Congress wrapped up its busy pre-recess schedule focused on a supplemental appropriations bill to help fund costs associated with the inflow of people across the southwest border. This update includes:
- ACG's June Public Policy Newsletter, which includes several policy-related articles;
- The Private Equity Growth Capital Council's private equity performance update for Q4 2013;
- Senate Banking Committee's hearing on the recent GAO study on whether large banks enjoy a "Too Big To Fail" advantage; and
- The recent Senate Permanent Subcommittee on Investigations hearing on the use of structured financial products to evade U.S. short-term capital gains tax.
This will be my last update until September. Have a great summer, and as always, please let me know if you have any suggestions or comments.
Note: The head of the SEC's Office of Compliance Inspections and
Examinations recently gave a speech (described below) warning private
equity managers about several areas where PE funds are failing to meet
their obligations under the Investment Advisers Act. A key problem area
is the issue of fees and expenses charged by the general partner.
Venable attorneys, including myself, can help fund advisers comply with
the IAA and avoid the issues described in the speech. If you would like to
discuss having Venable perform a risk assessment for your firm, or if you
have any other questions, please contact me directly.
Venable LLP tracks a wide range of regulatory issues, so please
contact me for more information regarding anything
contained in this update.
The 113th Congress
House of Representatives
House Financial Services Committee
Diverse Legislation Passes Committee – The HFSC approved six diverse bills before the recess:
• H.R. 3240, "Regulation D Study Act," requires the Comptroller General to study the impact on
depository institutions, consumers, and monetary policy of the reserve requirement under
subsections (b) and (c) of Section 19 of the Federal Reserve Act (12 U.S.C. 461) and
Regulation D. Passed by voice vote.• H.R. 4042, "Community Bank Mortgage Service Asset Capital Requirements Study Act,"
would require a study of appropriate capital requirements for mortgage servicing assets for
non-systemic banking institutions. Passed by a vote of 44-9.
• H.R. 5148, "Access to Affordable Mortgages Act," would amend the Truth in Lending Act to
exempt certain higher-risk mortgages from property appraisal requirements and to exempt
individuals from penalties for failure to report certain appraisers. Passed by a vote of 31-23.
• H.R. 3913 would amend the Bank Holding Company Act to require agencies to make
considerations relating to the promotion of efficiency, competition, and capital formation
before issuing or modifying certain regulations. Passed by a vote of 32-22.
• H.R. 4329, "Native American Housing Assistance and Self-Determination Reauthorization
Act," would amend the process for HUD block grants for Indian Housing Plans. Passed by a
vote of 47-11.
• H.R. 5018, "Federal Reserve Accountability and Transparency Act," would amend the Federal
Reserve Act to establish requirements for policy rules and blackout periods of the Federal
Open Market Committee, and to establish requirements for certain activities of the Board of
Governors of the Federal Reserve System. Passed by a vote of 32-26.
Hearing on Four-Year Anniversary of Dodd-Frank – The full committee held a hearing titled
"Assessing the Impact of the Dodd-Frank Act Four Years Later." Witnesses were:
• Mr. Dale K. Wilson, Chairman, President, and Chief Executive Officer, First State Bank
• Mr. Anthony J. Carfang, Partner, Treasury Strategies, Inc.
• The Honorable Barney Frank, former Chairman, House Committee on Financial Services
• Mr. Thomas C. Deas, Vice President & Treasurer, FMC Corporation, on behalf of the
Coalition for Derivatives End-Users
• Mr. Paul H. Kupiec, Resident Scholar, American Enterprise Institute
The Committee Memorandum is here.
Oversight of SEC's Division of Corporate Finance – The Capital Markets subcommittee held a hearing
titled "Oversight of the SEC's Division of Corporation Finance," which covered JOBS Act
implementation. The sole witness was Keith Higgins, Director of the SEC's Division of Corporate
Finance. The Committee Memorandum is here.
House Appropriations Committee
SEC FY 2015 Budget – The House approved the FY 2015 Financial Services appropriations bill, H.R.
5016, which funds the SEC at $1.4 billion ($50 million above the FY 2014 enacted level but $300
million below the President's requested level). A Senate/House Conference was not appointed, and
the bill is likely to be part of an omnibus appropriations bill in September.
