Small Business Capital Access and Job Preservation Act

Floor Speech

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Mr. Speaker, I yield myself such time as I may consume.

I rise today in opposition to H.R. 1105, which will create a gaping loophole for private equity fund advisers and deprive investors and regulators of important information about the risk these funds pose.

The Dodd-Frank Act wisely required that advisers to all hedge funds, private equity funds, and other private funds register and file regular reports with the SEC. It did this for two reasons: one, to help regulators better understand the systemic risks that these funds pose to the overall financial system, and to provide investors in these funds with meaningful information about the funds' governance.

This bill would exempt nearly every private equity fund adviser from these important disclosure requirements. Some of my colleagues who support this bill will argue that because private equity funds were not the cause of the last crisis, we should not subject them to these modest transparency and accountability requirements.

But one of the most important lessons we did learn during the financial crisis is that systemic threats seem to always bubble up from the opaque and unregulated sectors of the market. Giving this exemption will allow threats to once again grow in the dark corners of our financial system, only showing themselves when it is too late to prevent serious harm to the American taxpayer.

Supporters of this bill, while well-intended, will point to the provision that ensures advisers to private equity funds with leverage ratios over 2:1 will still have to register. This may sound attractive on its surface until you realize that every private equity fund is basically within that parameter. Private equity funds invest in companies, and it is these portfolio companies that load up on leverage and that have the potential to take on outside risk, piling on the leverage while the private equity fund itself appears on its surface to be modestly leveraged. A private equity fund could have a leverage ratio well below 2:1, while its portfolio companies are leveraged in excess of 30:1 masking the actual risk that these funds pose. Nearly every private equity fund in existence today would come in below the 2:1 leverage cap. This is a hollow limitation that provides no protection to the funds' investors or to the American taxpayer.

Mr. Speaker, we learned the hard way after the recent financial crisis that systemic risks grow in the dark corners of our financial markets and that the more information we can gather about how the markets work, the safer we will be. The registration and reporting requirements for private equity advisers are modest and narrowly tailored, but they provide investors and regulators with important information. Rolling back these reforms now moves us in the wrong direction. I urge my colleagues to oppose H.R. 1105.

I reserve the balance of my time.

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Mr. Speaker, I yield myself 1 minute.

I do want to respond to the gentleman's invoking of the SEC chair, Mary Jo White. Judging from the gentleman's remarks, you would think she might be in favor of this bill. Well, let me talk about what she says about this bill in particular:

Our markets would not be well served by narrowing the scope of the commission's jurisdiction in oversight of these advisers.

That is with respect to this bill. She also said:

Private equity investors are in need of the same protections as other private fund investors.

Lastly, she has also said that the commission has brought enforcement actions, talking about the advisability of having oversight over advisers and having these disclosures made:

The commission has brought enforcement actions against private equity funds and their advisory personnel involving unlawful pay-to-play schemes, insider trading, conflicts of interest, valuation, and misappropriation of assets.

The SPEAKER pro tempore. The time of the gentleman has expired.

Mr. LYNCH. I yield myself another 30 seconds.

Now, when you think about the protections that are necessary for pension funds, especially where these workers have invested their whole lives in these pension funds, you understand the need for this disclosure.

At this time I yield 3 minutes to the gentleman from Minnesota (Mr. Ellison).

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Mr. Speaker, I yield myself 1 minute to respond to some of these allegations.

In respect to sophisticated investors, the Council of Institutional Investors, which is an association representing corporate, union, and public pensions, foundations and endowments, largely very sophisticated investors with combined assets of $3 trillion, opposes this bill. They oppose this bill because of the record of enforcement actions of the SEC to go after risks that do actually exist.

I now yield 3 minutes to the gentleman from Connecticut (Mr. Himes), a cosponsor of the bill.

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Mr. Speaker, I yield myself such time as I may consume.

I do want to point out, in response to the gentleman from Tennessee's remarks about this bill going on voice vote in committee, I just want to remind the Members and the public that during that debate there was a need for further work on this bill.

I think, in a moment of bipartisanship, we agreed, both Democrat and Republican, to allow the bill to go by voice vote with the promise to work on some of those issues going forward. So it was an agreement to try to continue to agree and to work on the bill. It was not a vote in favor of any particular provisions within this bill.

There has been a lot of talk here about the risks that don't exist, and I do want to just point out some of those. As a result of this bill, funds investing more than $300 billion a year, much of which is the retirement savings of workers like teachers, firefighters, police officers, they would no longer be required to provide basic investor protections.

Specifically, H.R. 1105 would deprive investors of basic disclosures about an employee of a fund adviser who, for instance, violated securities law, or the adviser's businesses practices, its fees, any conflict of interest on the part of that adviser.

It would also eliminate a compliance program and code of ethics within the bill, within Dodd-Frank, and would eliminate the need for a chief compliance officer for each fund manager.

H.R. 1105, the bill under consideration here, would also prevent the SEC from conducting compliance exams of private equity fund adviser, even though SEC Chairman Mary Jo White notes that the Commission has already uncovered issues such as unlawful pay-to-play schemes, insider trading that we have all read about recently, conflicts of interest, valuation issues, and misappropriation of assets.

I want to talk about some of these since there has been a complete dismissal of any risk here. I think the record speaks to the risk.

The SEC has brought several enforcement actions against private equity firms. While the defendants do not necessarily represent all private equity firms, they do highlight the need for a strong police officer with the authority to examine all private equity advisers.

Capital formation relies on investor confidence in the underlying assets; and without registration with the SEC, investors will no longer have a cop on the beat that can enforce the rule of law, reducing investor demand.

In Knelman, for example here, there have been broad violations related to fraud, custody, compliance, and reporting. In Knelman Asset Management Group, the SEC found that registered private equity fund-of-funds adviser Knelman Asset Management Group, LLC, and Irving P. Knelman, KAMG's managing director, chief executive officer, and former CCO, violated the Advisers Act's custody, antifraud, compliance, reporting, and books-and-records provisions.

In insider trading enforcement, the Gowrish insider trading case involved an individual who allegedly stole confidential acquisition information, TPG Capital, and sold that information to two friends who made $500,000 in illicit trading profits.

Valuation related enforcement actions, the Oppenheimer/Brian Williamson matters concern an investment adviser and portfolio manager who misrepresented material details about his valuation methodology to his investors.

Recently, the Commission filed a case against Yorkville Advisors, where Yorkville allegedly inflated the values of certain liquid assets. While Yorkville managed hedge funds, the valuation issues are very similar to ones we see in private equity.

Finally, the KCAP valuation case involved alleged overstatements of the value of certain debt securities and CLOs held in the investment portfolio, highlighting the division and AMU's emphasis on pursuing valuation cases.

And in the Ranieri Partners case, the SEC also found that an investment manager knowingly used a sanctioned, unregistered broker-dealer to solicit capital for a pooled investment vehicle.

So all of these illegal activities would be made unavailable to private equity investors under this bill. That is what the risk is. That is not fiction. Those are actual cases that the SEC has introduced enforcement actions on. So there is real risk here for investors and for the markets themselves.

Mr. Speaker, I reserve the balance of my time.

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Mr. Speaker, I yield myself 2 minutes.

We need not worry about small firms in this. They are already exempt under this bill. They are already exempt. So the concerns about small firms being covered by this, they are already exempt, number one.

