[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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