[Congressional Record Volume 164, Number 115 (Tuesday, July 10, 2018)]
[House]
[Pages H5997-H5998]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
IMPROVING INVESTMENT RESEARCH FOR SMALL AND EMERGING ISSUERS ACT
Mr. HUIZENGA. Mr. Speaker, I move to suspend the rules and pass the
bill (H.R. 6139) to require the Securities and Exchange Commission to
carry out a study to evaluate the issues affecting the provision of and
reliance upon investment research into small issuers.
The Clerk read the title of the bill.
The text of the bill is as follows:
H.R. 6139
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 ``Improving Investment
Research for Small and Emerging Issuers Act''.
SEC. 2. RESEARCH STUDY.
(a) Study Required.--The Securities and Exchange Commission
shall conduct a study to evaluate the issues affecting the
provision of and reliance upon investment research into small
issuers, including emerging growth companies and companies
considering initial public offerings.
(b) Contents of Study.--The study required under subsection
(a) shall consider--
(1) factors related to the demand for such research by
institutional and retail investors;
(2) the availability of such research, including--
(A) the number and types of firms who provide such
research;
(B) the volume of such research over time; and
(C) competition in the research market;
(3) conflicts of interest relating to the production and
distribution of investment research;
(4) the costs of such research;
(5) the impacts of different payment mechanisms for
investment research into small issuers, including whether
such research is paid for by--
(A) hard-dollar payments from research clients;
(B) payments directed from the client's commission income
(i.e., ``soft dollars''); or
(C) payments from the issuer that is the subject of such
research;
(6) any unique challenges faced by minority-owned, women-
owned, and veteran-owned small issuers in obtaining research
coverage; and
(7) the impact on the availability of research coverage for
small issuers due to--
(A) investment adviser concentration and consolidation,
including any potential impacts of fund-size on demand for
investment research of small issuers;
(B) broker and dealer concentration and consolidation,
including any relationships between the size of the firm and
allocation of resources for investment research into small
issuers;
(C) Securities and Exchange Commission rules;
(D) registered national securities association rules;
(E) State and Federal liability concerns;
(F) the settlement agreements referenced in Securities and
Exchange Commission Litigation Release No. 18438 (i.e., the
``Global Research Analyst Settlement''); and
(G) Directive 2014/65/EU of the European Parliament and of
the Council of 15 May 2014 on markets in financial
instruments and amending Directive 2002/92/EC and Directive
2011/61/EU, as implemented by the European Union (``EU'')
member states (``MiFID II'').
(c) Report Required.--Not later than 180 days after the
date of the enactment of this Act, the Securities and
Exchange Commission shall submit to Congress a report that
includes--
(1) the results of the study required by subsection (a);
and
(2) recommendations to increase the demand for, volume of,
and quality of investment research into small issuers,
including emerging growth companies and companies considering
initial public offerings.
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Michigan (Mr. Huizenga) and the gentlewoman from California (Ms. Maxine
Waters) each will control 20 minutes.
The Chair recognizes the gentleman from Michigan.
General Leave
Mr. HUIZENGA. Mr. Speaker, I ask unanimous consent that all Members
may have 5 legislative days in which to revise and extend their remarks
and include extraneous materials on this bill.
The SPEAKER pro tempore (Mr. Katko). Is there objection to the
request of the gentleman from Michigan?
There was no objection.
Mr. HUIZENGA. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, initial public offerings, or IPOs, have historically
been one of the most meaningful steps in the lifecycle of a company.
Going public was the ultimate goal for many entrepreneurs. You start
a business from scratch, build it into a successful enterprise, and
then open up an opportunity for the public to share in your success.
Going public not only affords companies many benefits, including access
to the capital markets, but IPOs are also important to the investing
public. By completing an IPO, a company is able to raise much-needed
capital for job creation and expansion opportunities, while allowing
Main Street investors an opportunity to have an economic piece of the
action and the ability to participate in the growth phase of a company.
However, over the past two decades, our Nation has experienced a 37
percent decline in the number of U.S.-listed companies. Equally
troubling, we have seen the number of public companies fall to around
5,700. These statistics are concerning because they are similar to the
data we saw in the 1980s when our economy was less than half of its
current size.
For a myriad of reasons, the public model is no longer viewed as the
most attractive means of raising capital. Instead, small and emerging
growth companies are choosing to go public much later in their
lifecycle or, frankly, choosing not to go public at all.
We must work to change that trajectory, in my mind. In speaking to
the New York Economic Club, SEC Chairman Jay Clayton stated:
``Regardless of the cause, the reduction in the number of U.S.-listed
public companies is a serious issue for our markets and the country
more generally. To the extent companies are eschewing our public
markets, the vast majority of Main Street investors will be unable to
participate in their growth. The potential lasting effects of such an
outcome to the economy and society are, in two words, not good.''
That is from SEC Chairman Jay Clayton.
I share Chairman Clayton's concerns. We need to ensure that our
capital markets are open for innovators and job creators, and we must
work to rightsize regulations for smaller companies as well.
One way that Congress worked to lift burdensome regulations and help
small companies gain access to these capital markets was the bipartisan
Jumpstart Our Business Startups Act, commonly known as the JOBS Act.
