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House Financial Services Committee – Markup

House Committee on Financial Services

Markup of H.R. 835, H.R. 1579, H.R. 1548, H.R. 2792, H.R. 2797, H.R. 2793, H.R. 2610, H.R. 2608, H.R. 1807, H.R. 2795, H.R. 2593, H.R. 2812, H.R. 2796, H.R. 2799, H.R. 2798

Wednesday, April 26, 2023

Topline

  • The committee marked up and approved 15 pieces of legislation, including the e-delivery bill, which passed by voice vote.

Legislation

  • R. 835, the Fair Investment Opportunities for Professional Experts Act
  • R. 1579, the Accredited Investor Definition Review Act
  • R. 1548, the Improving Access to Small Business Information Act
  • R. 2792, the Small Entity Update Act
  • R. 2797, the Equal Opportunity for All Investors Act
  • R. 2793, the Encouraging Public Offerings Act of 2023
  • R. 2610, a bill to amend the Securities Exchange Act of 1934 to specify certain registration statement contents for emerging growth companies, to permit issuers to file draft registration statements with the Securities and Exchange Commission for confidential review, and for other purposes
  • R. 2608, a bill to amend the Federal securities laws to specify the periods for which financial statements are required to be provided by an emerging growth company, and for other purposes
  • R. 1807, the Improving Disclosure for Investors Act of 2023
  • R. 2795, the “Enhancing Multi-Class Share Disclosures Act”
  • R. 2593, the Senior Security Act
  • R. 2812, the Middle Market IPO Underwriting Cost Act
  • R. 2796, the Promoting Opportunities for Non-Traditional Capital Formation Act
  • R. 2799, the Expanding Access to Capital Act
  • R. 2798, the CFPB Transparency and Accountability Reform Act

Opening Statements

Chairman Patrick McHenry (R-N.C.)

In his opening statement, McHenry noted that last month the financial system experienced a great deal of volatility. He said that there are still questions that need to be answered, and many requests that were transmitted to agencies have yet to be fulfilled. He also announced that regulators will be testifying in front of this committee next month. On the topic of the markup, the Chair said that expanding access to capital markets has been a priority for Republicans, and many of the bills are bipartisan. One of the partisan bills is the CFPB Transparency and Accountability Reform Act, which is a compilation of seven bills. McHenry argued that the CFPB has been one of the most unaccountable agencies ever created, but the bill will ensure they are accountable to Congress and the American people.

Ranking Member Maxine Waters (D-Calif.)

In her opening statement, Waters noted that the committee is not taking action to get to the bottom of recent bank failures, determine what happened, or consider legislation to get our banks back up. She added that if the committee really wanted to support small businesses’ access to capital, it should be doing everything possible to avoid a debt default. As it relates to the legislation, the Ranking Member said that there are twelve targeted pieces of legislation that Democrats will support, but there are two packages of toxic bills and a third standalone measure that she will oppose.

Specially, she said the CFPB Transparency and Accountability Reform Act will rob the CFPB of the funding it needs to properly regulate the consumer financial marketplace, the Expanding Access to Capital Act would weaken investor protections by removing disclosures and legal protections that customers rely on, and H.R. 1807 would require brokerages and investment advisors to access their investment statements online, even if they do not have access to the internet.

Consideration of Legislation

H.R. 835, the Fair Investment Opportunities for Professional Experts Act

Rep. French Hill (R-Ark.) offered an ANS and explained the bill. He said the SEC’s many proposed regulations would overhaul our markets without any direction from Congress, while ignoring needed fixes like expanding the accredited investor definition. Furthermore, he stated that new businesses are staying private for longer because of bad policies from Washington. This legislation would provide individuals who demonstrate a strong understanding the opportunity to invest in private offerings, enabling entrepreneurs to create more jobs.

Rep. Juan Vargas (D-Calif.) said that this bipartisan bill to expand the definition of accredited investor, which is currently limited and has prevented well informed Americans from investing in private securities, will allow investors with relevant qualifications and credentials to meet the definition and access private offerings.

Rep. Stephen Lynch (D-Mass.) said that he does not oppose the bill but highlighted a few areas of caution. He said that over the last decade, the amount of money raised through private equity has exceeded the amount of money raised for public markets, which has led to fewer opportunities for unaccredited investors. He continued by stating that there is value in looking at different ways a person may be qualified to be an accredited investor and have the sophistication necessary to make wise decisions, without locking in the idea of a financial threshold that has shown to be ineffective.

