House Subcommittee Examines Expanding Access to Private Markets

February 13, 2023

The House Financial Services Subcommittee on Capital Markets held a hearing Wednesday afternoon titled, “Empowering Entrepreneurs: Removing Barriers to Capital Access for Small Businesses.” The hearing was the Subcommittee’s second hearing of the day, following one focused on modifying the definition of “accredited investor.” Ten legislative proposals (all “discussion drafts”) were attached to the hearing as a precursor to the committee’s development of a JOBS Act 4.0 proposal. A committee markup is expected later in March.

The hearing primarily focused on expanding access to the private markets. Committee Republicans praised the reforms of the JOBS Act of 2012, urging additional changes to remove barriers to small business capital access. Democrats were generally more cautious and criticized large private companies and private equity firms for taking advantage of exemptions to avoid disclosure requirements. Witnesses were split ideologically, with the Democratic witness advocating to scale back the current exemption framework and other witnesses offering support for Republicans’ proposals.

Of particular importance to advisers was draft legislation authored by Subcommittee Chair Ann Wagner (R-Mo.) that would direct the SEC to update its definition of “small entities” under the Regulatory Flexibility Act “to ensure that the SEC more carefully accounts for impacts on small businesses when pursuing rulemakings.” The proposal is similar to the “Investment Adviser Regulatory Flexibility Improvement Act” strongly advocated by the IAA in the last Congress.

The Regulatory Flexibility Act was intended to require agencies to analyze the economic impact of their regulations on small businesses and consider less burdensome ways to achieve their regulatory goals. However, the SEC has been able to avoid application of the Act to smaller advisory firms because its definition of small entity includes only advisory firms with less than $25 million AUM. Congress gave the SEC authority under the Regulatory Flexibility Act to update this definition, but the agency has failed to do so.

Rep. Wagner’s bill would require the SEC to report to Congress and conduct a rulemaking updating its definition of small entity to ensure it covers a meaningful number of businesses under its jurisdiction. The IAA supports her proposal and will be working to ensure it is included in the committee’s JOBS Act 4.0 proposal.