Number two, the other scenario that has been posited here is that somehow, by allowing private equity firms the right to keep secret--or to refuse to disclose that their employees have been prosecuted for violating securities laws, by allowing that to remain undisclosed, that somehow that is going to help some single mom go to work, I don't think that is a rational assumption.

Mr. Speaker, I will now enter into the Record letters from the following organizations who are all opposed to this bill: Americans for Financial Reform, the Council of Institutional Investors, the North American Securities Administrators Association, and a Statement of Administration Policy from the Obama administration.

I reserve the balance of my time.

AMERICANS FOR

FINANCIAL REFORM,

Washington, DC.

DEAR REPRESENTATIVE: On behalf of Americans for Financial Reform, we are writing to express our opposition to HR 1105. Contrary to its title, this bill is not designed to benefit small business. Instead, it would exempt private equity fund advisers--who include some of the wealthiest and most significant entities on Wall Street--from basic reporting requirements designed to help regulators monitor systemic risk in the financial system and protect investors and the public.

Prior to the Dodd-Frank Act, hedge and private equity funds received almost no regulatory monitoring, despite the fact that combined they manage some $3 trillion in assets and played a significant intermediary role in the financial crisis. Section 404 of the Dodd-Frank Act created more transparency for this previously dark portion of the markets, by requiring advisers to hedge and private equity funds to report basic financial information relevant to systemic risk to the Securities and Exchange Commission (SEC). The experience of the 2008 crisis--where risks emerged from parts of the markets not being monitored by regulators--clearly demonstrates the importance of ensuring that regulators can track financial risks wherever they originate.

The Section 404 reporting requirements as implemented by the SEC are far from onerous. All advisers with below $150 million in assets under management are completely exempted, and advisers with up to $1.5 billion in assets under management must report only limited and basic information once per year. Advisers to large private equity funds are required to respond only once per year (advisers to other large funds report quarterly).

HR 1105 would exempt almost all private equity fund advisers from reporting requirements to the Securities and Exchange Commission. The sole requirement for the exemption is that the fund must not have outstanding borrowings that exceed twice the fund's invested capital. But this requirement places little if any real limitation on the exemption, since the great majority of borrowing connected with private equity activity is conducted through portfolio companies, not at the fund level. (That is, companies owned by private equity funds borrow large amounts as the direction of the fund, but the fund itself rarely borrows a great deal).

It is particularly distressing that Congress would consider granting this exemption at a time when concern is growing among regulators and market observers about risks created by a possible bubble in the leveraged loan market, which is dominated by loans sponsored by private equity firms. Several warnings have been issued recently by regulators concerning the risks being created in these markets. As Moody's investor's service has stated:

``Private equity firms have been exploiting investors'' willingness to lend to speculative-grade companies ..... Higher yields are drawing investors to riskier structures at a time when interest rates remain at historical lows.''

Since leveraged loans are also being sold to small retail investors, a bubble could impact both the stability of the broader financial system and the retirement savings of retail investors. The situation in the leveraged loan market clearly demonstrates the connection between private equity activity and important risks to financial stability and to investors.

An additional source of concern is the danger that the exemption granted in HR 1105 could too easily be exploited to reach beyond private equity firms alone. The distinction between a hedge fund and a private equity fund is not a formal legal distinction, it is simply a differentiation between general investment strategies. While HR 1105 grants the SEC the ability to define more precisely what a private equity fund is, if that definition is at all overbroad then it could be taken advantage of by a wide range of hedge funds in order to avoid oversight.

Private equity funds already receive significant subsidies through the tax system, as they are major beneficiaries of the favorable treatment for `carried interest', as well as the general tax subsidy to debt costs. It is totally inappropriate to also grant such funds a blanket exemption from even the limited and basic Dodd-Frank regulatory reporting requirements. Such a blanket exemption would make it more difficult for regulators to monitor systemic risk and risks to investors, solely in order to exempt wealthy managers of large private equity funds from a minor administrative task. HR 1105 should be rejected.

Thank you for your consideration. For more information please contact AFR's Policy Director, Marcus Stanley.

Sincerely,
AMERICANS FOR FINANCIAL REFORM.

Following Are the Partners of Americans for Financial Reform

All the organizations support the overall principles of AFR and are working for an accountable, fair and secure financial system. Not all of these organizations work on all of the issues covered by the coalition or have signed on to every statement.;

A New Way Forward; AFL-CIO; AFSCME; Alliance For Justice; American Income Life Insurance; American Sustainable Business Council; Americans for Democratic Action, Inc; Americans United for Change; Campaign for America's Future; Campaign Money; Center for Digital Democracy; Center for Economic and Policy Research; Center for Economic Progress; Center for Media and Democracy; Center for Responsible Lending; Center for Justice and Democracy.

Center of Concern; Center for Effective Government; Change to Win; Clean Yield Asset Management; Coastal Enterprises Inc.; Color of Change; Common Cause; Communications Workers of America; Community Development Transportation Lending Services; Consumer Action; Consumer Association Council; Consumers for Auto Safety and Reliability; Consumer Federation of America; Consumer Watchdog; Consumers Union.

Corporation for Enterprise Development; CREDO Mobile; CTW Investment Group; Demos; Economic Policy Institute; Essential Action; Greenlining Institute; Good Business International; HNMA Funding Company; Home Actions; Housing Counseling Services; Home Defender's League; Information Press; Institute for Global Communications; Institute for Policy Studies: Global Economy Project.

International Brotherhood of Teamsters; Institute of Women's Policy Research; Krull & Company; Laborers' International Union of North America; Lawyers' Committee for Civil Rights Under Law; Main Street Alliance; Move On; NAACP; NASCAT; National Association of Consumer Advocates; National Association of Neighborhoods; National Community Reinvestment Coalition; National Consumer Law Center (on behalf of its low-income clients); National Consumers League; National Council of La Raza.

National Council of Women's Organizations; National Fair Housing Alliance; National Federation of Community Development Credit Unions; National Housing Resource Center; National Housing Trust; National Housing Trust Community Development Fund; National NeighborWorks Association; National Nurses United; National People's Action; National Urban League; Next Step; OpenTheGovernment.org; Opportunity Finance Network; Partners for the Common Good; PICO National Network.

Progress Now Action; Progressive States Network; Poverty and Race Research Action Council; Public Citizen; Sargent Shriver Center on Poverty Law; SEIU; State Voices; Taxpayer's for Common Sense; The Association for Housing and Neighborhood Development; The Fuel Savers Club; The Leadership Conference on Civil and Human Rights; The Seminal; TICAS; U.S. Public Interest Research Group; UNITE HERE.

United Food and Commercial Workers; United States Student Association; USAction; Veris Wealth Partners; Western States Center; We the People Now; Woodstock Institute; World Privacy Forum; UNET; Union Plus; Unitarian Universalist for a Just Economic Community.

List of State and Local Affiliates

Alaska PIRG; Arizona PIRG; Arizona Advocacy Network; Arizonans For Responsible Lending; Association for Neighborhood and Housing Development NY; Audubon Partnership for Economic Development LDC, New York NY; BAC Funding Consortium Inc., Miami FL; Beech Capital Venture Corporation, Philadelphia PA; California PIRG; California Reinvestment Coalition; Century Housing Corporation, Culver City CA; CHANGER NY; Chautauqua Home Rehabilitation and Improvement Corporation (NY); Chicago Community Loan Fund, Chicago IL.