The ANS was agreed to by voice vote, and H.R. 835, as amended, was reported favorably to the House by voice vote.

H.R. 1579, the Accredited Investor Definition Review Act

Rep. Bill Huizenga (R-Mich.) offered an ANS and explained the bill. He said the bill would require the SEC to incorporate additional “certifications, designations, or credentials that further the purpose of the accredited investor definition” within 18 months. This change would expand investment opportunities for sophisticated investors who may not have the advantage of being born in the right zip code or have generational wealth, and also provide small startup companies with additional sources of funding.

Waters agreed that there need to be some changes to the definition, as any definition that restricts certain financial opportunities only to the wealthy is not a good definition. She added, however, that permitting Wall Street to sell people high-risk and illiquid products because they have built up a decent nest egg for retirement is also a terrible outcome. She closed by stating that this legislation ensures the definition is not stagnant and changes with time as new certifications and degrees are developed.

The ANS was agreed to by voice vote, and H.R. 1579, as amended, was reported favorably to the House by a vote of 41-2.

H.R. 1548, the Improving Access to Small Business Information Act

Rep. Young Kim (R-Mich.) offered an ANS and explained the bill. She said this bill would amend the Securities Exchange Act of 1934 to specify that actions of the Office of the Advocate for Small Business Capital Formation, like conducting field surveys, are not a collection of information under the Paper Reduction Act.

Rep. Joyce Beatty (R-Ohio) added that this bill streamlines the ability of the SEC Office to carry out its mission by exempting it from the requirements that are in the Act. Rep. Ann Wagner (R-Mo.) said that this ensures the SEC is not hamstrung by bureaucratic hurdles in its efforts to promote capital formation and advocate for creators, entrepreneurs, and investors.

The ANS was agreed to by voice vote, and H.R. 1548, as amended, was reported favorably to the House by a vote of 41-0.

H.R. 2792, the Small Entity Update Act

Wagner offered an ANS and explained the bill. She said that this bill would alleviate the burdensome regulatory requirement that hinders small businesses from flourishing by directing the SEC to conduct a study followed by a rulemaking to update the term “small entity” under the Regulatory Flexibility Act. Rep. Sean Casten (D-Ill.) added that this is a good government bill that would remove barriers to competition for small businesses and require the Commission to update the definition every five years to consider the continued growth of our markets and ensure regulations are tailored to the size of the business. He highlighted one small issue about the lack of an inflation index, and Wagner said she would work with him on it.

The ANS was agreed to by voice vote, and H.R. 2792, as amended, was reported favorably to the House by a vote of 42-0.

H.R. 2797, the Equal Opportunity for All Investors Act

Rep. Mike Flood (R-Nebr.) offered an ANS and explained the bill. He said that this bill provides more opportunities to a larger slice of the investing public by expanding the accredited investor definition to include individuals that are certified through an exam written by the SEC and administered by FINRA. It also contains guardrails to filter out individuals who do not fully understand private offerings and their investment risks. Rep. Wiley Nickel (D-N.C.) added that the bill cuts through red tape to improve access and opens up lucrative investments to people with the knowledge to understand the risk they are taking on.

The ANS was agreed to by voice vote, and H.R. 2797, as amended, was reported favorably to the House by a vote of 42-1.

H.R. 2793, the Encouraging Public Offerings Act of 2023

Wagner offered an ANS and explained the bill. She said that it would allow an issuer to communicate and test the waters with potential investors to determine interest in a securities offering either before or after the filing of a registration statement. She added that by codifying the existing SEC rule, the bill will encourage more companies to go public and provide better information to investors by expanding on the popular provisions of the JOBS Act.  Lynch added as a note of caution that at some point “accredited investor” means nothing. He said the committee may be exposing more and more people to unreasonable risk. Wagner responded that this legislation is about public offerings, and it specifically codifies an existing SEC rule to encourage more companies to go public and provide better information to investors.

The ANS was agreed to by voice vote, and H.R. 2793, as amended, was reported favorably to the House by a vote of 39-1.

