- TXT
-
PDF
(PDF provides a complete and accurate display of this text.)
Tip
?
115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-431
======================================================================
SMALL BUSINESS MERGERS, ACQUISITIONS, SALES, AND BROKERAGE
SIMPLIFICATION ACT OF 2017
_______
November 30, 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
together with
MINORITY VIEWS
[To accompany H.R. 477]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 477) to amend the Securities Exchange Act of
1934 to exempt from registration brokers performing services in
connection with the transfer of ownership of smaller privately
held companies, having considered the same, report favorably
thereon without amendment and recommend that the bill do pass.
Purpose and Summary
On January 12, 2017, Representative Bill Huizenga
introduced H.R. 477, the ``Small Business Mergers,
Acquisitions, Sales, and Brokerage Simplification Act of
2017'', which amends Section 15(b) of the Securities Exchange
Act of 1934 (Exchange Act) to create a simplified federal
registration system for brokers known as merger and acquisition
(M&A;) brokers that perform services in connection with the
transfer of ownership of smaller privately held companies.
Background and Need for Legislation
M&A; brokers provide crucial services to small businesses
whose owners want to sell their businesses or merge with others
so that their enterprises can continue to operate and grow, to
preserve existing jobs, and to create new jobs. M&A; brokers
educate business owners looking to sell their businesses on the
selling process; help prepare the business for sale; analyze
the company's financials and its business; perform or
coordinate valuation; advise on potential capital sources and
capital structure; prepare business offering information
packages; identify, screen, and market the business to
qualified potential buyers; assist in organizing and
facilitating the buyer's due diligence; and coordinate with the
parties' lawyers, accountants, and other consultants.
The goal of H.R. 477 is to clarify the reach of the federal
securities laws for M&A; brokers. By clarifying and simplifying
the registration regime for M&A; brokers, H.R. 477 will reduce
the burdens on the M&A; brokers, which in turn will reduce the
costs borne by their small businesses clients that need the
services of the M&A; broker to assist them in with merger or
acquisition opportunities--thereby facilitating liquidity in
the small business market and preserving and creating jobs.
Gayle Hughes previously testified on behalf of the Small
Business Investor Alliance in support of amending Section
15(b), stating:
We do a lot of business with small M&A; and business
brokers who are transacting mostly small private
companies. They truly add value. A lot of those
companies are very interested in dealing with the
smaller firms. They are a little bit afraid of the
larger, bigger houses and would far rather deal with
the guy down the street who they have known for 20
years as they bring their company to market because it
is their baby that they are transacting, or they are
trying to raise money to generate fine growth capital.
Ms. Hughes further testified that ``providing relief for
these M&A; brokers will bolster middle market and lower-middle
market M&A;, which will lower costs for small and mid-size
companies seeking to unlock their value through a sale or
engaging in a financing transaction for future growth.''
On September 29, 2015, the North American Securities
Administrators Association, Inc. adopted a model rule similar
to H.R. 477 that would exempt M&A; brokers from registration in
states that adopted the model.
On April 25, 2015, the International Business Brokers
Association (``IBBA'') wrote to Chairman Hensarling that the
need to amend Section 15(b) of the Exchange Act ``will help
squeeze out the obstacles created by counterproductive
regulations; ones that add risks and costs without
demonstrating commensurate benefits to any party . . .[and
will] enhance private business commerce, protect and create
jobs, and improve the efficient flow of capital for small to
medium businesses.''
More recently, in a March 31, 2017 letter IBBA explained:
Today's ``one-size-fits all'' regime of broker-dealer
regulation treats the activities of M&A; brokers
assisting sellers or buyers of private companies like
``Wall Street'' investment bankers selling passive
ownership in public companies. This regime imposes
regulatory burdens and related costs that are
necessarily passed on to private business sellers and
buyers who use these professional services, but who
benefit little from the perceived ``investor
protections'' associated with SEC and FINRA regulation
in the context of these business brokerage activities.
Although the Securities and Exchange Commission (SEC)
issued a ``no-action letter'' on January 31, 2014, indicating
that the SEC would not enforce registration requirements
against certain M&A; brokers, a no-action letter does not
formally change the law, the limit of the no-action relief
pertains to the specific fact found in the no-action letter and
most importantly the SEC can rescind the no-action letter at
any time. Thus, this legislation--which is consistent with the
SEC's no-action letter--will provide small businesses and M&A;
brokers the clarification, simplification, legal certainty and
predictability needed within the federal securities to allow
small businesses to more freely explore merger and acquisition
opportunities.
Importantly, nothing in this bill prevents the SEC or the
Department of Justice from investigating or bringing actions
against M&A; brokers who violate the federal securities laws,
and nothing in this legislation prevents any of the States from
regulating M&A; brokers. Further, this bill includes safeguards
to protect consumers and small businesses through a ``bad
actor'' disqualification provision, exclusion of transactions
involving public shell companies, and not extending
registration relief to any M&A; broker who handles or has
custody of the funds or securities to be exchanged by the
parties in the transaction.
Hearings
The Committee on Financial Services held a hearing
examining matters relating to H.R. 477 on April 26, 2017 and
April 28, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
October 11, 2017, and October 12, 2017, and ordered H.R. 477 to
be reported favorably to the House without amendment by a
recorded vote of 37 yeas to 23 nays (Record vote no. FC-83), 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 37 yeas to 23 nays
(Record vote no. FC-83), 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. 477
will reduce the burdensome and extensive regulations imposed on
merger and acquisition brokers, which are passed onto the small
businesses they serve, by amending Section 15(b) of the
Exchange Act to simplify the registration requirements for M&A;
brokers.
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, November 30, 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. 477, the Small
Business Mergers, Acquisitions, Sales, and Brokerage
Simplification 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,
Mark P. Hadley
(For Keith Hall, Director).
Enclosure.
H.R. 477--Small Business Mergers, Acquisitions, Sales, and Brokerage
Simplification Act of 2017
H.R. 477 would exempt certain brokers that perform
transactions related to ownership transfers of eligible
privately held companies from the requirement to register with
the Securities and Exchange Commission (SEC).
Using information from the SEC, CBO estimates that
implementing H.R. 477 would cost less than $500,000 for the
agency to clarify the applicability of regulations regarding
registration requirements for brokers of mergers and
acquisitions. Moreover, the SEC is authorized to collect fees
sufficient to offset its annual appropriation; therefore,
assuming appropriation actions consistent with that authority,
CBO estimates that the net effect of the bill on discretionary
spending would be negligible.
Enacting H.R. 477 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
CBO estimates that enacting H.R. 477 would not increase net
direct spending or on-budget deficits in any of the four
consecutive 10-year periods beginning in 2028.
H.R. 477 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Stephen Rabent.
The estimate was approved 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
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 477 as the ``Small Business
Mergers, Acquisitions, Sales, and Brokerage Simplification Act
of 2017''.
Section 2. Registration exemption for merger and acquisition brokers
This section amends Section 15(b) of the Securities and
Exchange Act of 1934 by adding language that exempts M&A;
brokers from registration provided that such brokers do not
undertake an excluded activity or are not subject to a
disqualification set forth in the section. It also provides for
a rule of construction specifying that the bill does not limit
any other authority of the SEC to exempt any person, or any
class of persons, from any provision of this title, or from any
provision of any rule or regulation thereunder. Finally, it
contains certain definitions applicable to the section.
Section 3. Effective date
This section issues the effective date of the act, 90 days
after the enactment of the said act.