House Small Business Committee
Hearing on SBIR/SBTT Programs – Prior to the recess, HSBC held a hearing on the Small Business
Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) programs, which
provide grants to private small businesses to fund research. The hearing focused on private sector
actions of the SBA, NIH, and DOD regarding the program. Witnesses were:
• Javier Saade, Associate Administrator, SBA
• Marie Mak, Acting Director, Acquisition and Sourcing Management Team, GAO
• Andre Gudger, Director, Office of Small Business Programs, DOD• Matthew Portnoy, Director, NIH SBIR/STTR
Here is a link to the video of the hearing and the Hearing Memo, which contains a good overview of
the two programs.
Senate Banking Committee
Hearing on GAO Study on "Too Big To Fail" Large Bank Advantages – The SBC held a hearing last
week titled "Examining the GAO Report on Expectations of Government Support for Bank Holding
Companies." Witnesses were:
• Lawrance L. Evans, Director, U.S. GAO
• Deniz Anginer, Assistant Professor of Finance, Virginia Tech
• Edward Kane, Professor of Finance, Boston College
• Anat Admati, Professor of Finance and Economics, Stanford University
• Douglas Holtz-Eakin, President, American Action Forum
A link to a video of the hearing is here.
The hearing focused on a long-awaited report from the GAO studying whether large banks enjoy an
advantage over small banks because of the perception that they are "too big to fail." The GAO report
found that the largest banks did receive an advantage from the federal government during the recent
financial crisis, but that this advantage had recently declined or reversed itself. However, the report
found that the advantage could return if financial conditions deteriorate. A copy of the full GAO
report is here and a summary of the report is here.
The SBC also held hearings last week on Financial Products for Students and on the flood insurance
claims process in communities after Hurricane Sandy.
Permanent Subcommittee on Investigations
Hearing on Structured Financial Products – In late July, the Senate Permanent Subcommittee on
Investigations held a three-panel hearing titled "Abuse of Structured Financial Products: Misusing
Basket Options to Avoid Taxes and Leverage Limits." The hearing focused on the use of barrier
options, a complex option derivative to attempt to avoid paying U.S. taxes on short-term capital
gains. Witnesses were:
• Steven Rosenthal, Senior Fellow, Urban-Brookings Tax Policy Center
• James White, Director, Tax Issues, GAO
• Martin Malloy, Managing Director, Barclays
• Satish Ramakrishna, Managing Director, Deutsche Bank Securities Inc.
• Mark Silber, EVP, CCO, CLO, Renaissance Technologies LLC
• Jonathan Mayers, Counsel, Renaissance Technologies LLC
• Gerard LaRocca, CEO, Barclays Capital Inc.
• Barry Bausano, President, Deutsche Bank Securities Inc.• Peter Brown, Co-Chief Executive Officer and Co-President, Renaissance Technologies LLC
Here is a link to the Committee's Report titled "Abuse of Structured Financial Products: Misusing
Basket Options to Avoid Taxes and Leverage Limits" and to the Exhibits (Part 1, Part 2, Part 3 and Part
Senate Finance Committee
Hearing on U.S. Tax Code – In late July, the SFC held a hearing titled "The U.S. Tax Code: Love It,
Leave It or Reform It," which focused on the current U.S. system of international taxation. Witnesses
• Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs, Department of the
• Pascal Saint-Amans, Director, Centre for Tax Policy and Administration, OECD
• Mihir A. Desai, Professor of Finance & Law, Harvard University
• Peter R. Merrill, Director, PricewaterhouseCoopers
• Leslie Robinson, Associate Professor of Business Administration, Dartmouth College
• Allan Sloan, Senior Editor at Large, Fortune
Senate Appropriations Committee
Subcommittee Markup – The Financial Services and General Government subcommittee recently
held a markup of the FY 2015 appropriations bill, which funds the SEC at the Presidents' requested
level of $1.7 billion – $300 million more than the House's bill. A copy of the final bill is here.
