Rounds Introduces Legislation to Expand Holding Period for Merchant Banking Investments

WASHINGTON – U.S. Senator Mike Rounds (R-S.D.), a member of the Senate Committee on Banking, Housing, and Urban Affairs, introduced the Merchant Banking Modernization Act. This legislation would expand the holding period for merchant banking investments from 10 to 15 years.

“Access to capital remains a barrier for entrepreneurs to start up and grow their business, especially in rural states like South Dakota,” said Rounds. “Small businesses, a central pillar of our state economy, make up 99 percent of the businesses in South Dakota and employ 58 percent of our workforce. The Merchant Banking Modernization Act seeks to bridge the financial gap between small, often rurally-based, businesses that are not privy to the type of investments larger, more established, companies are able to access.”

Rounds is joined by Banking Committee Chairman Tim Scott (R-S.C.), as well as Senators Thom Tillis (R-N.C.), Bill Hagerty (R-Tenn.), Kevin Cramer (R-N.D.), Steve Daines (R-Mont.), Markwayne Mullin (R-Okla.), Rick Scott (R-Fla.), Ted Cruz (R-Texas) and John Cornyn (R-Texas). This legislation is supported by the U.S. Chamber of Commerce, Independent Community Bankers of America and the South Dakota Bankers Association.

“Small businesses are the backbone of our economy, both in my home state of South Carolina and across the United States, but they need access to capital to grow and support their employees,” said Scott (S.C.). “This bill will support investment in local businesses and help ensure more Americans have a shot at the American Dream.”

“Small businesses drive job creation and economic growth in North Carolina, but too often they struggle to secure the long-term capital needed to expand,” said Tillis. “By extending the merchant banking investment window, this legislation will help attract investment in businesses that are vital to our state. I’m proud to support this effort to strengthen North Carolina’s economy and expand opportunities for entrepreneurs.”

“By extending the holding period for merchant banking investments, this legislation would help Texas small businesses access the capital needed to grow and thrive, and I’m proud to support it,” said Cornyn.

"With over twenty-five years of firsthand experience as a business owner, I know just how necessary access to capital is to grow your operation," said Mullin. "By expanding the holding period, the Merchant Banking Modernization Act will boost small businesses in Oklahoma and across the country."

“Small businesses are the cornerstone of Montana’s economy and represent 99 percent of all businesses in our state,” said Daines. “As the son of a contractor, I’ve seen firsthand how difficult it can be to keep a company flourishing, and we need to do everything we can to help small businesses grow and remove unnecessary barriers to accessing capital. I’m proud to join my colleagues to introduce this bill, which will support investment in small and rural businesses and unleash our economy.”

“Small businesses are the backbone of our economy, and as a former business owner, I understand firsthand how businesses are critical to the success of our economy, to creating jobs, and to sustaining everyday life,” said Scott (Fla.). “This legislation makes a common-sense change to help give investors the confidence and flexibility to support entrepreneurs who need more time to grow and stabilize -- especially in rural and underserved communities – to support job growth and long-term economic prosperity.”

BACKGROUND

The Bank Holding Company Act of 1956 set forth requirements for bank holding companies and in doing so, authorized the Board of Governors of the Federal Reserve System (Fed) and the Secretary of the Treasury to issue regulations governing merchant banking activities. In January 2001, the Fed Board of Governors and U.S. Department of the Treasury approved a joint final rule doing just that, while implementing provisions of the Gramm-Leach-Bliley Act.

As a result, bank holding companies were allowed to declare themselves a financial holding company (FHC) to engage in securities underwriting and dealing, insurance agency and underwriting activities, along with merchant banking activities, which involves acquiring equity in nonfinancial companies in exchange for capital investment.

Generally, under the Merchant Banking Rule, FHCs must divest from their investment in 10 years. This 10-year window has discouraged holding companies from devoting capital to smaller, less established, businesses because certain investments are not financially viable within a 10-year horizon, as they require longer development and stabilization periods before yielding returns.

By extending the holding period for merchant banking investments to 15 years, entities engaging in merchant banking activities will be further incentivized to invest in the small businesses that power our local economies.

Click HERE to read full bill text.

###