Credit: Gage Skidmore from Surprise, AZ, United States of America, CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, via Wikimedia Commons
On October 20th, several of the country’s highest-ranking Democrats reintroduced legislation that, if passed, could become one of the largest regulatory crackdowns the industry has seen in decades. Leading the charge, Sen. Elizabeth Warren (D-MA), Sen. Sherrod Brown (D-OH), and Sen. Tammy Baldwin (D-WI) are putting forth a bill known as the Stop Wall Street Looting Act. The legislation would prohibit these newly taken over companies from paying dividends or making stock buybacks for two years following the private equity firm closing the leveraged buyout. Also, it would tax carried interest at earned-income rates and impose a 100% tax on fees received from their companies. Thirdly, the bill would prevent private equity funds’ newly-purchased companies from taking on loans to pay out dividends that the portfolio companies could not otherwise afford.
But, despite these steps that she has proposed, Warren maintains that her goal is not to eliminate private equity. Instead, she hopes to curb some of the tactics private equity firms use in the prioritization of short term profits at the expense of the portfolio companies and their employees.
As Senator Warren said in her justification for the bill, “We’ve seen in industry after industry that it’s bad news when private equity comes knocking. It’s bad for workers and consumers when local retailers or even large chains are bought out by a private-equity firm. They load up their companies with debt, strip their assets, and the next thing you know thousands of workers have lost their jobs.”
In addition to the direct regulations on the operation of these funds, it would also direct the Securities and Exchange Commission (SEC) to begin drafting new disclosure rules for private equity companies, shedding light on what Warren claims has been an opaque industry. In increasing transparency, the SEC would require funds to publicly disclose the names of major investors as well as information on fees, debt, and performance.
When this proposed legislation was first introduced two years ago, it met fierce resistance, and Warren expects the same level of fierce opposition. When it was first introduced, it was blasted by many in the private sector, including Drew Maloney, president and CEO of the American Investment Council. He suggested that the bill would so severely hurt small businesses that “it should be named the Stop Main Street Investment Act” rather than the Stop Wall Street Act. Maloney also called Warren’s bill “irresponsible,” and warned that the bill would “discourage small business investment, destroy jobs, hurt retirements, and threaten investments in important fields including sustainability and life sciences.”
In addition to pushback from citizens not in government, the bill ran into heavy opposition during a Senate Banking Committee hearing on October 20th. Leading the charge, Louisiana Senator John Kennedy claimed that the bill would “gut private equity like a fish,” while others said it would curb innovation, curtail productivity, and cause layoffs.
Supporters shared their thoughts as well. For example, Eileen Appelbaum, the co-director of the Center for Economic and Policy Research, said private equity exposed investors to greater risk and did not deliver greater returns than the stock market. In addition, Illinois Treasurer Michael Frerichs stated that the lack of transparency among private equity firms made vetting investments more expensive and burdensome, and the new SEC disclosure rules would help address this issue.
Comments