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Other Comment Letters

SBIA Comment Letters to Agencies Other than the SBA & SEC 

SBIA Encourages DOL to Improve Investor Choice
On Monday, April 17, 2017, SBIA submitted a comment letter on the Department of Labor Fiduciary Rule. SBIA submitted comments in 2015, and DOL made changes to the final rule that allowed non-traded BDCs to continue to sell their products in retirement accounts. The final rule was published on April 8, 2016, but its applicability date was delayed following a memorandum from President Trump asking the Department to conduct an economic and legal analysis on the rule's impact. The comment letter submitted this week encouraged DOL to further improve the Best Interest Contract (BIC) Exemption to improve investor choice. The letter also discussed the rule's private right of action and the potential for increased litigation, as well as SBIA's desire for DOL and the SEC to work together to craft a larger rule that "would provide clarity for broker dealers, address consumer protection concerns, and eliminate burdensome compliance costs and duplicative regulations.


Treasury Department Releases Proposed Rule Amending Tax Code Characterizations of “Disguised Payments for Services”

On July 23, 2015, the Treasury Department released a new proposed rule amending the Internal Revenue Code in regard to the characterization of certain partnership arrangements, and may impact private equity partnerships’ utilization of “management fee waivers.” Comments on this proposed rule are due on November 16, 2015. SBIA submitted a comment letter on this issue on November 13, 2015, which is available here.

The Proposed Rule sets out factors that may indicate that a partner in a partnership is inappropriately receiving preferential tax treatment from an arrangement that disguises “payment for their services” as an allocation of partnership income. For example, this may occur where a partner takes a share of a private equity fund’s profits (at a lower capital gains tax rate), instead of being compensated immediately through a fee payment (taxed at the individual rate) for services rendered to the partnership. The new rule seeks to limit the ability for these partners to receive distributions from the partnership at the lower capital gains tax rate by evaluating the compensation arrangement through six factors. This may implicate certain structures of private equity or SBIC “management fee waivers” which allow general partners (GPs) in funds to offset their management fee in return for more of the carry income from the partnership during the harvesting period of the fund. 

The six factors the Internal Revenue Service (IRS) will use to evaluate whether this allocation of partnership income is a “disguised payment for services” include: 

1. A lack of entrepreneurial risk;

2. The transitory nature of the partner’s interest;

3. The time between the service provider’s rendition of services and distribution;

4. Evidence of the service provider joining the partnership solely for tax benefits;

5. The value of the distribution relative to the service provider’s interest in the profits of the partnership; and

6. The existence of differing values of distributions or levels of risk with respect to different services rendered. 

The Proposed Rule indicates that the entrepreneurial risk factor is the most important factor, and lack of risk will be presumed by a showing of:

             i.   Capped allocations of partnership income;

             ii.  An allocation for one or more years under which the service
                  provider’s share of income is reasonably certain;

             iii. An allocation of gross income;

             iv. An allocation that is predominantly fixed in amount; and

             v.  An arrangement in which a service provider waives its right to
                  receive payment for the future performance of services in a
                  manner that is non-binding or fails to timely notify the
                  partnership and its partners of the waiver and its terms. 

These factors can be rebutted by a showing of other facts and circumstances that establish the presence of significant entrepreneurial risk by clear and convincing evidence.


Financial Crimes Enforcement Network (FinCEN) Releases New Proposed Rule Mandating Anti-Money Laundering and Suspicious Activity Report Filing Requirements for Registered Investment Advisers 

On September 1, 2015, the Financial Crimes Enforcement Network (FinCEN) released a proposed rulemaking prescribing minimum standards for anti-money laundering (AML) to be established by certain registered investment advisers (RIAs), and to require these advisers to report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (BSA). FinCEN has created this new regulatory requirement to regulate RIAs that may be at risk for attempts by money launderers or terrorist financers seeking access to the U.S. financial system. This rule will only apply to registered advisers with the Securities and Exchange Commission. 

The Proposed Rule has been in the works since the first attempt to issue a proposed rule in 2003, and FinCEN’s announcement that they would be re-evaluating these requirements in 2007. The Proposed Rule will require RIAs to now be defined as a “financial institution” under the BSA, and require them to file a variety of reports with FinCEN and retain certain records. These requirements include: 

  • Filing Currency Transaction Reports (CTRs) with FinCEN for transactions involving a transfer over $10,000 by, through, or to the RIA;
  • Create and retain records for transmittals of funds over $3,000, and ensure that certain information pertaining to the transmittal of funds travel with the transmittal to the next financial institution in the payment chain;
  • Create and retain records for extensions of credit and cross-border transfers of currency, monetary instruments, checks, investment securities, and credit in amounts over $10,000;
  • Develop internal policies, procedures and controls, designate an AML compliance officer, and create an ongoing employee training program and an independent audit function to test programs; FinCEN believes many policies developed for SEC registration purposes could be adapted to deal with these rules;

o   This includes the development of a written AML program reasonably designed to prevent the RIA from being used to facilitate money laundering or the financing of terrorism activities