Chicago Community Ventures, Chicago IL; Chicago Consumer Coalition; Citizen Potawatomi CDC, Shawnee OK; Colorado PIRG; Coalition on Homeless Housing in Ohio; Community Capital Fund, Bridgeport CT; Community Capital of Maryland, Baltimore MD; Community Development Financial Institution of the Tohono O'odham Nation, Sells AZ; Community Redevelopment Loan and Investment Fund, Atlanta GA; Community Reinvestment Association of North Carolina; Community Resource Group, Fayetteville A; Connecticut PIRG; Consumer Assistance Council; Cooper Square Committee (NYC).

Cooperative Fund of New England, Wilmington NC; Corporacion de Desarrollo Economico de Ceiba, Ceiba PR; Delta Foundation, Inc., Greenville MS; Economic Opportunity Fund (EOF), Philadelphia PA; Empire Justice Center NY; Empowering and Strengthening Ohio's People (ESOP), Cleveland OH; Enterprises, Inc., Berea KY; Fair Housing Contact Service OH; Federation of Appalachian Housing; Fitness and Praise Youth Development, Inc., Baton Rouge LA; Florida Consumer Action Network; Florida PIRG; Funding Partners for Housing Solutions, Ft. Collins CO; Georgia PIRG.

Grow Iowa Foundation, Greenfield IA; Homewise, Inc., Santa Fe NM; Idaho Nevada CDFI, Pocatello ID; Idaho Chapter, National Association of Social Workers; Illinois PIRG; Impact Capital, Seattle WA; Indiana PIRG; Iowa PIRG; Iowa Citizens for Community Improvement; JobStart Chautauqua, Inc., Mayville NY; La Casa Federal Credit Union, Newark NJ; Low Income Investment Fund, San Francisco CA; Long Island Housing Services NY; MaineStream Finance, Bangor ME.

Maryland PIRG; Massachusetts Consumers' Coalition; MASSPIRG; Massachusetts Fair Housing Center; Michigan PIRG; Midland Community Development Corporation, Midland TX; Midwest Minnesota Community Development Corporation, Detroit Lakes MN; Mile High Community Loan Fund, Denver CO; Missouri PIRG; Mortgage Recovery Service Center of L.A.; Montana Community Development Corporation, Missoula MT; Montana PIRG; Neighborhood Economic Development Advocacy Project; New Hampshire PIRG.

New Jersey Community Capital, Trenton NJ; New Jersey Citizen Action; New Jersey PIRG; New Mexico PIRG; New York PIRG; New York City Aids Housing Network; New Yorkers for Responsible Lending; NOAH Community Development Fund, Inc., Boston MA; Nonprofit Finance Fund, New York NY; Nonprofits Assistance Fund, Minneapolis M; North Carolina PIRG; Northside Community Development Fund, Pittsburgh PA; Ohio Capital Corporation for Housing, Columbus OH; Ohio PIRG.

OligarchyUSA; Oregon State PIRG; Our Oregon; PennPIRG; Piedmont Housing Alliance, Charlottesville VA; Michigan PIRG; Rocky Mountain Peace and Justice Center, CO; Rhode Island PIRG; Rural Community Assistance Corporation, West Sacramento CA; Rural Organizing Project OR; San Francisco Municipal Transportation Authority; Seattle Economic Development Fund; Community Capital Development; TexPIRG.

The Fair Housing Council of Central New York; The Loan Fund, Albuquerque NM; Third Reconstruction Institute NC; Vermont PIRG; Village Capital Corporation, Cleveland OH; Virginia Citizens Consumer Council; Virginia Poverty Law Center; War on Poverty--Florida; WashPIRG; Westchester Residential Opportunities Inc.; Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI; WISPIRG.

Small Businesses

Blu; Bowden-Gill Environmental; Community MedPAC; Diversified Environmental Planning; Hayden & Craig, PLLC; Mid City Animal Hospital, Pheonix AZ; The Holographic Repatteming Institute at Austin; UNETO.

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COUNCIL OF

INSTITUTIONAL INVESTORS,

Washington, DC, December 3, 2013.
Hon. JOHN BOEHNER,
Speaker of the House, House of Representatives, Washington, DC.
Hon. NANCY PELOSI,
House Minority Leader, House of Representatives, Washington, DC.

DEAR MR. SPEAKER AND MINORITY LEADER PELOSI: I am writing on behalf of the Council of Institutional Investors (Council), a nonprofit association of corporate, union, and public pension funds, foundations, and endowments, with combined assets that exceed $3 trillion. Most member funds are major shareowner with a duty to protect the retirement assets of millions of American workers. Significantly affected by the financial crisis, Council member funds have a strong interest in meaningful regulatory reform.

The purpose of this letter is to share with you the Council's views on The Small Business Capital Access and Job Preservation Act (H.R. 1105) that the House of Representatives is scheduled to consider in open session tomorrow, December 4, 2013. Our views are in part informed by the findings of the Investors' Working Group (IWG). The IWG was an independent nonpartisan commission of industry experts sponsored in 2009 by the CFA Institute and the Council to provide an investor perspective on ways to improve U.S. financial system regulation. As you may be aware, many of the IWG's findings and recommendations were adopted by the 111th Congress during the development of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The Council opposes the Small Business Capital Access and Job Preservation Act. We strongly believe that all private equity advisors available to U.S. investors should be subject to oversight and registration with the Securities and Exchange Commission (SEC), and we concur with SEC Chairman White's letter to the House Financial Services Committee leadership in that ``our markets would not be well-served'' by such a decrease in the SEC's authority.

Private equity funds play a significant role in the economy as a source of capital, as an investment vehicle, and as a growing job provider. However, prior to the Dodd-Frank Act many private equity fund advisors operated unchecked--exempt from regulation, compliance examinations, disclosure requirements, and unencumbered by leverage limits.

By requiring private equity fund advisors to register with the SEC and abide by disclosure requirements, the Dodd-Frank Act adds a meaningful layer of protection for investors. Registration ensures that investors have access to basic information about the adviser's compensation, disciplinary history, and investment strategies; it safeguards against the possibility for an advisor's conflict of interest; it ensures that advisers establish formal compliance programs and act in the best interests of their clients; and it allows the SEC to collect data and examine advisers for compliance weaknesses and potential fraud. By eliminating the registration and reporting requirements on private fund advisors, H.R. 1105 would deny investors in private equity funds these important protections, and it would restrict the SEC from garnering regulatory information critical for assessing systemic risk in a comprehensive manner.

Furthermore, H.R. 1105 does not define what constitutes a ``private equity fund,'' but instead requires the SEC to develop specific parameters for an otherwise ambiguous asset class within a mere six months of passage. We believe it may be imprudent to exempt a broad asset class without first understanding the boundaries of such an exemption, especially considering the notion widely held by many industry experts that ``there is no fundamental legal distinction between private equity funds, hedge funds and venture capital funds ..... there is no telling how broad or narrow [the SEC's] definition will be.''

Finally, we note that the Dodd-Frank Act also creates a special exemption from SEC registration for venture capital funds under $150 million. H.R. 1105 attempts to create a similar exemption for private equity funds, yet the Bill fails to include size limits akin to those in place for venture capital funds. It is similarly imprudent to exempt large private equity funds from the protections typically afforded to investors via SEC registration.

Thank you for considering our members' views in connection with this critical financial regulatory issue. We look forward to continuing to work with you to restore confidence in our economy by improving the transparency and oversight of the U.S. financial system.

If you have any questions, or would like additional information regarding our views please feel free to contact me. Additionally, General Counsel Jeff Mahoney is available.

