Critics say House bill would create 'Wild West' for private placements

Legislation exempts from SEC registration small-business M&A brokers

Jan 17, 2014 @ 12:43 pm

By Mark Schoeff Jr.

+ Zoom

A bill that passed the House quietly but overwhelmingly this week would dangerously deregulate the private-placement market, according to critics, who will try to stop the measure in the Senate.

In a 422-0 vote on Tuesday, the House approved legislation that would exempt from Securities and Exchange Commission registration brokers who specialize in mergers and acquisition of small businesses.

Under the bill, a small business is defined as one that has earnings of less than $25 million before interest, taxes, depreciation and amortization or has gross revenue of less than $250 million.

Those parameters go far beyond the small-business realm and open the entire middle market to nonregistered brokers, according to Jessica Pastorino, president and chief compliance officer of M&A Securities Group Inc.

She is also critical of a provision that would allow unlicensed brokers to raise capital.

“This bill would allow a lot of private-placement work to be done outside of broker-dealers,” said Ms. Pastorino, whose company provides a compliant broker platform for investment bankers.

The measure would end the regulatory monitoring of the M&A marketplace that keeps it safe, said Dante Fichera, chief executive of the Independent Investment Bankers Corp.

“It's the Wild West,” he said.

“There's going to be a lot of fraud. It eliminates transparency and eliminates a lot of the protections under [securities laws] that investors have,” Mr. Fichera said.

A spokesman for the author of the bill, Rep. Bill Huizenga, R-Mich., a member of the House Financial Services Committee, disputed Mr. Fichera's assertion. He said that M&A brokers would remain subject to state laws and that that the SEC could still investigate and bring enforcement actions against them.

“It is utterly and completely false that [the bill] will create the Wild West,” said Brian Patrick, Mr. Huizenga's communications director. “There would still be protections.”

In a House floor speech on Tuesday, Mr. Huizenga, a member of the House Financial Services Committee, said that the legislation would ease regulatory burdens for M&A brokers who will be helping baby boomer business owners headed for retirement sell their enterprises rather than close them and eliminate jobs.

He estimated that the market for privately owned small businesses is $10 trillion.

“We want people to see the fruits of their hard work over the years,” Mr. Huizenga said.

“We want them to be able to sell those companies,” he said. “We don't want to see people close them unnecessarily, because we know the impact that happens to small communities.”

Even though the bill is heading to the Senate with a strong wind at its back after the unanimous vote on the House floor, Ms. Pastorino hopes to stop it in the Senate.

A companion bill has been introduced in that chamber.

The Consumer Federation of America is reviewing the legislation.

“We are concerned that the bill provides an exemption for these firms that appears to be far more sweeping than is either necessary or appropriate,” said Barbara Roper, CFA director of investor protection.

Supporters of the bill overstate the regulatory costs that come with oversight by the SEC and the Financial Industry Regulatory Authority Inc., Ms. Pastorino said.

“We're registered, and we get examined,” she said.

“It's not overly burdensome. Finra was here for a day and a half last year,” Ms. Pastorino said.

This story was corrected at 6:32 p.m. ET to remove a reference to 20% as the amount of capital that an unlicensed broker can raise. The 20% figure refers to the amount of stock ownership that defines control of a company.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17

Conference

Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

INTV

How advisers are helping clients battle the opioid crisis

Editor Fred Gabriel, contributing editor Elizabeth MacBride and reporter Greg Iacurci discuss the financial impact of the opioid epidemic on American families, and how advisers can help.

Latest news & opinion

Fiduciary advocates press CFP Board for specifics on standards changes

Meanwhile, few brokerages and their trade associations, which blasted the DOL's fiduciary rule in comment letters, are responding to the CFP Board's proposal.

Big gains attract new money to emerging markets, but should investors stay?

An estimated $6.7 billion has flowed into emerging-market stock funds and ETFs so far this year, according to Morningstar.

Attorney blasts Finra after regulator loses insider trading case

Lawyer says it was 'slimy' of Finra to publicize the case while it was still being litigated.

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print