[House Report 113-342]
[From the U.S. Government Publishing Office]
113th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 113-342
======================================================================
SMALL CAP LIQUIDITY REFORM ACT OF 2013
_______
February 5, 2014.--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. 3448]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 3448) to amend the Securities Exchange Act of
1934 to provide for an optional pilot program allowing certain
emerging growth companies to increase the tick sizes of their
stocks, having considered the same, report favorably thereon
with an amendment and recommend that the bill as amended do
pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Small Cap Liquidity Reform Act of
2013''.
SEC. 2. LIQUIDITY PILOT PROGRAM FOR SECURITIES OF CERTAIN EMERGING
GROWTH COMPANIES.
(a) In General.--Section 11A(c)(6) of the Securities Exchange Act of
1934 (15 U.S.C. 78k-1(c)(6)) is amended to read as follows:
``(6) Liquidity Pilot Program for Securities of Certain Emerging
Growth Companies.--
``(A) Quoting increment.--Beginning on the date that is 90
days after the date of the enactment of the Small Cap Liquidity
Reform Act of 2013, the securities of a covered emerging growth
company shall be quoted using--
``(i) a minimum increment of $0.05; or
``(ii) if, not later than 60 days after such date of
enactment, the company so elects in the manner
described in subparagraph (D)--
``(I) a minimum increment of $0.10; or
``(II) the increment at which such securities
would be quoted without regard to the minimum
increments established under this paragraph.
``(B) Trading increment.--In the case of a covered emerging
growth company the securities of which are quoted at a minimum
increment of $0.05 or $0.10 under this paragraph, the
Commission shall determine the increment at which the
securities of such company are traded.
``(C) Future right to opt out or change minimum increment.--
``(i) In general.--At any time beginning on the date
that is 90 days after the date of the enactment of the
Small Cap Liquidity Reform Act of 2013, a covered
emerging growth company the securities of which are
quoted at a minimum increment of $0.05 or $0.10 under
this paragraph may elect in the manner described in
subparagraph (D)--
``(I) for the securities of such company to
be quoted at the increment at which such
securities would be quoted without regard to
the minimum increments established under this
paragraph; or
``(II) to change the minimum increment at
which the securities of such company are quoted
from $0.05 to $0.10 or from $0.10 to $0.05.
``(ii) When election effective.--An election under
this subparagraph shall take effect on the date that is
30 days after such election is made.
``(iii) Single election to change minimum
increment.--A covered emerging growth company may not
make more than one election under clause (i)(II).
``(D) Manner of election.--
``(i) In general.--An election is made in the manner
described in this subparagraph by informing the
Commission of such election.
``(ii) Notification of exchanges and other trading
venues.--Upon being informed of an election under
clause (i), the Commission shall notify each exchange
or other trading venue where the securities of the
covered emerging growth company are quoted or traded.
``(E) Issuers ceasing to be covered emerging growth
companies.--
``(i) In general.--If an issuer the securities of
which are quoted at a minimum increment of $0.05 or
$0.10 under this paragraph ceases to be a covered
emerging growth company, the securities of such issuer
shall be quoted at the increment at which such
securities would be quoted without regard to the
minimum increments established under this paragraph.
``(ii) Exceptions.--The Commission may by regulation,
as the Commission considers appropriate, specify any
circumstances under which an issuer shall continue to
be considered a covered emerging growth company for
purposes of this paragraph after the issuer ceases to
meet the requirements of subparagraph (L)(i).
``(F) Securities trading below $1.--
``(i) Initial price.--
``(I) At effective date.--If the trading
price of the securities of a covered emerging
growth company is below $1 at the close of the
last trading day before the date that is 90
days after the date of the enactment of the
Small Cap Liquidity Reform Act of 2013, the
securities of such company shall be quoted
using the increment at which such securities
would be quoted without regard to the minimum
increments established under this paragraph.
``(II) At ipo.--If a covered emerging growth
company makes an initial public offering after
the day described in subclause (I) and the
first share of the securities of such company
is offered to the public at a price below $1,
the securities of such company shall be quoted
using the increment at which such securities
would be quoted without regard to the minimum
increments established under this paragraph.
