On July 27, 2017, Ranking Member of the House Committee on Financial Services, Congresswoman Maxine Waters, introduced the Bad Actor Disqualification Act of 2017.  This draft legislation directs the SEC to implement more rigorous and public processes for granting waivers that restore certain benefits to bad actors.  These benefits include reduced oversight, reduced disclosure requirements and limited liability.  The current draft of the bill specifically requires:

  • that the waiver process be conducted and voted on at the Commission level, rather than staff level;
  • that the SEC consider whether granting a waiver would protect investors, be in the public’s interest and promote market integrity;
  • that the SEC to publish notice and allow for public comment on whether a particular waiver will be approved or denied; and
  • that the SEC create a public database of all disqualified actors and keep complete/public records of all waiver requests.

This legislation follows the Congresswoman’s previous legislation from 2015 aimed at reforming the SEC’s waiver approval process, which was in response to a 2014 study that concluded that 82% of waivers were granted to financial firms in the last 11 years.

The full text of the bill can be found here.

The House Financial Services Committee met on Tuesday, July 25, 2017 and approved four bipartisan bills. Among them, H.R. 2864, the Improving Access to Capital Act, was approved by the Committee by a vote of 59-0.

The bill proposes to amend Regulation A to remove the requirement that an issuer not be subject to certain reporting requirements under the Securities Exchange Act of 1934, immediately before an offering. The bill also proposes to amend Tier 2 offering reporting requirements under the Securities Exchange Act of 1933.

The legislation was introduced in an effort to allow for a streamlined SEC review process and promote capital raising for smaller reporting companies. The full bill text can be found here.

The SEC’s Investor Advisory Committee has announced the agenda for its June 22 meeting.  The committee will discuss issues relating to capital formation for smaller companies, including the decline in IPOs. The committee will also review certain provisions of the Financial CHOICE Act, as they relate to the SEC.

The meeting is open to the public and will be webcast live from the SEC’s website.

On June 8, 2017, the House passed H.R. 10, the Financial “CHOICE” Act with a vote of 233 to 186.  Introduced on April 27, 2017, the Financial CHOICE Act proposes to amend the Dodd-Frank Act to repeal the Volcker Rule, eliminate the FDIC’s orderly liquidation authority, and repeal certain limitations imposed by the Durbin Amendment.  The bill would also remove FSOC’s authority to designate non-bank financial institutions and financial market utilities as “systemically important” (also known as “too big to fail”).

Furthermore, in addition to the numerous amendments to the Consumer Financial Protection Act of 2010, the bill intends to (1) modify provisions related to the SEC’s managerial structure and enforcement authority; (2) eliminate the Office of Financial Research within the Department of the Treasury; and (3) revise provisions related to capital formation, insurance regulation, civil penalties for securities laws violations, and community financial institutions.

The bill would also repeal the Department of Labor’s fiduciary rule which, when fully implemented, significantly expands the categories of persons considered fiduciaries.  The DOL would be prohibited from adopting any similar rule until after the U.S. Securities and Exchange Commission (“SEC”) adopts a fiduciary standard for broker-dealers.

Chairman of the House Financial Services Committee, Jeb Hensarling, said in a statement after the passing of the bill: “We will make sure there is needed regulatory relief for our small banks and credit unions, because it’s our small banks and credit unions that lend to our small businesses that are the jobs engine of our economy and make sure the American dream is not a pipe dream.”

For a summary of current pending legislation relating to capital formation, click here.

As the 115th United States Congress is currently in session, a number of bills designed to promote capital raising for companies have been introduced in both the House and the Senate. In the last two months, both the House and Senate approved a handful of these bills, further advancing potential legislative reform relating to corporate capital formation.

For a summary of the status of these various bills, see our Pending Legislation tracker.

On March 9, 2017, a number of bipartisan bills designed to promote capital raising for companies were approved by the House Financial Services Committee and the Senate Committee on Banking, Housing and Urban Affairs.  Chairman of the Senate Committee on Banking, Housing and Urban Affairs Mike Crapo noted that the bills “will improve economic growth and investor protections.” The approved bills include:

