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Proposed Senate Bill Would Significantly Impact Certain Private Funds and Their Affiliates

Recently, a group of Congress members introduced into Congress Senate Bill 2155 named the Stop Wall Street Looting Act of 2019. Although unlikely to be enacted into law as drafted, this proposed legislation would directly and substantially affect a number of fundamental operational aspects of private equity funds and their affiliates. The proposal, co-sponsored by a number of Democratic members of Congress, is the latest iteration of periodic legislative efforts to “rein in” perceived abuses in the private equity industry.

To summarize several key areas of Senate Bill 2155:

  • Sections 101 and 102 would hold private funds that are control persons of a portfolio company jointly and severally liable for all debt incurred by the portfolio company;
  • Section 103 would provide that any indemnification of a private fund that is a control person, or an affiliate thereof (defined to include 20% or greater beneficial owners), for the liabilities of a portfolio company and its affiliates is void against public policy;
  • Section 201 would prohibit portfolio companies from making a capital distribution during the 24 months following a leveraged buyout transaction;
  • Section 203 would apply a 100% tax on fees paid by portfolio companies to private fund managers, such as “monitoring” or “transaction” fees;
  • Section 403 would tax carried interest, currently taxed at the preferential capital gains rates at the higher earned income rates;
  • Section 501 would require the SEC to issue rules requiring each private fund to make certain annual public disclosures including the identities of those with interests in the fund and their ownership interests, the debt held by the fund (disaggregated by both domestic versus offshore and financial institution verses non-financial institution creditors) its portfolio companies (including portfolio company debt categorized as liabilities, long-term liabilities, and payment in kind or zero coupon debt), the performance of the portfolio companies, and fees and payments collected by the firm; and
  • Section 502 would prohibit investment advisers, including private fund managers, from requiring investors (including pension plans) to waive the fund managers’ fiduciary duty under ERISA or under the Investment Advisers Act of 1940.

Additionally, for purposes of Senate Bill 2155, Section 3 defines a “private fund” as a company or partnership relying on either section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (but expressly excluding venture capital funds) that directly, or through an affiliate, acts as a control person of an entity that is acquired in a change in control transaction (e.g. a portfolio company). Section 3 further defines the term “control person” as someone who owns or controls, including through coordination with other persons, at least 20% of voting securities of a company, but excludes limited partners of a private fund organized as a partnership.

Reactions from the private fund industry to date have understandingly varied. On July 18thAmerican Investment Council President and CEO Drew Maloney issued a statement characterizing Senate Bill 2155 as both “harmful” and “extreme.” Subsequently, a Pensions & Investments article dated August 5th reported that the Institutional Limited Partners Association “support[ed] some of the legislation’s ideas but it also look[ed] forward to House hearings and more bipartisan legislation later this year.

© 2020 Proskauer Rose LLP.


About this Author

Anthony M. Drenzek, Special regulatory Counsel, Proskauer Rose, Attorney, Finance Policy Lawyer
Special Regulatory Counsel

Tony is special regulatory counsel in the Corporate Department and a member of the Private Funds Group and the Private Equity & Hedge Fund Litigation team. His practice focuses on advising U.S. and offshore private fund managers on all aspects of federal, state and SRO organizational and operational compliance, with a specific emphasis on the Investment Advisers Act of 1940.

Tony assists U.S. and offshore private fund clients in registering with the SEC as investment advisers, or reporting as exempt reporting advisers, and complying with...

Joshua Newville, Proskauer Rose, regulatory enforcement attorney, industry compliance legal counsel, securities exchange commission lawyer

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset Management Unit, a specialized unit focusing on investment advisers and the asset management industry.  His prior experience with the SEC provides a unique perspective to help private investment funds and their advisers manage risk and handle regulatory issues.

Stephen T Mears, Proskauer, growth equity lawyer, buyout funds attorney

Stephen T. Mears is a partner in the Private Investment Funds Group. He concentrates on private investment funds, including venture capital, growth equity and buyout funds. He represents fund sponsors in all aspects of fund formation, operation and management, including fund structuring, portfolio investments, sales and distributions, internal governance and management, regulatory compliance and ongoing maintenance and administration. Stephen also represents institutional investors in connection with their participation in private investment funds.