``(ii) Average trading price.--If the average trading
price of the securities of a covered emerging growth
company falls below $1 for any 90-day period beginning
on or after the day before the date of the enactment of
the Small Cap Liquidity Reform Act of 2013, the
securities of such company shall, after the end of such
period, be quoted using the increment at which such
securities would be quoted without regard to the
minimum increments established under this paragraph.
``(G) Fraud or manipulation.--If the Commission determines
that a covered emerging growth company has violated any
provision of the securities laws prohibiting fraudulent,
manipulative, or deceptive acts or practices, the securities of
such company shall, after the date of the determination, be
quoted using the increment at which such securities would be
quoted without regard to the minimum increments established
under this paragraph.
``(H) Ineligibility for increased minimum increment
permanent.--The securities of an issuer may not be quoted at a
minimum increment of $0.05 or $0.10 under this paragraph at any
time after--
``(i) such issuer makes an election under
subparagraph (A)(ii)(II);
``(ii) such issuer makes an election under
subparagraph (C)(i)(I), except during the period before
such election takes effect; or
``(iii) the securities of such issuer are required by
this paragraph to be quoted using the increment at
which such securities would be quoted without regard to
the minimum increments established under this
paragraph.
``(I) Additional reports and disclosures.--The Commission
shall require a covered emerging growth company the securities
of which are quoted at a minimum increment of $0.05 or $0.10
under this paragraph to make such reports and disclosures as
the Commission considers necessary or appropriate in the public
interest or for the protection of investors.
``(J) Limitation of liability.--An issuer (or any officer,
director, manager, or other agent of such issuer) shall not be
liable to any person (other than such issuer) under any law or
regulation of the United States, any constitution, law, or
regulation of any State or political subdivision thereof, or
any contract or other legally enforceable agreement (including
any arbitration agreement) for any losses caused solely by the
quoting of the securities of such issuer at a minimum increment
of $0.05 or $0.10, by the trading of such securities at the
increment determined by the Commission under subparagraph (B),
or by both such quoting and trading, as provided in this
paragraph.
``(K) Report to congress.--Not later than 6 months after the
date of the enactment of the Small Cap Liquidity Reform Act of
2013, and every 6 months thereafter, the Commission, in
coordination with each exchange on which the securities of
covered emerging growth companies are quoted or traded, shall
submit to Congress a report on the quoting and trading of
securities in increments permitted by this paragraph and the
extent to which such quoting and trading are increasing
liquidity and active trading by incentivizing capital
commitment, research coverage, and brokerage support, together
with any legislative recommendations the Commission may have.
``(L) Definitions.--In this paragraph:
``(i) Covered emerging growth company.--The term
`covered emerging growth company' means an emerging
growth company, as defined in the first paragraph (80)
of section 3(a), except that--
``(I) such paragraph shall be applied by
substituting `$750,000,000' for
`$1,000,000,000' each place it appears; and
``(II) subparagraphs (B), (C), and (D) of
such paragraph do not apply.
``(ii) Security.--The term `security' means an equity
security.
``(M) Savings provision.--Notwithstanding any other provision
of this paragraph, the Commission may--
``(i) make such adjustments to the pilot program
specified in this paragraph as the Commission considers
necessary or appropriate to ensure that such program
can provide statistically meaningful or reliable
results, including adjustments to eliminate selection
bias among participants, expand the number of
participants eligible to participate in such program,
and change the duration of such program for one or more
participants; and
``(ii) conduct any other study or pilot program, in
conjunction with or separate from the pilot program
specified in this paragraph (as such program may be
adjusted pursuant to clause (i)), to evaluate quoting
or trading in various minimum increments.''.
(b) Sunset.--Effective on the date that is 5 years after the date of
the enactment of this Act, section 11A(c)(6) of the Securities Exchange
Act of 1934 (15 U.S.C. 78k-1(c)(6)) is repealed.
Purpose and Summary
In 2000, the Securities and Exchange Commission (SEC)
ordered U.S. securities exchanges to change their quotations in
equity securities and options from fractions to decimals.\1\
This process, known as ``decimalization,'' was completed in
April 2001.\2\ In 2005, the SEC adopted Rule 612 of Regulation
National Market System (Reg. NMS)--also known as the Sub-Penny
Rule--to establish a minimum price variation, or ``tick size,''
of one penny ($.01) for all stocks listed on U.S. securities
exchanges.\3\
---------------------------------------------------------------------------
\1\See Securities and Exchange Commission, Regulation NMS, Rel. No.