H.R. 2610

McHenry offered an ANS and explained the bill. He noted that the next two bills being considered deal with slight changes to the Emerging Growth Companies Act provision in the JOBS Act. This bill addresses instances when an EGC does not conduct an IPO in its entirety, and rather spins off a portion of its business as a new company and takes that company public. The Chair noted that currently, the spinoff does not benefit from the two-year financial statement accommodation that the parent would.  He explained that this bill harmonizes the Emerging Growth Companies Act’s financial statement requirements in both scenarios. Waters said that the bill reduces the obligation for EGC spinoffs to two years, streamlining the financial disclosure obligations for EGCs across the board.

The ANS was agreed to by voice vote, and H.R. 2610, as amended, was reported favorably to the House by a vote of 42-0.

H.R. 2608, a bill to amend the Federal securities laws to specify the periods for which financial statements are required to be provided by an emerging growth company, and for other purposes

McHenry offered an ANS and explained the bill, which updates the EGC financial reporting requirements to clarify that an EGC and any company that qualified as an EGC when it conducted its IPO does not need to provide financial statements for a period earlier than the two years of audited financial statements required during the initial IPO. Waters asked about the distinction between the last bill and this bill. McHenry replied that the first bill deals with the spinoff of a parent company before touching the public market as an EGC, while the second is post-IPO and says spinning off or buying does not trigger a new set of requirements and preserves status as an EGC.

The ANS was agreed to by voice vote, and H.R. 2608, as amended, was reported favorably to the House by a vote of 41-0.

H.R. 1807, the Improving Disclosure for Investors Act of 2023

Huizenga offered an ANS and explained the bill. He said that H.R. 1807 appropriately preserves the ability of investors who prefer to receive paper notices and disclosures to do so. He defended the bill by noting the effort and investment in expanding internet access and said it is time for the SEC to update its information, framework, and how it does business. He said the bill directs the SEC to promulgate rules with respect to electronic delivery of certain required disclosures to investors. It also provides a transition period allowing an initial paper communication about electronic delivery to be sent to investors. Finally, the bill requires delivery of an annual notice paper to remind investors of their ability to opt out of electronic delivery at any time.

Nickel noted that protecting the environment is essential and questioned why the financial system would still require paper disclosures when the vast majority of consumers prefer e-delivery. Wagner said that this commonsense bill prioritizes e-delivery while still preserving investor choice.

Waters said the bill ignores the reality that many investors, particularly seniors, do not have access to or the ability to receive electronic documents or simply do not prefer e-delivery. She added that it requires opt-out, effectively preventing individuals who do not have consistent or easy access to the internet from viewing important financial documents about securities they invest in. Waters also argued that while Republicans and big industry influences pushing this bill say that investors will be able to choose, in reality they will be forced to receive their documents electronically because they do not know how to receive paper delivery. Finally, she noted that most electronic deliveries result in low click-through rates of the disclosures they provide.

Rep. Brian Steil (R-Wisc.) said that if the concern is with people not reading these documents, the committee should ensure that only material information is included. McHenry said that there has been a massive deployment of internet across the country, and internet connectivity is at a record high.

Rep. Brad Sherman (D-Calif.) said that the people who prefer paper should be able to have that, but there are many benefits of e-delivery. He added that if the concern is the environment, disclosures should include climate risk information.

Beatty agreed with Waters and said that the committee should continue discussing the bill.

Rep. Mike Lawler (R-N.Y.) emphasized that the bill does not eliminate the use of paper but instead changes it from an opt out to an opt in. He added that the American people have seen great advances in technology in the last twenty years, and this bill is an attempt to modernize. He continued to explain that if an investor wants a paper statement, they can opt in, and if someone does not have internet access or an email, they probably have a broker who they can call and ask for paper statements. He finished by saying that the bill still allows investors to use paper if they prefer.

Finally, Waters, McHenry, and Huizenga engaged in a colloquy in which Waters asked where in the bill provides for opting out of e-delivery. McHenry directed her to the appropriate section, but Waters insisted that senior investors would not know how to opt out. Huizenga countered that investors would need to have an electronic account in order to initiate the e-delivery transition. In the end, McHenry said that Huizenga had promised to address the concerns of Rep. Josh Gottheimer (D-N.J.) and Beatty, and he pledged to not ask leadership to bring this to the floor without the accommodations of those members.

The ANS was agreed to by voice vote, and H.R. 1807, as amended, was reported favorably to the House by voice vote.

