[House Report 114-401]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-401
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FAIR ACCESS TO INVESTMENT RESEARCH ACT OF 2015
_______
January 28, 2016.--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. 2356]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 2356) to direct the Securities and Exchange
Commission to provide a safe harbor related to certain
investment fund research reports, and for other purposes,
having considered the same, report favorably thereon without
amendment and recommend that the bill do pass.
PURPOSE AND SUMMARY
Introduced by Representative Hill on May 15, 2015, H.R.
2356, the Fair Access to Investor Research Act, directs the
Securities and Exchange Commission (SEC) to provide a safe
harbor for research reports that cover Exchange Traded Funds
(ETFs) so that these reports are not considered ``offers''
under Section 5 of the Securities Act of 1933. H.R. 2356
requires the SEC to revise applicable regulations within 120
days of the Act's enactment and, if the deadline is not met,
H.R. 2356 provides that an interim safe harbor will take effect
until the SEC's rules are finalized. To qualify for H.R. 2356's
safe harbor, a broker or dealer must distribute the research
report in the regular course of business and the report must
relate to an ETF issuer that (1) has a class of securities
listed on a national securities exchange for at least 12 months
prior to the publishing or distribution of the report, (2) has
an aggregate market value of at least $75 million, and (3) is
either a unit investment or an open-ended company or a trust
whose assets consist primarily of interests in commodities,
currencies, or derivative instruments referring commodities or
currencies.
BACKGROUND AND NEED FOR LEGISLATION
An ETF is an investment company whose shares are traded
intraday on stock exchanges at market-determined prices.
Investors may buy or sell ETF shares through a broker or in a
brokerage account just as they would the shares of any publicly
traded company. In the United States, most ETFs are structured
as open-end investment companies (open-end funds) or unit
investment trusts, but other structures also exist--primarily
for ETFs investing in commodities, currencies, and futures.
Investor interest in ETFs has increased significantly in recent
years, with 5.7 million U.S. households holding ETF shares in
2013. Yet despite their growing popularity and increasing
importance to retail investors, anomalies in the SEC's safe
harbor rules have discouraged most broker-dealers from
publishing research regarding ETFs.
The SEC has implemented safe harbors for research issued in
support of other asset classes, including listed equities,
corporate debt, and closed-end funds. Congress has also
provided safe harbors for research covering certain securities
offerings. Most recently, in Title I of the Jumpstart Our
Business Startups Act, Congress codified a safe harbor for
research related to offerings of EGC securities. Yet despite
their similarities to these other asset classes, research that
covers open-ended funds and ETFs does not benefit from similar
safe harbors. As such, most broker-dealers do not publish
research regarding ETFs, depriving investors of useful
information when deciding whether to invest in this product.
In 2004, as part of its Securities Offering Reform
proposal, the SEC requested public comment on whether research
relating to ETFs should be protected by a safe harbor. While
comments were universally supportive, the SEC did not adopt a
final rule.
At a May 13, 2015 Capital Markets and Government Sponsored
Enterprises Subcommittee hearing, U.S. Chamber of Commerce
Senior Vice President Tom Quaadman testified that:
existing impediments prevent investors from obtaining
decision-useful information regarding ETFs . . . Under
the Exchange Acts, broker-dealers currently have safe
harbors to public research on equity offerings.
However, ETFs and openended funds do not have similar
specific safe harbors, thereby causing enough legal
vagueness to restrict information and research that may
be helpful to investors. Despite receiving comments
supporting an extension of the safe harbor rules to
ETFs and open ended funds, the SEC has not adopted a
final rule.
HEARINGS
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing examining matters relating to H.R. 2356 on May 13,
2015.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
May 20, 2015, and ordered H.R. 2356 to be reported favorably to
the House without amendment by a recorded vote of 48 yeas to 9
nays (recorded vote no. FC-41), a quorum being present. An
amendment offered by Representative Waters was not agreed to 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 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 48 yeas to 9 nays
(Record vote no. FC-41), 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. 2356
will enhance the quantity and quality of information available
to investors by providing for a safe harbor for research
reports covering Exchange Traded Funds.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
COMMITTEE COST ESTIMATE
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 28, 2015.
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. 2356, the Fair
Access to Investment Research Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Keith Hall.
Enclosure.
