Washington Update

Tax Reform

Over the past few months, serious debates about comprehensive tax reform are intensifying within the tax writing committees. The fact that Senate Finance Committee Chairman Baucus (D-MT) and House Ways and Means Committee Chairman Dave Camp (R-MI) will no longer be Chairmen of their respective committees in the next Congress has increased their desire to have tax reform stand as a legacy for their public service.

At the same time, changing dynamics in Washington are making it less likely that comprehensive tax reform will actually be signed into law this year or next. The recent focus of both committees on scandals at the Internal Revenue Service (IRS) has taken many Members’ focus off of tax reform and led some to question whether overarching tax reform should be undertaken at this time. In addition, the Treasury Department has received higher than expected revenues which has delayed the timing on the debt ceiling debate from mid-summer to mid-fall or later in the year. This reduces the urgency of reaching a Grand Bargain. As a result of these developments, it has become less likely – though not impossible – that resolution of the debt ceiling debate will include a mechanism to expedite tax reform and entitlement reform as part of a larger legislative package.

In this environment, we continue to engage actively with policymakers, the media, and third party validators to prepare for a long-term debate on the merits of three principal tax issues – carried interest, interest deductibility, and partnership taxation – regardless of whether comprehensive tax reform actually becomes law this year. Winning the arguments on these issues remains extremely important even if comprehensive tax reform does not come to fruition in 2013. If policymakers from both parties are unsuccessful in achieving comprehensive tax reform now, this year’s intense focus on these topics will still affect how these issues will be addressed going forward.

Legislation for Private Equity Registration Relief Moves Forward

Outside of the tax arena, the PEGCC continues to support movement of legislation to exempt private equity investment advisers from registering with the Securities and Exchange Commission (SEC). On June 19, 2013, the House Financial Services Committee approved the Small Business Capital Access and Job Preservation Act (H.R. 1105), on a bipartisan 38 to 18 vote. The legislation, co-authored by Representatives Robert Hurt (R-VA) and Jim Himes (D-CT), reaffirms that private equity and growth capital funds pose no systemic risk to the U.S. economy nor do they raise investor protection issues that require additional regulation.

Now that the House Financial Services Committee has favorably reported H.R. 1105, the next steps for the measure include floor consideration by the full House of Representatives and introduction of a similar or identical bill in the Senate.  The PEGCC will continue working with legislators and regulators to ensure they have the information needed while reducing costs and barriers to investing in the U.S. economy.

Regulatory Update

As highlighted in another portion of this newsletter, the SEC recently issued final regulations implementing the JOBS Act general solicitation rules. At the same time the SEC also issued proposed rules that would add new information requirements and obligations on firms making private placements under Regulation D. The PEGCC will engage with regulators during the comment period to ensure these new proposals do not add unintended, additional burdens on firms which could undercut provisions of the JOBS Act.

In Europe, the Alternative Investment Fund Managers Directive (AIFMD) crossed the first of several meaningful implementation deadlines on July 22, as several European nations continue the process of transposing the AIFMD into national law. Finally, many Dodd-Frank regulations remain unresolved (e.g., Commodity Futures Trading Commission updated aggregation rules, Volcker Rule, and incentive compensation).

Looking Forward

The legislative and regulatory calendar will remain relatively busy for the near future. Over the next three months, Congress and the President will face a series of decision points on various important fiscal matters. On or before October 1, Congress and the President will need to reach agreement on some form of spending package to fund the government for the forthcoming fiscal year. Failure to do so would lead to a government shutdown. In addition, as the year draws to a close, there will be heightened pressure to increase the United States Government’s debt limit. At the same time, committee action may proceed on tax reform even with uncertain prospects for final resolution. On the regulatory front, expect additional action on unresolved issues that impact private equity.

Throughout all of these coming challenges, we at the PEGCC will keep you informed of developments important to private equity and growth capital firms.