H. Rept. 115-103 - U.S. TERRITORIES INVESTOR PROTECTION ACT OF 2017115th Congress (2017-2018)
Committee Report
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115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-103
======================================================================
U.S. TERRITORIES INVESTOR PROTECTION ACT OF 2017
_______
May 1, 2017.--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
[To accompany H.R. 1366]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 1366) to amend the Investment Company Act of
1940 to terminate an exemption for companies located in Puerto
Rico, the Virgin Islands, and any other possession of the
United States, having considered the same, report favorably
thereon without amendment and recommend that the bill do pass.
Purpose and Summary
Introduced by Representative Nydia Velasquez on March 6,
2017, H.R. 1366, the U.S. Territories Investor Protection Act
of 2017, amends Section 6(a)(1) of the Investment Company Act
of 1940 to terminate an exemption for investment companies
located in Puerto Rico, the Virgin Islands, and any other
possession of the United States. Under current law, such
companies are exempt from registration under the Act provided
that their shares are sold solely to the residents of the
territory or possession in which they are located. The bill
provides an automatic three-year safe harbor for investment
companies that currently enjoy this exemption. Additionally,
the bill authorizes the SEC to further delay the effective date
(or end of the exemption) for a maximum of three years
following the initial three year safe harbor.
Background and Need for Legislation
When Congress enacted the Investment Company Act of 1940,
it was prohibitively expensive and logistically difficult for
SEC personnel to travel and inspect investment companies
located in certain U.S. territories, including Alaska, Hawaii,
the Philippines, the Panama Canal Zone, Puerto Rico and the
U.S. Virgin Islands.
Consequently, those investment companies were exempt from
registration with, and oversight by, the SEC, but the
investment company had to follow the laws of the jurisdiction
in which the investment company operated. As U.S. territories
and possessions became states or independent nations no longer
under U.S. control, amendments were made to Section 6(a)(1). As
the burdens and costs of travel are not the same today as they
were in 1940, H.R. 1366 terminates this anachronistic exemption
from registration under the Act. Thus, the bill ensures that
investment companies in Puerto Rico, Guam, and elsewhere will
operate subject to the same rules as their mainland
counterparts, consistent with the SEC's ability to gather
information quickly using modern technology regardless of
distance.
Hearings
The Committee on Financial Services' held no hearings
examining matters relating to H.R. 1366.
Committee Consideration
The Committee on Financial Services met in open session on
March 9, 2017 and ordered H.R. 1366 to be reported favorably to
the House without amendment by a recorded vote of 58 yeas to 0
nays (recorded vote no. FC-34), 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 in committee was a motion by Chairman
Hensarling to report the bill favorably to the House without
amendment. That motion was agreed to by a recorded vote of 58
yeas to 0 nays (Record vote no. FC-34), 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. 1366
will protect U.S. territories investments by terminating the
exemptions for investment companies located in U.S.
territories, and ensuring that they are subject to the same
requirements and oversight by the SEC.
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.
Committee Cost Estimate
The Committee adopts as its own 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, April 4, 2017.
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. 1366, the U.S.
Territories Investor Protection Act of 2017.
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.
Enclosure.
H.R. 1366--U.S. Territories Investor Protection Act of 2017
Under current law, the Securities and Exchange Commission
(SEC) requires some issuers of securities to register as an
investment company and regulates aspects of their operations.
Investment companies that are located in Puerto Rico, the
Virgin Islands, or other United States possessions are exempt
from registration under certain conditions and therefore,
exempt from the related regulations that apply to investment
companies. H.R. 1366 would remove that exemption three years
after the date of enactment of the bill; however, the SEC could
extend the exemption for up to three additional years following
the initial three-year period.
Based on an analysis of information from the SEC, CBO
estimates that implementing H.R. 1366 would have no significant
effect on the agency's costs or operations to extend current
regulations to include those companies. Moreover, 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. 1366 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply. CBO
estimates that enacting H.R. 1366 would not increase net direct
spending or on-budget deficits in any of the four consecutive
10-year periods beginning in 2028.
H.R. 1366 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) and would not affect
the budgets of state, local, or tribal governments.
By removing their regulatory exemption under the Investment
Company Act the bill would impose a private-sector mandate on
investment companies that are headquartered in a U.S. territory
and that sell securities exclusively to residents of that
territory. Without the exemption those companies would be
subject to existing federal requirements for investment
companies such as registering with the SEC, meeting minimum
capital requirements, making disclosures to investors and
registering the securities that they offer.
The cost of the mandate would include registration fees and
the ongoing costs of complying with SEC requirements. Based on
an estimate of the total asset size of the investment companies
that could be affected and the current rates of regulatory fees
that would apply to those companies, CBO estimates that the
aggregate cost of the mandate would fall below the annual
threshold established in UMRA for private-sector mandates ($156
million in 2017, adjusted annually for inflation).