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, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
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 (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
registration and regulation of brokers and dealers
Sec. 15. (a)(1) It shall be unlawful for any broker or dealer
which is either a person other than a natural person or a
natural person not associated with a broker or dealer which is
a person other than a natural person (other than such a broker
or dealer whose business is exclusively intrastate and who does
not make use of any facility of a national securities exchange)
to make use of the mails or any means or instrumentality of
interstate commerce to effect any transactions in, or to induce
or attempt to induce the purchase or sale of, any security
(other than an exempted security or commercial paper, bankers'
acceptances, or commercial bills) unless such broker or dealer
is registered in accordance with subsection (b) of this
section.
(2) The Commission, by rule or order, as it deems consistent
with the public interest and the protection of investors, may
conditionally or unconditionally exempt from paragraph (1) of
this subsection any broker or dealer or class of brokers or
dealers specified in such rule or order.
(b)(1) A broker or dealer may be registered by filing with
the Commission an application for registration in such form and
containing such information and documents concerning such
broker or dealer and any persons associated with such broker or
dealer as the Commission, by rule, may prescribe as necessary
or appropriate in the public interest or for the protection of
investors. Within forty-five days of the date of the filing of
such application (or within such longer period as to which the
applicant consents), the Commission shall--
(A) by order grant registration, or
(B) institute proceedings to determine whether
registration should be denied. Such proceedings shall
include notice of the grounds for denial under
consideration and opportunity for hearing and shall be
concluded within one hundred twenty days of the date of
the filing of the application for registration. At the
conclusion of such proceedings, the Commission, by
order, shall grant or deny such registration. The
Commission may extend the time for conclusion of such
proceedings for up to ninety days if it finds good
cause for such extension and publishes its reasons for
so finding or for such longer period as to which the
applicant consents.
The Commission shall grant such registration if the Commission
finds that the requirements of this section are satisfied. The
order granting registration shall not be effective until such
broker or dealer has become a member of a registered securities
association, or until such broker or dealer has become a member
of a national securities exchange, if such broker or dealer
effects transactions solely on that exchange, unless the
Commission has exempted such broker or dealer, by rule or
order, from such membership. The Commission shall deny such
registration if it does not make such a finding or if it finds
that if the applicant were so registered, its registration
would be subject to suspension or revocation under paragraph
(4) of this subsection.
(2)(A) An application for registration of a broker or dealer
to be formed or organized may be made by a broker or dealer to
which the broker or dealer to be formed or organized is to be
the successor. Such application, in such form as the
Commission, by rule, may prescribe, shall contain such
information and documents concerning the applicant, the
successor, and any persons associated with the applicant or the
successor, as the Commission, by rule, may prescribe as
necessary or appropriate in the public interest or for the
protection of investors. The grant or denial of registration to
such an applicant shall be in accordance with the procedures
set forth in paragraph (1) of this subsection. If the
Commission grants such registration, the registration shall
terminate on the forty-fifth day after the effective date
thereof, unless prior thereto the successor shall, in
accordance with such rules and regulations as the Commission
may prescribe, adopt the application for registration as its
own.
(B) Any person who is a broker or dealer solely by reason of
acting as a municipal securities dealer or municipal securities
broker, who so acts through a separately identifiable
department or division, and who so acted in such a manner on
the date of enactment of the Securities Acts Amendments of
1975, may, in accordance with such terms and conditions as the
Commission, by rule, prescribes as necessary and appropriate in
the public interest and for the protection of investors,
register such separately identifiable department or division in
accordance with this subsection. If any such department or
division is so registered, the department or division and not
such person himself shall be the broker or dealer for purposes
of this title.
(C) Within six months of the date of the granting of
registration to a broker or dealer, the Commission, or upon the
authorization and direction of the Commission, a registered
securities association or national securities exchange of which
such broker or dealer is a member, shall conduct an inspection
of the broker or dealer to determine whether it is operating in
conformity with the provisions of this title and the rules and
regulations thereunder: Provided, however, That the Commission
may delay such inspection of any class of brokers or dealers
for a period not to exceed six months.
(3) Any provision of this title (other than section 5 and
subsection (a) of this section) which prohibits any act,
practice, or course of business if the mails or any means or
instrumentality of interstate commerce is used in connection
therewith shall also prohibit any such act, practice, or course
of business by any registered broker or dealer or any person
acting on behalf of such a broker or dealer, irrespective of
any use of the mails or any means or instrumentality of
interstate commerce in connection therewith.
(4) The Commission, by order, shall censure, place
limitations on the activities, functions, or operations of,
suspend for a period not exceeding twelve months, or revoke the
registration of any broker or dealer if it finds, on the record
after notice and opportunity for hearing, that such censure,
placing of limitations, suspension, or revocation is in the
public interest and that such broker or dealer, whether prior
or subsequent to becoming such, or any person associated with
such broker or dealer, whether prior or subsequent to becoming
so associated--
(A) has willfully made or caused to be made in any
application for registration or report required to be
filed with the Commission or with any other appropriate
regulatory agency under this title, or in any
proceeding before the Commission with respect to
registration, any statement which was at the time and
in the light of the circumstances under which it was
made false or misleading with respect to any material
fact, or has omitted to state in any such application
or report any material fact which is required to be
stated therein.
(B) has been convicted within ten years preceding the
filing of any application for registration or at any
time thereafter of any felony or misdemeanor or of a
substantially equivalent crime by a foreign court of
competent jurisdiction which the Commission finds--
(i) involves the purchase or sale of any
security, the taking of a false oath, the
making of a false report, bribery, perjury,
burglary, any substantially equivalent activity
however denominated by the laws of the relevant
foreign government, or conspiracy to commit any
such offense;
(ii) arises out of the conduct of the
business of a broker, dealer, municipal
securities dealer municipal advisor, government
securities broker, government securities
dealer, investment adviser, bank, insurance
company, fiduciary, transfer agent, nationally
recognized statistical rating organization,
foreign person performing a function
substantially equivalent to any of the above,
or entity or person required to be registered
under the Commodity Exchange Act (7 U.S.C. 1 et
seq.) or any substantially equivalent foreign
statute or regulation;
(iii) involves the larceny, theft, robbery,
extortion, forgery, counterfeiting, fraudulent
concealment, embezzlement, fraudulent
conversion, or misappropriation of funds, or
securities, or substantially equivalent
activity however denominated by the laws of the
relevant foreign government; or
(iv) involves the violation of section 152,
1341, 1342, or 1343 or chapter 25 or 47 of
title 18, United States Code, or a violation of
a substantially equivalent foreign statute.
(C) is permanently or temporarily enjoined by order,
judgment, or decree of any court of competent
jurisdiction from acting as an investment adviser,
underwriter, broker, dealer, municipal securities
dealer municipal advisor,, government securities
broker, government securities dealer, security-based
swap dealer, major security-based swap participant,
transfer agent, nationally recognized statistical
rating organization, foreign person performing a
function substantially equivalent to any of the above,
or entity or person required to be registered under the
Commodity Exchange Act or any substantially equivalent
foreign statute or regulation, or as an affiliated
person or employee of any investment company, bank,
insurance company, foreign entity substantially
equivalent to any of the above, or entity or person
required to be registered under the Commodity Exchange
Act or any substantially equivalent foreign statute or
regulation, or from engaging in or continuing any
conduct or practice in connection with any such
activity, or in connection with the purchase or sale of
any security.
(D) has willfully violated any provision of the
Securities Act of 1933, the Investment Advisers Act of
1940, the Investment Company Act of 1940, the Commodity
Exchange Act, this title, the rules or regulations
under any of such statutes, or the rules of the
Municipal Securities Rulemaking Board, or is unable to
comply with any such provision.
