[House Report 115-525]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-525
======================================================================
NATIONAL SECURITIES EXCHANGE REGULATORY PARITY ACT
_______
January 25, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4546]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4546) to amend the Securities Act of 1933 to
specify when a nationally traded security is exempt from State
regulation of security offerings, having considered the same,
report favorably thereon without amendment and recommend that
the bill do pass.
Purpose and Summary
On December 5, 2017, Representative Ed Royce introduced
H.R. 4546, the National Securities Exchange Regulatory Parity
Act, which modernizes Section 18 of the Securities Act of 1933
(Securities Act) and eliminates references to specific national
securities exchanges. H.R. 4546 also clarifies that the state
``blue sky'' exemption shall be available for all securities
that qualify for trading in the national market system pursuant
to section 11A(2) of the Securities Exchange Act of 1934.
Background and Need for Legislation
The goal of H.R. 4546 is to better reflect today's equity
markets, which compete aggressively to list securities and
execute transactions. In 1996, Congress passed, and President
Clinton signed into law, the National Securities Markets
Improvement Act of 1996 (NSMIA). NSMIA amended Section 18 of
the Securities Act to specifically and explicitly exempt from
state registration the securities listed on three equity
markets: the New York Stock Exchange (NYSE), the American Stock
Exchange (AMEX), and the Nasdaq Stock Market (NASDAQ).
It is Section 18(b)(1) of the Securities Act that
specifically exempts these certain securities from individual
state-by-state registration. This provision, commonly known as
a ``blue sky'' exemption, applies to the exchange on which
securities are listed for trading. In setting forth the
standard for blue sky exemption, this 1996 addition to the
Securities Act enumerated certain exchanges with national
listings programs that existed when Congress added the
provision.
As previously mentioned, the ``blue sky'' exemption applies
to securities listed on the NYSE, the AMEX, or the NASDAQ in
addition to any national securities exchange the Securities and
Exchange Commission (SEC) determines by rule has
``substantially similar'' listing standards to those enumerated
exchanges. Since the exemption's 1996 enactment, additional
securities exchanges have registered with the SEC and one of
the enumerated exchanges, AMEX, merged with the NYSE and no
longer exists as an independently owned national securities
exchange.
As a result, the current framework under Section 18 has
created a two-tiered system to list securities whereby the
enumerated exchanges can bypass unnecessary and burdensome
scrutiny by the SEC as compared to those exchanges that the
Securities Act does not specifically enumerate and have since
registered with the SEC. For example, in 2012, the SEC amended
Rule 146 under the Securities Act to designate Bats BZX
Exchange (Bats) as an exchange that has ``substantially
similar'' listing standards as the NYSE and NASDAQ.
Consequently, the SEC granted the ``blue sky'' exemption to the
securities listed on Bats. Unlike the enumerated exchanges,
because Bats is not specifically listed in Section 18(b)(1),
any proposed changes that Bats or its successor owner, the
CBOE, may make to its listing standards are subject to a formal
finding by the SEC that the Bats standards would remain
``substantially similar'' to those of either NYSE or Nasdaq,
and possibly the non-existent AMEX, before Bats could implement
the proposed changes.
The mandate that Section 18(b)(1) of the Securities Act
imposes on the SEC unnecessarily stifles competition and
innovation amongst equity markets, as the law forces the SEC to
make a finding that a proposed change to a listings standard
must be substantially similar to the rules in effect at NYSE
and NASDAQ. In doing so, the NYSE and NASDAQ could change a
listing standard solely to block competition from a new equity
market. Interestingly, Section 18(b)(1) would appear to
conflict with Section 106 of NSMIA, which amended Section 2 of
the Securities Act. Section 106 of NSMIA now requires the SEC
whenever it is engaged in rulemaking to also consider whether
the action will promote efficiency, competition, and capital
formation. Ultimately, the Securities Act, as amended by NSMIA,
allows the NYSE and NASDAQ to innovate its listing standards
without going through the onerous process of first gaining SEC
approval, but its plain language does not provide the same
benefit to other national securities exchanges. H.R. 4546
therefore creates parity amongst all national market system
participants and levels the playing field to allow all national
securities qualified for trading in the national market system
to have the same blue sky exemptions without regard to whether
an exchange is explicitly specified in the statute.