On April 4, 2017, CBO transmitted a cost estimate for S.
484, the U.S. Territories Investor Protection Act of 2017, as
reported by the Senate Committee on Banking, Housing, and Urban
Affairs on March 13, 2017. The two bills are similar and CBO's
estimate of their budgetary effects is the same.
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Logan Smith (for private-sector
mandates). The estimate was approved by H. Samuel Papenfuss,
Deputy Assistant Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates reform
Act.
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
H.R. 1366 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Duplication of Federal Programs
Pursuant to section 3(c)(5) of rule XIII, the Committee
states that no provision of H.R. 1366 establishes or
reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, 115th Cong. (2017),
the Committee states that H.R. 1366 contains no directed
rulemaking.
Section-by-Section Analysis of the Legislation
Section 1: Short title
This section cites H.R. 1366 as the ``U.S. Territories
Investor Protection Act of 2017.''
Section 2: Termination of exemption
This section amends the Investment Company Act of 1940 by
eliminating the exemption provided to U.S. possessions under
section 6(a)(1) of the Act. The exemption will take effect
three years after enactment. This section also provides the SEC
with the authority to extend the safe harbor to a maximum of
three years, in addition to the initial three year period.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets and
existing law in which no change is proposed is shown in roman):
INVESTMENT COMPANY ACT OF 1940
TITLE I--INVESTMENT COMPANIES
* * * * * * *
exemptions
Sec. 6. (a) The following investment companies are exempt
from the provisions of this title:
[(1) Any company organized or otherwise created
under the laws of and having its principal office and
place of business in Puerto Rico, the Virgin Islands,
or any other possession of the United States; but such
exemption shall terminate if any security of which such
company is the issuer is offered for sale or sold after
the effective date of this title, by such company or an
underwriter therefor, to a resident of any State other
than the State in which such company is organized.]
(2) Any company which since the effective date of
this title or within five years prior to such date has
been reorganized under the supervision of a court of
competent jurisdiction, if (A) such company was not an
investment company at the commencement of such
reorganization proceedings, (B) at the conclusion of
such proceedings all outstanding securities of such
company were owned by creditors of such company or by
persons to whom such securities were issued on account
of creditors' claims, and (C) more than 50 per centum
of the voting securities of such company, and
securities representing more than 50 per centum of the
net asset value of such company, are currently owned
beneficially by not more than twenty-five persons; but
such exemption shall terminate if any security of which
such company is the issuer is offered for sale or sold
to the public after the conclusion of such proceedings
by the issuer or by or through any underwriter. For the
purposes of this paragraph, any new company organized
as part of the reorganization shall be deemed the same
company as its predecessor; and beneficial ownership
shall be determined in the manner provided in section
3(c)(1).
(3) Any issuer as to which there is outstanding a
writing filed with the Commission by the Federal
Savings and Loan Insurance Corporation stating that
exemption of such issuer from the provisions of this
title is consistent with the public interest and the
protection of investors and is necessary or appropriate
by reason of the fact that such issuer holds or
proposes to acquire any assets or any product of any
assets which have been segregated (A) from assets of
any company which at the filing of such writing is an
insured institution within the meaning of section
401(a) of the National Housing Act, as heretofore or
hereafter amended, or (B) as a part of or in connection
with any plan for or condition to the insurance of
accounts of any company by said corporation or the
conversion of any company into a Federal savings and
loan association. Any such writing shall expire when
canceled by a writing similarly filed or at the
expiration of two years after the date of its filing,
whichever first occurs; but said corporation may,
nevertheless, before, at, or after the expiration of
any such writing file another writing or writings with
respect to such issuer.
(4) Any company which prior to March 15, 1940, was
and now is a wholly-owned subsidiary of a registered
face-amount certificate company and was prior to said
date and now is organized and operating under the
insurance laws of any State and subject to supervision
and examination by the insurance commissioner thereof,
and which prior to March 15, 1940, was and now is
engaged, subject to such laws, in business
substantially all of which consists of issuing and
selling only to residents of such State and investing
the proceeds from, securities providing for or
representing participations or interests in intangible
assets consisting of mortgages or other liens on real
estate or notes or bonds secured thereby or in a fund
or deposit of mortgages or other liens on real estate
or notes or bonds secured thereby or having outstanding
such securities so issued and sold.