  • These requirements would extend to RAI’s providing subadvisory services to a client;
  • Requires reporting suspicious transactions through Suspicious Activity Reports (SARs) of transactions over $5,000 in fund or assets, and encourages voluntary reporting of transactions that are under that amount and are suspicious in nature;
  • Retain copies of filed SARs and underlying related documentation for 5 years;
  • All SARs and information that reveal the existence of a SAR are confidential and shall not be disclosed under certain circumstances. If subpoenaed, or otherwise requested to disclose a SAR, the officers of the RIA must decline to produce the SAR and notify FinCEN; and
  • Supply information under the USA PATRIOT ACT to the government and can be required by FinCEN to search their records to determine whether someone law enforcement has certified is suspected of engaging in terrorist activity or money laundering.
  • The SEC will examine for compliance with FinCEN’s new requirements.

To read the proposed rule, please click here.  On November 2, 2015, SBIA submitted a comment letter on the proposal.  To see the comment letter, please click here.


Department of Labor Fiduciary Proposal & Best Interests Contract (BIC) Exemption – Due July 21, 2015

On April 14, 2015, after 43 months in development, the U.S. Department of Labor (DOL) released its re-proposal to expand the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974, as amended (ERISA), which was published in the Federal Register on April 20, 2015. A summary of the re-proposal can be found here.

SBIA intends to submit a comment letter on this important issue to encourage the DOL to include non-traded BDCs as eligible Assets under the BIC exemption. The rule proposal can be found here, and the BIC exemption is available here. A summary of the fiduciary rule is available here. 

If you have any input on these regulatory proposals, please contact Chris Hayes, SBIA’s Legislative & Regulatory Counsel by email or at (202) 628.5055.


On July 21, 2015, SBIA submitted a comment letter to the Department of Labor in response to their request for comment on the Department’s “Fiduciary” rule and associated “Best Interest Contract Exemption,” which was released for public comment on April 15, 2015. SBIA’s non-traded Business Development Company (“BDC”) members were impacted by the proposal, which governs how financial advice is given in connection with employee benefit plans and individual retirement accounts (“IRAs”), and imposed limitations on the types of products that could be sold by financial advisers to their clients. The Best Interest Contract Exemption permits financial advisors to sell a specified list of investment products in connection with retirement plans and IRAs under a commission-based model. Unfortunately, the exemption did not permit the sale of shares of non-traded BDCs, directly impacting the business model of our non-traded members. SBIA’s comment letter highlights that the other elements of the exemption were strong enough to obviate the need for the specified asset list and, if such a list is included in the final rule, it should include non-traded BDCs due to their similarity to other products currently on the list in the proposed rule, and the benefits of the products for investors. 


Proposed Update to Community Reinvestment Act Questions & Answers (Q&As)

On September 8, 2014, the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve (Fed) (collectively “Bank Regulators”) released for comment updated Interagency Questions and Answers regarding Community Reinvestment. 

The Proposed Q&A Update is available here. 

SBIA submitted comments on the Proposed Q&As on November 7, 2014.  They are available here.

"Community Development”:  These activities are considered under the large institution, intermediate small institution and wholesale and limited purpose institution performance tests.  Additionally, small institutions may use community development activity to receive consideration toward an outstanding rating.  The current CRA regulations (12 CFR _.12(g)(3) define community development as follows: “activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less.”  The Q&As provide that activities that “promote economic development” must meet 2 tests, (1) a size test (e.g. the recipient of the activity must meet the SBIC or SBDC size standards or have $1 mil in revenues or less) and (2) a purpose test.  The Bank Regulators propose to amend the language in the Q&As covering the “purpose” test.  The current Q&A states that  activities meet the purpose test if they “support permanent job creation, retention and/or improvement for persons who are currently low-or moderate-income or support permanent job creation, retention and/or improvement either in low or moderate income geographies or in areas targeted for redevelopment by federal, state, local, or tribal governments.  The Agencies will presume that any loan to or investment in an SBDC, SBIC, Rural Business Investment Company, New Markets Venture Capital Company or New Markets Tax Credit-eligible Community Development Entity promotes economic development.”  

 SBIA’s Take:  SBIA commented favorably on the regulators retaining the SBIC investments presumptively qualify under the "investment test" for CRA credit.  SBIA suggested that, along with expanding the community development loan definition and those considered under the "lending test", that banks investing in SBICs engaged in lending activities should also qualify under the "lending test."


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