H. Rept. 115-646 - SMALL BUSINESS CREDIT AVAILABILITY ACT115th Congress (2017-2018)
Committee Report
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115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-646
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SMALL BUSINESS CREDIT AVAILABILITY ACT
_______
April 24, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 4267]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4267) to amend the Investment Company Act of
1940 to change certain requirements relating to the capital
structure of business development companies, to direct the
Securities and Exchange Commission to revise certain rules
relating to business development companies, and for other
purposes, having considered the same, report favorably thereon
without amendment and recommend that the bill do pass.
Purpose and Summary
On November 7, 2017, Representative Steve Stivers
introduced H.R. 4267, to amend the Investment Company Act of
1940 to modernize the regulatory regime for Business
Development Companies (``BDCs''). BDCs are investment vehicles
designed to facilitate capital formation for small and middle-
market companies. The legislation requires the SEC to
streamline the offering, filing, and registration processes for
BDCs to eliminate significant regulatory burdens. This
legislation also increases a BDCs' ability to deploy capital to
businesses by reducing the BDC's asset coverage ratio--or
required ratio of assets to debt--from 200% to 150% if certain
requirements are met.
Background and Need for Legislation
The goal of H.R. 4267 is to help fuel capital formation for
small- and middle-market businesses that have difficulty
obtaining bank and other traditional financing by providing
BDCs some relief from a static regulatory regime that has not
been significantly updated in more than 30 years since BDCs
were created. In turn, these small- and middle-market
businesses will have greater opportunity to grow and create
jobs.
By 1980, many banks had pulled back from lending to small
businesses after the banks suffered significant losses related
to oil and real estate in the 1970s. Private equity and venture
capital firms offered an alternative source of credit to small
businesses, but they could not provide this credit to small,
growing businesses because the Investment Company Act
prohibited their securities from being owned by more than 100
persons. Thus, in 1980, Congress amended the Investment Company
Act of 1940 to authorize the creation of BDCs to facilitate
private finance investment in small- and middle-market
businesses.
BDCs are closed-end funds that make investments in small
and developing businesses and financially troubled firms. BDCs
were created as a means of making capital more readily
available to small, developing, and financially troubled
companies that are not able to access public markets or other
forms of conventional financing. By law, BDCs must invest at
least 70% of their assets in so-called ``eligible assets.'' The
most common eligible assets are private and small public
companies in the U.S. with $5-to-$150 million in annual
revenues. This so-called middle market sector of the economy is
responsible for one-third of the private sector GDP, and these
businesses produce $10 billion in revenues annually.
Investments in such businesses must be privately negotiated,
and the BDC is required to offer managerial assistance to these
companies to meet specific business challenges.
While BDCs are a type of closed-end fund, they have greater
flexibility than other investment companies in dealing with
businesses in which they have invested and in issuing
securities and compensating their managers. Further, BDCs do
not need to register as investment companies under the
Investment Company Act. Nonetheless, BDCs still must register
their securities under the Securities Exchange Act of 1934
(Exchange Act) and are subject to the full reporting
requirements under the Exchange Act, including the requirements
to file Forms 10-K, 10-Q, and 8-K.
Recently, BDCs have invested in small- and medium-sized
companies that provide vital services to the American public,
including companies involved in disease treatment and
prevention, education, information technology security,
agriculture, and construction. Many BDCs specialize in
financing acquisitions made by private equity firms. While wide
variation exists among BDCs in the size of their investments,
the companies they invest in and the industries in which they
concentrate all share a common investment objective of making
it easier for small- and medium-sized companies to obtain
access to capital.
Today, funding from BDCs has become more important for
small- and medium-sized businesses, as the stifling regulatory
environment resulting from the regulatory overreaction to the
financial crisis has restricted bank and other traditional
financing options for these companies. Specifically, lending to
small and medium-sized companies from commercial banks has
fallen off due to the regulatory constraints and compliance
burdens imposed by the Dodd-Frank Act, and BDCs now find
themselves in a position similar to the one at their creation
over 30 years ago--i.e., addressing the unmet capital needs of
small businesses. BDCs also are addressing important capital
needs for middle-market businesses, as 79 BDCs exist in the
U.S. with over $80 billion in outstanding loans to middle-
market businesses. Of these, 53 are publicly traded BDCs,
allowing retail investors a chance to purchase shares in the
growth of middle-market America.
Despite the important role that BDCs play in helping to
fund small- and medium-sized businesses, the static BDC
regulatory regime has prevented BDCs from playing as large a
role as they might otherwise. The BDC regulatory regime has not
been significantly updated in over 30 years since Congress
authorized the creation of BDCs in 1980. Currently, BDCs are
limited in the amount they can borrow, as their debt to equity
ratio is capped at a 1:1. Modernizing the regulatory regime for
BDCs will allow them to amplify financing for small- and
medium-sized businesses at a time when these companies are
struggling to access capital to support growth and job
creation. Even a modest increase in the leverage ratio, though
still below that of many other financial institutions, would
enable BDCs to deploy significantly more capital to small- and
mid-sized businesses, while still generating returns to their
shareholders. To this end, H.R. 4267 allows BDCs--via board or
shareholder vote to modestly increase their debt-to-equity
ratio to 2:1.
