[Congressional Bills 115th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3857 Reported in House (RH)]

<DOC>





                                                 Union Calendar No. 865
115th CONGRESS
  2d Session
                                H. R. 3857

                      [Report No. 115-894, Part I]

To amend the Securities Exchange Act of 1934 to establish standards of 
conduct for brokers and dealers that are in the best interest of their 
                           retail customers.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                           September 27, 2017

 Mrs. Wagner (for herself, Mr. Barr, Mr. Messer, Mr. Trott, Mr. Posey, 
     Mr. Williams, Mr. Budd, Mr. Hollingsworth, and Mr. Kustoff of 
  Tennessee) introduced the following bill; which was referred to the 
 Committee on Financial Services, and in addition to the Committees on 
  Ways and Means, and Education and the Workforce, for a period to be 
subsequently determined by the Speaker, in each case for consideration 
  of such provisions as fall within the jurisdiction of the committee 
                               concerned

                            August 10, 2018

           Reported from the Committee on Financial Services

                            August 10, 2018

  Referral to the Committees on Ways and Means and Education and the 
Workforce extended for a period ending not later than November 16, 2018

                           November 16, 2018

  Referral to the Committees on Ways and Means and Education and the 
Workforce extended for a period ending not later than December 28, 2018

                           December 28, 2018

   Additional sponsors: Mr. Luetkemeyer, Mr. Hill, Mr. Hultgren, Ms. 
           Tenney, Ms. McSally, Mr. Rothfus, and Mr. Sessions

                           December 28, 2018

     Committees on Ways and Means and Education and the Workforce 
discharged; committed to the Committee of the Whole House on the State 
                 of the Union and ordered to be printed

_______________________________________________________________________

                                 A BILL


 
To amend the Securities Exchange Act of 1934 to establish standards of 
conduct for brokers and dealers that are in the best interest of their 
                           retail customers.


 


    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Protecting Advice for Small Savers 
Act of 2017'' or the ``PASS Act of 2017''.

SEC. 2. REPEAL OF DEPARTMENT OF LABOR FIDUCIARY RULE.

    The final rule of the Department of Labor titled ``Definition of 
the Term `Fiduciary' Conflict of Interest Rule--Retirement Investment 
Advice'' and related prohibited transaction exemptions published April 
8, 2016 (81 Fed. Reg. 20946), shall have no force or effect.

SEC. 3. STANDARDS OF CONDUCT FOR BROKERS AND DEALERS.