(E) has willfully aided, abetted, counseled,
commanded, induced, or procured the violation by any
other person of any provision of the Securities Act of
1933, the Investment Advisers Act of 1940, the
Investment Company Act of 1940, the Commodity Exchange
Act, this title, the rules or regulations under any of
such statutes, or the rules of the Municipal Securities
Rulemaking Board, or has failed reasonably to
supervise, with a view to preventing violations of the
provisions of such statutes, rules, and regulations,
another person who commits such a violation, if such
other person is subject to his supervision. For the
purposes of this subparagraph (E) no person shall be
deemed to have failed reasonably to supervise any other
person, if--
(i) there have been established procedures,
and a system for applying such procedures,
which would reasonably be expected to prevent
and detect, insofar as practicable, any such
violation by such other person, and
(ii) such person has reasonably discharged
the duties and obligations incumbent upon him
by reason of such procedures and system without
reasonable cause to believe that such
procedures and system were not being complied
with.
(F) is subject to any order of the Commission barring
or suspending the right of the person to be associated
with a broker, dealer, security-based swap dealer, or a
major security-based swap participant;
(G) has been found by a foreign financial regulatory
authority to have--
(i) made or caused to be made in any
application for registration or report required
to be filed with a foreign financial regulatory
authority, or in any proceeding before a
foreign financial regulatory authority with
respect to registration, any statement that was
at the time and in the light of the
circumstances under which it was made false or
misleading with respect to any material fact,
or has omitted to state in any application or
report to the foreign financial regulatory
authority any material fact that is required to
be stated therein;
(ii) violated any foreign statute or
regulation regarding transactions in
securities, or contracts of sale of a commodity
for future delivery, traded on or subject to
the rules of a contract market or any board of
trade;
(iii) aided, abetted, counseled, commanded,
induced, or procured the violation by any
person of any provision of any statutory
provisions enacted by a foreign government, or
rules or regulations thereunder, empowering a
foreign financial regulatory authority
regarding transactions in securities, or
contracts of sale of a commodity for future
delivery, traded on or subject to the rules of
a contract market or any board of trade, or has
been found, by a foreign financial regulatory
authority, to have failed reasonably to
supervise, with a view to preventing violations
of such statutory provisions, rules, and
regulations, another person who commits such a
violation, if such other person is subject to
his supervision; or
(H) is subject to any final order of a State
securities commission (or any agency or officer
performing like functions), State authority that
supervises or examines banks, savings associations, or
credit unions, State insurance commission (or any
agency or office performing like functions), an
appropriate Federal banking agency (as defined in
section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813(q))), or the National Credit Union
Administration, that--
(i) bars such person from association with an
entity regulated by such commission, authority,
agency, or officer, or from engaging in the
business of securities, insurance, banking,
savings association activities, or credit union
activities; or
(ii) constitutes a final order based on
violations of any laws or regulations that
prohibit fraudulent, manipulative, or deceptive
conduct.
(5) Pending final determination whether any registration
under this subsection shall be revoked, the Commission, by
order, may suspend such registration, if such suspension
appears to the Commission, after notice and opportunity for
hearing, to be necessary or appropriate in the public interest
or for the protection of investors. Any registered broker or
dealer may, upon such terms and conditions as the Commission
deems necessary or appropriate in the public interest or for
the protection of investors, withdraw from registration by
filing a written notice of withdrawal with the Commission. If
the Commission finds that any registered broker or dealer is no
longer in existence or has ceased to do business as a broker or
dealer, the Commission, by order, shall cancel the registration
of such broker or dealer.
(6)(A) With respect to any person who is associated, who is
seeking to become associated, or, at the time of the alleged
misconduct, who was associated or was seeking to become
associated with a broker or dealer, or any person
participating, or, at the time of the alleged misconduct, who
was participating, in an offering of any penny stock, the
Commission, by order, shall censure, place limitations on the
activities or functions of such person, or suspend for a period
not exceeding 12 months, or bar any such person from being
associated with a broker, dealer, investment adviser, municipal
securities dealer, municipal advisor, transfer agent, or
nationally recognized statistical rating organization, or from
participating in an offering of penny stock, if the Commission
finds, on the record after notice and opportunity for a
hearing, that such censure, placing of limitations, suspension,
or bar is in the public interest and that such person--
(i) has committed or omitted any act, or is subject
to an order or finding, enumerated in subparagraph (A),
(D), (E), (H), or (G) of paragraph (4) of this
subsection;
(ii) has been convicted of any offense specified in
subparagraph (B) of such paragraph (4) within 10 years
of the commencement of the proceedings under this
paragraph; or
(iii) is enjoined from any action, conduct, or
practice specified in subparagraph (C) of such
paragraph (4).
(B) It shall be unlawful--
(i) for any person as to whom an order under
subparagraph (A) is in effect, without the consent of
the Commission, willfully to become, or to be,
associated with a broker or dealer in contravention of
such order, or to participate in an offering of penny
stock in contravention of such order;
(ii) for any broker or dealer to permit such a
person, without the consent of the Commission, to
become or remain, a person associated with the broker
or dealer in contravention of such order, if such
broker or dealer knew, or in the exercise of reasonable
care should have known, of such order; or
(iii) for any broker or dealer to permit such a
person, without the consent of the Commission, to
participate in an offering of penny stock in
contravention of such order, if such broker or dealer
knew, or in the exercise of reasonable care should have
known, of such order and of such participation.
(C) For purposes of this paragraph, the term ``person
participating in an offering of penny stock'' includes any
person acting as any promoter, finder, consultant, agent, or
other person who engages in activities with a broker, dealer,
or issuer for purposes of the issuance or trading in any penny
stock, or inducing or attempting to induce the purchase or sale
of any penny stock. The Commission may, by rule or regulation,
define such term to include other activities, and may, by rule,
regulation, or order, exempt any person or class of persons, in
whole or in part, conditionally or unconditionally, from such
term.
(7) No registered broker or dealer or government securities
broker or government securities dealer registered (or required
to register) under section 15C(a)(1)(A) shall effect any
transaction in, or induce the purchase or sale of, any security
unless such broker or dealer meets such standards of
operational capability and such broker or dealer and all
natural persons associated with such broker or dealer meet such
standards of training, experience, competence, and such other
qualifications as the Commission finds necessary or appropriate
in the public interest or for the protection of investors. The
Commission shall establish such standards by rules and
regulations, which may--
(A) specify that all or any portion of such standards
shall be applicable to any class of brokers and dealers
and persons associated with brokers and dealers;
(B) require persons in any such class to pass tests
prescribed in accordance with such rules and
regulations, which tests shall, with respect to any
class of partners, officers, or supervisory employees
(which latter term may be defined by the Commission's
rules and regulations and as so defined shall include
branch managers of brokers or dealers) engaged in the
management of the broker or dealer, include questions
relating to bookkeeping, accounting, internal control
over cash and securities, supervision of employees,
maintenance of records, and other appropriate matters;
and
(C) provide that persons in any such class other than
brokers and dealers and partners, officers, and
supervisory employees of brokers or dealers, may be
qualified solely on the basis of compliance with such
standards of training and such other qualifications as
the Commission finds appropriate.
The Commission, by rule, may prescribe reasonable fees and
charges to defray its costs in carrying out this paragraph,
including, but not limited to, fees for any test administered
by it or under its direction. The Commission may cooperate with
registered securities associations and national securities
exchanges in devising and administering tests and may require
registered brokers and dealers and persons associated with such
brokers and dealers to pass tests administered by or on behalf
of any such association or exchange and to pay such association
or exchange reasonable fees or charges to defray the costs
incurred by such association or exchange in administering such
tests.