Additionally, BDCs currently are unable to take advantage
of streamlined offering rules that apply to traditional
operating companies. In 2005, the SEC adopted rules that
significantly modernized and streamlined the registration,
communications, and offering processes for traditional offering
companies. These reforms have been very successful, and many
companies rely on them today. These reforms were primarily
designed to: (1) streamline the securities registration
process, especially for large reporting issuers referred to as
WKSIs; (2) liberalize the flow of information from issuers to
investors before and during offering periods; and (3) implement
a new model for prospectuses based on electronic availability
of the prospectuses, instead of physical delivery. The SEC
excluded registered closed-end funds and BDCs from these
reforms due to these funds being governed by a different, but
parallel, regulatory framework. The SEC, to date, has not
considered similar reforms to registered investment companies.
Like other companies that regularly raise capital through
securities issuances, BDCs rely on pre-filed ``shelf
registration'' statements, which are securities filings that
allow companies to position themselves to issue additional
securities. Because shelf registrations contain financial
information that becomes outdated as companies publicly report
more recent financial information, most companies incorporate
subsequent financial reports in their shelf registrations by
reference. BDCs, however, are prohibited from incorporating
subsequent financial information by reference and instead must
manually update their shelf registration statements each time
they report new quarterly information (which slows a BDC's
ability to issue additional securities and makes it more
expensive by requiring a BDC to hire lawyers, accountants, and
printing firms to continually update its shelf-registration
statements). To date, BDCs also have been barred from the
benefits associated with being a WKSI, which includes taking
advantage of more flexible rules relating to communications
with investors and the registration process.
To address these problems, H.R. 4267 provides parity on
securities offering and related rules between BDCs and other
operating companies, thereby streamlining disclosure
requirements and reducing burdensome, duplicative regulatory
paperwork for BDCs--while still ensuring that investors receive
relevant and necessary disclosures. Specifically, this bill
directs the SEC to revise its rules to allow BDCs to
incorporate by reference and to permit BDCs to qualify as
WKSIs. These reforms would allow BDCs to raise capital in the
same efficient manner as traditional operating companies, which
would thus permit them to invest more of their dollars in
small- and mid-sized businesses, as opposed to excessive
compliance costs on outdated securities offering rules.
Finally, consistent with this legislation, in its October
2017 report on Capital Markets, issued pursuant to President
Trump's February 3, 2017 Executive Order 13772, the Department
of the Treasury included a recommendation that the SEC revise
its securities offering reform rules to permit BDCs to utilize
the same provisions available to other issuers who file Forms
10-K, 10-Q, and 8-K.
Hearings
The Committee on Financial Services held a hearing
examining matters relating to H.R. 4267 on April 26, 2017,
April 28, 2017 and November 3, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
November 14, 2017, and November 15, 2017, and ordered H.R. 4267
to be reported favorably to the House without amendment by a
recorded vote of 58 yeas to 2 nays (Record vote no. FC-112), a
quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 58 yeas to 2 nays
(Record vote no. FC-112), a quorum being present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 4267
will increase access to capital for small and middle-market
businesses and facilitate job creation by modernizing the
regulatory regime for BDCs.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, March 16, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4267, the Small
Business Credit Availability Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 4267--Small Business Credit Availability
Summary: H.R. 4267 would direct the Securities and Exchange
Commission (SEC) to amend certain regulations that affect
business development companies (BDCs)--companies that operate
like mutual funds to invest in the stocks of small private
companies and that offer significant managerial assistance to
issuers. H.R. 4267 would raise the limits on the amount of
leverage allowed to a BDC if it met certain requirements. The
bill also would eliminate the exclusion of a BDC from
qualifying as a well-known seasoned issuer (WKSI).\1\
---------------------------------------------------------------------------
\1\Under current law, the SEC allows certain public companies,
called WKSIs, to use streamlined registration and reporting procedures
when issuing securities.
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The staff of the Joint Committee on Taxation (JCT)
estimates that enacting H.R. 4267 would reduce federal revenues
by $33 million over the 2018-2028 period; therefore, pay-as-
you-go procedures apply. Enacting the bill would not affect
direct spending.
Using information from the SEC, CBO estimates that
implementing H.R. 4267 would cost less than $500,000 to amend
certain regulations affecting BDCs and WKSIs. However, the SEC
is authorized to collect fees sufficient to offset its annual
appropriation; therefore, CBO estimates that the net effect on
discretionary spending would be negligible.
CBO estimates that enacting H.R. 4267 would not affect
direct spending and would not increase on-budget deficits by
more than $5 billion in any of the four consecutive 10-year
periods beginning in 2028.
H.R. 4267 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 4267 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce).
