[Congressional Record Volume 165, Number 114 (Tuesday, July 9, 2019)]
[House]
[Pages H5282-H5283]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
IMPROVING INVESTMENT RESEARCH FOR SMALL AND EMERGING ISSUERS ACT
Ms. WATERS. Mr. Speaker, I move to suspend the rules and pass the
bill (H.R. 2919) 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. 2919
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 gentlewoman from
California (Ms. Waters) and the gentleman from Kentucky (Mr. Barr) each
will control 20 minutes.
The Chair recognizes the gentlewoman from California.
General Leave
Ms. WATERS. Mr. Speaker, I ask unanimous consent that all Members may
have 5 legislative days in which to revise and extend their remarks on
this legislation and to insert extraneous material thereon.
The SPEAKER pro tempore. Is there objection to the request of the
gentlewoman from California?
There was no objection.
Ms. WATERS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I thank the ranking member of our Investor Protection,
Entrepreneurship, and Capital Markets Subcommittee, Representative
Huizenga, and Representative McAdams, for working across the aisle on
this bipartisan bill to improve investment research coverage for small
issuers.
Investment research helps to raise investor awareness, understanding,
and interest about a company, which in turn can promote informed
investment and overall trading in a company's securities.
However, reports indicate significant declines in analyst research on
small public companies. In fact, it appears that most exchange-listed
companies with less than $100 million in market capitalization have no
research coverage at all.
To address this concerning trend, H.R. 2919 would direct the SEC to
conduct a study on the issues that are affecting the availability of
research coverage for small issuers, including emerging growth
companies, companies considering an initial public offering, and
minority-, women-, and veteran-owned businesses. It also directs the
SEC to report back recommendations to improve the quality and
availability of investment research for small issuers.
I urge my colleagues to support this bipartisan bill to enable us to
identify some of the barriers small businesses face when attempting to
get their story out to investors in our public capital markets.
Mr. Speaker, I reserve the balance of my time.
Mr. BARR. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise in support of H.R. 2919, the Improving Investment
Research for Small and Emerging Issuers Act. I thank my colleagues,
Congressman Huizenga and Congressman McAdams, for their efforts on this
bipartisan legislation that will help small companies and our capital
markets.
The U.S. capital markets have, and continue to be, a vibrant
ecosystem, fueling America's economic growth and generating millions of
private sector jobs. These markets provide financing and needed
resources to the smallest startups and the largest international
companies.
However, a company's size often impacts how easily it can access
capital. For example, larger companies have generally found capital
markets easier to access than smaller ones.
While the number of IPOs in the U.S. has rebounded from its post-
crisis glut--thanks in large part to the success of the bipartisan JOBS
Act of 2012--smaller companies still face significant regulatory and
market impediments that disincentivize them from accessing capital via
the public markets.
There are differing perspectives as to why fewer companies,
particularly small companies, have gone public over the past few
decades. The data suggest that in fulfilling its capital formation
mandate, the Securities and Exchange Commission needs to tailor its
approach to account for the varying nature and size of companies.
{time} 1745
An important piece to this approach is recognizing insufficient
research coverage of microcap, small-cap, and emerging companies can
undermine the liquidity necessary to attract investor interest and
facilitate capital necessary for growth.
This bipartisan legislation would direct the SEC to study, evaluate,
and
[[Page H5283]]
report on issues affecting the ability of emerging growth companies and
other small issuers to obtain research coverage, including SEC rules,
FINRA rules, State and Federal liability concerns, the 2003 Global
Analyst Research Settlements, and MiFID II.
Again, I thank Congressman Huizenga and Congressman McAdams for this
commonsense and bipartisan legislation, which I support.
Mr. Speaker, we have no further speakers, so at this time, I will
close. Let me once again urge my colleagues to support this commonsense
legislation, and I yield back the balance of my time.
Ms. WATERS. Mr. Speaker, I yield myself the balance of my time.
Mr. Speaker, I am pleased that Mr. Huizenga and Mr. McAdams worked in
a bipartisan manner to bring forth H.R. 2919. Markets work best when
there is adequate public information, and the study on additional
research provided for in this bill will help ensure that this is the
case.
I urge my colleagues to join me in supporting this important
legislation, and I yield back the balance of my time.
Mr. HUIZENGA. 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 entrepreneurs.
You start a business from scratch, build it up into a successful
enterprise, and then open up an opportunity for the public to share in
your success.
By completing an IPO, a company is able to raise much-needed capital
for job creation and expansion opportunities, while allowing main
street investors the opportunity to have an economic piece of the
action and 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 1980's when our economy was less than half its
current size.
For myriad reasons, the public model is no longer viewed as an
attractive means of raising capital. Instead, small and emerging growth
companies are choosing to go public much later in their lifecycle or
choosing not to go public at all.
We must work to change the trajectory. In speaking to the New York
Economic Club, SEC Chairman Clayton stated that ``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.''
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 right-size regulations for smaller companies as well.
One way that Congress worked to lift burdensome regulations and help
small companies gain access to capital markets was the bipartisan
Jumpstart Our Business Startups Act--popularly 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 trading
liquidity.
This provision was intended to increase research but unfortunately it
has had the opposite effect and instead, there has been a significant
decline over recent years in analyst research covering small public
companies. According to the U.S. Chamber, ``61% of all companies listed
on a major exchange with less than a $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 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 increased. Little to no research coverage generally
corresponds with lower stock liquidity, and reduced research coverage
may be particularly disadvantageous to individual investors who have
limited research capabilities on their own.
In fact, one study published June 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 small issuers. The Treasury Report on Capital
Markets recommended a holistic review of 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. Not later than 180 days after
enactment, the SEC will be required to submit to Congress a report that
includes the results of the study and recommendations to assist EGCs
and other small issuers in obtaining 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.
I'd like to thank the Financial Services Chairwoman, Mrs. Waters, and
Rep. Ben McAdams, for recognizing the importance of research in our
capital markets and working with me to address this issue.
The SPEAKER pro tempore. The question is on the motion offered by the
gentlewoman from California (Ms. Waters) that the House suspend the
rules and pass the bill, H.R. 2919.
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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