H.R. 2795, the Enhancing Multi-Class Share Disclosures Act

Rep. Gregory Meeks (D-N.Y.) offered an ANS and explained the bill, which he said would close documented gaps in transparency around multi-class governance structures. He noted that under current rules, the difference between a corporate insider’s voting power and their ownership interest (regardless of how large the gap may be) is either not fully disclosed or incomprehensible to the investor. As a result, the Investor Advisory Committee recommended that the SEC amend its rules to ensure this gap is better identified and qualified. This bill adopts the recommendation. McHenry said the bill will provide investors with a better understanding of what is going on in capital markets.

The ANS was agreed to by voice vote, and H.R. 2795, as amended, was reported favorably to the House.

H.R. 2593, the Senior Security Act

Waters offered an ANS and explained the bill on behalf of Gottheimer. She said that the bill takes key steps to help protect older Americans from getting scammed out of their hard-earned money. Wagner added that the taskforce this legislation creates will help identify problems that senior investors encounter, including financial exploitation and cognitive decline, and recommend regulatory changes that would help senior investors. Gottheimer returned to the hearing room and explained that the bill will create a Senior Investor Taskforce at the SEC to exclusively focus on how seniors are being targeted by fraudsters who seek to take advantage of them.

The ANS was agreed to by voice vote, and H.R. 2593, as amended, was reported favorably to the House.

H.R. 2812, the Middle Market IPO Underwriting Cost Act

Rep. Jim Himes (D-Conn.) offered an ANS and explained the bill. He noted that the cost of going public has not changed for most companies. In response, this bill will call for a study by the GAO in consultation with the SEC to examine the gross spread and other costs associated with going public to understand where they come from and what might be done to reduce them. Hill thanked Himes for agreeing to changes in the bill, including having GAO do the study instead of just the SEC and adding an analysis of the impact of litigation costs and those burdens on being a public company.

The ANS was agreed to by voice vote, and H.R. 2812, as amended, was reported favorably to the House.

H.R. 2796, the Promoting Opportunities for Non-Traditional Capital Formation Act

Waters offered an ANS and explained the bill. She noted that the Office of the Advocate for Small Business Capital Formation proactively works to identify and address unique challenges faced by minority-owned, women-owned, and rural small businesses. This bill requires the Office to provide educational resources and host events to promote capital raising options for these under-represented small businesses. It would also require the Office to meet annually with representatives of state securities commissions to ensure that there is a whole of government approach to addressing the unique needs of under-represented businesses.

The ANS was agreed to by voice vote, and H.R. 2796, as amended, was reported favorably to the House.

H.R. 2799, the Expanding Access to Capital Act

McHenry offered an ANS and explained the bill. He said that regulatory and compliance costs discourage emerging companies from entering public markets and disproportionally burden small businesses. This bill addresses these problems by building on the success of the JOBS Act to right size onerous regulatory barriers, provide entrepreneurs access to capital, and expand investment opportunities in private markets in a safe and structured manner. Specifically, the bill includes policies that extend the IPO onramp for EGCs, allowing regulatory burdens to scale to the size of the effective issuer. It also includes policies to allow more issuers to benefit from the automatic self-registration process available to well-known seasoned issuers. The bill has policies that address the overly restrictive limits that hinder the ability of small, emerging venture fund managers to raise investments and deploy capital, and it also removes restrictions that constrain the ability of large venture funds to invest in smaller regional funds.

Rep. Dan Meuser (R-Pa.) highlighted Title 8 of Division B, which includes his Restoring the Secondary Trading Act. This provision would amend Section 18A of the Securities Act to restore the role of the federal government in regulating the secondary trading market.

Waters stated that the bill threatens to undermine investor confidence and the long-term benefits given to companies by targeting many of the pillars supporting market confidence. She added that it would eliminate much of the critical information provided to investors by expanding the number of companies who can offer securities without needing to register with the SEC. She also said that it would allow more private funds to avoid regulation, which is harmful to investors and raises national security concerns.

Rep. Alex Mooney (R-W.V.) noted that the package includes his Investment Opportunity Expansion Act to expand retail investor access to the private markets, which would allow an individual to invest up to a total of 10% of their annual income or net assets in the private market. Rep. Andy Barr (R-Ky.) said that allowing larger VC funds to deploy more capital to smaller funds will facilitate a more diverse pool of VC funds providing capital to a more diverse pool of founders outside of VC hubs. He also noted that there is still a multi-factor test needed to qualify as a VC fund.