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By fiscal year, in millions of dollars--
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2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-2022 2018-2027
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DECREASES IN REVENUES
Estimated Revenues.......................................... * * -1 -3 -5 -6 -6 -6 -4 * -15 -33
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Components may not sum to totals because of rounding; * = between -$500,000 and zero.
Basis of estimate: For this estimate, CBO assumes that H.R.
4267 will be enacted near the end of fiscal year 2018, that the
necessary amounts will be appropriated near the start of each
year, and that spending will follow historical patterns for the
SEC.
Revenues
JCT estimates that revenue losses under H.R. 4267 would
result from a shift in business lending and taxable income from
C corporations to BDCs, which are pass-through entities for tax
purposes. Specifically, H.R. 4267 would allow BDCs to take on
additional debt, increasing the amount they can borrow to a
maximum of $4 for every $6 in assets. Under current law, a BDC
can borrow up to $3 for every $6 it holds in assets.
Generally, the income of interests in pass-through entities
(such as BDCs) that are owned by individual taxpayers is
treated as personal income. That income is subject only to the
individual income tax, and it is taxed at the personal income
tax rate of the businesses' owners. In contrast, taxable income
from C corporations is subject to the corporate income tax, and
it can be taxed again at the individual level after
distribution to shareholders or investors. JCT estimates that,
by effectively shifting income from C corporations to BDCs, the
bill would reduce tax revenues by $33 million over the 2018-
2027 period.
Spending subject to appropriation
Using information from the SEC, CBO estimates that
implementing H.R. 4267 would cost less than $500,000 each year
to amend certain regulations affecting BDCs and WKSIs. However,
the SEC is authorized to collect fees sufficient to offset its
annual appropriation; therefore, CBO estimates that any net
effect on discretionary spending from implementing the bill
would be negligible, assuming appropriation actions consistent
with that authority.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in revenues that are subject to those
pay-as-you-go procedures are shown in the following table.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4267, THE SMALL BUSINESS CREDIT AVAILABILITY ACT, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL
SERVICES ON NOVEMBER 15, 2017
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By fiscal year, in millions of dollars--
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2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-2022 2018-2027
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NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Impact.............................. 0 0 1 3 5 6 6 6 4 0 15 33
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Increase in long-term direct spending and deficits: CBO and
JCT estimate that enacting H.R. 4267 would not affect direct
spending and would not increase on-budget deficits by more than
$5 billion in any of the four consecutive 10-year periods
beginning in 2028.
Mandates: H.R. 4267 contains no intergovernmental or
private-sector mandates as defined in the Unfunded Mandates
Reform Act.
Estimate prepared by: Federal Costs: Stephen Rabent;
Federal Revenues: Staff of the Joint Committee on Taxation;
Mandates: Jon Sperl.
Estimate approved by: H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires one
directed rulemaking.
H.R. 4267 requires the SEC to revise its rules to allow a
BDC that has filed an election pursuant to section 54 of the
Investment Company Act of 1940 to use the securities offering
and proxy rules that are available to other issuers that are
required to file reports under section 13(a) or section 15(d)
of the Exchange Act.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 4267 as the ``Small Business Credit
Availability Act.''
Section 2. Expanding access to capital for Business Development
Companies
This section provides for an increase in BDCs' ability to
deploy capital to businesses by reducing their asset coverage
ratio, or required ration of assets to debt, from 200% to 150%
if certain requirements are met. Further, after a board or
general partner vote to take advantage of the new asset
coverage ratio, the non-traded BDC must provide its
shareholders with the ability to redeem 100% of their shares
over the course of the year (25% per quarter). Alternatively,
both traded and non-traded BDCs can immediately reduce their
asset coverage ratio after a majority shareholder vote.
Section 3. Parity for Business Development Companies regarding offering
and proxy rules
This section requires the SEC to revise its rules to allow
BDCs to use the streamlined securities offering provisions
available to other registrants under the Exchange Act, such as
the ability to be a WKSI, use shelf offerings, and communicate
directly with shareholders. If the SEC does not act within one
year to codify its order or update its rules, the provisions
shall take effect and shall remain effective until the SEC
acts.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
INVESTMENT COMPANY ACT OF 1940
TITLE I--INVESTMENT COMPANIES
* * * * * * *
transactions with certain affiliates
Sec. 57. (a) It shall be unlawful for any person who is
related to a business development company in a manner described
in subsection (b) of this section, acting as principal--
(1) knowingly to sell any security or other property
to such business development company or to any company
controlled by such business development company, unless
such sale involves solely (A) securities of which the
buyer is the issuer, or (B) securities of which the
seller is the issuer and which are part of a general
offering to the holders of a class of its securities;
(2) knowingly to purchase from such business
development company or from any company controlled by
such business development company, any security or
other property (except securities of which the seller
is the issuer);
(3) knowingly to borrow money or other property from
such business development company or from any company
controlled by such business development company (unless
the borrower is controlled by the lender), except as
permitted in section 21(b) or section 62; or
(4) knowingly to effect any transaction in which such
business development company or a company controlled by
such business development company is a joint or a joint
and several participant with such person in
contravention of such rules and regulations as the
Commission may prescribe for the purpose of limiting or
preventing participation by such business development
company or controlled company on a basis less
advantageous than that of such person, except that
nothing contained in this paragraph shall be deemed to
preclude any person from acting as manager of any
underwriting syndicate or other group in which such
business development company or controlled company is a
participant and receiving compensation therefor.