Sincerely,
JORDAN LOFARO.

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NORTH AMERICAN SECURITIES

ADMINISTRATORS ASSOCIATION, INC.,

Washington, DC, December 4, 2013.
Re The Small Business Capital Access and Job Preservation Act (H.R. 1105).

Hon. John Boehner,
Speaker, House of Representatives, The Capitol, Washington, DC.
Hon. Nancy Pelosi,
Minority Leader, House of Representatives, The Capitol, Washington, DC.

DEAR SPEAKER BOEHNER AND LEADER PELOSI: On behalf of the North American Securities Administrators Association (NASAA), I'm writing to reiterate concerns the association previously expressed regarding H.R. 1105, the ``Small Business Capital Access and Job Preservation Act,'' which the House is scheduled to consider later this week.

Prior to enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), investment advisers to private funds with fewer than 15 clients were not required to register with the U.S. Securities and Exchange Commission (SEC) and precious little was known about the capital market activities of these funds and other shadow banking actors.

Title IV of the Dodd-Frank Act closed this regulatory gap by requiring nearly all advisers to private funds with more than $150 million in regulatory assets under management (RAUM) within the United States to register with the SEC. Advisers to private funds with less than $150 million in RAUM were exempted from SEC registration but required to report basic data and risk metrics on a confidential basis. The SEC finalized the rules to implement the registration and reporting requirements in November 2011 and, for the two years since, advisers to private funds have been subject to the regulatory oversight of the SEC.

Private fund advisers wishing to return to the shadows of the unregulated financial services industry have argued that the new registration and reporting requirements are burdensome and provide little benefit in monitoring systemic risk within our financial markets. While any regulation entails some measure of cost, the costs in this context are specifically scaled to the size of the adviser-limited, basic disclosure on the Form ADV for exempt reporting advisers and scaled-down disclosure on the Form PF for certain registered private equity fund advisers. Only private fund advisers managing at least a billion dollars in specific asset class funds are required to complete the more detailed sections of Form PF. For those large firms handling billions of dollars, which is the case for approximately a third of all private equity funds, cost arguments become specious at best.

In terms of systemic risk, private equity fund advisers reported managing approximately $1.6 trillion as of May 2013. While individual fund outcomes are not expected to cause catastrophic loss, most would agree the market as a whole is sizeable enough to warrant some oversight. Those in doubt should consider a number of recent SEC enforcement actions that illustrate the kinds of misconduct that were occurring in the unregulated private equity space prior to the SEC oversight before taking any steps to cloak that market in darkness once more.

Investor confidence in our markets is strengthened through prudent regulations that bring transparency to the marketplace and promote accountability. Any concerns regarding the structure or costs associated with the SEC's regulation of advisers to private equity firms is best addressed to the SEC in rulemaking that can adjust the reporting, registration, and examination requirements accordingly.

For the reasons advanced previously and set forth above, we respectfully urge you to oppose H.R. 1105 in its present form. Should you have any questions, please feel free to contact me or Michael Canning, NASAA's Director of Policy.

Sincerely,

Russ Iuculano,
NASAA Executive Director.

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Statement of Administration Policy

H.R. 1105--SMALL BUSINESS CAPITAL ACCESS AND JOB PRESERVATION ACT
(Rep. Hurt, R-VA, and 12 cosponsors, Dec. 3, 2013)

The Administration strongly opposes passage of H.R. 1105, which would amend the Investment Advisers Act of 1940 to exempt nearly all private equity fund advisers from registration. The legislation effectively provides a blanket registration and reporting exemption for private equity funds, undermining advances in investor protection and regulatory oversight implemented by the Securities and Exchange Commission (SEC) under Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Wall Street Reform).

The Administration is committed to building a safer, more stable financial system. H.R. 1105 represents a step backwards from the progress made to date, given that private equity fund advisers have been filing reports with the SEC for over a year. The bill's passage would deny investors access to important information intended to increase transparency and accountability and to minimize conflicts of interest. Moreover, H.R. 1105 would exempt private equity funds from the disclosure requirements that the Congress laid out in Wall Street Reform to allow regulators to assess potential systemic risks.

Private equity funds are already subject to less stringent reporting requirements compared to other types of private funds and to an annual, rather than quarterly, filing requirement. In addition, private fund advisers with under $150 million in assets under management are exempted from registration and subject only to recordkeeping and reporting requirements.

If the President were presented with H.R. 1105, his senior advisors would recommend that he veto the bill.

BREAK IN TRANSCRIPT

I yield myself 2 minutes.

Mr. Speaker, I would now like to enter into the Record statements from the following organizations which all oppose H.R. 1105: the AFL-CIO, California Public Employees' Retirement System, and North American Securities Administrators Association.

And regarding reading the bill, I certainly did read the bill, and my point is that the bill does not require public disclosure of those matters, as the gentleman points out. It just goes to the Commission. So it doesn't go to the public. The public doesn't get the information. It stays within the custody of the Commission.

Mr. HENSARLING. Will the gentleman yield?

Mr. LYNCH. I yield to the gentleman from Texas.

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Reclaiming my time, that is right. But those are public investors. They are the ones that need the information.

Mr. Speaker, I yield the balance of my time to the gentlelady from California (Ms. Waters), our ranking member and a real champion of America's working families.

Legislative Proposals to Relieve the Red Tape Burden on Investors and Job Creators

United States House of Representatives Committee on Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises
(Statement of Anne Simpson Senior Portfolio Manager, Investments Director of Global Governance California Public Employees' Retirement System, May 23, 2013)

Chairman Garrett, Ranking Member Maloney, and Members of the Committee, on behalf of the California Public Employees' Retirement System (CalPERS), we thank you for convening this hearing. CalPERS is pleased to submit testimony for the record to reassert our strong support for efficient and effective financial regulation, as enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank'').

This statement includes a brief overview of CalPERS, including how we benefit from effective financial markets regulation and the role that shareowner rights and corporate governance play in building investor confidence. It also includes a discussion of our views on HR 1135, HR 1105, and HR 1564.

SOME BACKGROUND ON CALPERS

CalPERS is the largest public pension fund in the United States with approximately $266 billion in global assets and equity holdings in over 9,000 companies. CalPERS pays out over $14 billion annually in retirement benefits to more than 1.6 million public employees, retirees, their families and beneficiaries. This is not only an important source of daily income for those individuals; it also provides a positive economic multiplier to the local economy. We fully understand the virtuous circle between savings, investment and economic growth. That is at the heart of the CalPERS agenda.

As a significant institutional investor with a long-term investment time horizon, CalPERS fundamentally relies upon the integrity and efficiency of the capital markets. For every dollar that we pay in benefits to our members, 64 cents are generated by investment returns. The financial crisis hit us hard with $70 billion wiped from CalPERS assets. While we are pleased that we have been able to recover these losses over the last several years, we simply cannot afford another drawdown on our fund.

We rely upon the safety and soundness of capital markets, and more broadly, sustainable economic growth, to provide the long term returns that allow us to meet our liabilities. However, there is still much to be done to bring about smart regulation.

In our view, smart regulation should be structured as follows:

First, regulation needs to be complete and coordinated. Innovation in financial markets has led to the development of new financial instruments and pools. Regulation needs to keep pace with financial innovation and the attendant risks in order to be relevant. (Derivatives are an example of that innovation, but it is innovation that has been outside the reach of regulation historically.)