34-51808 (June 9, 2005).
\2\See id.
\3\See Securities and Exchange Commission, Report to Congress on
Decimalization (July 2012).
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Recently, some equity market participants have argued that
the move to decimal pricing and penny tick sizes has
significantly reduced liquidity in publicly-traded small-cap
stocks, thereby hindering the ability of these companies to
grow and create jobs. H.R. 3448, the Small Cap Liquidity Reform
Act of 2013, would amend Section 11A(c)(6) of the Securities
Exchange Act of 1934 (Exchange Act) to provide for a pilot
program administered by the SEC allowing certain Emerging
Growth Companies (EGCs), a category of issuers recently
established in Title I of the Jumpstart Our Business Startups
(JOBS) Act (P.L. 112-106), with a stock price above $1.00 to
increase the tick size at which their stocks would be quoted
from $.01 to $.05, or, if the EGC's board of directors so
elects, $.10. Under H.R. 3448, the SEC would determine in its
discretion the minimum tick size at which a participating EGC's
stock would be traded.
Background and Need for Legislation
As noted above, some equity market participants have argued
that decimalization and penny tick sizes have significantly
harmed liquidity in publicly-traded small-cap stocks. For
example, according to Jeff Solomon, Chief Executive Officer of
Cowen and Company:
One of the principal reasons for the lack of
liquidity in small cap stocks can be directly
attributed to the advent of decimalization, meaning
trading in penny increments. As a direct result of
reduced trading spreads, professional market makers and
specialists, whose job was to provide liquidity for
their clientele, were forced to overhaul, sell or
dissolve their businesses to contend with much lower
revenues. This, in turn, gave rise to two market forces
affecting market structure--electronic trading and
reduced research coverage of small cap stocks.
In written testimony before the Subcommittee on Capital
Markets and Government Sponsored Enterprises, Tom Quaadman,
Vice President of the Center for Capital Markets
Competitiveness at the U.S. Chamber of Commerce, expressed a
similar view, stating that ``trading in pennies has impacted
the available liquidity in some thinly traded stocks, including
many small-cap stocks.''
Market participants have claimed that the reduction in
liquidity caused by the move to penny tick sizes for small-cap
stocks has made trading these stocks more difficult and
disincentivized other small companies from accessing the
capital markets through initial public offerings (IPOs). This,
in turn, has hindered small business capital formation and job
creation. In written testimony before the Subcommittee on
Capital Markets and Government Sponsored Enterprises, David
Wield, Chairman and CEO of IssuWorks Holdings LLC, stated:
Inadequate tick sizes (the smallest increment by
which a stock can be bought or sold) have eroded the
economic infrastructure required to support small cap
stocks. Inadequate tick sizes leave insufficient
revenue to pay for needed visibility (research and
sales) and liquidity (capital commitment) that support
investment in small capitalization stocks once they are
public. Fewer IPOs means fewer U.S. jobs.
As a result, market participants have argued that an SEC-
administered pilot program to widen tick sizes for certain EGCs
will enhance liquidity in small cap stocks, leading to
improvements in small business capital formation and job
creation. In his written testimony before the Subcommittee, Mr.
Wield stated that H.R. 3448 ``will lead to more liquidity . . .
which will bring more institutional investment . . . which will
raise stock prices in smaller stocks . . . leading to more IPOs
and more job creation that will grow the economy.'' The
Securities and Financial Markets Association (SIFMA) also
offered its support for H.R. 3448 before the Subcommittee,
stating:
[SIFMA] generally believe[s] that a pilot program
which widens quote increments for small and mid-cap
securities could increase trading liquidity in those
securities. Increased liquidity in the small and mid-
cap market will create a more fertile environment for
small and emerging growth companies to tap the public
markets, with broader market participation in the
sector and the potential for increased research
coverage to better inform and educate investors on both
the opportunities and risks. We know that these
companies can be an engine for economic growth, and the
sponsors of these proposals are right to consider
additional ways to ensure entrepreneurs have access to
the capital they need.