(b) The provisions of subsection (a) of this section shall
apply to the following persons:
(1) Any director, officer, employee, or member of an
advisory board of a business development company or any
person (other than the business development company
itself) who is, within the meaning of section
2(a)(3)(C) of this title, an affiliated person of any
such person specified in this paragraph.
(2) Any investment adviser or promoter of, general
partner in, principal underwriter for, or person
directly or indirectly either controlling, controlled
by, or under common control with, a business
development company (except the business development
company itself and any person who, if it were not
directly or indirectly controlled by the business
development company, would not be directly or
indirectly under the control of a person who controls
the business development company), or any person who
is, within the meaning of section 2(a)(3) (C) or (D),
an affiliated person of any such person specified in
this paragraph.
(c) Notwithstanding paragraphs (1), (2), and (3) of
subsection (a), any person may file with the Commission an
application for an order exempting a proposed transaction of
the applicant from one or more provisions of such paragraphs.
The Commission shall grant such application and issue such
order of exemption if evidence establishes that--
(1) the terms of the proposed transaction, including
the consideration to be paid or received, are
reasonable and fair and do not involve overreaching of
the business development company or its shareholders or
partners on the part of any person concerned;
(2) the proposed transaction is consistent with the
policy of the business development company as recited
in the filings made by such company with the Commission
under the Securities Act of 1933, its registration
statement and reports filed under the Securities
Exchange Act of 1934, and its reports to shareholders
or partners; and
(3) the proposed transaction is consistent with the
general purposes of this title.
(d) It shall be unlawful for any person who is related to a
business development company in the manner described in
subsection (e) of this section and who is not subject to the
prohibitions of subsection (a) of this section, acting as
principal--
(1) knowingly to sell any security or other property
to such business development company or to any company
controlled by such business development company, unless
such sale involves solely (A) securities of which the
buyer is the issuer, or (B) securities of which the
seller is the issuer and which are part of a general
offering to the holders of a class of its securities;
(2) knowingly to purchase from such business
development company or from any company controlled by
such business development company, any security or
other property (except securities of which the seller
is the issuer);
(3) knowingly to borrow money or other property from
such business development company or from any company
controlled by such business development company (unless
the borrower is controlled by the lender), except as
permitted in section 21(b); or
(4) knowingly to effect any transaction in which such
business development company or a company controlled by
such business development company is a joint or a joint
and several participant with such affiliated person in
contravention of such rules and regulations as the
Commission may prescribe for the purpose of limiting or
preventing participation by such business development
company or controlled company on a basis less
advantageous than that of such affiliated person,
except that nothing contained in this paragraph shall
be deemed to preclude any person from acting as manager
of any underwriting syndicate or other group in which
such business development company or controlled company
is a participant and receiving compensation therefor.
(e) The provisions of subsection (d) of this section shall
apply to the following persons:
(1) Any person (A) who is, within the meaning of
section 2(a)(3)(A), an affiliated person of a business
development company, (B) who is an executive officer or
a director of, or general partner in, any such
affiliated person, or (C) who directly or indirectly
either controls, is controlled by, or is under common
control with, such affiliated person.
(2) Any person who is an affiliated person of a
director, officer, employee, investment adviser, member
of an advisory board or promoter of, principal
underwriter for, general partner in, or an affiliated
person of any person directly or indirectly either
controlling or under common control with a business
development company (except the business development
company itself and any person who, if it were not
directly or indirectly controlled by the business
development company, would not be directly or
indirectly under the control of a person who controls
the business development company).
For purposes of this subsection, the term ``executive officer''
means the president, secretary, treasurer, any vice president
in charge of a principal business function, and any other
person who performs similar policymaking functions.
(f) Notwithstanding subsection (d) of this section, a person
described in subsection (e) may engage in a proposed
transaction described in subsection (d) if such proposed
transaction is approved by the required majority (as defined in
subsection (o)) of the directors of or general partners in the
business development company on the basis that--
(1) the terms thereof, including the consideration to
be paid or received, are reasonable and fair to the
shareholders or partners of the business development
company and do not involve overreaching of such company
or its shareholders or partners on the part of any
person concerned;
(2) the proposed transaction is consistent with the
interests of the shareholders or partners of the
business development company and is consistent with the
policy of such company as recited in filings made by
such company with the Commission under the Securities
Act of 1933, its registration statement and reports
filed under the Securities Exchange Act of 1934, and
its reports to shareholders or partners; and
(3) the directors or general partners record in their
minutes and preserve in their records, for such periods
as if such records were required to be maintained
pursuant to section 31(a), a description of such
transaction, their findings, the information or
materials upon which their findings were based, and the
basis therefor.