Second, regulation needs to allow market players to exercise their proper role and responsibilities. Capitalism was designed to allow the providers of finance a market role in allocating investment, and then holding boards accountable for their stewardship of those funds. This is why shareowner rights are vital to the functioning of markets, including the ability of investors to propose candidates to boards of directors (known in short as `proxy access') and to remove directors who fail.

Third, regulation needs to ensure transparency, so that markets can play their vital role in pricing risk. Timely, relevant and reliable information is the currency of risk management. Those agencies which have a role in channeling that information need to be fit for that purpose. (Credit ratings agencies were found wanting in this regard.)

Fourth, regulation needs to address conflicts of interest and perverse incentives which can undermine the market's ability to allocate capital effectively. (Short term, risk-free compensation for executives has fueled poor decision taking, as one example of this).

Fifth, regulation needs to ensure it does not prevent institutional investors from financing legitimate strategies, and taking advantage of new opportunities. Regulation is not there to prevent risk taking, it is there to ensure that risks are disclosed, and can be managed.

Finally, regulation needs to be proportionate. For CalPERS, we balance the additional costs that are required with the potential for financial ruin. To those who question whether we can afford to invest in smart regulation, we reply, how can we afford not to? The financial crisis dealt a crippling blow to many investors, and the underlying sub-prime mortgage scandal triggered widespread loss for ordinary people throughout the country. The devastating impact on the real economy is still with us. The costs of regulation need to be weighed against this loss.

We see smart regulation as an investment in safety and soundness of financial markets which generate the vast bulk of the returns to our fund. Smart regulation is an investment in the effective functioning of capital markets, which is critical not just to our fund, but to the recovery of the wider economy.

H.R. 1135

It is widely acknowledged that the 2008 financial crisis represented a massive failure of oversight. Too many CEOs pursued excessively risky strategies or investments that bankrupted their companies or weakened them financially for years to come. Boards of directors were often complacent, failing to challenge or rein in reckless senior executives who threw caution to the wind. And too many boards approved executive compensation plans that rewarded excessive risk taking.

Accountability is critical to motivating people to do a better job in any organization or activity. An effective board of directors can help every business understand and control its risks, thereby encouraging safety and stability in our financial system and reducing the pressure on regulators, who, even if adequately funded, will be unlikely to find and correct every problem. Unfortunately, long-standing inadequacies in investor protection have limited shareowners' ability to hold boards accountable.

Fortunately, Dodd-Frank contains a number of reforms that when fully implemented and effectively enforced will provide long-term investors like CalPERS with better tools, including better information, to hold directors more accountable going forward. These included a provision that requires additional disclosure involving the ratio between the CEO's total compensation and the median total compensation for all the other company employees. To be clear, section 953(b) as currently enacted is unartful and its critics properly identify a number of potential ambiguities. However, we strongly support the spirit of the disclosure and believe that the SEC has the regulatory flexibility to provide companies with guidance on how to comply with this section.

However, if Congress believes the SEC is unable to implement section 953(b) as currently written, we would encourage Congress to amend the section and retain the requirement. HR 1135 seeks only to repeal this requirement and for the reasons discussed above, we would strongly discourage the committee from advancing this bill.

H.R. 1105

Prior to the enactment of Dodd-Frank, we testified that the fundamental risk posed by private pools of capital is that they can choose to operate outside the regulatory structure of the United States. CalPERS Chief Investment Officer Joe Dear warned the Senate Securities Subcommittee of the overall risks to the financial system ``when these entities operate in the shadows of the financial system'' and when ``regulatory authorities lack basic information about exposures, leverage ratios, counterparty risks and other information.'' Less than three years after the enactment of Dodd-Frank, these risks have been mitigated by the requirement for private fund advisors to register and be subject to reasonable regulation.

Although HR 1105 would only exempt funds with low leverage ratios, it would constitute a large step away from the comprehensive regulation of market participants that Dodd-Frank sought to impose. Dodd-Frank has already provided small private fund advisors an exemption to registration and regulation, and we believe it is therefore unnecessary for large, albeit unleveraged, fund advisors.

H.R. 1564

The issues surrounding auditor independence and audit firm rotation are of great importance to CalPERS.

Clearly, auditors play a vital role in the integrity of financial reporting and the efficiency of the capital markets. As a long-term investor, and a strong advocate of reform we believe independence of an auditor is critical to investor confidence and the stability and effective functioning of the capital markets. It is the important role of auditors that brings standardization and discipline to corporate accounting which in turn enhances investor confidence.

CalPERS Global Principles of Accountable Corporate Governance (Principles) highlight the importance of auditor independence requiring audit committees to assess the independence of their external auditor on an annual basis. Also, as part of the engagement we recommend that audit committees require written disclosure from the external auditor of:

all relationships between the registered public accounting firm or any affiliates of the firm and the potential audit clients or persons in a financial reporting oversight role that may have a bearing on independence;

the potential effects of these relationships on the independence in both appearance and fact of the registered public accounting firm; and

the substance of the registered accounting firm's discussion with the audit committee.

CalPERS expressly supported mandatory rotation in the wake of the scandals which led to the Sarbanes-Oxley Act of 2002. CalPERS communicated its view to the European Parliament Committee on Legal Affairs, that ``mandatory auditor rotation is an effective means of increasing auditor independence''. CalPERS Principles state that

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``Audit Committees should promote the rotation of the auditor to ensure a fresh perspective and review of the financial reporting framework.''

We believe that audit committees should endorse expanding the pool of auditors for the annual audit to help improve market competition and minimize the concentration of audit firms from which to engage for audit services. We support audit committees having the ability to determine audit independence by requiring auditors to provide 3 prior years of activities, relationships and services (including tax services) with the company, affiliate of the company and persons in financial reporting oversight roles that may impact the independence of the audit firm.

Additionally, we would note that the Public Company Accounting Oversight Board's (PCAOB) Investor Advisory Group (IAG), of which I am a member, urged the agency to consider firm rotation in the context of lessons learned from the financial crisis. The PCAOB IAG indicated that the purpose of an audit is to provide confidence to investors that an independent set of eyes have looked at the numbers reported by management and objectively without bias determined they can indeed be relied upon. If investors' confidence in this process is diminished or lost, the benefits of the audit and its costs may be questioned.

Over the last two years, the PCAOB has thoughtfully reviewed auditor independence and mandatory rotation, holding a series of roundtables on the issues. We note the issue of mandatory rotation has been addressed by the European Commission (EC). The EC has voted to draft law to open up the European Union audit services market and improve audit quality and transparency including mandatory rotation of the auditor whereby an auditor may inspect a company's books for a maximum of 14 years. We believe that it is essential and beneficial for the PCAOB to collaborate with non-U.S. regulators and standard-setters on this matter.

Ultimately, we believe that audit committees are in the best position to select the auditor. However, we are strong supporters of the PCAOB and have faith in their thoughtful approach to the regulation of the audit profession. If they ultimately conclude that mandatory rotation is appropriate, we will support this judgment consistent with our support for the position taken by the EC. Accordingly, because HR 1564 would eliminate the PCAOB's discretion in this area, we cannot support the measure.