Rep. Blaine Luetkemeyer (R-Mo.) said he is glad that his legislation to raise the threshold and remove overlap in the definition to qualify as a smaller reporting company, accelerated filer, and large accelerated filer is included. He also noted that the bill exempts certain low revenue issuers from being required to have management’s assessment of the effectiveness of internal controls over financial reporting attested to and reported by an independent auditor.

Rep. Sylvia Garcia (D-Texas) offered an amendment to the ANS. She explained that the bill contains a provision extending the timeframe and threshold for qualifying as an EGC to ten years and $2 billion, and said that she could likely bring some other Democrats around on the provision if it is limited. Her amendment would limit the regulatory relief to pharmaceutical companies that conduct R&D involving rare diseases and addiction. The amendment was not adopted.

Waters offered an amendment to require private funds to disclose how much of their funds are invested in minority-owned, women-owned, veteran-owned, and rural small businesses. The amendment was not adopted either.

Finally, Rep. Al Green (D-Texas) offered an amendment on behalf of Lynch, which would mend the Gig Worker Equity Compensation Act provision to require any company that awards unregistered securities as part of their compensation package to pay a living wage and provide health care for the gig worker. It would also permit the employee to redeem these unregistered shares for cash whenever she or he wishes. The amendment was rejected.

The ANS was agreed to by voice vote, and H.R. 2799, as amended, was reported favorably to the House.

H.R. 2798, the CFPB Transparency and Accountability Reform Act

Barr offered an ANS and explained the bill. He said that it will hold the most authoritarian, partisan, unchecked agency in the financial system accountable. Specifically, he noted that the CFPB consistently evades statutory mandates and fails to comply with the Administrative Procedure Act, all while harassing businesses and perpetuating administrative law fouls. He highlighted six key features of the bill:

  • It converts the Bureau into an independent agency led by a bipartisan commission.
  • It eliminates the Bureau’s funding stream from the Federal Reserve and brings it into the regular appropriations process.
  • It establishes an inspector general for the Bureau separate from the IG they share with the Fed.
  • It revises the mandate to promote more private-sector participation in the markets.
  • It creates a new Office of Economic Analysis and requires cost-benefit analyses for all guidance, orders, rules, and regulations.
  • It requires the consideration of the impact of proposed rules on small entities.

Waters said that the bill is pulled from an old, tired Republican playbook that has been used since Democrats created the CFPB in Dodd-Frank. She added that it is simply another attempt to undermine and tear down this popular and effective federal watchdog, and would place a series of additional administrative requirements on the CFPB to slow down its work.

Rep. Ralph Norman (R-S.C.) said that he agrees with the need to reign in the CFPB, but has concerns about the bill growing government. He said that the CFPB should be abolished, instead of creating another commission.

Lynch offered an amendment to the ANS that would require the Financial Stability Oversight Council to study this law and certify that it will not increase systemic risk or contribute to a financial crisis. If they cannot make such a certification, then the bill will not take effect according to this amendment. Barr said that this is asking another unaccountable bureaucracy to usurp the democratic prerogatives of the American people. The amendment failed.

Beatty offered an amendment to require that financial institutions subject to the CFPB’s regulations offer veterans an account that does not require a minimum balance or charge overdraft or insufficient fund fees. The amendment would also require a mortgage lender to get a court order before foreclosing on the home of a veteran, and offer an interest rate reducing refinancing loan to a veteran. The amendment was not agreed to.

Waters offered an amendment to prevent the bill from limiting the CFPB’s authority and capacity to reduce junk fees. Barr said that there is no statutory definition of a junk fee since the CFPB director made it up. The amendment also failed.

Green offered an amendment to replace Title 7 of the bill with his Financial Compensation for CFPB Whistleblowers Act, which would create a strong whistleblower compensation program at the CFPB. The amendment was not agreed to.

Rep. Emanuel Cleaver (D-Mo.) offered an amendment to ensure that the bill does not prevent the CFPB from doing anything within its authorized power to protect homeowners and prevent foreclosures in rural communities. It was not agreed to.

The ANS was agreed to by voice vote, and H.R. 2798, as amended, was reported favorably to the House.

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