(g) Notwithstanding subsection (a) or (d), a person may, in
the ordinary course of business, sell to or purchase from any
company merchandise or may enter into a lessor-lessee
relationship with any person and furnish the services incident
thereto.
(h) The directors of or general partners in any business
development company shall adopt, and periodically review and
update as appropriate, procedures reasonably designed to ensure
that reasonable inquiry is made, prior to the consummation of
any transaction in which such business development company or a
company controlled by such business development company
proposes to participate, with respect to the possible
involvement in the transaction of persons described in
subsections (b) and (e) of this section.
(i) Until the adoption by the Commission of rules or
regulations under subsections (a) and (d) of this section, the
rules and regulations of the Commission under subsections (a)
and (d) of section 17 applicable to registered closed-end
investment companies shall be deemed to apply to transactions
subject to subsections (a) and (d) of this section. Any rules
or regulations adopted by the Commission to implement this
section shall be no more restrictive than the rules or
regulations adopted by the Commission under subsections (a) and
(d) of section 17 that are applicable to all registered closed-
end investment companies.
(j) Notwithstanding subsections (a) and (d) of this section,
any director, officer, or employee of, or general partner in, a
business development company may--
(1) acquire warrants, options, and rights to purchase
voting securities of such business development company,
and securities issued upon the exercise or conversion
thereof, pursuant to an executive compensation plan
offered by such company which meets the requirements of
[section 61(a)(3)(B)] section 61(a)(4)(B); and
(2) borrow money from such business development
company for the purpose of purchasing securities issued
by such company pursuant to an executive compensation
plan, if each such loan--
(A) has a term of not more than ten years;
(B) becomes due within a reasonable time, not
to exceed sixty days, after the termination of
such person's employment or service;
(C) bears interest at no less than the
prevailing rate applicable to 90-day United
States Treasury bills at the time the loan is
made;
(D) at all times is fully collateralized
(such collateral may include any securities
issued by such business development company);
and
(E)(i) in the case of a loan to any officer
or employee of such business development
company (including any officer or employee who
is also a director of such company), is
approved by the required majority (as defined
in subsection (o)) of the directors of or
general partners in such company on the basis
that the loan is in the best interests of such
company and its shareholders or partners; or
(ii) in the case of a loan to any director of
such business development company who is not
also an officer or employee of such company, or
to any general partner in such company, is
approved by order of the Commission, upon
application, on the basis that the terms of the
loan are fair and reasonable and do not involve
overreaching of such company or its
shareholders or partners.
(k) It shall be unlawful for any person described in
subsection (l)--
(1) acting as agent, to accept from any source any
compensation (other than a regular salary or wages from
the business development company) for the purchase or
sale of any property to or for such business
development company or any controlled company thereof,
except in the course of such person's business as an
underwriter or broker; or
(2) acting as broker, in connection with the sale of
securities to or by the business development company or
any controlled company thereof, to receive from any
source a commission, fee, or other remuneration for
effecting such transaction which exceeds--
(A) the usual and customary broker's
commission if the sale is effected on a
securities exchange;
(B) 2 per centum of the sales price if the
sale is effected in connection with a secondary
distribution of such securities; or
(C) 1 per centum of the purchase or sale
price of such securities if the sale is
otherwise effected,
unless the Commission, by rules and regulations or order in the
public interest and consistent with the protection of
investors, permits a larger commission.
(l) The provisions of subsection (k) of this section shall
apply to the following persons:
(1) Any affiliated person of a business development
company.
(2)(A) Any person who is, within the meaning of
section 2(a)(3) (B), (C), or (D), an affiliated person
of any director, officer, employee, or member of an
advisory board of the business development company.
(B) Any person who is, within the meaning of section
2(a)(3) (A), (B), (C), or (D), an affiliated person of
any investment adviser of, general partner in, or
person directly or indirectly either controlling,
controlled by, or under common control with, the
business development company.
(C) Any person who is, within the meaning of section
2(a)(3)(C), an affiliated person of any person who is
an affiliated person of the business development
company within the meaning of section 2(a)(3)(A).
(m) For purposes of subsections (a) and (d), a person who is
a director, officer, or employee of a party to a transaction
and who receives his usual and ordinary fee or salary for usual
and customary services as a director, officer, or employee from
such party shall not be deemed to have a financial interest or
to participate in the transaction solely by reason of his
receipt of such fee or salary.