    (a) Standard of Conduct for Brokers and Dealers When Making 
Recommendations to Retail Customers.--
            (1) In general.--The second subsection (k) of section 15 of 
        the Securities Exchange Act of 1934 (15 U.S.C. 78o(k)) 
        (relating to standards of conduct) is amended to read as 
        follows:
    ``(k) Standard of Conduct for Recommendations to Retail 
Customers.--
            ``(1) In general.--The standard of conduct for a broker or 
        dealer (or registered representative) when providing 
        recommendations to a retail customer is as follows:
                    ``(A) Recommendation to retail customer.--When a 
                broker or dealer (or registered representative) makes a 
                recommendation to a retail customer, the recommendation 
                shall be in the retail customer's best interest at the 
                time it is made by--
                            ``(i) reflecting reasonable diligence; and
                            ``(ii) reflecting the reasonable care, 
                        skill, and prudence that a broker or dealer (or 
                        registered representative) would exercise based 
                        on the customer's investment profile.
                    ``(B) Disclosure to retail customer.--
                            ``(i) In general.--Before a broker or 
                        dealer (or registered representative) executes 
                        a transaction for the first time for each 
                        retail customer based on a recommendation to 
                        such retail customer, such broker or dealer (or 
                        registered representative) shall disclose prior 
                        to the point of sale to such customer, in a 
                        clear and concise manner--
                                    ``(I) the type and scope of 
                                services the broker or dealer (or 
                                registered representative) provides;
                                    ``(II) the standard of conduct that 
                                applies to the relationship;
                                    ``(III) the types of compensation 
                                the broker or dealer (or registered 
                                representative) receives; and
                                    ``(IV) any material conflict of 
                                interest.
                            ``(ii) Content of disclosure.--The 
                        Commission may issue regulations determining 
                        the content of the disclosure required in 
                        clause (i). Such regulations may provide for a 
                        disclosure of fees received by the broker or 
                        dealer, whether from the retail customer or a 
                        third party, prior to the execution of the 
                        transaction.
                    ``(C) Material conflict of interest.--A broker or 
                dealer (or registered representative) shall avoid, 
                disclose, or otherwise reasonably manage any material 
                conflict of interest with a retail customer.
            ``(2) Nonviolation of standard of conduct.--The following 
        is not, by itself, a violation of the standard of conduct 
        described in paragraph (1):
                    ``(A) The receipt of compensation, including 
                transaction-based compensation, by a broker or dealer 
                (or registered representative) or any affiliate of such 
                broker or dealer (or registered representative).
                    ``(B) The recommendation by a broker or dealer (or 
                registered representative) to a retail customer of 
                principal transactions (including cross transactions), 
                or the recommendation of affiliated, unaffiliated, or 
                proprietary products or services, or a limited range of 
                products or services.
            ``(3) No requirement to recommend least expensive 
        product.--Nothing in this subsection shall require a broker or 
        dealer (or registered representative) to recommend the least 
        expensive security or investment strategy (however quantified) 
        or to analyze all possible securities, other products, or 
        investment strategies before making a recommendation.
            ``(4) Definitions.--In this subsection:
                    ``(A) Compensation.--The term `compensation' 
                includes commissions or sales charges, or other fees or 
                variable compensation, for or related to the sale of 
                securities or for the servicing of customer accounts, 
                whether paid by the retail customer or received from a 
                third party.
                    ``(B) Customer's investment profile.--The term 
                `customer's investment profile' has the meaning of such 
                term as described in Rule 2111 of the Financial 
                Industry Regulatory Authority as of the date of the 
                enactment of this subsection.
                    ``(C) Institutional account.--The term 
                `institutional account' has the same meaning given such 
                term in Rule 4512 of the Financial Industry Regulatory 
                Authority as of the date of the enactment of this 
                subsection.
                    ``(D) Material conflict of interest.--The term 
                `material conflict of interest' means a financial 
                interest of a broker or dealer (or registered 
                representative) that a reasonable person would expect 
                to affect the impartiality of a recommendation.
                    ``(E) Reasonable diligence.--The term `reasonable 
                diligence' has the meaning of such term as described in 
                Rule 2111 of the Financial Industry Regulatory 
                Authority as of the date of the enactment of this 
                subsection.
                    ``(F) Recommendation.--The term `recommendation' 
                means either of the following recommendations (under 
                the meaning ascribed to such term in Rule 2111 of the 
                Financial Industry Regulatory Authority) for which the 
                broker or dealer (or registered representative) making 
                the recommendation receives or will receive 
                compensation:
                            ``(i) A non-discretionary recommendation to 
                        buy, hold, or sell securities, or to follow an 
                        investment strategy involving securities, for 
                        taxable or non-taxable accounts.
                            ``(ii) A non-discretionary recommendation 
                        to rollover or transfer assets in an employer-
                        sponsored retirement plan to an individual 
                        retirement account.
                    ``(G) Retail customer.--The term `retail customer' 
                means a natural person or legal entity, or the legal 
                representative of such natural person or legal entity, 
                in each case other than an institutional account, who--
                            ``(i) receives a recommendation from a 
                        broker or dealer (or registered 
                        representative); and
                            ``(ii) implements such recommendation with 
                        such broker or dealer primarily for personal, 
                        family, retirement, or household purposes.
            ``(5) Supersession.--The provisions of this subsection 
        shall supersede and preempt State law, other than a State law 
        that regulates insurance products that are not securities, 
        insofar as they may now or hereafter relate to a broker or 
        dealer, or registered representative of a broker or dealer.
            ``(6) Fiduciary status under erisa, the internal revenue 
        code, the investment advisers act of 1940, or other fiduciary 
        regimes.--The fact that a person may owe, or may in fact comply 
        with, the standard of conduct under this subsection shall not 
        mean or create any presumption that such person is a 
        `fiduciary' under the Employee Retirement Income Security Act 
        of 1974 (29 U.S.C. 1001 et seq.), section 4975 of the Internal 
        Revenue Code of 1986, the Investment Advisers Act of 1940 (15 
        U.S.C. 80b et seq.), or any other Federal, State, or local 
        statutory or regulatory fiduciary regime.''.
            (2) Application.--The amendment made by paragraph (1) shall 
        apply to brokers and dealers (or registered representative) on 
        the date that is 18 months after the date of the enactment of 
        this Act.
    (b) Rulemaking Authority.--Section 913 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act is amended to read as 
follows:

``SEC. 913. OBLIGATIONS OF BROKERS AND DEALERS AND OTHER PERSONS AND 
              ENTITIES.