Section 105 of the JOBS Act changed the ``gun-jumping rules'' to
provide an exception from the definition of an offer to allow for the
publication or distribution by a broker or dealer of a research report
about an emerging growth company that is the subject of a proposed
public offering.
However, few investment banks have published any pre-IPO research
since passage of the JOBS Act, and research coverage, in general, on
small issuers continues to be an issue. This negatively affects
investor interest and awareness in a company as well as its trading
liquidity and, therefore, does not allow the company to launch the way
that it properly could.
{time} 1445
This provision is intended to increase research, but, unfortunately,
it has had the opposite effect, and, instead, there has been a
significant decline--we have seen a significant decline over recent
years in analyst research covering small public companies.
According to the U.S. Chamber, ``61 percent of all companies listed
on a major exchange with less than $100 million market capitalization
have no research coverage at all.''
For equities with a market cap below $750 million, the average number
of research analysts covering that stock is one, while equities above
$750 million
[[Page H5998]]
in market cap have an average of 12 research analysts covering the
stock.
Additionally, the amount of research written on small companies has
declined even as the percentage of individual ownership in small cap
companies has gone up, has increased. Little or no research coverage
generally corresponds with lower stock liquidity, and reduced research
coverage may particularly be disadvantageous to individual investors
who have limited research capabilities on their own.
In fact, one study published in June of 2017 in The Journal of
Finance found that an increase in the number of analysts covering an
industry improved the quality of analyst forecasts and information flow
to investors. For that reason, it is important to examine current SEC
rules and regulations affecting the ability of investment research
coverage regarding these small issuers.
The Treasury report on Capital Markets recommended a holistic review
of the rules and regulations regarding research, including the global
settlement, to determine which provisions should be retained, amended,
or removed.
Our bipartisan bill, the Improving Investment Research for Small and
Emerging Issuers Act would direct the SEC to study and evaluate issues
affecting the ability of emerging growth companies and other small
issuers in obtaining research coverage, including SEC rules, FINRA
rules, State and Federal liability concerns, the 2003 Global Research
Analyst Settlements, and MiFID II.
And not later than 180 days after enactment of that, the SEC will be
required to submit to Congress a report that includes the results of
the study and recommendations to assist these emerging growth
companies, or EGCs, and other small issuers to obtain research
coverage.
Among the issues the SEC must consider are factors related to the
demand for such research by institutional and retail investors, cost
considerations for such research, and the impact on the availability of
research coverage for small issuers due to a variety of market and
regulatory conditions.
The SEC's report must include recommendations to increase the demand
for, volume of, and quality of investment research into small issuers,
including EGCs. This legislation is supported by Biotechnology Industry
Organization, also known as BIO; the U.S. Chamber of Commerce; Nasdaq;
the Securities Industry and Financial Markets Association, also known
as SIFMA; and the National Venture Capital Association.
I thank the ranking member, Ms. Waters, for recognizing the
importance of this research in our capital markets and working with me
to address this issue and being a cosponsor of this.
So I urge all of my colleagues to support this bill, and I reserve
the balance of my time.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
Mr. Speaker, I rise in support of H.R. 6139, the Improving Investment
Research for Small and Emerging Issuers Act.
I first would like to thank Mr. Huizenga for working with me to
develop a bipartisan approach to identifying and addressing gaps in
investment research coverage for small issuers.
Investment research helps to raise investor awareness, understanding,
and interest about a company, which can, in turn, promote liquidity and
overall trading in the company's securities. Unfortunately, research of
small public companies has been on the decline in recent years.
According to a report from Capital IQ, nearly two-thirds of companies
with less than $100 million in market capitalization have no research
coverage at all. At a recent Capital Markets, Securities, and
Investment Subcommittee hearing, Tyler Gellasch, executive director of
the Healthy Markets Association, testified about some of the factors
contributing to low research coverage of small issuers.
According to Mr. Gellasch, one such factor is the bundling of
research and execution services by investment banks, which ``increases
cost for investors and competitively disadvantages smaller independent
research providers versus their larger peers.''
H.R. 6139 directs the SEC to study competition in the research market
and other factors affecting the availability of research coverage for
small issuers, including emerging growth companies and companies
considering an initial public offering. It also directs SEC to consider
any unique challenges faced by minority women and veteran-owned
businesses in obtaining research coverage.
Finally, the bill directs the SEC to report its findings to Congress
within 6 months, along with recommendations to improve the quality and
availability of investment research for small issuers. This bipartisan
effort will help identify the barriers small businesses face when
attempting to get their story out to investors in our public capital
markets.
I would urge my colleagues to join me in supporting this bill, and I
yield back the balance of my time.
Mr. HUIZENGA. Mr. Speaker, I want to, again, thank the ranking member
for her work on this and being able to move forward on this very
important issue. And I, again, want to encourage all of our friends on
all sides, on both sides of the aisle, to be supportive of this. It is
a very important thing as we figure out the situation with the IPOs
here in the United States.
Mr. Speaker, I yield back the balance of my time.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Michigan (Mr. Huizenga) that the House suspend the rules
and pass the bill, H.R. 6139.
The question was taken; and (two-thirds being in the affirmative) the
rules were suspended and the bill was passed.
A motion to reconsider was laid on the table.
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