Investment Advisers Legislative Update — The House Financial Services Committee passed the Investment Advisers Modernization Act, which makes modest changes to the Investment Advisers Act, providing regulatory relief for private equity funds. For example, the bill updates Form PF so that private equity firms do not have to provide information on their portfolio companies; adjusts the custodial rule by statute; and exempts investment advisers from the proxy voting rule where the investment adviser exercises voting authority with respect to non-voting securities. Previous versions of the bill would have updated the personal securities transaction reporting requirement, but this provision was removed in the amendment process during the committee markup.
Business-Development Company Legislation — For the first time in more than a decade, the Senate Banking Committee held a hearing on business development companies. Michael Arougheti, co-chairman of Ares Capital Corp, testified on behalf of the BDC industry in support of the BDC modernization legislation. The hearing was a good opportunity for senators to become more educated on BDC policies. The legislation is still being reviewed in the House and since last November has not been presented to the full House for a vote.
Tax Reform — The House Republicans formally released their blueprint for Tax Reform, “Built for Growth.” The document lowers rates on individuals and corporations, reduces capital gains and dividends taxes, and removes most of the deductions and tax credits in the current tax code. Notably for private equity, the agenda would restrict the deductibility of interest for corporate debt, something that the authors of the legislation stated would “equalize the tax treatment for different types of financing and reduces tax distortions in investment financing decisions.”
CHOICE ACT – House Financial Services Committee Chairman Jeb Hensarling introduced a bill that makes wholesale changes to Dodd-Frank and other financial-services laws. As it relates to private equity, the CHOICE Act would repeal the Volcker Rule, change the enforcement authority of the Securities and Exchange Commission, modernize the regulatory regime for business development companies, and establish an independent SEC small business capital formation advocate to ensure small businesses an independent voice at the SEC.
California Legislation on Public Disclosure of Fees/Expenses for Funds with Public Pensions — On February 19, 2016, legislation (AB 2833) was introduced in the California legislature that would affect all private equity and SBIC funds, with limited partners that are “public retirement and pension funds” in the state. This legislation sets out new requirements that “public investment funds” (including all public pension and retirement systems, including the University of California, in the state of California) receive information and disclose it to the public regarding the fees and expenses paid by public investment funds.
SEC Proposed Rule Impacting BDC Unfunded Commitments and Use of Derivatives — On December 11, 2015, the SEC released a new rule proposal on the use of derivatives and financial commitment transactions by registered investment companies and BDCs. The rule would require BDCs to set aside “qualified coverage assets” (cash or cash equivalents) to cover their “unfunded commitments,” which could include revolving credit facilities and delayed draw loans to portfolio companies. BDCs would also be subject to new risk and exposure limits on their use of derivative contracts. The SEC is reviewing industry comments and it is unclear when final rules will be issued.
SEC Targets Private Equity Fund for Acting as an Unregistered Broker-Dealer — On June 1, 2016, the Division of Enforcement at the SEC settled an enforcement action against a private equity fund, Blackstreet Capital Management for improperly operating as a broker-dealer. The SEC found that BCM had provided brokerage services for a fee to handle the acquisition and disposition of portfolio companies for a pair of private equity funds they advise. As a result of receiving this transaction-based compensation, BCM was charged with acting as an unregistered broker-dealer, with the case settled for $3 million. The new enforcement action has generated increased concern about private equity funds receiving transaction fees for conducting M&A activities with their portfolio companies.
SEC Proposed Rule Requiring SEC-Registered Advisers to Create Business Continuity and Transition Plans — On June 28, 2016, the SEC proposed a new rule requiring registered investment advisers to adopt and implement written business continuity and transition plans. The proposed rule is to ensure that RIAs have plans in place to address operational and other risks related to a significant disruption in the RIAs’ operations. Comments on the rule will be due 60 days after publication in the federal register.
Author Bio: Chris Walters is senior director-governmental and regulatory affairs for the Small Business Investor Alliance. Walters can be reached at +1 202-628-5055.
A tourist gazes up towards the dome of the U.S. Capitol in Washington on January 25, 2010. Photo courtesy Reuters/Kevin Lamarque