A flurry of activity was seen last week on the House floor as the Financial Services Committee reported on various bills, many of which JOBS Act related.  These bills propose to change registration and reporting requirements for small reporting companies, Small Business Investment Companies (SBICs) and savings and loan companies, as well as affect the treatment of Emerging Growth Companies (EGCs). On July 14, the House passed the following bills, and on July 15, referred them to the Senate Committee on Banking, Housing and Urban Affairs:

In contrast, plans to consider H.R. 1675 and H.R. 2354 were scrapped by House Republicans, according to CQ News. H.R. 1675 would have directed the SEC to revise regulations relating to compensatory benefit disclosures by issuers. H.R. 2354 planned to reduce the number excessive and costly regulations issued by the SEC by requiring a review of each significant regulation it had issued.

Today the House of Representatives approved several bills including these two, which we have previously commented on:

H.R. 4569, the Disclosure Modernization and Simplification Act, sponsored by Rep. Scott Garrett (R-NJ).  This bipartisan bill will help investors navigate lengthy and confusing company disclosures by allowing public companies to submit a summary page of all material information included in annual Securities and Exchange Commission (SEC) filings.  The bill directs the SEC to also simplify financial reporting requirements for small and emerging growth companies.

H.R. 4200, the Small Business Investment Companies Advisers Relief Act, sponsored by Rep. Blaine Luetkemeyer (R-MO).  H.R. 4200 amends the Investment Advisers Act of 1940 to reduce unnecessary regulatory costs and eliminate duplicative regulation of advisers to Small Business Investment Companies, which are professionally-managed investment funds that finance small businesses.

In a Guidance Update published on June 30, 2014 by the SEC’s Division of Investment Management, the staff closed a loophole that allowed business development companies (BDCs) with wholly owned Small Business Investment Company (SBIC) subsidiaries to avoid meeting asset coverage requirements when the SBIC subsidiaries issue debt that is not guaranteed by the Small Business Administration (SBA).

Sections 18(a) and 61(a) of the Investment Company Act of 1940 (1940 Act) generally require BDCs to meet asset coverage requirements when they issue “senior securities,” including debt instruments.  A BDC may be deemed an indirect issuer of any class of “senior security” issued by its direct or indirect wholly owned SBIC subsidiaries.

The SEC has regularly granted BDCs limited exemptive relief from these asset coverage requirements.  The relief allows the BDCs to treat certain indebtedness issued by their wholly owned SBIC subsidiaries as indebtedness not represented by senior securities for purposes of determining the BDC’s consolidated asset coverage.  The SEC exemptive orders are, in part, based upon the representation that SBIC subsidiaries are subject to the SBA’s regulation of leverage.

The staff said that it learned that some BDCs have sought to rely on this limited relief in connection with SBICs that have not issued indebtedness that is held or guaranteed by the SBA.

Although in most cases the representations and condition in the orders have not explicitly required that an SBIC subsidiary have issued indebtedness held or guaranteed by the SBA, the staff said that this requirement is implicit in the rationale for the relief because the SBA’s independent oversight of SBIC debt makes the protections of the 1940 Act unnecessary.  The staff said that when an SBIC subsidiary issues debt that is not backed by the SBA, the subsidiary is not subject to the full oversight of the SBA, and thus the protections of Section 18(a) are required.

Going forward, the staff will require that BDC applications for relief from the Section 18 asset coverage requirements include a condition providing that:

[A]ny senior securities representing indebtedness of an SBIC Subsidiary will not be considered senior securities and, for purposes of the definition of “asset coverage” in section 18(h), will be treated as indebtedness not represented by senior securities but only if that SBIC Subsidiary has issued indebtedness that is held or guaranteed by the SBA.

We expect that as BDCs grow in popularity and assets, the staff will issue more regulatory guidance for BDCs.