(5)(A) Any company that is not engaged in the
business of issuing redeemable securities, the
operations of which are subject to regulation by the
State in which the company is organized under a statute
governing entities that provide financial or managerial
assistance to enterprises doing business, or proposing
to do business, in that State if--
(i) the organizational documents of the
company state that the activities of the
company are limited to the promotion of
economic, business, or industrial development
in the State through the provision of financial
or managerial assistance to enterprises doing
business, or proposing to do business, in that
State, and such other activities that are
incidental or necessary to carry out that
purpose;
(ii) immediately following each sale of the
securities of the company by the company or any
underwriter for the company, not less than 80
percent of the securities of the company being
offered in such sale, on a class-by-class
basis, are held by persons who reside or who
have a substantial business presence in that
State;
(iii) the securities of the company are
sold, or proposed to be sold, by the company or
by any underwriter for the company, solely to
accredited investors, as that term is defined
in section 2(a)(15) of the Securities Act of
1933, or to such other persons that the
Commission, as necessary or appropriate in the
public interest and consistent with the
protection of investors, may permit by rule,
regulation, or order; and
(iv) the company does not purchase any
security issued by an investment company or by
any company that would be an investment company
except for the exclusions from the definition
of the term ``investment company'' under
paragraph (1) or (7) of section 3(c), other
than--
(I) any debt security that meets
such standards of credit-worthiness as
the Commission shall adopt; or
(II) any security issued by a
registered open-end investment company
that is required by its investment
policies to invest not less than 65
percent of its total assets in
securities described in subclause (I)
or securities that are determined by
such registered open-end investment
company to be comparable in quality to
securities described in subclause (I).
(B) Notwithstanding the exemption provided by this
paragraph, section 9 (and, to the extent necessary to
enforce section 9, sections 38 through 51) shall apply
to a company described in this paragraph as if the
company were an investment company registered under
this title.
(C) Any company proposing to rely on the exemption
provided by this paragraph shall file with the
Commission a notification stating that the company
intends to do so, in such form and manner as the
Commission may prescribe by rule.
(D) Any company meeting the requirements of this
paragraph may rely on the exemption provided by this
paragraph upon filing with the Commission the
notification required by subparagraph (C), until such
time as the Commission determines by order that such
reliance is not in the public interest or is not
consistent with the protection of investors.
(E) The exemption provided by this paragraph may be
subject to such additional terms and conditions as the
Commission may by rule, regulation, or order determine
are necessary or appropriate in the public interest or
for the protection of investors.
(b) Upon application by any employees' security company, the
Commission shall by order exempt such company from the
provisions of this title and of the rules and regulations
hereunder, if and to the extent that such exemption is
consistent with the protection of investors. In determining the
provisions to which such an order of exemption shall apply, the
Commission shall give due weight, among other things, to the
form of organization and the capital structure of such company,
the persons by whom its voting securities, evidences of
indebtedness, and other securities are owned and controlled,
the prices at which securities issued by such company are sold
and the sales load thereon, the disposition of the proceeds of
such sales, the character of the securities in which such
proceeds are invested, and any relationship between such
company and the issuer of any such security.
(c) The Commission, by rules and regulations upon its own
motion, or by order upon application, may conditionally or
unconditionally exempt any person, security, or transaction, or
any class or classes of persons, securities, or transactions,
from any provision or provisions of this title or of any rule
or regulation thereunder, if and to the extent that such
exemption is necessary or appropriate in the public interest
and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of this
title.
(d) The Commission, by rules and regulations or order, shall
exempt a closed-end investment company from any or all
provisions of this title, but subject to such terms and
conditions as may be necessary or appropriate in the public
interest or for the protection of investors, if--
(1) the aggregate sums received by such company from
the sale of all its outstanding securities, plus the
aggregate offering price of all securities of which
such company is the issuer and which it proposes to
offer for sale, do not exceed $10,000,000, or such
other amount as the Commission may set by rule,
regulation, or order;
(2) no security of which such company is the issuer
has been or is proposed to be sold by such company or
any underwriter therefor, in connection with a public
offering, to any person who is not a resident of the
State under the laws of which such company is organized
or otherwise created; and
(3) such exemption is not contrary to the public
interest or inconsistent with the protection of
investors.
(e) If, in connection with any rule, regulation, or order
under this section exempting any investment company from any
provision of section 7, the Commission deems it necessary or
appropriate in the public interest or for the protection of
investors that certain specified provisions of this title
pertaining to registered investment companies shall be
applicable in respect of such company, the provisions so
specified shall apply to such company, and to other persons in
their transactions and relations with such company, as though
such company were a registered investment company.
(f) Any closed-end company which--
(1) elects to be treated as a business development
company pursuant to section 54; or
(2) would be excluded from the definition of an
investment company by section 3(c)(1), except that it
presently proposes to make a public offering of its
securities as a business development company, and has
notified the Commission, in a form and manner which the
Commission may, by rule, prescribe, that it intends in
good faith to file, within 90 days, a notification of
election to become subject to the provisions of
sections 55 through 65,
shall be exempt from sections 1 through 53, except to the
extent provided in sections 59 through 65.
* * * * * * *
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