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115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-1009
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STREAMLINING COMMUNICATIONS FOR INVESTORS ACT
_______
November 2, 2018.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 6035]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 6035) to direct the Securities and Exchange
Commission to revise section 230.163 of title 17, Code of
Federal Regulations, to apply the exemption offered in such
section to communications made by underwriters and dealers
acting by or on behalf of a well-known seasoned issuer, having
considered the same, report favorably thereon without amendment
and recommend that the bill do pass.
PURPOSE AND SUMMARY
On June 7, 2018, Representative Ted Budd introduced H.R.
6035, the ``Streamlining Communications for Investors Act''.
H.R. 6035 directs the U.S. Securities and Exchange Commission
(SEC) to revise SEC Rule 163(c) to allow a well-known seasoned
issuer (WKSI) to authorize an underwriter or dealer to act as
its agent or representative in communicating about offerings of
the issuer's securities prior to the filing of a registration
statement. The legislation allows a WKSI to rely on the
exemption provided in Rule 163 if, before such a communication
is made, the underwriter or dealer making such communication
receives written authorization from the WKSI to act as its
agent or representative and the WKSI authorized or approved
such communication. Additionally, a WKSI must identify, in the
prospectus filed for an offering, each underwriter or dealer
that has made oral or written communications related to the
offering in reliance on the exemption.
BACKGROUND AND NEED FOR LEGISLATION
The goal of H.R. 6035 is to enhance the efficiency of the
U.S. capital markets by removing unnecessary regulatory
impediments that inhibit a WKSI's ability to reach a broader
group of prospective investors.
The SEC's 2005 Securities Offering Reform adopted various
modifications to the registration, communication, and offering
processes under the Securities Act of 1933, including creating
a new category of issuer, the WKSI. WKSIs benefit from the
communications and registration flexibilities provided in the
Securities Offering Reform and can register their offerings on
shelf registration statements that become effective
automatically upon filing, which means they are not required to
wait until the SEC reviews and declares its statement effective
before making sales.
Rule 163 of the SEC's 2005 Securities Offering Reform eased
many of the ``gun jumping'' restrictions on communications by
issuers and others in connection with securities offerings.
Although Rule 163 permits a WKSI to offer securities before
filing a registration statement, as currently drafted, Rule 163
only applies to communications made by the issuer itself. This
means that other participants involved in the offering, such as
underwriters or dealers, may not rely on this exception.
In 2009, the SEC proposed amending Rule 163 to allow
underwriters or dealers to engage in offers or communications
on behalf of WKSIs. But in the wake of the financial crisis and
the various directed rulemaking mandates in the Dodd-Frank Wall
Street Reform and Consumer Protection Act, the SEC ultimately
never finalized its 2009 proposal. In a comment letter to the
SEC on its 2009 proposal Wilson, Sonsini, Goodrich & Rosati
commented on January 27, 2010 that the WKSI proposal ``. . .
will remove an unnecessary barrier to communication and allow
WKSIs and their advisers to make better decisions concerning
their ability to access the capitalmarkets, without impairing
investor protection. In addition, investors will benefit from
the Proposed Amendments through the efficiencies of direct
communication with financial advisers to WKSIs.''
Similar to what the 2009 proposal envisioned, this
legislation would amend Rule 163 to allow underwriters and
dealers to act as agents on behalf of WKSIs in making efforts
in advance of the filing of the registration statement based on
three conditions: (1) the underwriter or dealer making such
communication receives written authorization from the WKSI to
act as its agent or representative; (2) the WKSI must authorize
or approve such communications; and (3) WKSIs are required to
identify in the prospectus any underwriter or dealer that made
communications related to the offering in reliance on the
exemption under Rule 163. The Center for Capital Markets
Competitiveness at the U.S. Chamber of Commerce told the
Subcommittee on Capital Markets, Securities and Investment on
May 23, 2018, ``Allowing WKSIs to authorize an underwriter or
dealer to communicate about offerings of the issuer's
securities prior to the filing of a registration statement
would help these companies better gauge investor interest
before having to expand the time and resources to file a formal
registration statement.''
Brett Paschke, Managing Director, Head of Capital Markets,
William Blair, shared similar support for the legislation, ``We
also support many of the draft bills that have been released
alongside this hearing. Some of these proposals . . . --such as
allowing underwriters to communicate with prospective investors
on behalf of well-known seasoned issuers (WKSIs)--are examples
of thoughtful updates to our securities laws that will help
those laws keep pace with the intense changes our public
markets have undergone.''
The Committee agrees with the comments of Cravath, Swaine &
Moore's comment letter to the SEC from 2010 in support of the
WKSI proposal, ``. . . the Commission's proposed amendments to
Rule 163 are a welcome and practical extension of the existing
rule that would further facilitate capital formation for WKSIs
by allowing underwriters and dealers to gauge broader market
interest in the issuer's securities prior to filing a
registration statement'' H.R. 6130 simply codifies a proposal
that would promote capital formation and in the SEC's absence,
Congress has the obligation to amend the law and provide more
opportunities to issuers to reach more investors.