(8) It shall be unlawful for any registered broker or dealer
to effect any transaction in, or induce or attempt to induce
the purchase or sale of, any security (other than or commercial
paper, bankers' acceptances, or commercial bills), unless such
broker or dealer is a member of a securities association
registered pursuant to section 15A of this title or effects
transactions in securities solely on a national securities
exchange of which it is a member.
(9) The Commission by rule or order, as it deems consistent
with the public interest and the protection of investors, may
conditionally or unconditionally exempt from paragraph (8) of
this subsection any broker or dealer or class of brokers or
dealers specified in such rule or order.
(10) For the purposes of determining whether a person is
subject to a statutory disqualification under section 6(c)(2),
15A(g)(2), or 17A(b)(4)(A) of this title, the term
``Commission'' in paragraph (4)(B) of this subsection shall
mean ``exchange'', ``association'', or ``clearing agency'',
respectively.
(11) Broker/dealer registration with respect to
transactions in security futures products.--
(A) Notice registration.--
(i) Contents of notice.--
Notwithstanding paragraphs (1) and (2),
a broker or dealer required to register
only because it effects transactions in
security futures products on an
exchange registered pursuant to section
6(g) may register for purposes of this
section by filing with the Commission a
written notice in such form and
containing such information concerning
such broker or dealer and any persons
associated with such broker or dealer
as the Commission, by rule, may
prescribe as necessary or appropriate
in the public interest or for the
protection of investors. A broker or
dealer may not register under this
paragraph unless that broker or dealer
is a member of a national securities
association registered under section
15A(k).
(ii) Immediate effectiveness.--Such
registration shall be effective
contemporaneously with the submission
of notice, in written or electronic
form, to the Commission, except that
such registration shall not be
effective if the registration would be
subject to suspension or revocation
under paragraph (4).
(iii) Suspension.--Such registration
shall be suspended immediately if a
national securities association
registered pursuant to section 15A(k)
of this title suspends the membership
of that broker or dealer.
(iv) Termination.--Such registration
shall be terminated immediately if any
of the above stated conditions for
registration set forth in this
paragraph are no longer satisfied.
(B) Exemptions for registered brokers and
dealers.--A broker or dealer registered
pursuant to the requirements of subparagraph
(A) shall be exempt from the following
provisions of this title and the rules
thereunder with respect to transactions in
security futures products:
(i) Section 8.
(ii) Section 11.
(iii) Subsections (c)(3) and (c)(5)
of this section.
(iv) Section 15B.
(v) Section 15C.
(vi) Subsections (d), (e), (f), (g),
(h), and (i) of section 17.
(12) Exemption for security futures product exchange
members.--
(A) Registration exemption.--A natural person
shall be exempt from the registration
requirements of this section if such person--
(i) is a member of a designated
contract market registered with the
Commission as an exchange pursuant to
section 6(g);
(ii) effects transactions only in
securities on the exchange of which
such person is a member; and
(iii) does not directly accept or
solicit orders from public customers or
provide advice to public customers in
connection with the trading of security
futures products.
(B) Other exemptions.--A natural person
exempt from registration pursuant to
subparagraph (A) shall also be exempt from the
following provisions of this title and the
rules thereunder:
(i) Section 8.
(ii) Section 11.
(iii) Subsections (c)(3), (c)(5), and
(e) of this section.
(iv) Section 15B.
(v) Section 15C.
(vi) Subsections (d), (e), (f), (g),
(h), and (i) of section 17.
(13) Registration exemption for merger and
acquisition brokers.--
(A) In general.--Except as provided in
subparagraph (B), an M&A; broker shall be exempt
from registration under this section.
(B) Excluded activities.--An M&A; broker is
not exempt from registration under this
paragraph if such broker does any of the
following:
(i) Directly or indirectly, in
connection with the transfer of
ownership of an eligible privately held
company, receives, holds, transmits, or
has custody of the funds or securities
to be exchanged by the parties to the
transaction.
(ii) Engages on behalf of an issuer
in a public offering of any class of
securities that is registered, or is
required to be registered, with the
Commission under section 12 or with
respect to which the issuer files, or
is required to file, periodic
information, documents, and reports
under subsection (d).
(iii) Engages on behalf of any party
in a transaction involving a public
shell company.
(C) Disqualifications.--An M&A; broker is not
exempt from registration under this paragraph
if such broker is subject to--
(i) suspension or revocation of
registration under paragraph (4);
(ii) a statutory disqualification
described in section 3(a)(39);
(iii) a disqualification under the
rules adopted by the Commission under
section 926 of the Investor Protection
and Securities Reform Act of 2010 (15
U.S.C. 77d note); or
(iv) a final order described in
paragraph (4)(H).
(D) Rule of construction.--Nothing in this
paragraph shall be construed to limit any other
authority of the Commission to exempt any
person, or any class of persons, from any
provision of this title, or from any provision
of any rule or regulation thereunder.
(E) Definitions.--In this paragraph:
(i) Control.--The term ``control''
means the power, directly or
indirectly, to direct the management or
policies of a company, whether through
ownership of securities, by contract,
or otherwise. There is a presumption of
control for any person who--
(I) is a director, general
partner, member or manager of a
limited liability company, or
officer exercising executive
responsibility (or has similar
status or functions);
(II) has the right to vote 20
percent or more of a class of
voting securities or the power
to sell or direct the sale of
20 percent or more of a class
of voting securities; or
(III) in the case of a
partnership or limited
liability company, has the
right to receive upon
dissolution, or has
contributed, 20 percent or more
of the capital.
(ii) Eligible privately held
company.--The term ``eligible privately
held company'' means a privately held
company that meets both of the
following conditions:
(I) The company does not have
any class of securities
registered, or required to be
registered, with the Commission
under section 12 or with
respect to which the company
files, or is required to file,
periodic information,
documents, and reports under
subsection (d).
(II) In the fiscal year
ending immediately before the
fiscal year in which the
services of the M&A; broker are
initially engaged with respect
to the securities transaction,
the company meets either or
both of the following
conditions (determined in
accordance with the historical
financial accounting records of
the company):
(aa) The earnings of
the company before
interest, taxes,
depreciation, and
amortization are less
than $25,000,000.
(bb) The gross
revenues of the company
are less than
$250,000,000.
(iii) M&A; broker.--The term ``M&A;
broker'' means a broker, and any person
associated with a broker, engaged in
the business of effecting securities
transactions solely in connection with
the transfer of ownership of an
eligible privately held company,
regardless of whether the broker acts
on behalf of a seller or buyer, through
the purchase, sale, exchange, issuance,
repurchase, or redemption of, or a
business combination involving,
securities or assets of the eligible
privately held company, if the broker
reasonably believes that--
(I) upon consummation of the
transaction, any person
acquiring securities or assets
of the eligible privately held
company, acting alone or in
concert, will control and,
directly or indirectly, will be
active in the management of the
eligible privately held company
or the business conducted with
the assets of the eligible
privately held company; and
(II) if any person is offered
securities in exchange for
securities or assets of the
eligible privately held
company, such person will,
prior to becoming legally bound
to consummate the transaction,
receive or have reasonable
access to the most recent
fiscal year-end financial
statements of the issuer of the
securities as customarily
prepared by the management of
the issuer in the normal course
of operations and, if the
financial statements of the
issuer are audited, reviewed,
or compiled, any related
statement by the independent
accountant, a balance sheet
dated not more than 120 days
before the date of the offer,
and information pertaining to
the management, business,
results of operations for the
period covered by the foregoing
financial statements, and
material loss contingencies of
the issuer.
