Private Eye: Two legislators favor regulatory relief for PE; offer less hope on taxes

Two legislators who sit on influential financial committees held out hope that regulatory relief for buyout firms is on the way. But they seemed less sympathetic on taxes.

Speaking on Valentine’s Day at the fourth annual ACG Middle Market Public Policy Summit in Washington, Sen. Thom Tillis (R-North Carolina), a member of the committee on banking, housing and urban affairs, called the Dodd-Frank financial reform law “one of the most egregious overreactions in regulation that I’ve seen in my 30-year career.” He added: “The question is, how can you slowly but surely peel [the regulations] back?”

Speaking right before Tillis, Rep. Bill Huizenga (R-Michigan), chairman of the financial services subcommittee on capital markets, seemed to agree that the circa-2010 legislation, signed into law by President Barack Obama in the wake of the financial crisis, needed an overhaul. “We want to make sure we have healthy markets, growth, availability [of capital] and make sure that regulations and rules are not in the way of making growth happening,” he said.

Under Dodd-Frank, buyout firms with more than $150 million of assets under management had to register as investment advisers with the SEC. Meantime, bank-holding companies, subject to the law’s Volcker Rule, must significantly curtail their activity in the PE markets, while bank regulators have clamped down on leveraged-buyout financing.

I asked Tillis and Huizenga to address the prospects for a rollback of the registration requirement. Tillis said “it’s certainly something that’s already being discussed,” adding that regulation needed to monitor financial institutions is “far less than than we have today.” But he also cautioned about the likelihood of opposition from Democrats.

“We have certain people on the banking committee who think a single change to Dodd-Frank that doesn’t ensure its expansion of jurisdiction is a bad thing,” Tillis said. “They will do everything they can to keep the status quo.” As a practical matter, Tillis suggested that the quickest regulatory relief would come in the form of executive orders from the president. He also said Congress could pressure the SEC through its oversight role.

Huizenga said he was familiar with the partial rollback of the registration requirement proposed late last year by Rep. Robert Hurt (R-Virginia) as well as the full rollback proposed in the Dodd-Frank overhaul bill called the Financial Choice Act, which has passed the House Financial Services Committee. The proposed legislation would also repeal the Volcker Rule.

PE firms shouldn’t be the “intended target” of Dodd-Frank, Huizenga said, in part because their investors are sophisticated. “We have had some amazing debates both in committee and on the House floor where people on the other side of the aisle are arguing that literally janitors are going to be losing their life savings if they’re allowed to invest in these vehicles,” Huizenga said. “It’s an important element for the health of markets to recognize and distinguish between the different types” of investors.

Action on the Financial Choice Act, a collection of legislation that has either passed out of committee or passed the full House, ranks as the “first and foremost” priority of the financial services committee, Huizenga said. He anticipates committee action on it before the end of March.

Meantime, both legislators said they were sympathetic to overturning provisions of Dodd-Frank that have limited banks’ participation in private equity, both as fund sponsors and lenders.

“Why can’t we get back to a place to where they move back into the ecosystem that [Dodd-Frank has] excluded them from?” asked Tillis. “And I think we can.” Huizenga offered that by forcing banks to the sidelines, Dodd-Frank had ironically “increased risk, not decreased it, because you’ve concentrated [risk] rather than spreading it out.” He encouraged ACG members in the audience to contact their legislators about “why we need to look at Dodd-Frank and some of the handcuffs that have been put on capital in the United States.”

But singing-to-the-choir moments waned when Tillis and Huizenga talked about tax issues important to buyout firms, such as maintaining capital-gains treatment of carried interest and maintaining the deductibility of interest expenses. The House has proposed to eliminate the deductibility of interest expense, while allowing businesses to immediately expense the cost of equipment.

Tillis said he eventually wants to lower corporate taxes, provided it is done in a way that ensures the government is bringing in enough revenue. He suggested that there’s a “legitimate argument out there” for the current tax treatment of carried interest. “But we have to have the discussion,” he said. “If we cut off all the ideas at the beginning then you’re going to have a sub-optimal result.”

Gretchen Perkins, a partner at Huron Capital and a board member of ACG, asked Huizenga why buyout firms should get behind the House proposal to eliminate the deductibility of interest. She acknowledged that at some point the industry would perhaps be “indifferent” if corporate tax rates fall far enough. But she still said it would raise borrowing costs and is “basically a tax increase.”

Huizenga responded that he had “not committed into this proposal fully myself,” but then went through the argument for eliminating the deductibility of interest, as a way to both lower the overall rate of corporate taxes and simplify the tax code. He said Rep. Paul Ryan (R-Wisconsin), speaker of the House, and Rep. Kevin Brady (R-Texas), chairman of the House Ways and Means Committee, were still looking for analysis and encouraged ACG members to “let them know what your concerns are.”

“It’s not set in stone yet,” Huizenga said.

Image of Sherlock Holmes courtesy of Getty Images/Ostill