Regulatory Watch: Republicans push back on Dodd-Frank

On Jan. 14, a little more than a week after the start of its session, the Republican-controlled House of Representatives approved HR 37, which would exempt certain fund managers from having to register with the SEC as investment advisers.

Under Dodd-Frank, firms that only manage U.S. Small Business Administration-backed SBIC funds are exempt from SEC registration. But sponsors that manage other funds alongside their SBIC vehicles must register with the SEC if their total assets under management (AUM) are $150 million or more. For example, if a firm manages a $100 million SBIC fund and a $55 million private equity fund, it must register with the SEC. HR 37 would not count the SBIC fund against AUM in the previous scenario. 

“Fitzpatrick’s bill really targets areas in the law that are filled with unnecessary red tape, and Congress needs to pass these provisions to move capital more freely in our financial system,” NewSpring Mezzanine Capital General Partner Steven Hobman said in a statement.

The Small Business Investor Alliance has voiced support for the legislation, arguing that SBICs are already subject to federal regulation by the Small Business Administration (SBA). SBICs receive leverage from the SBA to invest in small and middle-market companies.

“It (HR 37) doesn’t remove any investor protections,” said Brett Palmer, president of the SBIA, which lobbies on behalf of many SBIC and middle-market private equity fund managers. “The SBA, because of the leverage (it provides), has skin in the game to make sure their credit facility does not lose its integrity.”

Sponsored by Pennsylvania Republican Michael Fitzpatrick, HR 37 also extends the deadline for when banks must come into compliance with the Volcker Rule, which places strict limits on how much banks can invest in private equity funds.

Although HR 37 passed the House by a wide margin, it will likely meet stiff opposition in the Senate, where Republicans hold less of an advantage. President Barack Obama has already threatened to veto the bill, should it reach his desk, citing provisions that would “undermine the Volcker Rule by further delaying a part of its implementation to 2019,” according to a statement.

“We didn’t actively seek this extension, but it may have a beneficial effect on credit cost for private equity portfolio companies,” said James Maloney, a spokesman for the Private Equity Growth Capital Council.

The Volcker Rule limits financial institutions from investing more than 3 percent of their balance sheet holdings in private equity funds and other pools of risky assets. In December, the Federal Reserve granted banking entities an extension until mid-2016 to come into compliance with the rule, a move that was praised by Goldman Sachs CFO Harvey Schwartz.

“The veto threat is a brush back pitch,” Palmer said. The SBIC registration provision, which eliminates registration requirements for certain firms managing SBIC funds, received a broader level of support than other aspects of the legislation, Palmer said. The SBIA may try to attach that provision as an amendment to other pieces of legislation that are moving through the Senate.

“One of the things going for us this time is that it’s early in the session, there are more moving vehicles to attach it to,” Palmer said. “We’re going to have lots of bites at the apple and we’re going to take every one we can get.”