[House Report 115-884]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-884
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INVESTMENT ADVISER REGULATORY FLEXIBILITY IMPROVEMENT ACT
_______
August 3, 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
[To accompany H.R. 6321]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 6321) to require the Securities and Exchange
Commission to revise the definitions of a ``small business''
and ``small organization'' for purposes of assessing the impact
of the Commission's rulemakings under the Investment Advisers
Act of 1940, having considered the same, report favorably
thereon without amendment and recommend that the bill do pass.
PURPOSE AND SUMMARY
On July 10, 2018, Representative Gwen Moore introduced H.R.
6321, the ``Investment Adviser Regulatory Flexibility
Improvement Act'', requires the U.S. Securities and Exchange
Commission (SEC or Commission) to better examine the regulatory
burdens faced by small entities that are subject to the SEC's
jurisdiction. H.R. 6321 requires the SEC to revise the
definitions of a ``small business'' and ``small organization''
for purposes of assessing the impact of the SEC's rulemakings
under section 275.0-7 of title 17, Code of Federal Regulations,
and to provide alternative methods under which a business or
organization may qualify as a small business or small
organization.
BACKGROUND AND NEED FOR LEGISLATION
The Regulatory Flexibility Act requires all federal
agencies to analyze the economic impact of regulations when
there is likely to be a significant economic impact on a
substantial number of small entities and to consider regulatory
alternatives that will achieve the agency's goal while
minimizing the burden on small entities. For the purposes of
the Investment Advisers Act of 1940 and the Regulatory
Flexibility Act, the SEC's rules lay out the criteria for when
investment advisers are considered small entities.
The goal of H.R. 6321 is to ensure that the Commission more
broadly considers the regulatory burden of its regulations on
small investment advisers by directing the Commission to revise
its definitions of a ``small business'' and ``small
organization to account for alternative methods for accounting
for which entities constitute such businesses and
organizations.''
SEC regulations currently define ``small business'' and
``small organization'' as investment advisers with less than
$25 million in assets under management (AUM); with less than $5
million in total assets at the end of the most recent fiscal
year; and who do not control, are not controlled by, and are
not under common control with another investment adviser with
more than $25 million in AUM or an entity with over $5 million
in total assets at the end of the most recent fiscal year.
Prior to enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), mandatory SEC
registration for investment advisers was set at AUM of at least
$25 million. Title IV of the Dodd-Frank Act increased this
mandatory SEC registration threshold from $25 million in AUM to
at least $100 million in AUM.
The Committee is aware of concerns that the SEC's attention
to the economic impact of its regulations on small investment
advisory firms is both inadequate and while not intentional,
the SEC's staff may not consider the effect of its rule on
small investment advisers. With the increased threshold for SEC
registration at $100 million in AUM, virtually no SEC-
registered investment advisers could be deemed to be ``small''
for cost-benefit analysis purposes--even though more than 6,000
registered advisory firms employ 10 or fewer non-clerical
employees. While H.R. 6321's subject matter is the treatment of
small business and small organization for purposes of the
Investment Advisers Act of 1940, the SEC has an obligation to
broadly considers the impact of its regulations on all small
entities that are subject to SEC oversight and regulation. The
SEC should also direct self-regulatory organizations, FINRA,
the PCAOB and FASB to consider the impact of rules and
standards on small broker-dealers, investment companies,
auditing firms of broker-dealers as well those entities that
also comply with U.S. generally accepted accounting principles.
The revisions to these definitions for smaller investment
advisers should serve as the SEC's template to better tailor
both regulations and guidance for these entities.
In revising the definitions of ``small business'' and
``small organization'' with regards to advisory firms, the bill
directs the SEC to consider whether such alternative methods
for qualifying as a ``small business'' or ``small
organization'' should include a threshold based on the number
of non-clerical employees of the business or organization. With
respect to this and any other alternative methods, it would be
the Commission's decision to determine what alternative methods
are appropriate. The Committee would expect that the SEC would
welcome public comments to inform its decisions. Nonetheless,
revising these definitions and considering whether such
definitions should include more meaningful metrics will result
in a better understanding of regulatory costs on small advisers
and should lead to more tailored regulations, reduced burdens
and improve the relationship and the delivery of advice to
investors.
HEARINGS
The Committee on Financial Services has not held a hearing
examining matters relating to H.R. 6321.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
July 11, 2018, and ordered H.R. 6321 to be reported favorably
to the House, without amendment, 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 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 voice vote, 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. 6321
will require the SEC--within one year of enactment--to revise
the definitions of ``small business'' and ``small
organization'' with regards to investment advisory firms for
purposes of assessing the impact of the SEC's rulemakings under
the Investment Advisers Act of 1940. In making such revision,
the bill directs the SEC to consider whether such alternative
methods for businesses or organizations to qualify as a ``small
business'' or ``small organization'' should include a threshold
based on the number of non-clerical employees of the business
or organization. This will allow for a better understanding of
the regulatory costs on small advisers and a more tailored
regulation to reduce burdens.
