Should Small Business Investment Companies Have Their Regulations Streamlined? (H.R. 5405)

What is H.R. 5405?

(Updated July 13, 2017)

This bill would make changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act to enhance the ability of small businesses to get money through financial markets.

It modifies rules to allow non-financial businesses to enter into derivative swaps without being subjected to the regulatory requirements that apply to financial firms. These derivative swaps are done to mitigate the risks faced by the businesses in the course of their operations.

The Volcker Rule — which restricted relationships between banks and hedge funds or private equity firms — would be prohibited from being construed as requiring companies to divest their of collateralized loan obligations (CLOs).

Small Business Investment Companies (SBICs) would be exempted from registering with the U.S. Securities and Exchange Commission that otherwise would apply by providing investment advice relating to venture capital funds. This would also apply to SEC reporting requirements regarding assets under management of private funds.

Argument in favor

Altering these regulations would allow small businesses to grow by making it easier for them to obtain capital. The regulations in place are impeding economic growth, and were an overreaction in the wake of the financial crisis.

Argument opposed

These regulations were designed to prohibit risky practices that jeopardize the health of the businesses themselves and the economy of the country as a whole.

Impact

Equity holders, small businesses, M&A brokers, small business investment companies, banks, hedge funds, private equity firms, the SEC.

Cost of H.R. 5405

A CBO cost estimate is unavailable.

Additional Info

Of Note:

Savings and loan holding companies would be required to register with the Securities and Exchange Commission (SEC) if they have:

• assets greater than $10 million and; 
• equities held by 2,000 or more people; 
• issue swaps.

These registration requirements, and reporting requirements would be eliminated if the number of equity holders falls below 1,200 people.

Merger and acquisition (M&A) brokers would be exempted from existing registration requirements. This exemption wouldn’t apply to brokers who actually receive, hold, transmit, or have custody of funds or securities in a transfer of ownership. It also doesn’t exempt M&A brokers that engage in a public offering of securities that are subject to mandatory registration, or if the issuer must file periodic reports.

Media:

Sponsoring Rep. Michael Fitzpatrick (R-PA) Press Release

Small Business & Entrepreneurship Council (In Favor)

Independent Community Bankers of America (In Favor)

Biotechnology Industry Organization (In Favor)

Wall Street Journal (Context)

(Photo Credit: "Wall Street bubbles - Always the same - Keppler 1901" by Udo J. Keppler (a.k.a. Joseph Keppler, Jr.; 1872-1956), cartoonist - Puck (magazine), Vol. XL, No. 1264, centerfold.  Licensed under Public Domain via Wikimedia Commons)