NASAA Encourages Congress to take ‘Balanced Approach’ to Capital Formation Proposals to Restore Investor Confidence

Abshure: “What we need is smarter regulation, not merely deregulation.”


WASHINGTON (October 23, 2013) – The North American Securities Administrators Association (NASAA) today urged lawmakers to proceed cautiously when considering additional legislation to reduce impediments to capital formation on the heels of the Jumpstart Our Business Startups (JOBS) Act of 2012.

“The states are committed to fostering responsible capital formation, which, in turn, strengthens investor confidence and leads to job growth. At the same time, capital formation will be impeded when investors are not adequately protected,” NASAA Past President and Arkansas Securities Commissioner Heath Abshure said during testimony before the House Subcommittee on Capital Markets and Government Sponsored Enterprises.

“NASAA shares the goal of Congress to improve the United States economy by spurring private investment in businesses. However, we are concerned that the Committee may be attempting to reach this goal through a strictly one-sided approach – namely, by eliminating sensible regulations that appear to be burdensome to businesses that want to raise capital,” Abshure said.

“We encourage the Committee to take a more balanced approach and to consider reforms that will restore investor confidence in the markets. What we need is smarter regulation, not merely deregulation,” he said.

The hearing was called to examine seven legislative proposals related to capital formation, including proposals to streamline registration requirements of “merger and acquisition brokers;” further ease reporting requirements applicable to “Emerging Growth Companies” or EGCs; and relax portfolio strictures, leverage limits, and other regulations for business development companies (BDCs). They also include common-sense proposals to reduce “red tape” that adds to the compliance costs of small and startup businesses, such as the SEC’s requirement that certain filings be made using eXtensible Business Reporting Language (XBRL).

“NASAA’s view regarding this new collection of bills is mixed,” Abshure said, noting that state securities regulators generally support the proposed “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2013” (H.R. 2274) sponsored by Rep. Bill Huizenga (R-MI).

“This legislation would establish a simplified and streamlined registration process for broker-dealers engaged solely in the business of effecting the transfer or sale of privately held companies,” Abshure said. “NASAA is optimistic that this legislation will encourage registration and regulatory compliance by M&A brokers.”

NASAA remains concerned about other proposals pending before the committee regarding emerging growth companies and business development companies.

“Most notably, NASAA is troubled by the proposal to further expand what are basically new, untested regulatory carve-outs for EGCs as well as proposals that would increase leverage and conflicts of interests in the BDC space,” Abshure said.

Three bills pending before the Subcommittee – H.R. 31, H.R. 1800, and H.R. 1973 – would repeal the provisions of the Investment Company Act of 1940 (ICA) that limit the ability of a BDC to invest in investment advisers. Two of these bills, H.R. 31 and H.R. 1800, additionally would ease the leverage limits for BDCs established by the ICA, allowing such firms to maintain a greater ratio of debt-to-asset valuation on their balance sheets.

“The most radical change contemplated by any of the bills before the Subcommittee occurs under H.R. 1973, which would redefine financial services companies as ‘eligible portfolio companies,’ thereby obviating all existing limitations on the ability of BDCs to invest in financial companies,” Abshure said. “State securities regulators also question the rationale for further relaxing the leverage limits applicable to BDCs, as contemplated by H.R. 31 and H.R. 1800.

Abshure emphasized that NASAA’s concern also extended to narrower bills that would allow BDC investment only in investment adviser firms.

“That proposal would create a significant conflict of interest,” Abshure said. “If an advisory firm were among a BDC’s portfolio of companies, an incentive would exist for the investment adviser to recommend, or even push, their clients toward investments in the BDC or its other portfolio companies, even if such investments were not in the client’s best interest,” Abshure said. “No such conflicts of interest exist now, and NASAA urges Congress not to allow for such a conflict of interest to arise as it considers reforms to the BDCs portfolio strictures.”

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.


For More Information:
Bob Webster | Director of Communications

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