Mr. Quaadman of the U.S. Chamber of Commerce added that H.R.
3448 will ``ensure that we have a market structure that
supports capital formation for all public companies. This
legislation would permit scientific evidence-based rulemaking,
which, in our opinion, is the best kind.''
Hearings
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing on legislative text that later became H.R. 3448 on
October 24, 2013.
Committee Consideration
The Committee on Financial Services met in open session on
November 14, 2013, and ordered H.R. 3448 to be reported
favorably to the House without amendment by a recorded vote of
57 yeas to 0 nays (recorded vote no. FC-39), a quorum being
present.
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.
1. A motion by Chairman Hensarling to report the bill (H.R.
3448) with an amendment to the House with a favorable
recommendation was agreed to by a record vote of 57 yeas to 0
nays (recorded vote no. FC-39).
RECORD VOTE NO. FC-39
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Hensarling................. X ........ ......... Ms. Waters....... X ........ .........
Mr. Gary G. Miller (CA)........ X ........ ......... Mrs. Maloney (NY) X ........ .........
Mr. Bachus..................... X ........ ......... Ms. Velazquez.... X ........ .........
Mr. King (NY).................. X ........ ......... Mr. Watt......... X ........ .........
Mr. Royce...................... X ........ ......... Mr. Sherman...... X ........ .........
Mr. Lucas...................... X ........ ......... Mr. Meeks........ X ........ .........
Mrs. Capito.................... X ........ ......... Mr. Capuano...... X ........ .........
Mr. Garrett.................... X ........ ......... Mr. Hinojosa..... X ........ .........
Mr. Neugebauer................. X ........ ......... Mr. Clay......... X ........ .........
Mr. McHenry.................... X ........ ......... Mrs. McCarthy ........ ........ .........
(NY).
Mr. Campbell................... ........ ........ ......... Mr. Lynch........ ........ ........ .........
Mrs. Bachmann.................. ........ ........ ......... Mr. David Scott X ........ .........
(GA).
Mr. McCarthy (CA).............. X ........ ......... Mr. Al Green (TX) X ........ .........
Mr. Pearce..................... X ........ ......... Mr. Cleaver...... X ........ .........
Mr. Posey...................... X ........ ......... Ms. Moore........ X ........ .........
Mr. Fitzpatrick................ X ........ ......... Mr. Ellison...... X ........ .........
Mr. Westmoreland............... X ........ ......... Mr. Perlmutter... X ........ .........
Mr. Luetkemeyer................ X ........ ......... Mr. Himes........ X ........ .........
Mr. Huizenga (MI).............. X ........ ......... Mr. Peters (MI).. X ........ .........
Mr. Duffy...................... X ........ ......... Mr. Carney....... X ........ .........
Mr. Hurt....................... X ........ ......... Ms. Sewell (AL).. X ........ .........
Mr. Grimm...................... X ........ ......... Mr. Foster....... X ........ .........
Mr. Stivers.................... X ........ ......... Mr. Kildee....... X ........ .........
Mr. Fincher.................... X ........ ......... Mr. Murphy (FL).. X ........ .........
Mr. Stutzman................... X ........ ......... Mr. Delaney...... X ........ .........
Mr. Mulvaney................... X ........ ......... Ms. Sinema....... X ........ .........
Mr. Hultgren................... X ........ ......... Mrs. Beatty...... X ........ .........
Mr. Ross....................... X ........ ......... Mr. Heck (WA).... X ........ .........
Mr. Pittenger.................. X ........ .........
Mrs. Wagner.................... X ........ .........
Mr. Barr....................... X ........ .........
Mr. Cotton..................... X ........ .........
Mr. Rothfus.................... X ........ .........
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Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in 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. 3448
amends Section 11A(c)(6) of the Exchange Act to provide for a
pilot program administered by the SEC allowing certain EGCs
with a stock price above $1.00 to increase the tick size at
which their stocks would be quoted from $.01 to $.05, or, if
the EGC's board of directors so elects, $.10.
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.
Committee Cost Estimate
The Committee adopts as its own 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, January 14, 2014.