REGULATORY AGENCY FUNDING

Finally, although the hearing has not focused directly on the funding for the SEC, we would be remiss if we didn't highlight the vital role of the SEC and PCAOB in fostering capital formation and protecting investors in financial markets. CalPERS has long recognized that for financial regulators to achieve their stated objectives, they must be well-managed, well-staffed and that means they must be well-funded. Rules without enforcement are little better than useless. In 2001, CalPERS testified in support of legislation that would put SEC staff salaries on par with other financial regulators and was pleased that pay-parity provisions were enacted into law that year. More recently, we called for lawmakers to provide the SEC and U.S. Commodity Futures Trading Commission (CFTC) with stable, independent funding. Although no such mechanisms were included in Dodd-Frank, it remains imperative that the SEC and CFTC be given sufficient resources to effectively police the U.S. capital and futures markets.

We believe the SEC FY2014 funding request reflects the importance of their traditional core responsibility, as well as the new authority granted it in Dodd-Frank, and we urge you to support their funding requests.

Thank you in advance for considering the views of a long-term investor like CalPERS when you decide on how to proceed with these important issues.

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NORTH AMERICAN SECURITIES

ADMINISTRATORS ASSOCIATION, INC.,

Washington, DC, June 18, 2013.
Re H.R. 1105, the Small Business Capital and Job Preservation Act.

Hon. Jeb Hensarling,
Chairman, House Committee on Financial Services, Rayburn House Office Building, Washington DC.
Hon. Maxine Waters,
Ranking Member, House Committee on Financial Services, Rayburn House Office Building, Washington DC.

DEAR CHAIRMAN HENSARLING AND RANKING MEMBER WATERS: On behalf of the North American Securities Administrators Association (NASAA), I'm writing to express concerns with H.R. 1105, the Small Business Capital and Job Preservation Act. NASAA appreciates and shares the desire of the Committee to facilitate job creation. Investor confidence in our markets is strengthened through efforts that are designed to bring transparency to the marketplace and promote accountability. Unfortunately, H.R. 1105 could frustrate this goal by establishing an exemption from the registration requirements in federal law designed to promote transparency and accountability. Moreover, while NASAA considers the inclusion of fund leverage limits in the bill to be an improvement, we believe Congress would be remiss to ignore the question of the size of funds, in terms of assets, in making determinations about which private equity firms should be subject to the registration exemption.

The Dodd-Frank Act provided exemptions for advisers who solely advise ``venture capital funds'' as defined by the SEC and for advisers who solely advise private funds and have assets under management in the United States of less than $150 million; however, in each case such exempted advisers remain subject to SEC recordkeeping and reporting requirements. H.R. 1105 would insert an additional exemption for private equity fund advisers from registration or reporting requirements. Unlike the exemptions contained in Dodd-Frank, H.R. 1105 does not limit the exemption to advisers solely to private funds nor does it contain a cap that would limit the exemption to smaller advisers.

Furthermore, at least two fundamental components of the proposed legislation are so vague that they undermine any benefits the bill purports to confer on small business.

First, the bill is unclear as to what, if any, reporting requirements are required for private equity fund advisers. Section 2 provides that an adviser to a ``private equity fund,'' regardless of assets under management, would be exempt from both registration and reporting requirements. This proposed exemption from all registration and reporting requirements would seem to run contrary to the basic and obvious interest of investors in private equity funds, since registration under the Investment Advisers Act serves to protect investors from conflicts of interest and other risks associated with entrusting their assets to advisers. The exemption would to have the unintended consequence of depriving the SEC of important regulatory information critical for assessing systemic risk and protecting investors. The registration regimes long in place for advisers, and recently the reporting regimes established under Dodd-Frank for certain private fund advisers, are designed to help insure that regulators and investors have access to important information. The inclusion of fund leverage limits in the bill attenuate NASAA's concerns with respect to systemic risk, and we understand that private equity funds were not a catalyst of the financial crisis of 2008; however, this information is nevertheless critical to regulators and investors alike. Specifically, regulators use the information to measure risk and assess compliance; investors use the information to guide choices in picking advisers and understanding their operations.

Second, even if the language in H. R. 1105 were clarified, the legislation would remain significantly ambiguous as to the type and size of adviser to which it would apply. This is because the legislation does not define ``private equity fund'' but rather delegates this task to the SEC, which would be given six months to promulgate rules necessary to establish the record keeping and reporting obligations of these advisers. Though the bill appears to treat advisers to ``private equity funds'' similar to advisers to venture capital funds for the purposes of exemption, it fails to include the limits currently applicable to the exemption for advisers to venture capital funds. Without more specificity and a clear definition of what constitutes a ``private equity fund'', it is unknown what types of entities are covered by the exemption. This is problematic because without statutory clarification of the universe of ``private equity,'' any assessment of risk to financial stability posed by such capital investment would be invalid. Moreover, it seems unwise to establish an exemption before defining what is covered by the exemption; as AFL-CIO Policy Director Damon Silver testified to the Committee on May 23rd:

``There is no fundamental legal distinction between private equity funds, hedge funds and venture capital funds. These are terms that describe broad investment strategies, not legal structures. So the bill directs the SEC to define what a private equity fund is. And there is no telling how broad or narrow, or gameable, such a definition will be.''

Moreover, the enactment of the JOBS Act and the removal of the long-standing prohibition on general solicitation and advertising in Regulation D, Rule 506 offerings reinforces NASAA's belief that, as a general matter, the risk to investors and regulators that would accompany the exemptions contemplated by H.R. 1105 far exceed the bill's potential benefits as a tool for capital formation and job creation.

Thank you for your consideration of these concerns. We look forward to working with you as these bills move through the legislative process. If you have questions, or if NASAA can be of assistance, please contact me or Michael Canning, NASAA's Director of Policy.

Sincerely,
A. Heath Abshure,

NASAA President and
Arkansas Securities Commissioner.

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American Federation of Labor and Congress of Industrial Organizations,

Washington, DC, June 19, 2013.
LEGISLATIVE ALERT

Hon. Jeb Hensarling,
Chairman, House Financial Services Committee, Rayburn House Office Building, Washington, DC.
Hon. MAXINE WATERS,
Ranking Minority Member, House Financial Services Committee, Rayburn House Office Building, Washington, DC.

DEAR CHAIRMAN HENSARLING AND RANKING MINORITY MEMBER WATERS: The AFL-CIO, a labor federation of 57 unions representing 12 million working men and women with over

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$4 trillion in assets in benefit plans, opposes the Small Business Capital Access and Job Preservation Act (H.R. 1105); the Burdensome Data Collection Relief Act (H.R. 1135); the Audit Integrity and Job Protection Act (H.R. 1564); and the Retail Investor Protection Act (H.R. 2374) scheduled for markup in committee this week. The AFL-CIO testified in May before this Committee in opposition to these bills and we reiterate, in brief, below our continued opposition. This package of bills is a clear indication that some in Congress have every intention to take us down the road of deregulation, yet again.

Since 1980, the United States has gone through several cycles of financial deregulation. The first of these episodes led to the savings and loan fiasco of the early 1990's, the second to the tech bubble collapse in 2000 and the wave of corporate scandals and bankruptcies that began with Enron in 2001. And the third, and by far the most devastating, was the residential real estate bubble driven by a deregulated banking sector through the use of mortgage backed securities, and the subsequent collapse of that bubble starting in 2007. Surely members of the Committee don't want to be associated with arguably the next and fourth devastating round of deregulation.

