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115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-878
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EXPANDING INVESTMENT IN SMALL BUSINESSES ACT
_______
July 31, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 6319]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 6319) to require the Securities and Exchange
Commission to carry out a study of the 10 per centum threshold
limitation applicable to the definition of a diversified
company under the Investment Company Act of 1940, and for other
purposes, having considered the same, report favorably thereon
without amendment and recommend that the bill do pass.
PURPOSE AND SUMMARY
On July 10, 2018, Representative Randy Hultgren introduced
H.R. 6319, the ``Expanding Investment in Small Businesses Act''
to requires the U.S. Securities and Exchange Commission (SEC)
to study the current diversified fund limit threshold for
diversified mutual funds--10 percent of the voting shares in an
individual company--and determine whether such threshold limits
capital formation. The SEC is to report its findings to
Congress and then recommend whether Congress should amend the
Investment Company Act of 1940. To conduct this study, the SEC
may take public comments, and shall issue a report of its
findings to Congress--including any legislative recommendations
to increase the 10 percent threshold--within 180 days of
enactment.
BACKGROUND AND NEED FOR LEGISLATION
In the April 26, 2018 report released by the Center for
Capital Markets Competitiveness at U.S. Chamber of Commerce,
the American Securities Association, the Biotechnology
Innovation Association, the Equity Dealers of America, SIFMA,
TECHNET, NASDAQ and the National Venture Capital Association
noted, ``the decline in public companies has created fewer
opportunities for American families and businesses, and we
present these recommendations to assist more companies in going
and staying public.''
The goal of H.R. 6321 is to improve the ability of
companies, particularly emerging growth companies (EGCS)
created by Title I of the Jumpstart Our Business Startups or
JOBS Act or smaller issuers, to attract and retain investment
capital. Specifically, H.R. 6321 would require the SEC to
conduct a study to determine if the diversified fund limit
threshold of 10 percent on mutual funds is constraining their
ability to take meaningful positions in small-cap companies.
Under Section 5(b)(1) of the Investment Company Act (ICA)
of 1940, for a mutual fund to qualify as ``diversified,'' (1)
75 percent of the fund's assets must be in cash, government
securities (e.g. bonds, treasury bills, etc.), or in other
issuers' securities; (2) no more than 5 percent of the fund's
assets may be invested in any one company; and (3) the fund may
own no more than 10 percent of an issuer's outstanding
securities.
Mutual funds have historically played an important role in
helping to provide liquid markets for the shares of newly
public companies. Since 1990, the number of total registered
mutual funds has grown about ten times, mean fund size has more
than doubled, and open-end fund holdings of U.S. corporate
equities has reached approximately 24 percent of the entire
market. This growth means the investment decisions of mutual
funds today are an important aspect of our country's public
capital markets.
As the size of mutual funds has increased in recent years,
some industry experts have said that the diversified fund limit
rules--specifically the cap on a diversified fund's ownership
of an issuer's outstanding shares at 10 percent--have limited
funds' ability to take meaningful positions in small-cap
companies. According to testimony at the Subcommittee on
Capital Markets, Securities, and Investment hearing on May 23,
2018, the current 10 percent limit on mutual fund positions
limits investment interest in small-cap initial public
offerings (IPOs) because, as large funds' assets under
management (AUM) grows, the 10 percent limit means that any
investment in a small IPO will have a negligible impact on
overall fund return. Declining mutual fund interest in small-
cap IPOs also materially weakens the trading environment for
small-cap stocks and likely deters small firms from joining our
public markets.
To address these concerns, this bill would require the SEC
to study whether the current diversified fund limit threshold
for mutual funds of 10 percent constrains their ability to take
meaningful positions in small-cap companies. Specifically,
under the bill, the SEC will consider: the size and number of
diversified funds that are currently restricted in their
ability to own more than 10% of the voting shares in an
individual company; if investing preferences of a diversified
funds have shifted away from companies with smaller market
capitalizations; the expected increase in the availability of
capital to small and emerging growth companies if the threshold
is increased; the ability of registered funds to manage
liquidity risk; and other considerations the SEC considers
necessary for the protection of investors.
A modest increasing in this threshold will allow
diversified mutual funds to continue to invest in either JOBS
Act EGCs or small issuers even as their assets under management
continue to grow.
HEARINGS
The Subcommittee on Capital Markets, Securities, and
Investment held a hearing examining matters relating to H.R.
6319 on May 23, 2018.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
July 11, 2018, and ordered H.R. 6319 to be reported favorably
to the House, without amendment, by voice vote.
