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

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

What to do when your partnership ends

Breaking up is hard to do: and that is certainly true when it comes to advisory firms. Financial Adviser Rob Holdford tells his story and explains how you can survive and thrive when a partnership dissolves.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

TD Ameritrade triples time before it charges fees on popular ETFs

Extending free trading of Vanguard and iShare ETFs to January.

Trump rejects idea of new caps on 401(k) savings in tax plan

GOP reportedly had been considering reducing the cap on the annual amount workers can set aside for 401(k)s.

Finra's stats reveal an industry in decline

The broker-dealer regulator reports fewer entities under its watchful eye.

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print