H.R. 2356--Fair Access to Investment Research Act of 2015
Under current law, the Securities Exchange Commission's
(SEC's) rules generally prohibit an issuer from offering
securities for sale without filing a registration statement
with the agency. H.R. 2356 would establish a safe harbor that
would allow broker-dealers to issue research reports about
certain investment funds without such reports being considered
as an offering for sale of shares of those funds. To be
eligible for the safe harbor, the research reports would need
to meet certain requirements (for example being distributed
with reasonable regularity in the normal course of business).
Based on information from the SEC, CBO expects that the
commission would need six additional staff positions working
across several divisions within the agency to propose and
implement the broadened rule. CBO estimates that implementing
H.R. 2356 would cost $2 million over the 2016-2020 period,
assuming appropriation of the necessary amounts. Under current
law, the SEC is authorized to collect fees sufficient to offset
its annual appropriation; therefore, CBO estimates that the net
budgetary effect would be negligible. Because enacting the
legislation would not affect direct spending or revenues, pay-
as-you-go procedures do not apply.
If the SEC increases fees to offset the costs of
implementing requirements in the bill, H.R. 2356 would increase
the cost of an existing mandate as defined in the Unfunded
Mandates Reform Act (UMRA) on private entities required to pay
those fees. Based on information from the SEC, CBO estimates
that the incremental cost of the mandate would be about $2
million in fiscal year 2016.
To the extent that H.R. 2356 would eliminate an existing
right of action for investors related to research reports for
exchange traded funds, it would impose an additional mandate on
public and private entities. The cost of the mandate would be
the forgone value of the awards and settlements in such cases.
To date, CBO has found no cases successfully establishing
liability for information contained in or missing from such
research reports and expects few, if any, in the future.
Therefore, CBO estimates the total cost of the mandates on
public and private entities would be small and would fall well
below the annual thresholds established in UMRA for
intergovernmental and private-sector mandates ($77 million and
$154 million in fiscal year 2015, respectively, adjusted
annually for inflation).
The CBO staff contacts for this estimate are Susan Willie
(for federal costs), Logan Smith (for private-sector mandates),
and Melissa Merrell (for intergovernmental mandates). The
estimate was approved by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
H.R. 2356 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
DUPLICATION OF FEDERAL PROGRAMS
Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015),
the Committee states that no provision of H.R. 2356 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015),
the Committee states that H.R. 2356 contains one directed
rulemaking.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This Section cites H.R. 2356 as the ``Fair Access to
Investment Research Act of 2015''
Section 2. Safe Harbor for Investment Fund Research
This section directs the Securities and Exchange Commission
to revise its rules to establish a safe harbor for covered
investment fund research reports and provides an interim safe
harbor if the SEC fails to revise such rules within the time
period covered by the Act.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 2356 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by Clause 3(e)(1)(B) of rule
XIII of the House of Representatives.
MINORITY VIEWS
H.R. 2356 would provide a safe harbor from certain investor
liability for broker-dealers to distribute research related to
Exchange Traded Funds (ETFs) and other similar products. While
the goal of providing retail investors with additional
important information deserves merit, the bill as it stands
does not appear necessary to achieve this goal nor does it
address concerns raised by SEC and FINRA staff.
Today, several broker-dealers provide ETF research to
retail investors, notwithstanding this threat of liability from
the purchasers of ETFs, which only arises when the report
contains material misstatements or omissions. It is not clear
that any broker-dealers have ever been sued by investors or
been subject to an enforcement action by the SEC or FINRA
related to their ETF research reports.
In addition, there are several concerns with the bill,
echoed by staffs of the SEC and FINRA, which have not yet been
addressed. Specifically, those concerns include: the overly
broad definition of research reports; the lack of clarity about
whether important FINRA content regulations would apply to ETF
research reports, as they apply to other research reports; the
permanent ban on requiring any ETF research reports to be filed
with FINRA, regardless of future abuses; the constraint on the
SEC and FINRA's ability to enforce the antimanipulation and
antifraud provisions of the securities laws; the fact that the
bill may permit brokers to offer ETFs comprised of commodities
and derivatives, as well as, registered investment companies
and business development companies (BDCs); and the broad
interim safe harbor that fails to protect investors and goes
into effect before the SEC has enough time to finalize its
rulemaking.
An amendment was offered to address these concerns, but was
withdrawn during the markup as the bill's sponsors pledged to
continue working to modify the language before the bill moves
to the House floor. We look forward to working with the sponsor
of the bill to address these concerns.
Maxine Waters.
Al Green.
Joyce Beatty.
Gwen Moore.
Wm. Lacy Clay.
Keith Ellison.
[all]