The alternative is to require state registration for non-
enumerated exchanges, which is an additional burden and cost
that is unnecessary for companies trying to access capital to
grow. As Representative Royce said in 2016:
The SEC's interpretation of the [current] law has
created a two-tiered playing field by giving this
``blue sky'' exemption only to [three] exchanges which
existed in 1996. It was not the intention of Congress
to create such a carve-out. . . . Why is this exemption
important? You could ask anyone from Massachusetts who
tried to invest in a little company called Apple during
its IPO. State regulators banned the stock for being
``too risky.''
Opponents of this common-sense modernization of the law
contend that the legislation somehow would increase the risks
to investors by increasing the number of securities that do not
need to register with the states. This concern is misguided.
The SEC is the primary enforcement agency of securities fraud,
and this bill in no way diminishes the SEC's oversight or
enforcement authority. The SEC also publishes rule changes
proposed by the national securities exchanges for public
comment. The intent of Congress in 1996 when it amended Section
18 of the Securities Act was not to entrench and favor the
three referenced exchanges; rather Congress acknowledged the
primary listing venues at the time of NSMIA's drafting and
enactment.
Any security listed on a registered national securities
exchange is, and still would be, subject to SEC registration
and required to provide periodic and annual reports to the
shareholders. They would also still be required to comply with
all applicable disclosure requirements that come with that
registration. Forcing securities subject to SEC registration
and disclosure obligations to also register with the states
would create inefficiencies, stifle innovation, and cause
conflicts amongst state statutory and regulatory regimes. While
perhaps well intentioned, state securities registration and
oversight can have negative market and economic consequences
that include chilling public offerings of national securities
and arbitrarily prohibiting investors in certain states from
participating in potentially promising investment
opportunities. What the SEC can approve by rule, the SEC can
also reverse by rule. A future SEC could reverse these Rule 146
approvals and alter its interpretation of ``substantially
similar.'' Congress has the responsibility to improve the law
and modernize the law, and provide clear directives to
Executive and independent agencies, such as the SEC. National
market system participants deserve the legal certainty that
they can compete for listings. The SEC should approve listing
standards that are consistent with the federal securities laws
rather than have the power to compare listing standards based
on a well-intentioned but in retrospect a clumsy statutory
construction. A legislative solution is therefore necessary to
resolve this outdated provision.
In short, H.R. 4546 is a technical fix that corrects
unintended preferential treatment that has resulted by
specifically naming the exchanges that existed in 1996 while
providing a statutory framework that both preserves the goal of
the exemptive structure set forth under Section 18 and ensures
that the statutory text can be applied as new national
securities exchanges emerge.
Hearings
The Committee on Financial Services held a hearing
examining matters relating to H.R. 4546 on April 26, 2017 and
April 28, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
December 12, 2017 and December 13, 2017, and ordered H.R. 4546
to be reported favorably to the House without amendment by a
recorded vote of 46 yeas to 14 nays (Record vote no. FC-122), 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 46 yeas to 14 nays
(Record vote no. FC-122), 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. 4546
levels the playing field for identically regulated securities
exchanges and eliminates additional burdens and costs for
companies by ensuring the availability of blue sky exemptions
for any security listed on a ``national securities exchange''
registered with the SEC.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
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, January 18, 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. 4546, the National
Securities Exchange Regulatory Parity Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 4546--National Securities Exchange Regulatory Parity Act
Under current law, certain securities listed on national
exchanges are exempt from state securities regulations. H.R.
4546 would allow any security listed on a national exchange
that is registered with the Securities and Exchange Commission
(SEC) to be exempted from such state regulations.
Using information from the SEC, CBO estimates that
implementing H.R. 4546 would have an insignificant effect on
that agency's costs. Under the bill, the SEC would have to
review any future changes to the rules of national exchanges
and update its own rules. CBO estimates that the cost of that
work would be insignificant. Moreover, the SEC is authorized to
collect fees sufficient to offset its annual appropriation;
therefore, CBO estimates that the net effect on discretionary
spending would be negligible, assuming appropriation actions
consistent with that authority.
