Middle-Market Public Policy Roundup

In this week’s roundup, ACG’s public policy team submitted a comment letter in support of the Securities and Exchange Commission’s effort to simplify private offering exemptions. In addition, a House Financial Services subcommittee summoned two witnesses last Wednesday to shed light on leveraged lending and its potential risk to the U.S. economy.

ACG Submits Comments on SEC Concept Release to Harmonize Securities Offerings Exemptions

Last week, ACG filed comments with the Securities and Exchange Commission to support streamlining and clarifying the current patchwork of private offering exemptions.

In the letter, ACG applauded the SEC’s effort to harmonize offering exemptions under the Securities Act, a framework that ACG member feedback confirmed is overly complex and confusing, particularly for middle-market investment advisers and firms that may lack the resources of larger firms.

Under current law, every offer and sale of securities must be registered with the SEC unless an exemption from registration is available.

While these exempt offerings are a crucial source of funding for middle-market businesses and private funds, over time, a complex framework for exempt offerings—each with different requirements and conditions—has emerged.

Middle-market companies have more limited resources and may be more likely to rely on exemptions given the costs associated with conducting a registered offering. They may find it particularly difficult to manage this complexity.

Because of this, ACG emphasized that clarifying and simplifying the offering exemptions will result in increased capital formation and investment in middle-market companies, ultimately producing economic growth and job creation.

Specifically, ACG recommended that the SEC:

• Allow “knowledgeable employees” of firms to be considered “accredited investors” for private funds sponsored by their employer;
• Allow any person who is a “family office” or a “family client” to be an accredited investor. (This is consistent with a new bill sponsored by Rep. Carolyn Maloney, D-N.Y., the Family Office Technical Correction Act);
• Expand the definition of an “accredited investor” to include persons that have passed examinations that test their knowledge and understanding in the areas of securities and investing, have been certified as a public accountant or comparable profession, or have passed an accredited investor qualification examination;
• Clarify that firms may communicate with data aggregators such as Pitchbook and Preqin without it being considered a “general solicitation;” and
• Formalize the Citizens VC, Inc. No Action Letter, which provides that an issuer that takes certain steps to establish a relationship with a potential investor will not be deemed to have a “substantive” relationship with the investor.

House Subcommittee Assesses Threats to U.S. Financial System

A recent hearing provided another opportunity for members of Congress to discuss concerns related to leveraged loans.

On Sept. 25, members of the House Financial Services Subcommittee on Consumer Protection and Financial Institutions examined potential threats to the U.S. financial system during a wide-ranging hearing that included a discussion about leveraged lending.

Subcommittee Chairman Rep. Gregory Meeks, D-N.Y., began the hearing by asking why there may be a risk in leveraged lending.

Among the witnesses giving testimony to members of Congress was Lael Brainard, a governor of the Federal Reserve System. Brainard noted the increase in leveraged lending—which has now topped $1 trillion—and its lack of transparency and oversight. However, she added that issuances have slowed as interest rates have made bonds more attractive.

Brainard, who also chairs the Fed’s Board Committee on Financial Stability, also noted the weakening of covenants, or lender protections, on leveraged loans as well as their increased opaqueness, stating it is important to have as much visibility as possible into who is holding these loans on the non-bank side.

Meeks continued to emphasize his concerns about a lack of information surrounding leveraged lending—specifically, collateralized loan obligations or CLOs—and urged regulators to monitor, map and quantify systemic risk.

Rep. Andy Barr, R-Ky., addressed concerns surrounding CLOs, explaining the fundamental difference between systemic risk and credit risk, saying “just because a product is risky doesn’t mean it is a contagion.”

Barr also emphasized that credit risk is priced into the CLO. The hearing’s second witness, Director of the Office of Research for the U.S. Treasury Dino Falaschetti agreed, explaining the full balance sheet needs to be taken into consideration when looking at CLOs.

Barr further argued that it is misplaced to look at triple-A-rated CLOs as risky, considering they have had no defaults in their entire existence.