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[House Report 113-641]
[From the U.S. Government Publishing Office]

113th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     113-641

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                    SBIC ADVISERS RELIEF ACT OF 2014

                                _______
                                

December 2, 2014.--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. 4200]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4200) to amend the Investment Advisers Act of 
1940 to prevent duplicative regulation of advisers of small 
business investment companies, having considered the same, 
report favorably thereon without amendment and recommend that 
the bill do pass.

                          Purpose and Summary

    H.R. 4200 amends the Investment Advisers Act of 1940 to 
reduce unnecessary regulatory costs and eliminate duplicative 
regulation of advisers to Small Business Investment Companies 
(SBICs) by the Securities and Exchange Commission (SEC). 
Specifically, H.R. 4200 preempts the application of any state 
registration requirements to those advisers solely advising 
SBIC funds; allows advisers to venture capital funds to 
continue to be ``exempt reporting advisers'' if they also 
advise an SBIC fund; and prevents the inclusion of the assets 
of an SBIC fund in the SEC registration calculation of ``assets 
under management'' for those advisers that advise private funds 
in addition to SBIC funds.

                  Background and Need for Legislation

    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act (P.L. 111-203) creates a new regulatory regime for advisers 
of private equity funds. Under this new regime, advisers to 
private equity funds must register as investment advisers with 
the SEC. However, there are several exemptions from SEC 
registration for private fund advisers. The main exemption for 
smaller private funds is calculated based upon an ``assets 
under management'' threshold test. If an adviser to a private 
fund manages less than $150 million, the adviser is exempt from 
SEC registration. Two other exemptions from SEC registration 
are available for advisers that solely advise SBICs and for 
advisers that solely advise venture capital funds. However, the 
law is not clear on whether advisers to both venture capital 
funds (or private funds) and SBICs are exempted, potentially 
resulting in new regulatory costs for some advisers.
    By eliminating duplicative regulation, H.R. 4200 will allow 
the private equity fund money that currently goes to pay for 
regulatory compliance and fees to flow directly to job-creating 
small businesses. These changes, while largely technical, 
remove duplicative regulation and allow fund managers to focus 
more on growing small businesses and less on fitting into a 
regulatory regime that is not designed for small business 
investing. Marc Reich, President of Ironwood Capital, testified 
at a Capital Markets Subcommittee hearing about the duplicative 
regulation that could result under the current system of 
exemptions:

          If an adviser advises for SBICs and any other private 
        funds and the total assets under management exceed the 
        $150 million registration threshold (as it does for 
        Ironwood Capital) the threshold for full registration 
        is triggered. The double counting of capital, even 
        otherwise exempt capital, causes double regulation for 
        advisers that advise SBICs and any other private funds 
        (non-SBICs). Firms should not be required to count the 
        SBIC exemption as part of the $150 million threshold. 
        Congress did not intend for firms to face the threat of 
        double regulation, and it is important to remove the 
        double regulation of SBICs and non-SBICs.\1\
---------------------------------------------------------------------------
    \1\Marc Reich, President of Ironwood Capital, Testimony before the 
Subcommittee on Capital Markets, Hearing entitled ``Legislative 
Proposals to Relieve the Red Tape Burden on Investors and Job 
Creators'' (May 23, 2013).
---------------------------------------------------------------------------

                                Hearings

    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises held a hearing on H.R. 4200 on April 9, 
2014.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
May 7, 2014, and again on May 22, 2014, and ordered H.R. 4200 
to be reported favorably to the House by a recorded vote of 56 
yeas to 0 nays (Record vote no. FC-58), 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.
    1. A motion by Chairman Hensarling to report the bill 
without amendment to the House with a favorable recommendation 
was agreed to by a record vote of 56 yeas and 0 nays (Record 
vote no. FC-58). [please see vote tally on next page]

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in 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. 4200 
will allow the private equity fund money that currently goes to 
pay for regulatory compliance diligence and fees to flow 
directly to job-creating small businesses.

   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.

                        Committee Cost Estimate

    The Committee adopts as its own 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, July 30, 2014.
Hon. Jeb Hensarling, 
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC 20515.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4200, the SBIC 
Advisers Relief Act of 2014.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Michael 
Hirsch and Susan Willie.
            Sincerely,
                                             Douglas W. Elmendorf. 
    Enclosure.