(n)(1) Notwithstanding subsection (a)(4) of this section, a
business development company may establish and maintain a
profit-sharing plan for its directors, officers, employees, and
general partners and such directors, officers, employees, and
general partners may participate in such profit-sharing plan,
if--
(A)(i) in the case of a profit-sharing plan for
officers and employees of the business development
company (including any officer or employee who is also
a director of such company), such profit-sharing plan
is approved by the required majority (as defined in
subsection (o)) of the directors of or general partners
in such company on the basis that such plan is
reasonable and fair to the shareholders or partners of
such company, does not involve overreaching of such
company or its shareholders or partners on the part of
any person concerned, and is consistent with the
interests of the shareholders or partners of such
company; or
(ii) in the case of a profit-sharing plan which
includes one or more directors of the business
development company who are not also officers or
employees of such company, or one or more general
partners in such company, such profit-sharing plan is
approved by order of the Commission, upon application,
on the basis that such plan is reasonable and fair to
the shareholders or partners of such company, does not
involve overreaching of such company or its
shareholders or partners on the part of any person
concerned, and is consistent with the interests of the
shareholders or partners of such company; and
(B) the aggregate amount of benefits which would be
paid or accrued under such plan shall not exceed 20 per
centum of the business development company's net income
after taxes in any fiscal year.
(2) This subsection may not be used where the business
development company has outstanding any stock option, warrant,
or right issued as part of an executive compensation plan,
including a plan pursuant to [section 61(a)(3)(B)] section
61(a)(4)(B), or has an investment adviser registered or
required to be registered under title II of this Act.
(o) The term ``required majority'', when used with respect to
the approval of a proposed transaction, plan, or arrangement,
means both a majority of a business development company's
directors or general partners who have no financial interest in
such transaction, plan, or arrangement and a majority of such
directors or general partners who are not interested persons of
such company.
* * * * * * *
capital structure
Sec. 61. (a) Notwithstanding the exemption set forth in
section 6(f), section 18 shall apply to a business development
company to the same extent as if it were a registered closed-
end investment company, except as follows:
[(1) The asset coverage requirements of section
18(a)(1) (A) and (B) applicable to business development
companies shall be 200 per centum.]
(1) Except as provided in paragraph (2), the asset
coverage requirements of subparagraphs (A) and (B) of
section 18(a)(1) (and any related rule promulgated
under this Act) applicable to business development
companies shall be 200 percent.
(2) The asset coverage requirements of subparagraphs
(A) and (B) of section 18(a)(1) and of subparagraphs
(A) and (B) of section 18(a)(2) (and any related rule
promulgated under this Act) applicable to a business
development company shall be 150 percent if--
(A) within five business days of the approval
of the adoption of the asset coverage
requirements described in clause (ii), the
business development company discloses such
approval and the date of its effectiveness in a
Form 8-K filed with the Commission and in a
notice on its website and discloses in its
periodic filings made under section 13(a) of
the Securities Exchange Act of 1934 (15 U.S.C.
78m(a))--
(i) the aggregate value of the senior
securities issued by such company and
the asset coverage percentage as of the
date of such company's most recent
financial statements; and
(ii) that such company has adopted
the asset coverage requirements of this
paragraph and the effective date of
such requirements;
(B) with respect to a business development
company that issues equity securities that are
registered on a national securities exchange,
the periodic filings of the company under
section 13(a) of the Securities Exchange Act of
1934 (15 U.S.C. 78m(a)) include disclosures
reasonably designed to ensure that shareholders
are informed of--
(i) the amount of indebtedness and
asset coverage ratio of the company,
determined as of the date of the
financial statements of the company
dated on or most recently before the
date of such filing; and
(ii) the principal risk factors
associated with such indebtedness, to
the extent such risk is incurred by the
company; and
(C)(i) the application of this paragraph to
the company is approved by the required
majority (as defined in section 57(o)) of the
directors of or general partners of such
company who are not interested persons of the
business development company, which application
shall become effective on the date that is 1
year after the date of the approval, and, with
respect to a business development company that
issues equity securities that are not
registered on a national securities exchange,
the company extends, to each person who is a
shareholder as of the date of the approval, an
offer to repurchase the equity securities held
by such person as of such approval date, with
25 percent of such securities to be repurchased
in each of the four quarters following such
approval date; or
(ii) the company obtains, at a special or
annual meeting of shareholders or partners at
which a quorum is present, the approval of more
than 50 percent of the votes cast of the
application of this paragraph to the company,
which application shall become effective on the
date immediately after the date of the
approval.
[(2)] (3) Notwithstanding section 18(c), a business
development company may issue more than one class of
senior security representing indebtedness.