Enacting H.R. 4546 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
CBO estimates that enacting H.R. 4546 would not increase
net direct spending or on-budget deficits in any of the four
consecutive 10-year periods beginning in 2028.
H.R. 4546 would preempt state laws that govern the state-
level registration of securities. Preemptions are mandates as
defined in the Unfunded Mandates Reform Act (UMRA) because they
limit the authority of states to apply their own laws. However,
CBO estimates that the preemption would not affect the budgets
of state, local, or tribal governments because it would impose
no duty on states that would result in additional spending or
loss of revenues.
H.R. 4546 contains no private-sector mandates as defined in
UMRA.
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). 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 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. 4546 as the ``National Securities
Exchange Regulatory Parity Act''.
Section 2. Nationally traded securities exemption
This section amends Section 18 of the Securities Act of
1933 to extend the blue sky exemption for any security listed
on a national securities exchange registered with the SEC and
whose listing standards were approved by the SEC.
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 (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):
SECURITIES ACT OF 1933
TITLE I--
* * * * * * *
SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.
(a) Scope of Exemption.--Except as otherwise provided in this
section, no law, rule, regulation, or order, or other
administrative action of any State or any political subdivision
thereof--
(1) requiring, or with respect to, registration or
qualification of securities, or registration or
qualification of securities transactions, shall
directly or indirectly apply to a security that--
(A) is a covered security; or
(B) will be a covered security upon
completion of the transaction;
(2) shall directly or indirectly prohibit, limit, or
impose any conditions upon the use of--
(A) with respect to a covered security
described in subsection (b), any offering
document that is prepared by or on behalf of
the issuer; or
(B) any proxy statement, report to
shareholders, or other disclosure document
relating to a covered security or the issuer
thereof that is required to be and is filed
with the Commission or any national securities
organization registered under section 15A of
the Securities Exchange Act of 1934, except
that this subparagraph does not apply to the
laws, rules, regulations, or orders, or other
administrative actions of the State of
incorporation of the issuer; or
(3) shall directly or indirectly prohibit, limit, or
impose conditions, based on the merits of such offering
or issuer, upon the offer or sale of any security
described in paragraph (1).
(b) Covered Securities.--For purposes of this section, the
following are covered securities:
(1) Exclusive federal registration of nationally
traded securities.--A security is a covered security if
such security is--
[(A) listed, or authorized for listing, on
the New York Stock Exchange or the American
Stock Exchange, or listed, or authorized for
listing, on the National Market System of the
Nasdaq Stock Market (or any successor to such
entities);]
[(B)] (A) a security designated as qualified
for trading in the national market system
pursuant to section 11A(a)(2) of the Securities
Exchange Act of 1934 that is listed, or
authorized for listing, on a national
securities exchange (or tier or segment
thereof) [that has listing standards that the
Commission determines by rule (on its own
initiative or on the basis of a petition) are
substantially similar to the listing standards
applicable to securities described in
subparagraph (A)]; or
[(C)] (B) a security of the same issuer that
is equal in seniority or that is a senior
security to a security described in
subparagraph (A) [or (B)].
(2) Exclusive federal registration of investment
companies.--A security is a covered security if such
security is a security issued by an investment company
that is registered, or that has filed a registration
statement, under the Investment Company Act of 1940.
(3) Sales to qualified purchasers.--A security is a
covered security with respect to the offer or sale of
the security to qualified purchasers, as defined by the
Commission by rule. In prescribing such rule, the
Commission may define the term ``qualified purchaser''
differently with respect to different categories of
securities, consistent with the public interest and the
protection of investors.