``THE SMALL BUSINESS CAPITAL ACCESS AND JOB PRESERVATION ACT.'' (H.R. 1105)

Despite its title, H.R. 1105 has nothing to do with small business and everything to do with ensuring some of the richest and most powerful, and most tax subsidized, Wall Street firms are allowed to continue to operate, and build up system-wide leverage, in secret. Specifically, H.R. 1105 would exempt all private equity fund advisers from the registration and reporting requirements in the Dodd-Frank Act, unless each fund has outstanding borrowings that exceed two times the fund's invested capital commitments.

The impact of H.R. 1105 would be to prevent the SEC from collecting the information necessary to monitor a significant source of systemic risk. Section 404 of the Dodd-Frank Act gave the Securities and Exchange Commission (SEC) authority to establish recordkeeping and reporting requirements ``as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the Financial Stability Oversight Council. H.R. 1105 would exempt private equity funds from this recordkeeping and reporting framework and direct the SEC to replace it with one that omits consideration of potential systemic risks and is exclusively for use by the SEC. The AFL-CIO continues to oppose any bill that weakens investor protections and increases systemic risk.

``THE BURDENSOME DATA COLLECTION RELIEF ACT'' (H.R. 1135)

H.R. 1135 seeks to keep secret the relationship between CEO pay and the median pay of other employees at public companies, by repealing section 953(b) of the Dodd-Frank Act, which requires such disclosure. It is a bill designed to hide material information from investors and boards which ultimately becomes detrimental in efforts to fight income inequality.

Investors have long had multiple concerns about CEO pay--starting with the raw numbers that come out of investors' 'pockets. Top executives at large public companies now keep for themselves an average of 10% of their companies' net profits, approximately double the rate in the early 1990s. The disclosure requirements of 953(b) would help reveal the true nature of disparities between CEO's and their employees enabling investors and boards to also consider and take action accordingly. As such, the AFL-CIO strongly opposes H.R. 1135 and the repeal of 953(b) disclosure requirements.

``THE AUDITOR INTEGRITY AND JOB PROTECTION ACT.'' (H.R. 1564)

H.R. 1564 seeks to prevent the Public Company Accounting Oversight Board (PCAOB) from placing limits on the length of time a public company can use the same audit firm, referred to as auditor rotation. H.R. 1564 amends Sarbanes-Oxley by adding a limitation on PCAOB authority which states, ``The Board shall have no authority under this title to require that audits conducted for a particular issuer in accordance with the standards set forth under this section be conducted by specific auditors, or that such audits be conducted for an issuer by different auditors on a rotating basis.''

H.R. 1564 both substantively weakens the ability of the PCAOB to play its role in protecting our economy against systemic risk, and it weakens the independence of auditor regulation. Both results are contrary to the public interest, and consequently the AFL-CIO opposes this bill.

``THE RETAIL INVESTOR PROTECTION ACT'' (H.R. 2374)

H.R. 2374 would require the SEC to identify whether the different standards of conduct that apply to broker-dealers and investment advisers result in harm to retail investors. In addition, the bill requires the SEC's Chief Economist to conduct a cost benefit analysis of such a change. make a formal finding that the rule would reduce investor confusion, and coordinate with other federal regulators. Finally, the bill would prohibit the SEC from proposing rules applicable to broker-dealers' standard of conduct without simultaneously proposing rules that would ``address any harm to retail customers resulting from differences in the registration, supervision, and examination requirements applicable to brokers, dealers, and investment advisers.''

H.R. 2374 suggests these changes despite the fact that the SEC is currently collecting data to support an economic analysis before any rulemaking is undertaken. The bill would significantly delay and perhaps derail these long overdue efforts of the SEC to raise the standard of conduct that applies to brokers when they give advice to retail investors and accordingly the AFL-CIO opposes H.R. 2374.

For the above reasons we urge you to vote against this cluster of bills that seek to undo much needed reforms enacted in the Dodd-Frank Act.

Sincerely,
William Samuel,

Director Government Affairs Department.

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CONSUMER FEDERATION OF AMERICA,

June 18, 2013.
Hon. JEB HENSARLING,
Chairman, Financial Services Committee, House of Representatives.
Hon. MAXINE WATERS,
Ranking Member, Financial Services Committee, House of Representatives.

DEAR CHAIRMAN HENSARLING, RANKING MEMBER WATERS AND MEMBERS OF THE COMMITTEE: The Financial Services Committee is scheduled to mark-up yet another set of bills this week that would weaken investor protection and undermine the transparency and integrity of our capital markets. I am writing on behalf of the Consumer Federation of America to urge you to oppose these bills. While CFA opposes each of the bills scheduled for mark-up for reasons described briefly below, our primary focus is the cynically titled ``Retail Investor Protection Act,'' which would undermine the ability of federal agencies to ensure that Americans receive appropriate protections in their dealings with financial/professionals who purport to offer investment advice.

OPPOSE BILL (H.R. 2374) TO UNDERMINE PROTECTIONS FOR VULNERABLE INVESTORS

H.R. 2374 launches a two-stage attack on federal regulators' attempts to improve protections for average, unsophisticated investors in their dealings with predatory and self-dealing investment professionals. First, it would throw new roadblocks in the way of the Securities and Exchange Commission (SEC) as it attempts to close a gaping regulatory loophole that permits broker-dealers to provide investment ``advice'' to retail investors that is not designed to serve the best interests of those investors. Second, it would inappropriately tie the ability of the Department of Labor (DOL) to update its fiduciary definition under ERISA to the SEC's successful completion of its separate rulemaking under the securities laws.

Over the years, brokers have been permitted to call themselves financial advisers and offer extensive advisory services without having to meet the best interest standard included as part of the fiduciary duty that applies to all other investment advisers. As a result, many investors are deceived into believing they are dealing with a trusted adviser when, in fact, they are dealing with a salesperson--a salesperson, moreover, who is free to put his or her own financial interests ahead of the interests of the investor and often receives financial incentives to encourage such practices. Investors who place their trust in these salesmen in advisers' clothing can end up paying excessively high costs for higher risk or poorly performing investments that satisfy a suitability standard, but not a fiduciary duty. That is money most middle income investors can ill afford to waste.

This legislation would make it more difficult for the SEC to address this problem by requiring further study of an issue that has already been studied extensively. Indeed, the SEC has been studying the issue of the standard of conduct that should apply to brokers' investment advice for over a decade. In the process, it has conducted focus group testing of disclosures designed (without success) to clarify the differing legal standards that apply to brokerage and advisory accounts, commissioned a comprehensive independent study intended to lay the foundation for further rulemaking, and conducted a staff study of the issues to be addressed by rulemaking. Over the years, the SEC has collected reams of comment from all interested parties with a stake in the issue, and it has recently issued an additional Request for Information to form the basis of a thorough economic analysis to accompany any rulemaking it might decide to undertake.

Clearly, the additional cost-benefit analysis requirements in H.R. 2374 are not designed to address any shortcomings in the SEC approach to economic analysis of this issue. Instead, their primary effect would be to create additional grounds for legal challenge by fringe industry groups that oppose any rulemaking that might force them to abandon predatory practices that allow them to profit at their customers' expense. The best outcome, if this legislation were adopted, would be further delay of a rule that is already years overdue. More likely is that the legislation would inhibit SEC rulemaking altogether or result in a rule so weak as to be entirely devoid of meaningful. new protections for investors. Middle income investors who need to make every dollar count would be the ultimate victims of these bureaucratic games.