[(3)] (4) Notwithstanding section 18(d)--
(A) a business development company may issue
warrants, options, or rights to subscribe or
convert to voting securities of such company,
accompanied by securities, if--
(i) such warrants, options, or rights
expire by their terms within ten years;
(ii) such warrants, options, or
rights are not separately transferable
unless no class of such warrants,
options, or rights and the securities
accompanying them has been publicly
distributed;
(iii) the exercise or conversion
price is not less than the current
market value at the date of issuance,
or if no such market value exists, the
current net asset value of such voting
securities; and
(iv) the proposal to issue such
securities is authorized by the
shareholders or partners of such
business development company, and such
issuance is approved by the required
majority (as defined in section 57(o))
of the directors of or general partners
in such company on the basis that such
issuance is in the best interests of
such company and its shareholders or
partners;
(B) a business development company may issue,
to its directors, officers, employees, and
general partners, warrants, options, and rights
to purchase voting securities of such company
pursuant to an executive compensation plan,
if--
(i)(I) in the case of warrants,
options, or rights issued to any
officer or employee of such business
development company (including any
officer or employee who is also a
director of such company), such
securities satisfy the conditions in
clauses (i), (iii), and (iv) of
subparagraph (A); or (II) in the case
of warrants, options, or rights issued
to any director of such business
development company who is not also an
officer or employee of such company, or
to any general partner in such company,
the proposal to issue such securities
satisfies the conditions in clauses (i)
and (iii) of subparagraph (A), is
authorized by the shareholders or
partners of such company, and is
approved by order of the Commission,
upon application, on the basis that the
terms of the proposal are fair and
reasonable and do not involve
overreaching of such company or its
shareholders or partners;
(ii) such securities are not
transferable except for disposition by
gift, will, or intestacy;
(iii) no investment adviser of such
business development company receives
any compensation described in section
205(a)(1) of title II of this Act,
except to the extent permitted by
paragraph (1) or (2) of section 205(b);
and
(iv) such business development
company does not have a profit-sharing
plan described in section 57(n); and
(C) a business development company may issue
warrants, options, or rights to subscribe to,
convert to, or purchase voting securities not
accompanied by securities, if--
(i) such warrants, options, or rights
satisfy the conditions in clauses (i)
and (iii) of subparagraph (A); and
(ii) the proposal to issue such
warrants, options, or rights is
authorized by the shareholders or
partners of such business development
company, and such issuance is approved
by the required majority (as defined in
section 57(o)) of the directors of or
general partners in such company on the
basis that such issuance is in the best
interests of the company and its
shareholders or partners.
Notwithstanding this paragraph, the amount of voting
securities that would result from the exercise of all
outstanding warrants, options, and rights at the time
of issuance shall not exceed 25 per centum of the
outstanding voting securities of the business
development company, except that if the amount of
voting securities that would result from the exercise
of all outstanding warrants, options, and rights issued
to such company's directors, officers, employees, and
general partners pursuant to any executive compensation
plan meeting the requirements of subparagraph (B) of
this paragraph would exceed 15 per centum of the
outstanding voting securities of such company, then the
total amount of voting securities that would result
from the exercise of all outstanding warrants, options,
and rights at the time of issuance shall not exceed 20
per centum of the outstanding voting securities of such
company.
[(4)] (5) For purposes of measuring the asset
coverage requirements of section 18(a), a senior
security created by the guarantee by a business
development company of indebtedness issued by another
company shall be the amount of the maximum potential
liability less the fair market value of the net
unencumbered assets (plus the indebtedness which has
been guaranteed) available in the borrowing company
whose debts have been guaranteed, except that a
guarantee issued by a business development company of
indebtedness issued by a company which is a wholly-
owned subsidiary of the business development company
and is licensed as a small business investment company
under the Small Business Investment Act of 1958 shall
not be deemed to be a senior security of such business
development company for purposes of section 18(a) if
the amount of the indebtedness at the time of its
issuance by the borrowing company is itself taken fully
into account as a liability by such business
development company, as if it were issued by such
business development company, in determining whether
such business development company, at that time,
satisfies the asset coverage requirements of section
18(a).
(b) A business development company shall comply with the
provisions of this section at the time it becomes subject to
sections 55 through 65, as if it were issuing a security of
each class which it has outstanding at such time.
* * * * * * *
distribution and repurchase of securities
Sec. 63. Notwithstanding the exemption set forth in section
6(f), section 23 shall apply to a business development company
to the same extent as if it were a registered closed-end
investment company, except as follows:
(1) The prohibitions of section 23(a)(2) shall not
apply to any company which (A) is a wholly-owned
subsidiary of, or directly or indirectly controlled by,
a business development company, and (B) immediately
after the issuance of any of its securities for
property other than cash or securities, will not be an
investment company within the meaning of section 3(a).
(2) Notwithstanding the provisions of section 23(b),
a business development company may sell any common
stock of which it is the issuer at a price below the
current net asset value of such stock, and may sell
warrants, options, or rights to acquire any such common
stock at a price below the current net asset value of
such stock, if--
(A) the holders of a majority of such
business development company's outstanding
voting securities, and the holders of a
majority of such company's outstanding voting
securities that are not affiliated persons of
such company, approved such company's policy
and practice of making such sales of securities
at the last annual meeting of shareholders or
partners within one year immediately prior to
any such sale, except that the shareholder
approval requirements of this subparagraph
shall not apply to the initial public offering
by a business development company of its
securities;
(B) a required majority (as defined in
section 57(o)) of the directors of or general
partners in such business development company
have determined that any such sale would be in
the best interests of such company and its
shareholders or partners; and
(C) a required majority (as defined in
section 57(o)) of the directors of or general
partners in such business development company,
in consultation with the underwriter or
underwriters of the offering if it is to be
underwritten, have determined in good faith,
and as of a time immediately prior to the first
solicitation by or on behalf of such company of
firm commitments to purchase such securities or
immediately prior to the issuance of such
securities, that the price at which such
securities are to be sold is not less than a
price which closely approximates the market
value of those securities, less any
distributing commission or discount.