(4) Exemption in connection with certain exempt
offerings.--A security is a covered security with
respect to a transaction that is exempt from
registration under this title pursuant to--
(A) paragraph (1) or (3) of section 4, and
the issuer of such security files reports with
the Commission pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934;
(B) section 4(4);
(C) section 4(6);
(D) a rule or regulation adopted pursuant to
section 3(b)(2) and such security is--
(i) offered or sold on a national
securities exchange; or
(ii) offered or sold to a qualified
purchaser, as defined by the Commission
pursuant to paragraph (3) with respect
to that purchase or sale;
(E) section 3(a), other than the offer or
sale of a security that is exempt from such
registration pursuant to paragraph (4), (10),
or (11) of such section, except that a
municipal security that is exempt from such
registration pursuant to paragraph (2) of such
section is not a covered security with respect
to the offer or sale of such security in the
State in which the issuer of such security is
located;
(F) Commission rules or regulations issued
under section 4(2), except that this
subparagraph does not prohibit a State from
imposing notice filing requirements that are
substantially similar to those required by rule
or regulation under section 4(2) that are in
effect on September 1, 1996; or
(G) section 4(a)(7).
(c) Preservation of Authority.--
(1) Fraud authority.--Consistent with this section,
the securities commission (or any agency or office
performing like functions) of any State shall retain
jurisdiction under the laws of such State to
investigate and bring enforcement actions, in
connection with securities or securities transactions
(A) with respect to--
(i) fraud or deceit; or
(ii) unlawful conduct by a broker or
dealer; and
(B) in connection to a transaction described
under section 4(6), with respect to--
(i) fraud or deceit; or
(ii) unlawful conduct by a broker,
dealer, funding portal, or issuer.
(2) Preservation of filing requirements.--
(A) Notice filings permitted.--Nothing in
this
section prohibits the securities commission (or
any agency or office performing like functions)
of any State from requiring the filing of any
document filed with the Commission pursuant to
this title, together with annual or periodic
reports of the value of securities sold or
offered to be sold to persons located in the
State (if such sales data is not included in
documents filed with the Commission), solely
for notice purposes and the assessment of any
fee, together with a consent to service of
process and any required fee.
(B) Preservation of fees.--
(i) In general.--Until otherwise
provided by law, rule, regulation, or
order, or other administrative action
of any State or any political
subdivision thereof, adopted after the
date of enactment of the National
Securities Markets Improvement Act of
1996, filing or registration fees with
respect to securities or securities
transactions shall continue to be
collected in amounts determined
pursuant to State law as in effect on
the day before such date.
(ii) Schedule.--The fees required by
this subparagraph shall be paid, and
all necessary supporting data on sales
or offers for sales required under
subparagraph (A), shall be reported on
the same
schedule as would have been applicable
had the issuer not relied on the
exemption provided in subsection (a).
(C) Availability of preemption contingent on
payment of fees.--
(i) In general.--During the period
beginning on the date of enactment of
the National Securities
Markets Improvement Act of 1996 and
ending 3 years after that date of
enactment, the securities commission
(or any agency or office performing
like functions) of any State may
require the registration of securities
issued by any issuer who refuses to pay
the fees required by subparagraph (B).
(ii) Delays.--For purposes of this
subparagraph, delays in payment of fees
or underpayments of fees that are
promptly remedied shall not constitute
a refusal to pay fees.
(D) Fees not permitted on listed
securities.--Notwithstanding subparagraphs (A),
(B), and (C), no filing or fee may be required
with respect to any security that is a covered
security pursuant to subsection (b)(1), or will
be such a covered security upon completion of
the transaction, or is a security of the same
issuer that is equal in seniority or that is a
senior security to a security that is a covered
security pursuant to subsection (b)(1).
(F) Fees not permitted on crowdfunded
securities.--Notwithstanding subparagraphs (A),
(B), and (C), no filing or fee may be required
with respect to any security that is a covered
security pursuant to subsection (b)(4)(B), or
will be such a covered security upon completion
of the transaction, except for the securities
commission (or any agency or office performing
like functions) of the State of the principal
place of business of the issuer, or any State
in which purchasers of 50 percent or greater of
the aggregate amount of the issue are
residents, provided that for purposes of this
subparagraph, the term ``State'' includes the
District of Columbia and the territories of the
United States.