HEARINGS
The Committee on Financial Services held a hearing
examining matters relating to H.R. 6035 on May 23, 2018.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
June 14, 2018, and ordered H.R. 6035 to be reported favorably
to the House without amendment by a recorded vote of 31 yeas to
23 nays (recorded vote no. FC-189), a quorum being present.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 31 yeas to 23 nays
(Record vote no. FC-189), a quorum being present.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 6035
will make U.S. capital markets more efficient by reducing
compliance costs and helping companies better gauge investor
interest and market conditions by allowing WKSIs to authorize
an underwriter or dealer to communicate about offerings prior
to the filing of a registration statement so long as certain
conditions are met.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 20, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 6035, the
Streamlining Communications for Investors Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 6035--Streamlining Communications for Investors Act
Under current law, companies that sell securities must
register their offerings with the Securities and Exchange
Commission (SEC) before communicating with investors about
those securities. Some public companies, called well-known
seasoned issuers (WKSIs), are exempt from this communication
limitation if they meet specific information disclosure
conditions. H.R. 6035 would expand that exemption to include
communication by an underwriter or dealer acting by or on
behalf of a WKSI if the WKSI provides them written
authorization to act as its agent, authorizes the
communication, and identifies each underwriter or dealer that
made use of the exemption in the prospectus for the offering.
Using information from the SEC, CBO estimates that
implementing H.R. 6035 would cost less than $500,000 for the
agency to conduct a rulemaking to expand the current exemption.
However, the SEC is authorized to collect fees sufficient to
offset its annual appropriation; therefore, CBO estimates that
the net effect on discretionary spending would be negligible,
assuming appropriation actions consistent with that authority.
Enacting H.R. 6035 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
CBO estimates that enacting H.R. 6035 would not increase
net direct spending or on-budget deficits in any of the four
consecutive 10-year periods beginning in 2029.
H.R. 6035 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA).
If the SEC increased fees to offset its costs to conduct a
rulemaking, H.R. 6035 would increase the cost of an existing
mandate on private entities required to pay those fees. Using
information from the SEC, CBO estimates that the incremental
cost of the mandate would be small and fall well below the
annual threshold for private-sector mandates established in
UMRA ($160 million in 2018, adjusted annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires one
directed rulemaking within the meaning of such section to
direct the SEC to revise section 230.163(c) of title 17, Code
of Federal Regulations, to allow underwriters and dealers to
act as agents on behalf of WKSIs in making efforts in advance
of the filing of the registration statement.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This section cites H.R. 6035 as the ``Streamlining
Communications for Investors Act''.
Section 2. Exemption of communications made by underwriters and dealers
acting by or on behalf of well-known seasoned issuer
This section requires the SEC to amend Rule 163 to allow
underwriters and dealers to act as agents on behalf of WKSIs in
making efforts in advance of the filing of the registration
statement based on three conditions: (1) the underwriter or
dealer making such communication receives written authorization
from the WKSI to act as its agent or representative; (2) the
WKSI must authorize or approve such communications; and (3)
WKSIs are required to identify in the prospectus any
underwriter or dealer that made communications related to the
offering in reliance on the exemption under Rule 163.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 6035 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by Clause 3(e)(1)(B) of rule
XIII of the House of Representatives.
MINORITY VIEWS
H.R. 6035, the so-called ``Streamlining Communications for
Investors Act,'' would undermine the ability of investors to
make informed decisions by towing underwriters and securities
dealers acting on behalf of well-known seasoned issuers
(``WKSIs'')\1\ to offer securities prior to registering them
with the Securities and Exchange Commission (``SEC'').
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\1\WKSIs are large corporations that are widely followed by
analysts. To qualify as a WKSI, a public company must have a minimum
capitalization of $700 million, have been public for at least a year,
and must not be an ``ineligible issuer'' by, for example, violating the
securities laws.
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The SEC has already granted WKSIs substantial
accommodations from our federal securities laws, including
affording them the ability to quickly raise capital through
automatic ``shelf' registration. Shelf registration provides
WKSIs the flexibility to register securities for sale to
investors without waiting for SEC review and approval of the
registration statement. Additionally, under SEC Rule 163, WKSIs
enjoy the benefit of an SEC-created safe harbor from Section
5(c) of the Securities Act of 1933, which prohibits all offers
of sale in any form prior to the filing of a registration
statement.
H.R. 6035 would extend the Rule 163 safe harbor to
underwriters and dealers acting on behalf of WKSIs. The bill
would broadly apply to pre-registration offers for all types of
securities. In 2009, the SEC proposed, but never finalized, a
similar amendment to Rule 163. In a comment letter to the SEC's
2009 proposal, the Credit Roundtable, a group of approximately
65 large fixed income institutional asset managers representing
over $2 trillion in fixed income assets under management,
pointed out the unintended consequences such a change would
impose on our markets. According to the Credit Roundtable,
expanding Rule 163 to underwriters and dealers would,
``exacerbate existing weaknesses in the fixed income offering
process in which institutional investors are often in the
position of having to make an investment decision within
minutes of learning of an offering without ready access to key
disclosure documents.'' The Credit Roundtable recently
reiterated this position in a letter to the Committee on
Financial Services regarding H.R. 6035, adding that further
compressing the time investors have to evaluate the merits of
new debt offerings could introduce pricing inefficiencies and
create inequities between investors.
Democratic witnesses during a May 2018 Capital Markets
subcommittee hearing also expressed concerns with H.R. 6035.
Specifically, Tyler Gellasch, Executive Director of Healthy
Markets Association testified that regulatory accommodations
afforded to WKSIs have compounded the uneven playing field
between large corporations and smaller companies seeking to
access the public markets and have thus contributed to the
decline in initial public offerings.
In light of the existing accommodations available to WKSIs,
H.R. 6035 appears to be unwarranted. Moreover, the bill would
increase risks to investors by potentially undermining their
ability to make informed investment decisions. For these
reasons, we oppose H.R. 6035.
Maxine Waters.
Carolyn B. Maloney.
Wm. Lacy Clay.
Daniel T. Kildee.
Michael E. Capuano.
