Stop Wall Street Looting Act
A BILL
To subject certain private funds to joint and several liability with respect to the liabilities of firms acquired and controlled by those funds, and for other purposes.
Sec. 2 Findings
Congress finds the following:
During the 20-year period preceding the date of enactment of this Act, activity by private equity funds has exploded.
Millions of people in communities across the United States rely on companies that are owned by private equity funds, including nearly 12,000,000 individuals who work for companies owned by those funds. For millions of additional individuals, a private investment fund acts as a landlord, a lender, or an owner of a local grocery store, newspaper, or hospital. Many pension funds are also investors in private investment funds.
Private investment funds have taken controlling stakes in companies in a wide variety of industries, including the financial services, real estate, media, and healthcare industries, but some of the largest impacts from private investment funds have been in the retail sector. In the 5 years preceding the date of enactment of this Act, cases have been commenced under title 11, United States Code, with respect to dozens of retailers in the United States, including Sears, Toys “R” Us, Shopko, Payless ShoeSource, Charlotte Russe, Bon-Ton, Nine West, David’s Bridal, Claire’s, J. Crew, Neiman Marcus, Guitar Center, Art Van Furniture, and Southeastern Grocers, which was the parent company for BI–LO and Winn-Dixie.
Private investment funds have also targeted entities that serve low-income or vulnerable populations, including affordable housing developments, for-profit colleges, payday lenders, medical providers, and nursing homes.
While private investment funds often purport to take over struggling companies and make those companies viable, the opposite is often true. Leveraged buyouts impose enormous debt loads on otherwise viable companies and then strip those companies of assets, hobbling the operations of those companies and preventing them from making necessary investments for future growth. If an investment goes well, the fund reaps most of the rewards, but if the investment does not go well, workers and customers of the company, and the community relying on the company, suffer.
Regardless of the performance of a private investment fund, the managers of the fund often make profits through fees, dividends, and other financial engineering. Private funds should have a stake in the outcome of their investments, enjoying returns if those investments are successful but absorbing losses if those investments fail.
When a case is commenced under title 11, United States Code, with respect to a portfolio company, workers not only lose jobs, but also lose wages and benefits that are owed, severance pay that has been promised, and pensions that have been earned. Workers should not be sent to the back of the line behind other creditors if, through no fault of those workers, an investment fails.
The performance of private investment funds is often cloaked in secrecy. Those funds have full control over the information that the funds disclose to investors, which allows the funds to manufacture their own performance metrics and makes it difficult for an investor to compare the returns to other investment options. Funds also increasingly require investors to waive the fiduciary obligations applicable to the funds. Investors should have the information and bargaining power to take control over their own investments.
An increasing amount of risky debt is being introduced into the market and the quality of that debt is deteriorating, raising concerns with regulators and lawmakers about systemic risk. The institutions that make and securitize risky loans collect large fees and then pass on risk to unwitting investors. The financial system should not bear all of the risk while lenders and securitizers reap the rewards.
The Federal Government should—
protect workers, companies, consumers, and investors in the United States; and
put an end to the practice of looting economically viable companies for the enrichment of private investment fund managers.
Sec. 3 Definitions
Except as otherwise expressly provided, in this Act:
Affiliate— The term affiliate means—
a person that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of another entity, other than a person that holds such securities—
in a fiduciary or agency capacity without sole discretionary power to vote such securities; or
solely to secure a debt, if such entity has not in fact exercised such power to vote;
a corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by another entity (referred to in this subparagraph as a “covered entity”), or by an entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the covered entity, other than an entity that holds such securities—
in a fiduciary or agency capacity without sole discretionary power to vote such securities; or
solely to secure a debt, if such entity has not in fact exercised such power to vote;
a person whose business is operated under a lease or operating agreement by another entity, or person substantially all of whose property is operated under an operating agreement with that other entity; or
an entity that operates the business or substantially all of the property of another entity under a lease or operating agreement.
Capital distribution— The term capital distribution means—
a cash or share dividend;
a share repurchase;
a share redemption;
a share buyback;
a payment of interest or fee on a share of stock; and
any other transaction similar to a transaction described in any of subparagraphs (A) through (E).
Change in control— The term change in control means a change in a legal right with respect to—
the power to vote more than 50 per centum of any class of voting securities of a corporation that engages in interstate commerce; or
any lesser per centum of any class of voting securities of a corporation that engages in interstate commerce that is sufficient to make the acquirer of such an interest a person that has the ability to direct the actions of that corporation.
Change in control transaction— The term change in control transaction means a transaction, or a set of related transactions, that effectuates a change in control.
