to 
sections 55 through 65, as if it were issuing a security of 
each class which it has outstanding at such time.

           *       *       *       *       *       *       *


               distribution and repurchase of securities

  Sec. 63. Notwithstanding the exemption set forth in section 
6(f), section 23 shall apply to a business development company 
to the same extent as if it were a registered closed-end 
investment company, except as follows:
          (1) The prohibitions of section 23(a)(2) shall not 
        apply to any company which (A) is a wholly-owned 
        subsidiary of, or directly or indirectly controlled by, 
        a business development company, and (B) immediately 
        after the issuance of any of its securities for 
        property other than cash or securities, will not be an 
        investment company within the meaning of section 3(a).
          (2) Notwithstanding the provisions of section 23(b), 
        a business development company may sell any common 
        stock of which it is the issuer at a price below the 
        current net asset value of such stock, and may sell 
        warrants, options, or rights to acquire any such common 
        stock at a price below the current net asset value of 
        such stock, if--
                  (A) the holders of a majority of such 
                business development company's outstanding 
                voting securities, and the holders of a 
                majority of such company's outstanding voting 
                securities that are not affiliated persons of 
                such company, approved such company's policy 
                and practice of making such sales of securities 
                at the last annual meeting of shareholders or 
                partners within one year immediately prior to 
                any such sale, except that the shareholder 
                approval requirements of this subparagraph 
                shall not apply to the initial public offering 
                by a business development company of its 
                securities;
                  (B) a required majority (as defined in 
                section 57(o)) of the directors of or general 
                partners in such business development company 
                have determined that any such sale would be in 
                the best interests of such company and its 
                shareholders or partners; and
                  (C) a required majority (as defined in 
                section 57(o)) of the directors of or general 
                partners in such business development company, 
                in consultation with the underwriter or 
                underwriters of the offering if it is to be 
                underwritten, have determined in good faith, 
                and as of a time immediately prior to the first 
                solicitation by or on behalf of such company of 
                firm commitments to purchase such securities or 
                immediately prior to the issuance of such 
                securities, that the price at which such 
                securities are to be sold is not less than a 
                price which closely approximates the market 
                value of those securities, less any 
                distributing commission or discount.
          (3) A business development company may sell any 
        common stock of which it is the issuer at a price below 
        the current net asset value of such stock upon the 
        exercise of any warrant, option, or right issued in 
        accordance with [section 61(a)(3)] section 61(a)(4).

           *       *       *       *       *       *       *

                              ----------                              


                    INVESTMENT ADVISERS ACT OF 1940


TITLE II--INVESTMENT ADVISERS

           *       *       *       *       *       *       *



                     investment advisory contracts

  Sec. 205. (a) No investment adviser registered or required to 
be registered with the Commission shall enter into, extend, or 
renew any investment advisory contract, or in any way perform 
any investment advisory contract entered into, extended, or 
renewed on or after the effective date of this title, if such 
contract--
          (1) provides for compensation to the investment 
        adviser on the basis of a share of capital gains upon 
        or capital appreciation of the funds or any portion of 
        the funds of the client;
          (2) fails to provide, in substance, that no 
        assignment of such contract shall be made by the 
        investment adviser without the consent of the other 
        party by the contract; or
          (3) fails to provide, in substance, that the 
        investment adviser, if a partnership, will notify the 
        other party to the contract of any change in the 
        membership of such partnership within a reasonable time 
        after such change.
  (b) Paragraph (1) of subsection (a) shall not--
          (1) be construed to prohibit an investment advisory 
        contract which provides for compensation based upon the 
        total value of a fund averaged over a definite period, 
        or as of definite dates, or taken as of a definite 
        date;
          (2) apply to an investment advisory contract with--
                  (A) an investment company registered under 
                title I of this Act, or
                  (B) any other person (except a trust, 
                governmental plan, collective trust fund, or 
                separate account referred to in section 
                3(c)(11) of title I of this Act), provided that 
                the contract relates to the investment of 
                assets in excess of $1 million,
        if the contract provides for compensation based on the 
        asset value of the company or fund under management 
        averaged over a specified period and increasing and 
        decreasing proportionately with the investment 
        performance of the company or fund over a specified 
        period in relation to the investment record of an 
        appropriate index of securities prices or such other 
        measure of investment performance as the Commission by 
        rule, regulation, or order may specify;
          (3) apply with respect to any investment advisory 
        contract between an investment adviser and a business 
        development company, as defined in this title, if (A) 
        the compensation provided for in such contract does not 
        exceed 20 per centum of the realized capital gains upon 
        the funds of the business development company over a 
        specified period or as of definite dates, computed net 
        of all realized capital losses and unrealized capital 
        depreciation, and the condition of [section 
        61(a)(3)(B)(iii)] section 61(a)(4)(B)(iii) of title I 
        of this Act is satisfied, and (B) the business 
        development company does not have outstanding any 
        option, warrant, or right issued pursuant to [section 
        61(a)(3)(B)] section 61(a)(4)(B) of title I of this Act 
        and does not have a profit-sharing plan described in 
        section 57(n) of title I of this Act;
          (4) apply to an investment advisory contract with a 
        company excepted from the definition of an investment 
        company under section 3(c)(7) of title I of this Act; 
        or
          (5) apply to an investment advisory contract with a 
        person who is not a resident of the United States.
  (c) For purposes of paragraph (2) of subsection (b), the 
point from which increases and decreases in compensation are 
measured shall be the fee which is paid or earned when the 
investment performance of such company or fund is equivalent to 
that of the index or other measure of performance, and an index 
of securities prices shall be deemed appropriate unless the 
Commission by order shall determine otherwise.
  (d) As used in paragraphs (2) and (3) of subsection (a), 
``investment advisory contract'' means any contract or 
agreement whereby a person agrees to act as investment adviser 
to or to manage any investment or trading account of another 
person other than an investment company registered under title 
I of this Act.
  (e) The Commission, by rule or regulation, upon its own 
motion, or by order upon application, may conditionally or 
unconditionally exempt any person or transaction, or any class 
or classes of persons or transactions, from subsection (a)(1), 
if and to the extent that the exemption relates to an 
investment advisory contract with any person that the 
Commission determines does not need the protections of 
subsection (a)(1), on the basis of such factors as financial 
sophistication, net worth, knowledge of and experience in 
financial matters, amount of assets under management, 
relationship with a registered investment adviser, and such 
other factors as the Commission determines are consistent with 
this section. With respect to any factor used in any rule or 
regulation by the Commission in making a determination under 
this subsection, if the Commission uses a dollar amount test in 
connection with such factor, such as a net asset threshold, the 
Commission shall, by order, not later than 1 year after the 
date of enactment of the Private Fund Investment Advisers 
Registration Act of 2010, and every 5 years thereafter, adjust 
for the effects of inflation on such test. Any such adjustment 
that is not a multiple of $100,000 shall be rounded to the 
nearest multiple of $100,000.
  (f) Authority to Restrict Mandatory Pre-dispute 
Arbitration.--The Commission, by rule, may prohibit, or impose 
conditions or limitations on the use of, agreements that 
require customers or clients of any investment adviser to 
arbitrate any future dispute between them arising under the 
Federal securities laws, the rules and regulations thereunder, 
or the rules of a self-regulatory organization if it finds that 
such prohibition, imposition of conditions, or limitations are 
in the public interest and for the protection of investors.

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