Letter to The Honorable Gary Gensler, Chairman, U.S. Securities and Exchange Commission (July 27, 2023)

Summary

A July 27, 2023 letter from the House Committee on Small Business to Gary Gensler, Chairman of the U.S. Securities and Exchange Commission, about two recently proposed SEC rules: one on the definition of exchange (Exchange Rule) and one on private fund advisors (Private Fund Advisor Rule). The letter states that the rules would "heap additional requirements on small investment advisory practices" and that it appears the SEC may not have properly considered small entities. The letter requests information by August 10, 2023 in numbered questions, including on capital availability for small businesses, compliance costs for a sole proprietorship, and the length of the comment period. The signature block names Roger Williams, Chairman, and Blaine Luetkemeyer, Vice Chairman, of the Committee on Small Business.

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Issuer: Congressional materials
Document type: 2023 07 27 Housesbc Majority To Sec Letter To Sec Re Rfa
Date: 2023-07-27
Case: 2023 07 27 Housesbc Majority To Sec Letter To Sec Re Rfa

Cite this document

“Letter to The Honorable Gary Gensler, Chairman, U.S. Securities and Exchange Commission (July 27, 2023).” Original at smallbusiness.house.gov, dated 2023-07-27. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2023-07-27-2023-07-27-housesbc-majority-to-sec-letter-to-sec-re-rfa/, SHA-256 32c9c2118e52761fee78273e83a606f66cd0f202e2fc0f6760332a5a6c1fba8f.

Full text

July 27, 2023

The Honorable Gary Gensler
Chairman
U.S. Securities and Exchange Commission
100 F Street NE
Washington, D.C. 20549

Dear Chairman Gensler:

The House Committee on Small Business (the Committee) writes to inquire about two of the
Securities and Exchange Commission's (SEC) recently proposed rules, one relating to the definition
of exchange (Exchange Rule), and the other concerning private fund advisors (Private Fund Advisor
Rule).1 These rules would heap additional requirements on small investment advisory practices and
undermine small business capital access and innovation. It appears that the SEC may not have
properly considered small entities during this rulemaking process.

The SEC proposed updating its definition of an “Exchange” and “Alternative Trading
Systems” under the Securities and Exchange Act of 1934.2 This rule incorporates Communication
Protocol Systems, Alternative Trading Systems, and many Decentralized Finance (DeFi) firms into
the SEC’s regulatory scheme.3 By broadly interpreting the term “exchange,” the Commission’s rule
could impact numerous platforms only tangentially related to finance and financial exchanges, such
as messaging platforms and certain types of software.4 This change would not only increase costs
for Communication Protocol System and the small businesses that rely on them, but also discourage
the creation of new Communication Protocol Systems. Additionally, DeFi firms represent an
emerging avenue for innovation and capital access for many small businesses.5 These changes to the
exchange rule place additional burdens on small business that the rule does not adequately consider.

1
Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, 87 Fed. Reg. 16886
(2022) (to be codified at 17 CFR 275); Amendments Regarding the Definition of “Exchange” and Alternative Trading
Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other
Securities, 87 Fed. Reg. 15496 (2022) (to be codified at 17 CFR 232, 240, 242, 249); See also Supplemental
Information and Reopening of Comment Period for Amendments Regarding the Definition of “Exchange”, 88 Fed. Reg.
29448 (to be codified at 17 CFR 232, 240, 242, 249).
2
Amendments Regarding the Definition of “Exchange” and Alternative Trading Systems (ATSs) That Trade U.S.
Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities, 87 Fed. Reg. 15496
(2022) (to be codified at 17 CFR 232, 240, 242, 249).
3
Id.
4
Id.; See also Letter from Patrick McHenry, Chairman, House Comm. on Financial Serv.’s, to Vanessa Countryman,
secretary, U.S. Securities & Exchange Cmm’n (Jun. 13, 2023).
5
David Gogel, DeFi: Beyond the Hype. U. OF PA., WHARTON (May 30, 2021) (in collaboration with the World
Economic Forum).
The Honorable Gary Gensler
July 27, 2023
Page 2 of 3