Commission— The term Commission means the Securities and Exchange Commission.
Control person— The term control person—
means—
a person—
that directly or indirectly owns, controls, or holds with power to vote, including through coordination with other persons, 20 percent or more of the outstanding voting interests of a corporation; or
that operates the business or substantially all of the property of a corporation under a lease or an operating or management agreement;
a corporation, other than a target firm, that has 20 percent or more of its outstanding voting interests directly or indirectly owned, controlled, or held with power to vote by a person that directly or indirectly owns, controls, or holds with power to vote, including through coordination with other persons, 20 percent or more of the outstanding voting interests of another corporation; or
a person that otherwise has the ability to direct the actions of a corporation; and
does not include a person that—
is a limited partner with respect to a controlling private fund that is a partnership;
does not participate in the direction of the management or policy of a corporation; and
is not an insider with respect to the controlling private fund described in subclause (I);
is a pension fund or employee welfare benefit plan, if neither the fund nor plan (as applicable), nor any beneficiary or affiliate of the benefit or plan, is an insider with respect to a controlling private fund; or
holds the voting interests of a corporation solely—
in a fiduciary or agency capacity without sole discretionary power to vote the securities; or
to secure a debt, if the person has not—
exercised the power to vote; or
exercised any other governance rights with respect to the corporation.
Controlling private fund— The term controlling private fund means a private fund that, directly or through an affiliate, becomes a control person with respect to a target firm through the change in control transaction with respect to the target firm.
Corporation— The term corporation means—
a joint-stock company;
a company or partnership association organized under a law that makes only the capital subscribed or callable up to a specified amount responsible for the debts of the association, including a limited partnership and a limited liability company;
a trust; and
an association having a power or privilege that a private corporation, but not an individual or a partnership, possesses.
Employee welfare benefit plan— The term employee welfare benefit plan has the meaning given the term in section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002).
Holder of an active interest— The term holder of an active interest—
subject to subparagraph (B)(ii), means—
a person that directly or indirectly has the right to participate in the governance of a controlling private fund, without regard to the form or source of that right; and
any insider with respect to a controlling private fund; and
does not include—
a person that—
holds an economic interest solely to secure a debt, if that person does not exercise any voting or other governance right with respect to the interest;
is a limited partner with respect to a controlling private fund that is a partnership;
does not participate in the direction of the management or policy of a corporation; and
is not an insider with respect to the controlling private fund described in item (aa); or
is a pension fund or employee welfare benefit plan, if neither the pension fund nor employee welfare benefit plan (as applicable), nor any affiliate or beneficiary of the pension fund or employee welfare benefit plan, is an insider with respect to, or affiliate of, a controlling private fund; or
if the source of the right described in subparagraph (A)(i) is a security—
a person that is engaged in business as an underwriter of securities and that acquires that security through the good faith participation of the person in a firm commitment underwriting registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.), until the date that is 40 days after the date on which that acquisition occurs; or
a member of a national securities exchange solely because that member is the record holder of that security and, under the rules of that exchange—
may direct the vote of that security, without instruction, on—
other than contested matters; or
matters that may substantially affect the rights or privileges of the holders of the security to be voted; and
is otherwise precluded from voting without instruction.
Insider— The term insider means any—
director of a corporation;
officer of a corporation;
managing agent of a corporation;
control person with respect to a corporation;
affiliate of a corporation;
general partner of a corporation that is a partnership;
consultant or contractor retained by a corporation;
affiliate, relative, or agent of a person described in any of subparagraphs (A) through (F); or
affiliate, relative, or agent of a person described in subparagraph (H).
Investment adviser— The term investment adviser has the meaning given the term in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)).
Issuer— The term issuer has the meaning given the term in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).
National securities exchange— The term national securities exchange means an exchange that is registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f).
Pension fund— The term pension fund has the meaning given the term pension plan in section 3 of the Employee Retirement Security Act of 1974 (29 U.S.C. 1002).
Private fund— The term private fund means a corporation that—
would be considered an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3) but for the application of paragraph (1) or (7) of subsection (c) of such section 3;
is not a venture capital fund, as defined in section 275.203(l)–1 of title 17, Code of Federal Regulations, as in effect on the date of enactment of this Act; and
is not an institution selected under section 107 of the Community Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 4706).
Relative— The term relative means an individual related by affinity or consanguinity within the third degree as determined by the common law, or individual in a step or adoptive relationship within such third degree.
Security— The term security has the meaning given the term in section 2(a) of the Securities Act of 1933 (15 U.S.C. 77b(a)).
Target firm— The term target firm means a corporation that is acquired in a change in control transaction.