(iv) Public shell company.--The term
``public shell company'' is a company
that at the time of a transaction with
an eligible privately held company--
(I) has any class of
securities registered, or
required to be registered, with
the Commission under section 12
or that is required to file
reports pursuant to subsection
(d);
(II) has no or nominal
operations; and
(III) has--
(aa) no or nominal
assets;
(bb) assets
consisting solely of
cash and cash
equivalents; or
(cc) assets
consisting of any
amount of cash and cash
equivalents and nominal
other assets.
(F) Inflation adjustment.--
(i) In general.--On the date that is
5 years after the date of the enactment
of the Small Business Mergers,
Acquisitions, Sales, and Brokerage
Simplification Act of 2017, and every 5
years thereafter, each dollar amount in
subparagraph (E)(ii)(II) shall be
adjusted by--
(I) dividing the annual value
of the Employment Cost Index
For Wages and Salaries, Private
Industry Workers (or any
successor index), as published
by the Bureau of Labor
Statistics, for the calendar
year preceding the calendar
year in which the adjustment is
being made by the annual value
of such index (or successor)
for the calendar year ending
December 31, 2012; and
(II) multiplying such dollar
amount by the quotient obtained
under subclause (I).
(ii) Rounding.--Each dollar amount
determined under clause (i) shall be
rounded to the nearest multiple of
$100,000.
(c)(1)(A) No broker or dealer shall make use of the mails or
any means or instrumentality of interstate commerce to effect
any transaction in, or to induce or attempt to induce the
purchase or sale of, any security (other than commercial paper,
bankers' acceptances, or commercial bills), or any security-
based swap agreement by means of any manipulative, deceptive,
or other fraudulent device or contrivance.
(B) No broker, dealer, or municipal securities dealer shall
make use of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to induce
or attempt to induce the purchase or sale of, any municipal
security or any security-based swap agreement involving a
municipal security by means of any manipulative, deceptive, or
other fraudulent device or contrivance.
(C) No government securities broker or government securities
dealer shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or to induce or to attempt to induce the
purchase or sale of, any government security or any security-
based swap agreement involving a government security by means
of any manipulative, deceptive, or other fraudulent device or
contrivance.
(2)(A) No broker or dealer shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security or
commercial paper, bankers' acceptances, or commercial bills)
otherwise than on a national securities exchange of which it is
a member, in connection with which such broker or dealer
engages in any fraudulent, deceptive, or manipulative act or
practice, or makes any fictitious quotation.
(B) No broker, dealer, or municipal securities dealer shall
make use of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to induce
or attempt to induce the purchase or sale of, any municipal
security in connection with which such broker, dealer, or
municipal securities dealer engages in any fraudulent,
deceptive, or manipulative act or practice, or makes any
fictitious quotation.
(C) No government securities broker or government securities
dealer shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or induce or attempt to induce the purchase or
sale of, any government security in connection with which such
government securities broker or government securities dealer
engages in any fraudulent, deceptive, or manipulative act or
practice, or makes any fictitious quotation.
(D) The Commission shall, for the purposes of this paragraph,
by rules and regulations define, and prescribe means reasonably
designed to prevent, such acts and practices as are fraudulent,
deceptive, or manipulative and such quotations as are
fictitious.
(E) The Commission shall, prior to adopting any rule or
regulation under subparagraph (C), consult with and consider
the views of the Secretary of the Treasury and each appropriate
regulatory agency. If the Secretary of the Treasury or any
appropriate regulatory agency comments in writing on a proposed
rule or regulation of the Commission under such subparagraph
(C) that has been published for comment, the Commission shall
respond in writing to such written comment before adopting the
proposed rule. If the Secretary of the Treasury determines, and
notifies the Commission, that such rule or regulation, if
implemented, would, or as applied does (i) adversely affect the
liquidity or efficiency of the market for government
securities; or (ii) impose any burden on competition not
necessary or appropriate in furtherance of the purposes of this
section, the Commission shall, prior to adopting the proposed
rule or regulation, find that such rule or regulation is
necessary and appropriate in furtherance of the purposes of
this section notwithstanding the Secretary's determination.
(3)(A) No broker or dealer (other than a government
securities broker or government securities dealer, except a
registered broker or dealer) shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security
(except a government security) or commercial paper, bankers'
acceptances, or commercial bills) in contravention of such
rules and regulations as the Commission shall prescribe as
necessary or appropriate in the public interest or for the
protection of investors to provide safeguards with respect to
the financial responsibility and related practices of brokers
and dealers including, but not limited to, the acceptance of
custody and use of customers' securities and the carrying and
use of customers' deposits or credit balances. Such rules and
regulations shall (A) require the maintenance of reserves with
respect to customers' deposits or credit balances, and (B) no
later than September 1, 1975, establish minimum financial
responsibility requirements for all brokers and dealers.
(B) Consistent with this title, the Commission, in
consultation with the Commodity Futures Trading Commission,
shall issue such rules, regulations, or orders as are necessary
to avoid duplicative or conflicting regulations applicable to
any broker or dealer registered with the Commission pursuant to
section 15(b) (except paragraph (11) thereof), that is also
registered with the Commodity Futures Trading Commission
pursuant to section 4f(a) of the Commodity Exchange Act (except
paragraph (2) thereof), with respect to the application of: (i)
the provisions of section 8, section 15(c)(3), and section 17
of this title and the rules and regulations thereunder related
to the treatment of customer funds, securities, or property,
maintenance of books and records, financial reporting, or other
financial responsibility rules, involving security futures
products; and (ii) similar provisions of the Commodity Exchange
Act and rules and regulations thereunder involving security
futures products.
(C) Notwithstanding any provision of sections
2(a)(1)(C)(i) or 4d(a)(2) of the Commodity Exchange Act
and the rules and regulations thereunder, and pursuant
to an exemption granted by the Commission under section
36 of this title or pursuant to a rule or regulation,
cash and securities may be held by a broker or dealer
registered pursuant to subsection (b)(1) and also
registered as a futures commission merchant pursuant to
section 4f(a)(1) of the Commodity Exchange Act, in a
portfolio margining account carried as a futures
account subject to section 4d of the Commodity Exchange
Act and the rules and regulations thereunder, pursuant
to a portfolio margining program approved by the
Commodity Futures Trading Commission, and subject to
subchapter IV of chapter 7 of title 11 of the United
States Code and the rules and regulations thereunder.
The Commission shall consult with the Commodity Futures
Trading Commission to adopt rules to ensure that such
transactions and accounts are subject to comparable
requirements to the extent practicable for similar
products.
(4) If the Commission finds, after notice and opportunity for
a hearing, that any person subject to the provisions of section
12, 13, 14, or subsection (d) of section 15 of this title or
any rule or regulation thereunder has failed to comply with any
such provision, rule, or regulation in any material respect,
the Commission may publish its findings and issue an order
requiring such person, and any person who was a cause of the
failure to comply due to an act or omission the person knew or
should have known would contribute to the failure to comply, to
comply, or to take steps to effect compliance, with such
provision or such rule or regulation thereunder upon such terms
and conditions and within such time as the Commission may
specify in such order.
(5) No dealer (other than a specialist registered on a
national securities exchange) acting in the capacity of market
maker or otherwise shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security or a
municipal security) in contravention of such specified and
appropriate standards with respect to dealing as the
Commission, by rule, shall prescribe as necessary or
appropriate in the public interest and for the protection of
investors, to maintain fair and orderly markets, or to remove
impediments to and perfect the mechanism of a national market
system. Under the rules of the Commission a dealer in a
security may be prohibited from acting as broker in that
security.
