ACG Public Policy - "Stop Wall Street Looting Act of 2019"
Date: July 19, 2019
ACG Advocacy Alert: Private Equity Industry Targeted in Newly Introduced "Stop Wall Street Looting Act of 2019"
Earlier today, Sen. Elizabeth Warren (D-MA), along with other 2020 presidential candidate hopefuls and Democrat colleagues in both chambers, introduced the Stop Wall Street Looting Act of 2019. This bill, a cornerstone of Sen. Warren's "economic patriotism" agenda, seeks to overhaul the private equity industry by instituting a comprehensive set of changes that would fundamentally alter the private equity business model.
In a Medium post released on the same day titled, "End Wall Street's Stranglehold On Our Economy," Sen. Warren describes the private equity industry as "legalized looting," calling it "the poster child for financial firms that suck value out of the economy." She also accuses the private equity industry of making "a handful of Wall Street managers very rich while costing thousands of people their jobs, putting valuable companies out of business, and hurting communities across the country."
The bill's "findings" reflect similar messages, stating that "[p]rivate funds should have a stake in the outcome of their investments," and that the Federal Government should "put an end to the practice of looting economically viable companies for the enrichment of private investment fund managers."
Key components of the bill include:
"Corporate Responsibility" making PE funds liable for debt and other legal liabilities held by portfolio companies.
"Anti-Looting" limiting dividend recaps within 24 months of an LBO, applying a 100% tax on monitoring and transaction fees, and strictly limiting the deduction of interest expenses by portfolio companies.
"Worker and Consumer Protection in Bankruptcy" raising the priority of worker backpay severance, and limiting executive pay during and after the bankruptcy process.
"Closing the Carried Interest Loophole" reclassifying carried interest as regular income.
"Investor Protection and Market Transparency" requiring annual SEC disclosure of interest in funds, debt held by funds and their portfolio companies, and fees and expenses. Additionally, makes PE funds fiduciaries of their pension plan investors under ERISA, and prohibits "preferential side deals."
"Restrictions on Securitizing Risky Corporate Debt" clarifying managers of collateralized debt obligations are subject to risk retention requirements under Dodd-Frank.
In addition to Sen. Warren, Sens. Kirsten Gillibrand (D-NY), Bernie Sanders (I-VT), Tammy Baldwin (D-WI), and Sherrod Brown (D-OH) introduced the bill in the Senate.
Reps. Mark Pocan (D-WI) and Pramila Jayapal (D-WA) introduced the House companion bill, with Reps. Barbara Lee (D-CA), Jesus Garcia (D-IL), Ayanna Pressley (D-MA), Rashida Tlaib (D-MI), Jan Schakowsky (D-IL), Ro Khanna (D-CA), and Raul Grijalva (D-AZ) as cosponsors.
As the bill title intimates, the Stop Wall Street Looting Act of 2019 is a political messaging bill that falls squarely within Elizabeth Warren's presidential campaign agenda to "fundamentally change the government's approach to the economy ... to put American workers and middle-class prosperity ahead of multinational profits and Wall Street bonuses."
While the legislation is likely to get substantial coverage on the campaign trail and in the media, there is virtually no chance it can pass the divided Congress. Still, it is a clear indication that an anti-private equity narrative will be increasing and that the industry must gear up to combat misguided messages with robust data demonstrating the consistent high performance of private capital investment, how private equity returns strongly support public pension funds and university endowments, and how U.S. companies backed by private equity – particularly those in the middle market – grow jobs and sales by a significantly higher rate than their public counterparts.
ACG is actively analyzing the bill text and assessing best next steps for strategic advocacy on behalf of the middle market.