Focus on Re-Authorizing Export-Import Bank and Preventing Inversions
Over the last week, the White House focused on preventing inversions – where U.S. based companies
shift their residence to other countries in order to reduce their tax burden – and also on re-authorizing the
Export-Import Bank, which has come under fire from conservatives. The Office of Management and
Budget issued a Statement of Administration Policy supporting S. 2569, which would impose significant
penalties on companies seeking to undergo an inversion for tax purposes. In the Treasury Notes blog,
Assistant Secretary of the Treasury for Tax Policy Mark Mazur notes that Congress has, in the past,
imposed retroactive effective dates for provisions that shut down egregious tax loopholes.
Securities and Exchange Commission
SEC Adopts Money Market Fund Reforms
In late July, the SEC issued a final rule imposing new regulations on adopted amendments to the rules
that govern money market mutual funds. The new rules require a floating net asset value (NAV) for
institutional prime money market funds, which allows the daily share prices of these funds to fluctuate
along with changes in the market-based value of fund assets and provide non-government money market
fund boards new tools – liquidity fees and redemption gates – to address runs. The final rules provide a
two-year transition period to enable both funds and investors time to fully adjust their systems,
operations, and investing practices.
Major Speech on Private Equity Compliance Shortcomings
Andrew J. Bowden, Director of the Securities and Exchange Commission's Office of Compliance
Inspections and Examinations (OCIE) delivered a major speech entitled "Spreading Sunshine in Private
Equity." In the speech, Director Bowden described multiple areas in which OCIE examiners have observed deficiencies in private equity advisers fulfilling their obligations under the Investment Advisers Act.
Problem areas mentioned in the speech include:
• Vague limited partnership agreements;
• Fees and expenses relating to a variety of areas, such as:
o Co-Investments – Allocation of transaction-related fees and expenses (including
o Operating Partners – Charging "operating partner" salaries and overhead to the fund
or portfolio company, while simultaneously presenting operating partners as
members of the adviser's team;
o Fee-shifting Expenses from GP to LP; and
o "Hidden" Fees – Receiving "hidden" fees, such as monitoring fees, under agreements
that are not adequately disclosed to investors.
The speech puts private equity advisers on notice that the SEC will be paying very close attention to these
issues in current and future examinations. Fund advisers should review their compliance procedures and
fund documents to ensure they are complying with their obligations under the Advisers Act. Venable can
conduct a risk assessment for fund managers and help managers comply with the IAA obligations, so
please let me know if you have any questions. A link to Venable's full summary of the speech is here.
Association for Corporate Growth (ACG)
ACG Public Policy Newsletter – June 2014
ACG released its June Public Policy Newsletter, which updates the organization's policy-related activities
and contains articles on ACG's SEC Working Group, the recent NLRB decision impacting franchisors, and
ACG's meeting with members of the New Democrats Coalition.
Small Business Investor Alliance (SBIA)
SBIA Applauds Introduction of Bipartisan "SBIC Advisers Relief Act" in the Senate
The SBIA applauded the July 31, 2014 introduction by Sen. Mark Kirk (R-IL) and Joe Manchin (D-WV) of
S.2765, the "SBIC Advisers Relief Act." S.2765 would reduce regulatory burdens on smaller private equity
funds, SBICs, and venture capital funds by (i) including SBICs in the definition of a venture capital fund for
purposes of IAA registration, (ii) excluding SBIC AUM for advisers to both SBICs and non-SBICs for the
$150 million AUM registration threshold, and (iii) preempting certain state security regulations. The bill is
the Senate companion bill to H.R. 4200, which unanimously passed by a 56-0 vote in the House Financial
Services Committee on May 22.
SBIC Regulations Class – August 7, 2014
The SBIA and the SBA will be holding an SBIC Regulations Class on August 7, 2014. The class is
mandatory for any fund seeking an SBIC license. Classes are currently sold out, but interested persons
can contact the SBIA at email@example.com to get added to the waiting list.
Private Equity Growth Capital Council (PEGCC)
PEGCC Releases Q4 2013 Performance Update
The PEGCC released its Performance Update for Q4 of 2013. The Performance Update shows that, as of
December 31, 2013, returns from private equity (net of fees) beat the S&P 500 (including dividends) for the
10-year horizon by 6.5 percentage points, but the S&P 500 outperformed the private equity benchmark over the 5-year, 3-year and 1-year periods. According to the Update, private equity funds returned an
annualized 13.9, 15.9, 15, and 20.9 percent during 10-year, 5-year, 3-year and 1-year periods, respectively.