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. 3448, the Small
Cap Liquidity Reform Act of 2013.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 3448--Small Cap Liquidity Reform Act of 2013
CBO estimates that implementing H.R. 3448 would have an
insignificant effect on gross spending by the Securities and
Exchange Commission (SEC) to establish a pilot program that
would change the minimum increment that the price of a stock
could change (the tick size) for certain securities. Pay-as-
you-go procedures do not apply to this legislation because it
would not affect direct spending or revenues.
H.R. 3448 would establish a five-year program that would
allow the price of securities issued by smaller companies to
change in increments of 5 or 10 cents, rather than the penny
increments that are currently the standard for most stocks
traded on U.S. exchanges. Under the pilot program the SEC would
set the tick size for certain small companies at 5 cents;
however, those companies would have the option to select a 10-
cent increment. Further, the program would allow a one-time
option to change the tick size from 5 cents to 10 cents or vice
versa. H.R. 3448 also would require the SEC to submit biannual
reports to the Congress showing the extent to which different
tick sizes are affecting liquidity and trading activity. CBO
expects that changes in the workload of the SEC to implement
the pilot program would not be significant because the agency
has already begun efforts to develop such a program.
H.R. 3448 would impose intergovernmental and private-sector
mandates, as defined in the Unfunded Mandates Reform Act
(UMRA), by providing liability protection to issuers of
securities of companies participating in the pilot program.
Such issuers would not be liable for any losses caused by the
quoting or trading of their securities at increments
established under the program. Providing such protection would
impose a mandate on both public and private investors that
would otherwise be able to sue the issuers to recover losses
related to tick size. The protection also would impose an
intergovernmental mandate by preempting state and local
liability laws.
The cost of the mandate would be the forgone value of
awards and settlements in such claims. Because the securities
of companies covered by the liability protection are more risky
than other securities, few public entities invest in them, and
those that do limit the size of such investments. Consequently,
CBO estimates that any potential losses tied to the mandate
would be small. In addition, the costs, if any, of the
preemption would be small because it would impose no duty that
would result in additional spending or a loss of revenues.
Therefore, CBO estimates the cost to public entities of
complying with the mandates in the bill would fall below the
annual threshold for intergovernmental mandates established in
UMRA ($76 million in 2014, adjusted annually for inflation).
Because of uncertainty about both the value of awards in
such cases and the number of claims that would be filed in the
absence of this provision, CBO cannot estimate the level of
potential awards or settlements that would otherwise accrue to
private investors. Therefore, CBO cannot determine whether the
cost of the mandate would exceed the annual threshold
established in UMRA for private-sector mandates ($152 million
in 2014, adjusted annually for inflation).
In addition to those mandates, the bill would impose a
private-sector mandate on companies in the pilot program
established in the bill by requiring them to notify the SEC if
they elect to not participate. Based on information from the
SEC, CBO estimates that the cost to comply with that mandate
would be minimal.
The CBO staff contacts for this estimate are Susan Willie
(for federal costs), Melissa Merrell (for the state and local
impact), and Paige Piper/Bach (for the impact on the private
sector). The estimate was approved by Theresa Gullo, Deputy
Assistant Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates reform
Act.
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
H.R. 3448 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Duplication of Federal Programs
Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013),
the Committee states that no provision of H.R. 3448 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rulemaking
Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013),
the Committee states that H.R. 3448 contains no directed
rulemaking.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This Section cites H.R. 3448 as the ``Small Cap Liquidity
Reform Act of 2013.''
Section 2. Liquidity Pilot Program for securities of certain emerging
growth companies
This section: creates a pilot program under which the
securities of covered EGCs may be quoted using small
increments; permits covered EGCs to opt out of the pilot
program; gives the SEC attendant authorities to carry out the
program and detect fraud or manipulation; requires semiannual
reports to Congress on the effect of the pilot program on
liquidity; sets out definitions for the Act; sets forth certain
savings provisions; and sunsets the pilot program after five
years.