  • H.R. 910/S. 327, “Fair Access to Investment Research Act of 2017”
    Directs the SEC to provide a safe harbor related to certain investment fund research reports
  • H.R. 1219/S. 444, “Supporting America’s Innovators Act of 2017”
    Amends the Investment Company Act of 1940 to expand the investor limitation for qualifying venture capital funds under an exemption from the definition of an investment company.
  • H.R. 1257/S. 462, “Securities and Exchange Commission Overpayment Credit Act”
    Amends the Securities Exchange Act of 1934 to require the SEC to refund or credit excess payments made to the Commission.
  • H.R. 1366/S. 484, “U.S. Territories Investor Protection Act of 2017”
    Amends the Investment Company Act of 1940 to terminate an exemption for companies located in Puerto Rico, the Virgin Islands, and any other possession of the United States.
  • H.R. 1343/S. 488, “Encouraging Employee Ownership Act”
    Directs the SEC to revise its rules so as to increase the threshold amount for requiring issuers to provide certain disclosures relating to compensatory benefit plans.
  • H.R. 1312, the “Small Business Capital Formation Enhancement Act”
    Amends the Small Business Investment Incentive Act of 1980 to require an annual review by the SEC of the annual government-business forum on capital formation that is held pursuant to such Act.

On January 10, 2017, the House of Representatives passed H.R. 79, the “Helping Angels Lead Our Startups Act” (the “HALOS Act”). The HALOS Act was originally passed by the House of Representatives as H.R. 4498 on April 27, 2016, but the Senate did not act on the bill in the 114th Congress. The HALOS Act directs the SEC to amend Regulation D under the Securities Act to make the prohibition against general solicitation or general advertising inapplicable to events with specified sponsors (including nonprofit organizations, colleges or universities, venture forums, and angel investor groups that are composed of accredited investors) where:

  • presentations or communications are made by or on behalf of an issuer;
  • the advertising does not refer to any specific offering of securities by the issuer;
  • the sponsor does not engage in certain activities (such as offering investment recommendations or advice to attendees) or charge attendees any fees other than administrative fees; and
  • no specific information regarding a securities offering is communicated (other than that the issuer is in the process of offering or planning to offer securities, including the type and amount of securities being offered).

However, the HALOS Act merely incorporates into formal regulation guidance that the SEC Staff has previously provided in the form of a no-action letter (Michigan Growth Capital Symposium, SEC No-Action Letter (May 4, 1995)) and a Compliance and Disclosure Interpretation (“C&DI”) (SEC Division of Corporation Finance Compliance and Disclosure Interpretations, Securities Act Rules, Question 256.26 (Aug. 6, 2015)). No-action letters and C&DIs are treated by companies and their counsel as having the same practical effect as formal SEC rules or regulations.

H.R. 79 is available at: https://www.govtrack.us/congress/bills/115/hr79/text.

In this piece, which was included in a recent compendium published by Practising Law Institute (PLI) titled “Looking Ahead:  The Impact of the 2016 Election on Key Legal Issues,” we offer our thoughts on the likely areas of focus for the Securities and Exchange Commission.

Access here:  https://media2.mofo.com/documents/170100-securities-law-crystal-ball.pdf.

 

On January 17, Chair White delivered a speech at The Economic Club of New York, which was titled “The SEC after the Financial Crisis: Protecting Investors, Preserving Markets.”  Chair White commented on the Securities and Exchange Commission’s achievements during the financial crisis era, as well as other areas of focus, such as modernizing the regulation of asset management, addressing equity market structure issues, and related matters.  Chair White noted that an area for further work for the Commission is addressing financial responsibility rules for broker-dealers.  Chair White also noted that the Staff has prepared a public request for comment on Industry Guide 3 for financial institutions, which awaits the approval of the Commission for release.

In these, her last remarks as Chair, she commented on the role of the Commission, “for the SEC to be a strong market regulator, wiser from the experience of the financial crisis, we must be ready to use the full array of tools available to us – not relying on disclosure and enforcement alone.  And we must do so with a fierce independence in applying our expert, best judgment to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate the formation of capital by the companies whose innovation and growth drives the American economy.”

Chair White also addressed the CHOICE Act and other measures designed to address agency rulemaking, noting:

“Another current trend pushing against the independence of the Commission are the legislative proposals from Congress seeking to remake our rulemaking process.  The House passed a bill just last week that would impose conflicting, burdensome, and needlessly detailed requirements regarding economic matters in Commission rulemaking that would provide no benefit to investors beyond the exhaustive economic analysis we already undertake.  These requirements would also prevent the Commission from responding timely to market developments or risks that could lead to a market crisis.  And elements of the CHOICE Act, which could be re‑introduced this session, would similarly undermine agency rulemaking as well as cripple our enforcement capabilities.  The next Commission must continue to challenge these efforts, and so should all of you.”

The full text is available here:  https://www.sec.gov/news/speech/the-sec-after-the-financial-crisis.html.