The proposed Private Fund Advisor Rule would add additional disclosure requirements
relating to preferential treatment and fund performance, and prohibit certain sales practices,
conflicts of interest, and compensation schemes.6 These requirements will add compliance costs for
investors and limit the creativity and innovation of investment vehicles.7 Private equity is a crucial
component of capital access for US small businesses—85 percent of private equity investment goes
toward small entities.8 Additionally, due to the current high interest rate environment, private equity
investment has certain advantages for small businesses when compared to traditional loans.9 As
with most regulation, this rule would have a disproportionate impact on smaller investors, for whom
regulatory compliance is more expensive, and adds additional barriers to capital access for other
small businesses.10

It is important for agencies to correctly evaluate small businesses interests—which make up
99.9 percent of all businesses in the United States—when passing any new rule. America’s small
businesses deserve to have their voices heard and considered. We therefore request the following
information as soon as possible but no later than August 10, 2023:

1. How will the changes to the Private Fund Advisor Rule affect capital availability for small
businesses?

2. What impact would these rules have on innovation within the financial industry and small
business capital access?

3. Did the SEC use its proposed new definitions of an “exchange” when identifying potentially
impacted businesses in its Private Fund Advisor Rule?

a. If not, how would the rule changes within Private Fund Advisor Rule be augmented
by the impacts of the Exchange Rule?

4. What additional cost would a sole proprietorship incur to employ someone or contract with
an entity to comply with the Private Fund Advisor Rule?

a. Larger entities often have existing staff and infrastructure to support compliance
efforts.11 Are there currently services available to small businesses and sole
proprietorships that would assist in complying with these proposed rules?

6
Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, 87 Fed. Reg. 16886
(2022) (to be codified at 17 CFR 275).
7
Ed Dartley, et al., SEC Proposes Significant New Rules for Private Fund Advisers, K&L GATES (Apr. 7, 2022)
8
These Are the Builders, AM. INVESTMENT COUNCIL (Last visited Jul. 20, 2023),
https://www.investmentcouncil.org/builders/.
9
Jared Gross, Private Equity: Braced for a Turn in Rates, J.P. MORGAN (last visited Jul. 21, 2023).
10
Regulations, NAT’L FED’N OF INDEP. BUSINESSES (last visited Jul. 21, 2023).
11
Id.
The Honorable Gary Gensler
July 27, 2023
Page 3 of 3

5. Since 2021, the amount of time the SEC has allowed for comments on its proposed rules has
decreased substantially.12 Has the SEC considered how this condensed comment period may
prevent or limit the comments it receives from small businesses?

6. Instead of incorporating emerging financial firms into the existing regulatory scheme, did
the SEC consider alternative rules that would be more specifically targeted at
Communication Protocol Systems and DeFi firms?

7. Under the SEC’s proposed exchange rule, when individuals use a website such as Twitter or
Discord to communicate and confirm trades, would those websites be operating as an
exchange?

a. If so, how would this rule impact emerging and new small social media platforms,
websites, and software developers?

To schedule the delivery of your response or ask any related follow-up questions, please
contact Committee on Small Business Majority Staff at (202) 225-5821. The Committee on Small
Business has broad authority to investigate “problems of all types of small business” under House
Rule X. Thank you in advance for your cooperation with this inquiry.”

In God We Trust,

_________________________ _________________________
Roger Williams Blaine Luetkemeyer
Chairman Vice Chairman
Committee on Small Business Committee on Small Business

_________________________ _________________________
Jake Ellzey Aaron Bean
Member of Congress Member of Congress
Committee on Small Business Committee on Small Business

cc: The Honorable Nydia M. Velasquez, Ranking Member
Committee on Small Business

12
Jennifer Schulp & Nicholas Anthony, The SEC Short‐Changes Public Comment, CATO INST. (Jan. 13, 2022).

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Our copy: 2023-07-27_HouseSBC-Majority-to-sec_letter-to-sec-re-rfa.pdf
Original: smallbusiness.house.gov