H.R. 1105 – What’s In A Name? Nothing.

Legislation is often named in an utterly pretentious style, as if every subparagraph is the second coming of the Constitution. Other bills are named like advertising slogans, The Whiter Teeth and Job Creation Act. Still others are named like the Holy Roman Empire, which we all know was not Holy, nor Roman, nor an empire. H.R. 1105, the Small Business Capital Access and Jobs Preservation Act probably hits the trifecta.

H.R. 1105 was first put forward last March, and is supposed to come up on the House calendar after the Thanksgiving break. How, my dear readers are wondering, does H.R.1105 acheive its laudable goals of Small Business Capital Access and Jobs Preservation? Why it’s easy, just exempt private equity fund investment advisers from regulation under the Investment Advisers Act of 1940.

I know you are rubbing your forehead at this moment, failing to see the connection. Don’t worry, the sponsor of the bill, Rep. Robert Hurt (R-VA) will make it clear.

“By reducing costly government mandates placed on those who are making critical investments in our economy, our small business owners will have the ability to gain access to capital more easily so that more jobs can be created and more jobs can be preserved,” he said.

Thanks, Bob. Now here’s my take.

Private equity funds do invest in small companies at times, acting as venture capitalist funding. However, that is only a piece of the private equity business, which is more familiar as leveraged buyouts of larger firms, leading to mass layoffs. Small Business Capital Access and Jobs Preservation? Not so much.

The text of the bill has an odd caveat on the fund being advised. They can’t have a leverage of more than 200% debt to equity. This is odd because the fund doesn’t usually take debt in its own name, the debt in an LBO is issued by the company being bought out. In any case it seems that the registration requirement on the adviser could be triggered by factors out of his control, or which fluctuate from period to period.

But the real weirdness is this. What the bill seems to be aimed at is avoiding the ” costly government mandate” of filing Form ADV. But if you read Form ADV, you’ll see that there are already carve outs in place for VCs and private funds. Who, exactly, is Hurt trying to help?

I think that a consequence (which I hope is unintended, but this is Congress we’re talking about) of this bill is that certain persons who are barred from registering as investment advisers (due to previous bad behavior) could now act as investment advisers to private equity funds.

Bottom line: this bill lets some very rich people avoid filling in about 7 items on Form ADV, or lets some people who couldn’t legally fill out Form ADV work for very wealthy and powerful companies. Thank you, Rep. Robert Hurt (R-VA). The costly government mandate of a few minutes on Form ADV might have been preventing these advisers from choosing to buy and gut companies all across our proud American landscape, and leaving securities lawyers with nothing to feed their families but their trust funds. Heroic.


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