(3) Enforcement of requirements.--Nothing in this
section shall prohibit the securities commission (or
any agency or office performing like functions) of any
State from suspending the offer or sale of securities
within such State as a result of the failure to submit
any filing or fee required under law and permitted
under this section.
(d) Definitions.--For purposes of this section, the following
definitions shall apply:
(1) Offering document.--The term ``offering
document''--
(A) has the meaning given the term
``prospectus'' in section 2(a)(10), but without
regard to the provisions of subparagraphs (a)
and (b) of that section; and
(B) includes a communication that is not
deemed to offer a security pursuant to a rule
of the Commission.
(2) Prepared by or on behalf of the issuer.--Not
later than 6 months after the date of enactment of the
National Securities Markets Improvement Act of 1996,
the Commission shall, by rule, define the term
``prepared by or on behalf of the issuer'' for purposes
of this section.
(3) State.--The term ``State'' has the same meaning
as in section 3 of the Securities Exchange Act of 1934.
(4) Senior security.--The term ``senior security''
means any bond, debenture, note, or similar obligation
or instrument constituting a security and evidencing
indebtedness, and any stock of a class having priority
over any other class as to distribution of assets or
payment of dividends.
* * * * * * *
MINORITY VIEWS
H.R. 4546 would allow the Securities and Exchange
Commission to preempt state oversight of securities listed on a
national securities exchange without having to first find that
an exchange's listing standards are ``substantially similar''
to the listing standards of the New York Stock Exchange (NYSE),
the American Stock Exchange (now NYSE AMEX), or Nasdaq. This
bill completely removes any separate analysis for state
preemption, which, if anything, should be improved to ensure
fair and rigorous listing standards.
H.R. 4546 is intended to address a provision in the
National Securities Markets Improvement Act of 1996, which
explicitly granted state preemption to the three existing
exchanges, NYSE, the American Stock Exchange, and Nasdaq. The
law requires any other exchange seeking state preemption to
prove to the SEC that its standards for listing securities are
just as robust as the three named exchanges.
More than twenty years later, there are now twenty-one
securities exchanges and the American Stock Exchange has been
acquired by NYSE. While we acknowledge that it may not make
sense to judge exchange listing standards based on the three
exchanges named in the 1996 law, H.R. 4546 does nothing to
guide the SEC in how it should otherwise determine whether an
exchange's listing standards are sufficient to warrant state
preemption. Instead, the bill would completely remove the
baseline analysis and with it, the quantitative thresholds the
SEC has developed to evaluate proposed listing standards.
However imperfect the current framework is for evaluating
exchange listing standards for state preemption, it does not
make sense to simply remove it and replace it with nothing.
Doing so would, at best, create confusion and, at worst, result
in a race-to-the-bottom as exchanges try to compete for
business by lowering their listing standards.
The bill also rolls back a bipartisan compromise that was
unanimously approved on the Floor last Congress to require the
SEC to issue rules establishing minimum core quantitative
listing standards to determine whether an exchange's proposed
listing standards are sufficiently robust to warrant state
preemption.
H.R. 4546 is opposed by consumer advocates like Americans
for Financial Reform, Consumer Federation of America, and
Public Citizen. Unsurprisingly, the bill is also opposed by the
North American Securities Administrators Association (NASAA),
who represents our state securities regulators. According to
NASAA:
Fair and rigorous listing standards are essential. Such
listing standards give investors a voice when it comes
to important decisions, ensure independent directors
are in place to watch out for investors, provide
oversight of conflicts of interest to ensure investors
have a chance at earning a return. . . . H.R. 4546
threatens to undercut the distinction between different
types of exchanges with potentially different types of
listing standards to the detriment of investors.
We agree and oppose H.R. 4546.
Maxine Waters.
Vicente Gonzalez.
Emanuel Cleaver.
Al Green.
Stephen F. Lynch.
Keith Ellison.
Joyce Beatty.
Michael E. Capuano.
Wm. Lacy Clay.
Nydia M. Velazquez.
Gwen Moore.
Daniel T. Kildee.