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 (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
national market system for securities; securities information
processors
Sec. 11A. (a) * * *
* * * * * * *
(c)(1) * * *
* * * * * * *
[(6) Tick size.--
[(A) Study and report.--The Commission shall conduct
a study examining the transition to trading and quoting
securities in one penny increments, also known as
decimalization. The study shall examine the impact that
decimalization has had on the number of initial public
offerings since its implementation relative to the
period before its implementation. The study shall also
examine the impact that this change has had on
liquidity for small and middle capitalization company
securities and whether there is sufficient economic
incentive to support trading operations in these
securities in penny increments. Not later than 90 days
after the date of enactment of this paragraph, the
Commission shall submit to Congress a report on the
findings of the study.
[(B) Designation.--If the Commission determines that
the securities of emerging growth companies should be
quoted and traded using a minimum increment of greater
than $0.01, the Commission may, by rule not later than
180 days after the date of enactment of this paragraph,
designate a minimum increment for the securities of
emerging growth companies that is greater than $0.01
but less than $0.10 for use in all quoting and trading
of securities in any exchange or other execution
venue.]
(6) Liquidity Pilot Program for Securities of Certain
Emerging Growth Companies.--
(A) Quoting increment.--Beginning on the date that is
90 days after the date of the enactment of the Small
Cap Liquidity Reform Act of 2013, the securities of a
covered emerging growth company shall be quoted using--
(i) a minimum increment of $0.05; or
(ii) if, not later than 60 days after such
date of enactment, the company so elects in the
manner described in subparagraph (D)--
(I) a minimum increment of $0.10; or
(II) the increment at which such
securities would be quoted without
regard to the minimum increments
established under this paragraph.
(B) Trading increment.--In the case of a covered
emerging growth company the securities of which are
quoted at a minimum increment of $0.05 or $0.10 under
this paragraph, the Commission shall determine the
increment at which the securities of such company are
traded.
(C) Future right to opt out or change minimum
increment.--
(i) In general.--At any time beginning on the
date that is 90 days after the date of the
enactment of the Small Cap Liquidity Reform Act
of 2013, a covered emerging growth company the
securities of which are quoted at a minimum
increment of $0.05 or $0.10 under this
paragraph may elect in the manner described in
subparagraph (D)--
(I) for the securities of such
company to be quoted at the increment
at which such securities would be
quoted without regard to the minimum
increments established under this
paragraph; or
(II) to change the minimum increment
at which the securities of such company
are quoted from $0.05 to $0.10 or from
$0.10 to $0.05.
(ii) When election effective.--An election
under this subparagraph shall take effect on
the date that is 30 days after such election is
made.
(iii) Single election to change minimum
increment.--A covered emerging growth company
may not make more than one election under
clause (i)(II).
(D) Manner of election.--
(i) In general.--An election is made in the
manner described in this subparagraph by
informing the Commission of such election.
(ii) Notification of exchanges and other
trading venues.--Upon being informed of an
election under clause (i), the Commission shall
notify each exchange or other trading venue
where the securities of the covered emerging
growth company are quoted or traded.
(E) Issuers ceasing to be covered emerging growth
companies.--
(i) In general.--If an issuer the securities
of which are quoted at a minimum increment of
$0.05 or $0.10 under this paragraph ceases to
be a covered emerging growth company, the
securities of such issuer shall be quoted at
the increment at which such securities would be
quoted without regard to the minimum increments
established under this paragraph.
(ii) Exceptions.--The Commission may by
regulation, as the Commission considers
appropriate, specify any circumstances under
which an issuer shall continue to be considered
a covered emerging growth company for purposes
of this paragraph after the issuer ceases to
meet the requirements of subparagraph (L)(i).
(F) Securities trading below $1.--
(i) Initial price.--
(I) At effective date.--If the
trading price of the securities of a
covered emerging growth company is
below $1 at the close of the last
trading day before the date that is 90
days after the date of the enactment of
the Small Cap Liquidity Reform Act of
2013, the securities of such company
shall be quoted using the increment at
which such securities would be quoted
without regard to the minimum
increments established under this
paragraph.
(II) At ipo.--If a covered emerging
growth company makes an initial public
offering after the day described in
subclause (I) and the first share of
the securities of such company is
offered to the public at a price below
$1, the securities of such company
shall be quoted using the increment at
which such securities would be quoted
without regard to the minimum
increments established under this
paragraph.