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, July 17, 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. 3555, H.R. 6177,
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R.
6324.
If you wish further details on these estimates, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Mark P. Hadley
(For Keith Hall, Director).
Enclosure.
Securities and Exchange Commission Legislation
On July 11, the House Committee on Financial Services
ordered eight bills to be reported related to the rules,
regulations, and operations of the Securities and Exchange
Commission (SEC). The bills are:
H.R. 3555, the Exchange Regulatory
Improvement Act, would require the Securities and
Exchange Commission (SEC) to issue regulations
regarding its definition of what constitutes a facility
used by a national securities exchange;
H.R. 6177, the Developing and Empowering our
Aspiring Leaders Act of 2018, would direct the SEC to
conduct a rulemaking to expand what types of asset
acquisitions are considered qualifying investments for
a venture capital fund;
H.R. 6319, the Expanding Investment in Small
Business Act, would require the SEC to conduct a study
on the limitation on the amount of outstanding
securities a closed-end fund may hold from a single
issuer and still be classified as diversified;
H.R. 6320, the Promoting Transparent
Standards for Corporate Insiders Act, would require the
SEC to conduct a study of various proposals to change
agency rules regarding the use of written trading plans
by certain securities traders;
H.R. 6321, the Investment Adviser Regulatory
Flexibility Improvement Act, would require the SEC to
revise the definitions of a small business and small
organization applicable for assessing the effect of the
agency's rulemakings under the Investment Advisers Act
of 1940 on those entities;
H.R. 6322, the Enhancing Multi-Class Share
Disclosures Act, would direct the SEC to issue a rule
requiring securities issuers with multi-class stock
structures to make disclosures regarding the voting
power of certain individuals;
H.R. 6323, the National Senior Investor
Initiative Act of 2018, would direct the SEC to
establish a taskforce to identify challenges that
senior investors face and to report on its findings
every two years; and
H.R. 6324, the Middle Market IPO
Underwriting Cost Act, would direct the SEC to study
the costs associated with small and medium-sized
companies undertaking an initial public offering and to
report on its findings.
Using information from the SEC regarding the costs of
similar activities, CBO estimates that implementing seven of
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R.
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of
about $1 million for the agency to conduct the required studies
and rulemakings and to issue reports. CBO estimates that
implementing the eighth bill--H.R. 6323--would have a gross
cost of $7 million over the 2019-2023 period for the SEC to
establish and carry out the functions of the taskforce
established under the bill.
However, the SEC is authorized to collect fees sufficient
to offset its annual appropriation; therefore, CBO estimates
that the net effect on discretionary spending of implementing
each of those bills would be negligible, assuming appropriation
actions consistent with that authority. H.R. 6323 also would
require the Government Accountability Office (GAO) to conduct a
study on the economic costs of the financial exploitation of
senior citizens and CBO estimates that implementing that
section would cost GAO less than $500,000; such spending would
be subject to the availability of appropriated funds.
None of the bills would affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply for any of the
eight bills.
None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods
beginning in 2029, CBO estimates.
None of the bills contain intergovernmental mandates as
defined in the Unfunded Mandate Reform Act (UMRA) and would not
affect the budgets of state, local, or tribal governments. All
of them would require the SEC to take actions that could raise
the agency's administrative costs and the fees it collects to
offset those costs. If the SEC increased fees, it would
increase the cost of an existing mandate on private entities
required to pay those fees. CBO estimates that none of the
bills would increase fees in an amount that would exceed the
annual threshold for private-sector mandates established in
UMRA ($160 million in 2018, adjusted annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed 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 one
directed rulemaking to require the SEC--within one year of
enactment--to revise the definitions of ``small business'' and
``small organization'' to provide alternative methods under
which a business or organization may qualify as a ``small
business'' or ``small organization.''
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This Section cites H.R. 6321 as the ``Investment Adviser
Regulatory Flexibility Improvement Act''.
Section 2. Definition of small business of small organization
This section requires the SEC--within one year of
enactment--to revise the definitions for ``small business'' and
``small organization'' under section 275.0-7 of title 17, Code
of Federal Regulations, to provide alternative methods under
which a business or organization may qualify as a ``small
business'' or ``small organization.'' In making such revision,
the SEC shall consider whether such alternative methods should
include a threshold based on the number of non-clerical
employees of the business or organization.
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: H.R. 6321 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.
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