(6) No broker or dealer shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security,
municipal security, commercial paper, bankers' acceptances, or
commercial bills) in contravention of such rules and
regulations as the Commission shall prescribe as necessary or
appropriate in the public interest and for the protection of
investors or to perfect or remove impediments to a national
system for the prompt and accurate clearance and settlement of
securities transactions, with respect to the time and method
of, and the form and format of documents used in connection
with, making settlements of and payments for transactions in
securities, making transfers and deliveries of securities, and
closing accounts. Nothing in this paragraph shall be construed
(A) to affect the authority of the Board of Governors of the
Federal Reserve System, pursuant to section 7 of this title, to
prescribe rules and regulations for the purpose of preventing
the excessive use of credit for the purchase or carrying of
securities, or (B) to authorize the Commission to prescribe
rules or regulations for such purpose.
(7) In connection with any bid for or purchase of a
government security related to an offering of government
securities by or on behalf of an issuer, no government
securities broker, government securities dealer, or bidder for
or purchaser of securities in such offering shall knowingly or
willfully make any false or misleading written statement or
omit any fact necessary to make any written statement made not
misleading.
(8) Prohibition of referral fees.--No broker or dealer, or
person associated with a broker or dealer, may solicit or
accept, directly or indirectly, remuneration for assisting an
attorney in obtaining the representation of any person in any
private action arising under this title or under the Securities
Act of 1933.
(d) Supplementary and Periodic Information.--
(1) In general.--Each issuer which has filed a
registration statement containing an undertaking which
is or becomes operative under this subsection as in
effect prior to the date of enactment of the Securities
Acts Amendments of 1964, and each issuer which shall
after such date file a registration statement which has
become effective pursuant to the Securities Act of
1933, as amended, shall file with the Commission, in
accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors,
such supplementary and periodic information, documents,
and reports as may be required pursuant to section 13
of this title in respect of a security registered
pursuant to section 12 of this title. The duty to file
under this subsection shall be automatically suspended
if and so long as any issue of securities of such
issuer is registered pursuant to section 12 of this
title. The duty to file under this subsection shall
also be automatically suspended as to any fiscal year,
other than the fiscal year within which such
registration statement became effective, if, at the
beginning of such fiscal year, the securities of each
class, other than any class of asset-backed securities,
to which the registration statement relates are held of
record by less than 300 persons, or, in the case of a
bank, a savings and loan holding company (as defined in
section 10 of the Home Owners' Loan Act), or a bank
holding company, as such term is defined in section 2
of the Bank Holding Company Act of 1956 (12 U.S.C.
1841), 1,200 persons persons. For the purposes of this
subsection, the term ``class'' shall be construed to
include all securities of an issuer which are of
substantially similar character and the holders of
which enjoy substantially similar rights and
privileges. The Commission may, for the purpose of this
subsection, define by rules and regulations the term
``held of record'' as it deems necessary or appropriate
in the public interest or for the protection of
investors in order to prevent circumvention of the
provisions of this subsection. Nothing in this
subsection shall apply to securities issued by a
foreign government or political subdivision thereof.
(2) Asset-backed securities.--
(A) Suspension of duty to file.--The
Commission may, by rule or regulation, provide
for the suspension or termination of the duty
to file under this subsection for any class of
asset-backed security, on such terms and
conditions and for such period or periods as
the Commission deems necessary or appropriate
in the public interest or for the protection of
investors.
(B) Classification of issuers.--The
Commission may, for purposes of this
subsection, classify issuers and prescribe
requirements appropriate for each class of
issuers of asset-backed securities.
(e) Notices to Customers Regarding Securities Lending.--Every
registered broker or dealer shall provide notice to its
customers that they may elect not to allow their fully paid
securities to be used in connection with short sales. If a
broker or dealer uses a customer's securities in connection
with short sales, the broker or dealer shall provide notice to
its customer that the broker or dealer may receive compensation
in connection with lending the customer's securities. The
Commission, by rule, as it deems necessary or appropriate in
the public interest and for the protection of investors, may
prescribe the form, content, time, and manner of delivery of
any notice required under this paragraph.
(f) The Commission, by rule, as it deems necessary or
appropriate in the public interest and for the protection of
investors or to assure equal regulation, may require any member
of a national securities exchange not required to register
under section 15 of this title and any person associated with
any such member to comply with any provision of this title
(other than section 15(a)) or the rules or regulations
thereunder which by its terms regulates or prohibits any act,
practice, or course of business by a ``broker or dealer'' or
``registered broker or dealer'' or a ``person associated with a
broker or dealer,'' respectively.
(g) Every registered broker or dealer shall establish,
maintain, and enforce written policies and procedures
reasonably designed, taking into consideration the nature of
such broker's or dealer's business, to prevent the misuse in
violation of this title, or the rules or regulations
thereunder, of material, nonpublic information by such broker
or dealer or any person associated with such broker or dealer.
The Commission, as it deems necessary or appropriate in the
public interest or for the protection of investors, shall adopt
rules or regulations to require specific policies or procedures
reasonably designed to prevent misuse in violation of this
title (or the rules or regulations thereunder) of material,
nonpublic information.
(h) Requirements for Transactions in Penny Stocks.--
(1) In general.--No broker or dealer shall make use
of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to
induce or attempt to induce the purchase or sale of,
any penny stock by any customer except in accordance
with the requirements of this subsection and the rules
and regulations prescribed under this subsection.
(2) Risk disclosure with respect to penny stocks.--
Prior to effecting any transaction in any penny stock,
a broker or dealer shall give the customer a risk
disclosure document that--
(A) contains a description of the nature and
level of risk in the market for penny stocks in
both public offerings and secondary trading;
(B) contains a description of the broker's or
dealer's duties to the customer and of the
rights and remedies available to the customer
with respect to violations of such duties or
other requirements of Federal securities laws;
(C) contains a brief, clear, narrative
description of a dealer market, including
``bid'' and ``ask'' prices for penny stocks and
the significance of the spread between the bid
and ask prices;
(D) contains the toll free telephone number
for inquiries on disciplinary actions
established pursuant to section 15A(i) of this
title;
(E) defines significant terms used in the
disclosure document or in the conduct of
trading in penny stocks; and
(F) contains such other information, and is
in such form (including language, type size,
and format), as the Commission shall require by
rule or regulation.
(3) Commission rules relating to disclosure.--The
Commission shall adopt rules setting forth additional
standards for the disclosure by brokers and dealers to
customers of information concerning transactions in
penny stocks. Such rules--
(A) shall require brokers and dealers to
disclose to each customer, prior to effecting
any transaction in, and at the time of
confirming any transaction with respect to any
penny stock, in accordance with such procedures
and methods as the Commission may require
consistent with the public interest and the
protection of investors--
(i) the bid and ask prices for penny
stock, or such other information as the
Commission may, by rule, require to
provide customers with more useful and
reliable information relating to the
price of such stock;
(ii) the number of shares to which
such bid and ask prices apply, or other
comparable information relating to the
depth and liquidity of the market for
such stock; and
(iii) the amount and a description of
any compensation that the broker or
dealer and the associated person
thereof will receive or has received in
connection with such transaction;
(B) shall require brokers and dealers to
provide, to each customer whose account with
the broker or dealer contains penny stocks, a
monthly statement indicating the market value
of the penny stocks in that account or
indicating that the market value of such stock
cannot be determined because of the
unavailability of firm quotes; and
(C) may, as the Commission finds necessary or
appropriate in the public interest or for the
protection of investors, require brokers and
dealers to disclose to customers additional
information concerning transactions in penny
stocks.
(4) Exemptions.--The Commission, as it determines
consistent with the public interest and the protection
of investors, may by rule, regulation, or order exempt
in whole or in part, conditionally or unconditionally,
any person or class of persons, or any transaction or
class of transactions, from the requirements of this
subsection. Such exemptions shall include an exemption
for brokers and dealers based on the minimal percentage
of the broker's or dealer's commissions, commission-
equivalents, and markups received from transactions in
penny stocks.