H.R. 4200--SBIC Advisers Relief Act of 2014

    H.R. 4200 would direct the Securities and Exchange 
Commission (SEC) to exempt certain investment advisers who 
advise Small Business Investment Companies (SBICs) from 
requirements to register with the agency. Specifically, 
advisers to venture capital funds that also advise SBICs would 
be exempt from registration requirements under the bill. 
Further, advisers to private funds would not be required to 
count the value of SBICs they advise in the calculation used to 
determine whether an adviser is large enough to require such 
registration.
    Based on information from the SEC, CBO estimates that 
implementing H.R. 4200 would not have a significant effect on 
the number of registered investment advisers, and as a result, 
CBO estimates that implementing H.R. 4200 would not 
significantly affect discretionary spending. Further, under 
current law, the SEC is authorized to collect fees sufficient 
to offset its appropriation each year; therefore, we estimate 
that the net cost to the SEC would be negligible, assuming 
appropriation action consistent with that authority. Enacting 
H.R. 4200 would not affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply.
    H.R. 4200 would impose intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act (UMRA) by 
prohibiting state governments from requiring some advisers of 
SBICs to comply with registration, licensing, or other 
qualification requirements. Some states require those advisers 
to pay a fee for registration. The cost of the mandate would be 
the forgone revenue that states could no longer collect. 
Information from organizations representing state security 
commissioners and SBICs indicates that both the number of SBIC 
advisers and the registration fee that states currently charge 
is small. Therefore, CBO estimates the annual cost for states 
to comply with the mandate would total less than $1 million and 
would thus fall well below the threshold established in UMRA 
($76 million in 2014, adjusted annually for inflation). This 
bill contains no private-sector mandates as defined in UMRA.
    The CBO staff contacts for this estimate are Michael Hirsch 
and Susan Willie (for federal costs) and Melissa Merrell (for 
the state and local impact). The estimate was approved by 
Theresa Gullo, Deputy Assistant Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      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 section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 4200 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    Duplication of Federal Programs

    Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013), 
the Committee states that no provision of H.R. 4200 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013), 
the Committee states that H.R. 4200 requires no directed 
rulemaking.

             Section-by-Section Analysis of the Legislation

Section 1. Short title

    This section states that the Act may be cited as the SBIC 
Advisers Relief Act of 2014.

Section 2. Advisers of SBICs and Venture Capital Funds

    This section amends the Investment Advisers Act of 1940 to 
exempt from registration requirements advisers of SBICs and 
other similar advisers.

Section 3. Advisers of SBICs and Private Funds

    This section exempts assets under management of a private 
fund that is an SBIC from the $150 million registration trigger 
contained in section 203(m) of the Investment Advisers Act of 
1940.

Section 4. Relationship to State Law

    This section confirms that state registration laws shall 
not apply to an adviser to whom an exemption has been granted 
by the bill.

         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, existing law in which no change is 
proposed is shown in roman):

                    INVESTMENT ADVISERS ACT OF 1940

TITLE II--INVESTMENT ADVISERS

           *       *       *       *       *       *       *

                  registration of investment advisers

  Sec. 203. (a) * * *

           *       *       *       *       *       *       *

  (l) Exemption of Venture Capital Fund Advisers.--[No 
investment adviser]
          (1) In general._No investment adviser that acts as an 
        investment adviser solely to 1 or more venture capital 
        funds shall be subject to the registration requirements 
        of this title with respect to the provision of 
        investment advice relating to a venture capital fund. 
        Not later than 1 year after the date of enactment of 
        this subsection, the Commission shall issue final rules 
        to define the term ``venture capital fund'' for 
        purposes of this subsection. The Commission shall 
        require such advisers to maintain such records and 
        provide to the Commission such annual or other reports 
        as the Commission determines necessary or appropriate 
        in the public interest or for the protection of 
        investors.
          (2) Advisers of sbics.--For purposes of this 
        subsection, a venture capital fund includes an entity 
        described in subparagraph (A), (B), or (C) of 
        subsection (b)(7) (other than an entity that has 
        elected to be regulated or is regulated as a business 
        development company pursuant to section 54 of the 
        Investment Company Act of 1940).
  (m) Exemption of and Reporting by Certain Private Fund 
Advisers.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Advisers of sbics.--For purposes of this 
        subsection, the assets under management of a private 
        fund that is an entity described in subparagraph (A), 
        (B), or (C) of subsection (b)(7) (other than an entity 
        that has elected to be regulated or is regulated as a 
        business development company pursuant to section 54 of 
        the Investment Company Act of 1940) shall be excluded 
        from the limit set forth in paragraph (1).

           *       *       *       *       *       *       *

SEC. 203A. STATE AND FEDERAL RESPONSIBILITIES.

  (a) * * *
  (b) Advisers Subject to Commission Authority.--
          (1) In general.--No law of any State or political 
        subdivision thereof requiring the registration, 
        licensing, or qualification as an investment adviser or 
        supervised person of an investment adviser shall apply 
        to any person--
                  (A) that is registered under section 203 as 
                an investment adviser, or that is a supervised 
                person of such person, except that a State may 
                license, register, or otherwise qualify any 
                investment adviser representative who has a 
                place of business located within that State; 
                [or]
                  (B) that is not registered under section 203 
                because that person is excepted from the 
                definition of an investment adviser under 
                section 202(a)(11)[.]; or
                  (C) that is not registered under section 203 
                because that person is exempt from registration 
                as provided in subsection (b)(7) of such 
                section, or is a supervised person of such 
                person.

           *       *       *       *       *       *       *
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