SBIA Regulatory Update: Obama budget targets carry, capital gains

  • Obama proposes changes to tax treatment of carried interest
  • Proposes increase on capital gains
  • Mary Jo White asks for increased SEC budget

The Obama Administration released its budget in early February with several new and re-proposed tax increases.

The most notable tax proposals would change the tax treatment of carried interest, expand the 3.8 percent Medicare surtax to new income such as pass-through income, and increase the tax rates on capital gains and dividends to 28 percent.

These changes would bring in hundreds of billions in new revenue but are not expected to be enacted into law this year.

In mid-March Securities and Exchange Commission Chairman Mary Jo White testified in Congress to boost the agency’s budget by 18 percent for fiscal 2017. This boost would help the SEC increase examination coverage of investment advisers like private equity firms, which she said was vital to protecting investors and the nation’s securities markets.

The SEC expects the number of investment advisers to grow to 12,500, managing more than $70 trillion in assets. The budget request would enable the SEC to deal with the greater number of investment advisers in the marketplace.

The SEC proposed a rule governing the use of derivatives transactions and financial-commitment transactions by funds governed under the Investment Company Act of 1940, including mutual funds, ETFs, closed-end funds and business development companies.

The new rule will limit the ability of BDCs and other funds to make revolving-credit facilities available to borrowers, by requiring them to set aside cash or cash-equivalent assets to cover the unfunded portions of these commitments.

It will also require those funds and BDCs that enter into derivatives transactions to limit their exposure to these contracts based on their net assets, and set aside qualifying assets based on these limits.

On March 21, the SEC released interim guidance, in IM Guidance Update No. 2016-03, FAST Act Changes Affecting Investment Advisers to Small Business Investment Companies, which will permit advisers relying on the changes made in the FAST Act/SBIC Advisers Relief Act to, if eligible, withdraw from SEC registration.

These advisers would be required to report to the SEC as exempt reporting advisers under either the venture exemption or private-fund adviser exemption, or revert to state registration. The FAST Act passed in December and was a major legislative victory for advisers of PE funds and SBIC funds.

Legislation to create a Small Business Advocate at the SEC was unanimously passed out of the House of Representatives in early February. The Office of Small Business Advocate would be responsible for reviewing any regulations at the SEC and help make recommendations to the agency on the impact of these regulations on small business and small business investors.

The Small Business Advocate would also be responsible for making recommendations to Congress to help small business investors.

Author Bio: Chris Walters is senior director-governmental and regulatory affairs for the Small Business Investor Alliance. Walters can be reached at 202-628-5055.

Photo of SEC’s Mary Jo White courtesy Reuters/Gary Cameron