(5) Regulations.--It shall be unlawful for any person
to violate such rules and regulations as the Commission
shall prescribe in the public interest or for the
protection of investors or to maintain fair and orderly
markets--
(A) as necessary or appropriate to carry out
this subsection; or
(B) as reasonably designed to prevent
fraudulent, deceptive, or manipulative acts and
practices with respect to penny stocks.
(i) Limitations on State Law.--
(1) Capital, margin, books and records, bonding, and
reports.--No law, rule, regulation, or order, or other
administrative action of any State or political
subdivision thereof shall establish capital, custody,
margin, financial responsibility, making and keeping
records, bonding, or financial or operational reporting
requirements for brokers, dealers, municipal securities
dealers, government securities brokers, or government
securities dealers that differ from, or are in addition
to, the requirements in those areas established under
this title. The Commission shall consult periodically
the securities commissions (or any agency or office
performing like functions) of the States concerning the
adequacy of such requirements as established under this
title.
(2) Funding portals.--
(A) Limitation on state laws.--Except as
provided in subparagraph (B), no State or
political subdivision thereof may enforce any
law, rule, regulation, or other administrative
action against a registered funding portal with
respect to its business as such.
(B) Examination and enforcement authority.--
Subparagraph (A) does not apply with respect to
the examination and enforcement of any law,
rule, regulation, or administrative action of a
State or political subdivision thereof in which
the principal place of business of a registered
funding portal is located, provided that such
law, rule, regulation, or administrative action
is not in addition to or different from the
requirements for registered funding portals
established by the Commission.
(C) Definition.--For purposes of this
paragraph, the term ``State'' includes the
District of Columbia and the territories of the
United States.
(3) De minimis transactions by associated persons.--
No law, rule, regulation, or order, or other
administrative action of any State or political
subdivision thereof may prohibit an associated person
of a broker or dealer from effecting a transaction
described in paragraph (3) for a customer in such State
if--
(A) such associated person is not ineligible
to register with such State for any reason
other than such a transaction;
(B) such associated person is registered with
a registered securities association and at
least one State; and
(C) the broker or dealer with which such
person is associated is registered with such
State.
(4) Described transactions.--
(A) In general.--A transaction is described
in this paragraph if--
(i) such transaction is effected--
(I) on behalf of a customer
that, for 30 days prior to the
day of the transaction,
maintained an account with the
broker or dealer; and
(II) by an associated person
of the broker or dealer--
(aa) to which the
customer was assigned
for 14 days prior to
the day of the
transaction; and
(bb) who is
registered with a State
in which the customer
was a resident or was
present for at least 30
consecutive days during
the 1-year period prior
to the day of the
transaction; or
(ii) the transaction is effected--
(I) on behalf of a customer
that, for 30 days prior to the
day of the transaction,
maintained an account with the
broker or dealer; and
(II) during the period
beginning on the date on which
such associated person files an
application for registration
with the State in which the
transaction is effected and
ending on the earlier of--
(aa) 60 days after
the date on which the
application is filed;
or
(bb) the date on
which such State
notifies the associated
person that it has
denied the application
for registration or has
stayed the pendency of
the application for
cause.
(B) Rules of construction.--For purposes of
subparagraph (A)(i)(II)--
(i) each of up to 3 associated
persons of a broker or dealer who are
designated to effect transactions
during the absence or unavailability of
the principal associated person for a
customer may be treated as an
associated person to which such
customer is assigned; and
(ii) if the customer is present in
another State for 30 or more
consecutive days or has permanently
changed his or her residence to another
State, a transaction is not described
in this paragraph, unless the
associated person of the broker or
dealer files an application for
registration with such State not later
than 10 business days after the later
of the date of the transaction, or the
date of the discovery of the presence
of the customer in the other State for
30 or more consecutive days or the
change in the customer's residence.
(j) Rulemaking To Extend Requirements to New Hybrid
Products.--
(1) Consultation.--Prior to commencing a rulemaking
under this subsection, the Commission shall consult
with and seek the concurrence of the Board concerning
the imposition of broker or dealer registration
requirements with respect to any new hybrid product. In
developing and promulgating rules under this
subsection, the Commission shall consider the views of
the Board, including views with respect to the nature
of the new hybrid product; the history, purpose,
extent, and appropriateness of the regulation of the
new product under the Federal banking laws; and the
impact of the proposed rule on the banking industry.
(2) Limitation.--The Commission shall not--
(A) require a bank to register as a broker or
dealer under this section because the bank
engages in any transaction in, or buys or
sells, a new hybrid product; or
(B) bring an action against a bank for a
failure to comply with a requirement described
in subparagraph (A),
unless the Commission has imposed such requirement by
rule or regulation issued in accordance with this
section.
(3) Criteria for rulemaking.--The Commission shall
not impose a requirement under paragraph (2) of this
subsection with respect to any new hybrid product
unless the Commission determines that--
(A) the new hybrid product is a security; and
(B) imposing such requirement is necessary
and appropriate in the public interest and for
the protection of investors.
(4) Considerations.--In making a determination under
paragraph (3), the Commission shall consider--
(A) the nature of the new hybrid product; and
(B) the history, purpose, extent, and
appropriateness of the regulation of the new
hybrid product under the Federal securities
laws and under the Federal banking laws.
(5) Objection to commission regulation.--
(A) Filing of petition for review.--The Board
may obtain review of any final regulation
described in paragraph (2) in the United States
Court of Appeals for the District of Columbia
Circuit by filing in such court, not later than
60 days after the date of publication of the
final regulation, a written petition requesting
that the regulation be set aside. Any
proceeding to challenge any such rule shall be
expedited by the Court of Appeals.
(B) Transmittal of petition and record.--A
copy of a petition described in subparagraph
(A) shall be transmitted as soon as possible by
the Clerk of the Court to an officer or
employee of the Commission designated for that
purpose. Upon receipt of the petition, the
Commission shall file with the court the
regulation under review and any documents
referred to therein, and any other relevant
materials prescribed by the court.
(C) Exclusive jurisdiction.--On the date of
the filing of the petition under subparagraph
(A), the court has jurisdiction, which becomes
exclusive on the filing of the materials set
forth in subparagraph (B), to affirm and
enforce or to set aside the regulation at
issue.
(D) Standard of review.--The court shall
determine to affirm and enforce or set aside a
regulation of the Commission under this
subsection, based on the determination of the
court as to whether--
(i) the subject product is a new
hybrid product, as defined in this
subsection;
(ii) the subject product is a
security; and
(iii) imposing a requirement to
register as a broker or dealer for
banks engaging in transactions in such
product is appropriate in light of the
history, purpose, and extent of
regulation under the Federal securities
laws and under the Federal banking
laws, giving deference neither to the
views of the Commission nor the Board.
(E) Judicial stay.--The filing of a petition
by the Board pursuant to subparagraph (A) shall
operate as a judicial stay, until the date on
which the determination of the court is final
(including any appeal of such determination).
(F) Other authority to challenge.--Any
aggrieved party may seek judicial review of the
Commission's rulemaking under this subsection
pursuant to section 25 of this title.
(6) Definitions.--For purposes of this subsection:
(A) New hybrid product.--The term ``new
hybrid product'' means a product that--
(i) was not subjected to regulation
by the Commission as a security prior
to the date of the enactment of the
Gramm-Leach-Bliley Act;
(ii) is not an identified banking
product as such term is defined in
section 206 of such Act; and
(iii) is not an equity swap within
the meaning of section 206(a)(6) of
such Act.