    ``(a) Rulemaking.--
            ``(1) Rulemaking by the commission.--The Commission may 
        issue regulations as the Commission determines is necessary to 
        facilitate compliance by brokers and dealers (including their 
        registered representative) with the obligations of such brokers 
        and dealers (and their registered representative) under the 
        second subsection (k) of section 15 of the Securities Exchange 
        Act of 1934 only if such rulemaking does not impose any 
        obligation related to standard of care on a broker or dealer 
        (or its registered representative) that is in addition to, 
        duplicative of, or inconsistent with, the obligations set forth 
        in such subsection.
            ``(2) Rulemaking by the secretary of labor and the 
        secretary of the treasury.--After the date of the enactment of 
        the PASS Act of 2017, the Secretary of Labor and the Secretary 
        of the Treasury shall not promulgate any regulation under the 
        Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 
        et seq.) or section 4975 of the Internal Revenue Code of 1986, 
        respectively, defining the circumstances under which a person 
        is considered a fiduciary that would impose any obligation on a 
        broker or dealer (or its registered representative) or on a 
        life insurer fulfilling the term `insurance company' as defined 
        in section 3(a)(2) of the Securities Act of 1933 (or its agents 
        or distributors) that is in addition to, duplicative of, or 
        inconsistent with, the obligations set forth in such subsection 
        (k) of section 15 of the Securities Exchange Act of 1934 (15 
        U.S.C. 78o).
    ``(b) Exemption Available to Certain Persons With Respect to 
Manufacture or Sale of Annuities.--
            ``(1) Exemption.--With respect to the manufacture or sale 
        of annuities within paragraphs (2) or (8) of section 3(a) of 
        the Securities Act of 1933 (15 U.S.C. 77c(a)) or section 989J 
        of the Dodd-Frank Wall Street Reform and Consumer Protection 
        Act (15 U.S.C. 77c note), a person regulated by a State 
        insurance regulator may rely on the exemptions in section 
        408(b)(21) of the Employee Retirement Income Security Act of 
        1974 (29 U.S.C. 1108(b)(21)) and section 4975(d)(24) of the 
        Internal Revenue Code of 1986 (as added by the PASS Act of 
        2017) only if--
                    ``(A) such person adopts and implements practices 
                on a nationwide basis for the sale of annuity contracts 
                that meet or exceed the minimum requirements set forth 
                in the second subsection (k) of section 15 of the 
                Securities Exchange Act of 1934 (15 U.S.C. 78o) and 
                such person is subject to regulation or examination by 
                a State insurance regulator for purposes of assessing 
                market conduct; or
                    ``(B) such person complies with a standard 
                substantially similar to such subsection (k) and is 
                regulated by a State insurance regulator with respect 
                to annuities within paragraphs (2) or (8) of section 
                3(a) of the Securities Act of 1933 (15 U.S.C. 77c(a)) 
                or section 989J of the Dodd-Frank Wall Street Reform 
                and Consumer Protection Act (15 U.S.C. 77c note).
            ``(2) Coordination and cooperation.--Upon the request of 
        any State insurance regulator, the Commission or the Financial 
        Industry Regulatory Authority shall provide such reasonable 
        assistance to the requesting Authority as needed in connection 
        with the coordination or implementation of this section.
            ``(3) Definition of state insurance regulator.--As used in 
        this subsection, the term `State insurance regulator' means the 
        principal insurance regulatory authority of a State, the 
        District of Columbia, any territory of the United States, 
        Puerto Rico, Guam, American Samoa, the Trust Territory of the 
        Pacific Islands, the Virgin Islands, and the Northern Mariana 
        Islands.
    ``(c) Additional Exemptions.--A person who complies with a standard 
substantially similar to the second subsection (k) of section 15 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78o) may rely on the 
exemptions in section 408(b)(21) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1108(b)(21)) and section 4975(d)(24) of 
the Internal Revenue Code of 1986 (as added by the PASS Act of 2017) 
only if such person is--
            ``(1) registered as an investment adviser under the 
        Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or 
        under the laws of the State in which the person maintains its 
        principal office and place of business; or
            ``(2) a bank or similar financial institution supervised by 
        the United States or a State, or a savings association (as 
        defined in section 3(b)(1) of the Federal Deposit Insurance Act 
        (12 U.S.C. 1813(b)(1)).''.
    (c) Exemption From Prohibited Transactions for Brokers and Dealers, 
and Other Persons and Entities, When Making Recommendations to Retail 
Customers.--
            (1) Section 408(b) of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1108(b)) is amended by adding 
        at the end the following:
            ``(21) Any transaction involving a recommendation made by a 
        broker or dealer (including its registered representative), or 
        other persons or entities, that is subject to the requirements 
        of the second subsection (k) of section 15 of the Securities 
        Exchange Act of 1934 (15 U.S.C. 78o(k)).''.
            (2) Section 4975(d) of the Internal Revenue Code of 1986 is 
        amended by adding at the end the following:
            ``(24) any transaction involving a recommendation made by a 
        broker or dealer (including its registered representatives), or 
        other persons or entities, that is subject to the requirements 
        of the second subsection (k) of section 15 of the Securities 
        Exchange Act of 1934 (15 U.S.C. 78o(k)).''.
    (d) Repeal of Certain Provisions.--The following provisions are 
hereby repealed:
            (1) The second subsection (l) and subsection (m) of section 
        15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o).
            (2) Subsections (g), (h), and (i) of section 211 of the 
        Investment Advisers Act of 1940 (15 U.S.C. 80b-11).
                                                 Union Calendar No. 865

115th CONGRESS

  2d Session

                               H. R. 3857

                      [Report No. 115-894, Part I]

_______________________________________________________________________

                                 A BILL

To amend the Securities Exchange Act of 1934 to establish standards of 
conduct for brokers and dealers that are in the best interest of their 
                           retail customers.

_______________________________________________________________________

                           December 28, 2018

     Committees on Ways and Means and Education and the Workforce 
discharged; committed to the Committee of the Whole House on the State 
                 of the Union and ordered to be printed