U.S. Sen. Mike Rounds (R-SD) introduced legislation this week to expand the holding period for merchant banking investments from 10 to 15 years.
In 2001, per the Bank Holding Company Act of 1956, the Federal Reserve Board (Fed) and the Secretary of the Treasury approved a joint final rule governing merchant banking, which involves acquiring equity in nonfinancial companies in exchange for capital investment. The rule allowed bank holding companies 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.
Generally, FHCs must divest from their investment in 10 years. However, lawmakers say this 10-year window has discouraged many holding companies from devoting capital to smaller, less established, businesses because certain investments are not financially viable within a 10-year horizon. So, the proposal to extend the holding period for merchant banking investments to 15 years seeks to further incentivize merchant banks to invest in small businesses.
“Access to capital remains a barrier for entrepreneurs to start up and grow their business, especially in rural states like South Dakota,” Rounds, a member of the Senate Committee on Banking, Housing, and Urban Affairs, said. “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.”
The legislation is supported by the U.S. Chamber of Commerce, Independent Community Bankers of America and the South Dakota Bankers Association.