Legislation that would fundamentally reform the private equity industry with enhanced disclosure and liability and fewer tax advantages was introduced Thursday by 13 Democratic members of Congress, led by Sen. Elizabeth Warren, D-Mass.
The proposed Stop Wall Street Looting Act calls for public disclosure of fees and returns and would hold general partners liable for all portfolio companies' debt, including severance and pension obligations, that would gain priority in bankruptcy proceedings. It would end the tax treatment of carried interest, eliminate tax advantages of leverage-related debt and limit leveraged buyout distributions for the first 24 months.
The bill calls for the Securities and Exchange Commission to issue rules requiring private equity funds to annually disclose ownership, all debt held by the fund and its portfolio companies, investment performance, fees and other payments collected and to make that information publicly available.
The proposal puts private investment funds "on the hook for the decisions made by the companies they control, ending looting, empowering workers and investors and safeguarding the markets from risky corporate debt," Ms. Warren said.
Other co-sponsors in the Senate are Tammy Baldwin of Wisconsin, Sherrod Brown of Ohio and Kirsten Gillibrand of New York. House co-sponsors are Mark Pocan of Wisconsin, Pramila Jayapal of Washington, Barbara Lee and Ro Khanna of California, Ayanna Pressley of Massachusetts, Jan Schakowsky and Jesus Garcia of Illinois, Rashida Tlaib of Michigan and Raul Grijalva of Arizona.
At a Capitol Hill rally, Mr. Brown said that private equity firms "pay themselves first and then they strip them for their parts," and the bill would force them "to take responsibility for the messes they make."
Some of the changes are supported by the Institutional Limited Partners Association, whose 520 member institutions represent $2 trillion in private equity assets under management.
ILPA has not yet surveyed its members on the legislation, "but we are certainly supportive of efforts to support a strong fiduciary duty," ILPA Senior Policy Counsel Chris Hayes said in an interview.
"Our members are strong believers in this asset class" because of the returns it delivers and its role diversification, Mr. Hayes said. "That being said, we support changes that promote transparency and better alignment between GPs and LPs."
ILPA is pushing Congress to change the Investment Advisers Act to get uniform federal reporting rules for fees and expenses, and to address what it said is a growing trend of general partners using legal loopholes to reduce their fiduciary obligations. ILPA would also like Congress or the SEC to ease restrictions on limited partners' ability to communicate and to require the sharing of investors' names. Compliance actions against funds should also be made known to limited partners, who are increasingly paying for registration and compliance costs as partnership expenses, ILPA said.
Drew Maloney, president and CEO of the private equity advocacy group American Investment Council said in a statement that "private equity is an engine for American growth and innovation — especially in Sen. Warren's home state of Massachusetts." The group pointed out that $199 billion of private equity in the state from 2013 to 2018 has produced nearly 400,000 jobs and made Massachusetts Pension Reserves Investment Trust Fund last year's strongest private equity investor, with returns of 21.8% last year and 13.6% over 10 years.
"Extreme political plans only hurt workers, investment, and our economy," Mr. Maloney said.