Vote Explanations for H.R. 2357 — Accelerating Access to Capital Act of 2015 and H.R. 5424 — Investment Advisors Modernization Act of 2016
After returning from the longest summer recess in recent history, Republican leadership brought two financial services bills to the House floor, instead of addressing major issues such as funding our fight against the spread of Zika and making meaningful reforms to protect the American people from gun violence.
H.R. 2357 — Accelerating Access to Capital Act of 2015
This legislation is the combination of three bills passed by the Financial Services Committee that expands the range of companies that can use Form S-3 to register securities sales, exempts the sale of certain securities from registration with the SEC and state regulatory agencies, and requires the SEC to revise Regulation D (Reg D) with the goal of loosening restrictions and filing requirements under existing Rule 506 exemptions.
Supporters of the bill argue it allows smaller companies to have greater access to capital by allowing them to sell securities without incurring large costs and without having to wait for unnecessary SEC review of registration documents. The ability to raise funds through the sale of securities will enable these small businesses to expand, thereby creating new jobs and ultimately helping the economy overall.
Opponents of the bill argue this legislation creates yet more unwarranted exemptions from securities registration that may ultimately harm investors. They contend that the changes to Form S-3 would allow smaller companies to pick a time to offer their securities that is best for them but that is not best for the investor. That quick access, they say, leads to accounting fraud, market manipulation, insider trading and sales of artificially inflated stock.
I am concerned that provisions in this legislation could increase the chances of fraud, market manipulation, and insider trading, all of which have been found to be more common among non-exchange-listed companies. A 2006 study of SEC enforcement actions found that 80 percent of manipulation cases involved non-exchange-traded stocks. It would also thwart state oversight and SEC oversight of these securities offerings and enforcement against fraud as neither would have any information that the security has been sold or whether the company is legitimate. H.R. 5424 also includes no requirement that investors have the financial sophistication to understand the potential risks of the offering or the financial wherewithal to withstand any losses. Lastly, this legislation would prevent the SEC from adopting these modest reforms even where it finds the actions are necessary to protect investors, to promote market integrity, and encourage capital formation.
While Republicans argue that this legislation is necessary to remove barriers to capital formation and business growth, reducing disclosures and certain restrictions for these companies — most of which are NOT publicly traded — limits the quality and availability of information investors need to make smart investment decisions.
H.R. 5424 — Accelerating Access to Capital Act of 2015
This legislation would create an exemption to the SEC’s rule requiring advisers who manage at least $150 million to file information to the Financial Stability Oversight Council that detail aspects of their business to the agency.
Supporters of this legislation argue that current regulations for private equity are outdated, and many of these requirements are burdensome to small business, threaten capital formation, and stifle economic growth. Private equity investors bring capital to our communities, and current law does not fit the business model of the private equity industry.
Opponents of this legislation raise concerns that exemptions that this bill provides would enable private fund advisers to slip back into the shadows and considering that investors in private equity funds include public pension funds — which support teachers, police officers and firefighters — the Congress should be encouraging the SEC to fully implement the enhanced investor safeguards provided in current law.
Private equity investors provide billions of dollars every year to Main Street businesses and over 11 million Americans work for private-equity-backed businesses. While I understand the concerns raised by opponents to this legislation, it is important to note that H.R. 5424does NOT reduce the SEC’s authority to examine or bring enforcement actions against private fund managers or eliminate any of the tools that the SEC has to pursue these actions.
This legislation passed out of the House Financial Services Committee with 14 Democrats voting in support and 12 voting against. An amendment offered by one of my Democratic colleagues improved the bill by striking language that would have limited the SEC’s annual audit and surprise inspection requirements and eliminated the requirement that advisers deliver in plain language narrative brochures to clients annually.
I supported this bipartisan effort, which makes much-needed changes to private equity regulation, while maintaining the SEC’s ability to protect consumers and monitor this area of our financial system.