(B) Board.--The term ``Board'' means the
Board of Governors of the Federal Reserve
System.
(j) The authority of the Commission under this section with
respect to security-based swap agreements shall be subject to
the restrictions and limitations of section 3A(b) of this
title.
(k) Registration or Succession to a United States Broker or
Dealer.--In determining whether to permit a foreign person or
an affiliate of a foreign person to register as a United States
broker or dealer, or succeed to the registration of a United
States broker or dealer, the Commission may consider whether,
for a foreign person, or an affiliate of a foreign person that
presents a risk to the stability of the United States financial
system, the home country of the foreign person has adopted, or
made demonstrable progress toward adopting, an appropriate
system of financial regulation to mitigate such risk.
(l) Termination of a United States Broker or Dealer.--For a
foreign person or an affiliate of a foreign person that
presents such a risk to the stability of the United States
financial system, the Commission may determine to terminate the
registration of such foreign person or an affiliate of such
foreign person as a broker or dealer in the United States, if
the Commission determines that the home country of the foreign
person has not adopted, or made demonstrable progress toward
adopting, an appropriate system of financial regulation to
mitigate such risk.
(k) Standard of Conduct.--
(1) In general.--Notwithstanding any other provision
of this Act or the Investment Advisers Act of 1940, the
Commission may promulgate rules to provide that, with
respect to a broker or dealer, when providing
personalized investment advice about securities to a
retail customer (and such other customers as the
Commission may by rule provide), the standard of
conduct for such broker or dealer with respect to such
customer shall be the same as the standard of conduct
applicable to an investment adviser under section 211
of the Investment Advisers Act of 1940. The receipt of
compensation based on commission or other standard
compensation for the sale of securities shall not, in
and of itself, be considered a violation of such
standard applied to a broker or dealer. Nothing in this
section shall require a broker or dealer or registered
representative to have a continuing duty of care or
loyalty to the customer after providing personalized
investment advice about securities.
(2) Disclosure of range of products offered.--Where a
broker or dealer sells only proprietary or other
limited range of products, as determined by the
Commission, the Commission may by rule require that
such broker or dealer provide notice to each retail
customer and obtain the consent or acknowledgment of
the customer. The sale of only proprietary or other
limited range of products by a broker or dealer shall
not, in and of itself, be considered a violation of the
standard set forth in paragraph (1).
(l) Other Matters.--The Commission shall--
(1) facilitate the provision of simple and clear
disclosures to investors regarding the terms of their
relationships with brokers, dealers, and investment
advisers, including any material conflicts of interest;
and
(2) examine and, where appropriate, promulgate rules
prohibiting or restricting certain sales practices,
conflicts of interest, and compensation schemes for
brokers, dealers, and investment advisers that the
Commission deems contrary to the public interest and
the protection of investors.
(m) Harmonization of Enforcement.--The enforcement authority
of the Commission with respect to violations of the standard of
conduct applicable to a broker or dealer providing personalized
investment advice about securities to a retail customer shall
include--
(1) the enforcement authority of the Commission with
respect to such violations provided under this Act; and
(2) the enforcement authority of the Commission with
respect to violations of the standard of conduct
applicable to an investment adviser under the
Investment Advisers Act of 1940, including the
authority to impose sanctions for such violations, and
the Commission shall seek to prosecute and sanction violators
of the standard of conduct applicable to a broker or dealer
providing personalized investment advice about securities to a
retail customer under this Act to same extent as the Commission
prosecutes and sanctions violators of the standard of conduct
applicable to an investment advisor under the Investment
Advisers Act of 1940.
(n) Disclosures to Retail Investors.--
(1) In general.--Notwithstanding any other provision
of the securities laws, the Commission may issue rules
designating documents or information that shall be
provided by a broker or dealer to a retail investor
before the purchase of an investment product or service
by the retail investor.
(2) Considerations.--In developing any rules under
paragraph (1), the Commission shall consider whether
the rules will promote investor protection, efficiency,
competition, and capital formation.
(3) Form and contents of documents and information.--
Any documents or information designated under a rule
promulgated under paragraph (1) shall--
(A) be in a summary format; and
(B) contain clear and concise information
about--
(i) investment objectives,
strategies, costs, and risks; and
(ii) any compensation or other
financial incentive received by a
broker, dealer, or other intermediary
in connection with the purchase of
retail investment products.
(o) Authority to Restrict Mandatory Pre-dispute
Arbitration.--The Commission, by rule, may prohibit, or impose
conditions or limitations on the use of, agreements that
require customers or clients of any broker, dealer, or
municipal securities dealer to arbitrate any future dispute
between them arising under the Federal securities laws, the
rules and regulations thereunder, or the rules of a self-
regulatory organization if it finds that such prohibition,
imposition of conditions, or limitations are in the public
interest and for the protection of investors.
* * * * * * *
MINORITY VIEWS
H.R. 477 would exempt certain merger and acquisition (M&A;)
brokers from registration as broker-dealers with the Securities
and Exchange Commission. Under the bill, M&A; brokers are
defined as brokers that facilitate the transfer of ownership of
privately held companies with earnings of less than $25 million
or revenues of less than $250 million annually. M&A; brokers
cannot be subject to certain bad actor disqualifications, and
public shell companies cannot be a party to the transaction.
When the Committee considered this bill in the 113th
Congress, there was broad consensus that its purpose was to
encourage the SEC to finalize its no-action relief to exempt
certain merger and acquisition brokers from registration. Two
weeks after that bill passed in the House, the SEC issued the
no-action relief, but added several protections for investors
and small businesses.
Some have argued that because of the nature of the relief
provided by the SEC, the agency could retract its no-action
letter at any time. Therefore, they say that the bill is
necessary to provide legal certainty. However, if that is the
goal of this bill, it should more closely track the SEC's
relief, including the additional protections that are omitted
from the bill.
For example, under the relief, if an M&A; broker represents
the buyer and seller in the transaction, it must obtain the
consent of both parties to that conflict-of-interest.
Similarly, the SEC reasonably prohibited M&A; brokers from
engaging in private placements and arranging buyer financing,
recognizing that the narrow exemption is intended for persons
who fairly facilitate the merger of small businesses, not for
promoters who are compensated for their ability to hype up the
value of the companies and attract new investment. The relief
also prohibits M&A; brokers from being able to bind parties to
the transaction similar to a power of attorney to ensure that
transaction is ultimately decided by the parties themselves,
who know and understand its terms. It has now been over three
and a half years since the SEC issued its relief and there has
been no evidence that these conditions are inappropriate or
onerous.
Moreover, Democratic witnesses, Professor Theresa Gabaldon
of GW Law and Professor Mercer Bullard of the University of
Mississippi School of Law, testified in past Congresses that
smaller companies may be better served by licensed
professionals. According to a 2015 New York Times opinion
piece, there is also a concern that it could create a loophole
in the law, which private equity firms could use to avoid more
frequent broker-dealer exams and rules and to be able to charge
more for merger advice to a company its investors own in a fund
portfolio. The bill is opposed by small brokerage firms like
the Independent Investment Bankers, M&A; Securities, BA
Securities, and Burch, and regional firms like D.A. Davidson,
Stephens, BB&T;, WilliamBlair, and RW Baird.
For all of these reasons, we oppose H.R. 477.
Maxine Waters.
Nydia M. Velazquez.
Gregory W. Meeks.
Carolyn B. Maloney.
Emanuel Cleaver.
Denny Heck.
Keith Ellison.
Wm. Lacy Clay.
Al Green.
Gwen Moore.
Brad Sherman.
Joyce Beatty.
[all]