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 vote was on a motion by Chairman Hensarling to report the
bill favorably to the House without amendment. The motion was
agreed to by voice vote, 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. 6319
mandate the SEC to conduct a study on the effect of the 10%
diversified fund limit threshold on mutual funds and their
ability to take investment positions within small-cap companies
that will help provide liquid markets for newly-listed
companies.
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, July 17, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services, House of Representatives,
Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3555, H.R. 6177,
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R.
6324.
If you wish further details on these estimates, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Mark P. Hadley
(For Keith Hall, Director).
Enclosure.
Securities and Exchange Commission Legislation
On July 11, the House Committee on Financial Services
ordered eight bills to be reported related to the rules,
regulations, and operations of the Securities and Exchange
Commission (SEC). The bills are:
H.R. 3555, the Exchange Regulatory
Improvement Act, would require the Securities and
Exchange Commission (SEC) to issue regulations
regarding its definition of what constitutes a facility
used by a national securities exchange;
H.R. 6177, the Developing and Empowering our
Aspiring Leaders Act of 2018, would direct the SEC to
conduct a rulemaking to expand what types of asset
acquisitions are considered qualifying investments for
a venture capital fund;
H.R. 6319, the Expanding Investment in Small
Business Act, would require the SEC to conduct a study
on the limitation on the amount of outstanding
securities a closed-end fund may hold from a single
issuer and still be classified as diversified;
H.R. 6320, the Promoting Transparent
Standards for Corporate Insiders Act, would require the
SEC to conduct a study of various proposals to change
agency rules regarding the use of written trading plans
by certain securities traders;
H.R. 6321, the Investment Adviser Regulatory
Flexibility Improvement Act, would require the SEC to
revise the definitions of a small business and small
organization applicable for assessing the effect of the
agency's rulemakings under the Investment Advisers Act
of 1940 on those entities;
H.R. 6322, the Enhancing Multi-Class Share
Disclosures Act, would direct the SEC to issue a rule
requiring securities issuers with multi-class stock
structures to make disclosures regarding the voting
power of certain individuals;
H.R. 6323, the National Senior Investor
Initiative Act of 2018, would direct the SEC to
establish a taskforce to identify challenges that
senior investors face and to report on its findings
every two years; and
H.R. 6324, the Middle Market IPO
Underwriting Cost Act, would direct the SEC to study
the costs associated with small and medium-sized
companies undertaking an initial public offering and to
report on its findings.
Using information from the SEC regarding the costs of
similar activities, CBO estimates that implementing seven of
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R.
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of
about $1 million for the agency to conduct the required studies
and rulemakings and to issue reports. CBO estimates that
implementing the eighth bill--H.R. 6323--would have a gross
cost of $7 million over the 2019-2023 period for the SEC to
establish and carry out the functions of the taskforce
established under the bill.
However, the SEC is authorized to collect fees sufficient
to offset its annual appropriation; therefore, CBO estimates
that the net effect on discretionary spending of implementing
each of those bills would be negligible, assuming appropriation
actions consistent with that authority. H.R. 6323 also would
require the Government Accountability Office (GAO) to conduct a
study on the economic costs of the financial exploitation of
senior citizens and CBO estimates that implementing that
section would cost GAO less than $500,000; such spending would
be subject to the availability of appropriated funds.
None of the bills would affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply for any of the
eight bills.
None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods
beginning in 2029, CBO estimates.
None of the bills contain intergovernmental mandates as
defined in the Unfunded Mandate Reform Act (UMRA) and would not
affect the budgets of state, local, or tribal governments. All
of them would require the SEC to take actions that could raise
the agency's administrative costs and the fees it collects to
offset those costs. If the SEC increased fees, it would
increase the cost of an existing mandate on private entities
required to pay those fees. CBO estimates that none of the
bills would increase fees in an amount that would exceed the
annual threshold for private-sector mandates established in
UMRA ($160 million in 2018, adjusted annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This section cites H.R. 6319 as the ``Expanding Investment
in Small Businesses Act.''
Section 2. SEC study
This section directs the SEC to carry out a study on the
10% threshold limitation applicable to the definition of a
diversified company under section 5(b)(1) of the Investment
Company Act of 1940. In conducting this study, the SEC may take
public comments, and the SEC shall issue a report of its
findings--including any legislative recommendations--within 180
days of enactment of the bill.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 6319 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by Clause 3(e)(1)(B) of rule
XIII of the House of Representatives.