But retail investors would not be the only victims of this legislation. Working Americans attempting to prepare for a secure retirement would also be denied appropriate protections, perhaps indefinitely. Loopholes

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in the definition of investment advice under ERISA make DOL's fiduciary standard all but unenforceable. This bill would prevent DOL from acting to address that problem until after the SEC completes an entirely separate fiduciary rulemaking under the securities laws. It would impede DOL action despite repeated assurances that the SEC and DOL are coordinating their efforts and that any rules adopted will not conflict. DOL has responded to criticism of its original approach by withdrawing that proposal in order to conduct a thorough economic analysis, redraft the proposal, and clarify how the revised definition would interact with prohibited transaction exemptions. DOL deserves to have the resulting reproposal judged on its merits, not halted based on unsubstantiated fears about the form that rulemaking might take. For all these reasons, we urge you to vote NO on H.R. 2374.

OPPOSE ANTI-INVESTOR BILLS TO UNDERMINE MARKET TRANSPARENCY AND INTEGRITY

The Committee is also scheduled to mark up three other bills, each of which would in its own way undermine market transparency and integrity.

H.R. 1564, the ``Audit Integrity and Job Protection Act,'' would prevent the Public Company Accounting Oversight Board (PCAOB) from adopting a rule to require rotation of auditors at public companies even if it determines, based on a thorough review of the evidence, that doing so is necessary to address the persistent lack of independence and professional skepticism in the audits of public companies. The PCAOB has not yet decided on a regulatory approach and is instead engaged in carefully weighing the evidence. In contrast to the PCAOB's balanced and thoughtful approach, this legislation would decide the issue without any consideration of the evidence on audit failures tied to lack of auditor independence, a problem that has been highlighted by regulators both here and abroad. We urge you to protect the independence of the PCAOB and the audit process by voting NO on H.R. 1564.

H.R. 1105, the Small Business Capital Access and Job Preservation Act, would exempt a large swath of ``private equity'' funds from registration with the SEC without showing any reason why such an exemption is necessary or appropriate. The bill would leave it to the agency to define the scope of funds that might qualify for the exemption, setting up an inevitable regulatory race to the bottom as funds pressure the agency to write as expansive an exemption as possible. As such, the bill would limit the ability of the agency to provide effective oversight of a portion of the securities business with a proven capacity to spread risk through the financial system. We urge you to vote NO on H.R. 1105, which would undermine efforts to protect the financial system from systemic threats.

H.R. 1135, the ``Burdensome Data Collection Relief Act,'' would undermine market transparency by denying investors information about the relationship between CEO and worker pay at the companies in which they invest. Not only would this bill hide material information from the owners of public companies, but it would also undermine efforts to rein in out-of-control CEO pay. Opposition to this disclosure is clearly based not on any excessive costs or insurmountable burdens associated with making the disclosure, but on the fact that the information is likely to be embarrassing to many companies and could provide the impetus for reform. We urge you to stand up for market transparency and economic equality by voting NO on H.R. 1135.

Taken together, these bills would reduce oversight of potentially risky market segments (H.R. 1105), tie the hands of regulators seeking to address a persistent market failure (H.R. 1564), deprive investors of information that could provide a check on excessive CEO pay (H.R. 1135), and impede the ability of federal regulators to act to protect unsophisticated investors from predatory industry practices (H.R. 2374). We urge you to vote NO on each of these bills. Thank you for your attention to our concerns. You may contact me if you have any questions about our position on the issues.

Respectfully submitted,

Barbara Roper,
Director of Investor Protection.

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UNITED STATES SECURITIES

AND EXCHANGE COMMISSION,

Washington, DC, June 18, 2013.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services, House of Representatives, Rayburn House Office Building, Washington, DC.
Hon. Maxine Waters,
Ranking Member, Committee on Financial Services, House of Representatives, Rayburn House Office Building, Washington, DC.

DEAR CHAIRMAN HENSARLING AND RANKING MEMBER WATERS: I understand that the House Committee on Financial Services is scheduled this week to consider several bills pending before it, including H.R. 1105 and H.R. 2374. I write to briefly express my views on these two bills. The views expressed in this letter are my own and do not necessarily reflect the views of the full Commission or any Commissioner.

The Small Business Capital Access and Job Preservation Act (H.R. 1105) would amend the Investment Advisers Act of 1940 (Investment Advisers Act) to generally exempt investment advisers to private equity funds from the registration requirements of the Investment Advisers Act, unless such funds have borrowed and have outstanding principal amounts in excess of twice their invested capital commitments. The Retail Investor Protection Act (H.R. 2374) would impose new restrictions on the Commission's ability to adopt a uniform fiduciary standard of conduct for investment advisers and broker-dealers.

REGISTRATION OF PRIVATE EQUITY ADVISERS

Regarding H.R. 1105, registration under the Investment Advisers Act serves to protect investors from conflicts of interest and other risks associated with investors' entrusting their assets to advisers. Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandated that advisers to private equity funds with assets under management above $150 million register with the Commission. Although private equity funds were not an underlying cause of the recent financial crisis, private equity fund advisers represent a significant and influential part of the financial landscape. In my view, our markets would not be well-served by narrowing the scope of the Commission's jurisdiction and oversight of these advisers.

Private equity fund investors are in need of the same protections as other private fund investors. As with other types of funds and advisers, the Commission has brought enforcement actions against private equity funds and their advisory personnel involving unlawful pay to play schemes, insider trading, conflicts of interest, valuation, and misappropriation of assets. Registration provides the Commission with tools to discover and prevent fraud and other violations of the securities laws, enhancing confidence in our capital markets and promoting fair dealing. It is important, therefore, that the Commission, as a capital markets regulator, have an appropriate level of oversight of these entities, for both investor protection and market efficiency purposes.

Beyond this, to base exemptions from registration on investment strategy or leverage would result in the securities laws generally favoring or disfavoring particular strategies, which should be avoided when the objective is a fair and level playing field.

UNIFORM FIDUCIARY STANDARD OF CONDUCT

Section 913 of the Dodd-Frank Act added new express authority for the Commission to adopt a uniform fiduciary standard of conduct and to consider other potential options for the harmonization of the regulation of broker-dealers and investment advisers. Although there are differing views on this issue, many investor advocates and industry participants support the establishment of a uniform fiduciary standard of conduct. The new restrictions on the Commission's authority that would be imposed under H.R. 2374, however, would make it difficult for the Commission to adopt such a rule should it determine to do so.

The Commission has pursued the consideration of possible rulemaking under section 913 with care and diligence. Section 913 required the Commission to conduct a study regarding obligations of broker-dealers and investment advisers. That study, published in 2011, contained two primary recommendations from Commission staff--one in favor of a uniform fiduciary standard of conduct and another calling for enhanced harmonization of the regulatory requirements for broker-dealers and investment advisers. Following publication of the study, Commissioners and Commission staff have met with relevant parties and maintained an open dialogue with those interested in these issues. To further its review, the Commission in March 2013 published a request for additional data and other information, in particular quantitative data and economic analysis. Any rulemaking under section 913 would include a rigorous economic analysis.

If, after such fact-finding and deliberations, the Commission should determine to propose a uniform fiduciary standard of conduct, H.R. 2374 would layer on new statutory requirements for the Commission to satisfy before finalizing any such rules, which could impede this investor-focused initiative in what already has been a multi-year process.

I hope that this information is helpful to you and to the other members of the Committee. Please do not hesitate to contact me or have your staff contact Tim Henseler, Acting Director of the Office of Legislative and Intergovernmental Affairs, if I can be of further assistance.

Sincerely,

Mary Jo White,
Chair.

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