(3) A business development company may sell any
common stock of which it is the issuer at a price below
the current net asset value of such stock upon the
exercise of any warrant, option, or right issued in
accordance with [section 61(a)(3)] section 61(a)(4).
* * * * * * *
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INVESTMENT ADVISERS ACT OF 1940
TITLE II--INVESTMENT ADVISERS
* * * * * * *
investment advisory contracts
Sec. 205. (a) No investment adviser registered or required to
be registered with the Commission shall enter into, extend, or
renew any investment advisory contract, or in any way perform
any investment advisory contract entered into, extended, or
renewed on or after the effective date of this title, if such
contract--
(1) provides for compensation to the investment
adviser on the basis of a share of capital gains upon
or capital appreciation of the funds or any portion of
the funds of the client;
(2) fails to provide, in substance, that no
assignment of such contract shall be made by the
investment adviser without the consent of the other
party by the contract; or
(3) fails to provide, in substance, that the
investment adviser, if a partnership, will notify the
other party to the contract of any change in the
membership of such partnership within a reasonable time
after such change.
(b) Paragraph (1) of subsection (a) shall not--
(1) be construed to prohibit an investment advisory
contract which provides for compensation based upon the
total value of a fund averaged over a definite period,
or as of definite dates, or taken as of a definite
date;
(2) apply to an investment advisory contract with--
(A) an investment company registered under
title I of this Act, or
(B) any other person (except a trust,
governmental plan, collective trust fund, or
separate account referred to in section
3(c)(11) of title I of this Act), provided that
the contract relates to the investment of
assets in excess of $1 million,
if the contract provides for compensation based on the
asset value of the company or fund under management
averaged over a specified period and increasing and
decreasing proportionately with the investment
performance of the company or fund over a specified
period in relation to the investment record of an
appropriate index of securities prices or such other
measure of investment performance as the Commission by
rule, regulation, or order may specify;
(3) apply with respect to any investment advisory
contract between an investment adviser and a business
development company, as defined in this title, if (A)
the compensation provided for in such contract does not
exceed 20 per centum of the realized capital gains upon
the funds of the business development company over a
specified period or as of definite dates, computed net
of all realized capital losses and unrealized capital
depreciation, and the condition of [section
61(a)(3)(B)(iii)] section 61(a)(4)(B)(iii) of title I
of this Act is satisfied, and (B) the business
development company does not have outstanding any
option, warrant, or right issued pursuant to [section
61(a)(3)(B)] section 61(a)(4)(B) of title I of this Act
and does not have a profit-sharing plan described in
section 57(n) of title I of this Act;
(4) apply to an investment advisory contract with a
company excepted from the definition of an investment
company under section 3(c)(7) of title I of this Act;
or
(5) apply to an investment advisory contract with a
person who is not a resident of the United States.
(c) For purposes of paragraph (2) of subsection (b), the
point from which increases and decreases in compensation are
measured shall be the fee which is paid or earned when the
investment performance of such company or fund is equivalent to
that of the index or other measure of performance, and an index
of securities prices shall be deemed appropriate unless the
Commission by order shall determine otherwise.
(d) As used in paragraphs (2) and (3) of subsection (a),
``investment advisory contract'' means any contract or
agreement whereby a person agrees to act as investment adviser
to or to manage any investment or trading account of another
person other than an investment company registered under title
I of this Act.
(e) The Commission, by rule or regulation, upon its own
motion, or by order upon application, may conditionally or
unconditionally exempt any person or transaction, or any class
or classes of persons or transactions, from subsection (a)(1),
if and to the extent that the exemption relates to an
investment advisory contract with any person that the
Commission determines does not need the protections of
subsection (a)(1), on the basis of such factors as financial
sophistication, net worth, knowledge of and experience in
financial matters, amount of assets under management,
relationship with a registered investment adviser, and such
other factors as the Commission determines are consistent with
this section. With respect to any factor used in any rule or
regulation by the Commission in making a determination under
this subsection, if the Commission uses a dollar amount test in
connection with such factor, such as a net asset threshold, the
Commission shall, by order, not later than 1 year after the
date of enactment of the Private Fund Investment Advisers
Registration Act of 2010, and every 5 years thereafter, adjust
for the effects of inflation on such test. Any such adjustment
that is not a multiple of $100,000 shall be rounded to the
nearest multiple of $100,000.
(f) Authority to Restrict Mandatory Pre-dispute
Arbitration.--The Commission, by rule, may prohibit, or impose
conditions or limitations on the use of, agreements that
require customers or clients of any investment adviser to
arbitrate any future dispute between them arising under the
Federal securities laws, the rules and regulations thereunder,
or the rules of a self-regulatory organization if it finds that
such prohibition, imposition of conditions, or limitations are
in the public interest and for the protection of investors.
* * * * * * *
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