(ii) Average trading price.--If the average
trading price of the securities of a covered
emerging growth company falls below $1 for any
90-day period beginning on or after the day
before the date of the enactment of the Small
Cap Liquidity Reform Act of 2013, the
securities of such company shall, after the end
of such period, be quoted using the increment
at which such securities would be quoted
without regard to the minimum increments
established under this paragraph.
(G) Fraud or manipulation.--If the Commission
determines that a covered emerging growth company has
violated any provision of the securities laws
prohibiting fraudulent, manipulative, or deceptive acts
or practices, the securities of such company shall,
after the date of the determination, be quoted using
the increment at which such securities would be quoted
without regard to the minimum increments established
under this paragraph.
(H) Ineligibility for increased minimum increment
permanent.--The securities of an issuer may not be
quoted at a minimum increment of $0.05 or $0.10 under
this paragraph at any time after--
(i) such issuer makes an election under
subparagraph (A)(ii)(II);
(ii) such issuer makes an election under
subparagraph (C)(i)(I), except during the
period before such election takes effect; or
(iii) the securities of such issuer are
required by this paragraph to be quoted using
the increment at which such securities would be
quoted without regard to the minimum increments
established under this paragraph.
(I) Additional reports and disclosures.--The
Commission shall require a covered emerging growth
company the securities of which are quoted at a minimum
increment of $0.05 or $0.10 under this paragraph to
make such reports and disclosures as the Commission
considers necessary or appropriate in the public
interest or for the protection of investors.
(J) Limitation of liability.--An issuer (or any
officer, director, manager, or other agent of such
issuer) shall not be liable to any person (other than
such issuer) under any law or regulation of the United
States, any constitution, law, or regulation of any
State or political subdivision thereof, or any contract
or other legally enforceable agreement (including any
arbitration agreement) for any losses caused solely by
the quoting of the securities of such issuer at a
minimum increment of $0.05 or $0.10, by the trading of
such securities at the increment determined by the
Commission under subparagraph (B), or by both such
quoting and trading, as provided in this paragraph.
(K) Report to congress.--Not later than 6 months
after the date of the enactment of the Small Cap
Liquidity Reform Act of 2013, and every 6 months
thereafter, the Commission, in coordination with each
exchange on which the securities of covered emerging
growth companies are quoted or traded, shall submit to
Congress a report on the quoting and trading of
securities in increments permitted by this paragraph
and the extent to which such quoting and trading are
increasing liquidity and active trading by
incentivizing capital commitment, research coverage,
and brokerage support, together with any legislative
recommendations the Commission may have.
(L) Definitions.--In this paragraph:
(i) Covered emerging growth company.--The
term ``covered emerging growth company'' means
an emerging growth company, as defined in the
first paragraph (80) of section 3(a), except
that--
(I) such paragraph shall be applied
by substituting ``$750,000,000'' for
``$1,000,000,000'' each place it
appears; and
(II) subparagraphs (B), (C), and (D)
of such paragraph do not apply.
(ii) Security.--The term ``security'' means
an equity security.
(M) Savings provision.--Notwithstanding any other
provision of this paragraph, the Commission may--
(i) make such adjustments to the pilot
program specified in this paragraph as the
Commission considers necessary or appropriate
to ensure that such program can provide
statistically meaningful or reliable results,
including adjustments to eliminate selection
bias among participants, expand the number of
participants eligible to participate in such
program, and change the duration of such
program for one or more participants; and
(ii) conduct any other study or pilot
program, in conjunction with or separate from
the pilot program specified in this paragraph
(as such program may be adjusted pursuant to
clause (i)), to evaluate quoting or trading in
various minimum increments.
[Effective on the date that is five years after the date of
enactment of H.R. 3448, paragragh (6), as amended by section 2
of such bill, is repealed.]
[(6) Liquidity Pilot Program for Securities of Certain
Emerging Growth Companies.--
[(A) Quoting increment.--Beginning on the date that
is 90 days after the date of the enactment of the Small
Cap Liquidity Reform Act of 2013, the securities of a
covered emerging growth company shall be quoted using--
[(i) a minimum increment of $0.05; or
[(ii) if, not later than 60 days after such
date of enactment, the company so elects in the
manner described in subparagraph (D)--
[(I) a minimum increment of $0.10; or
[(II) the increment at which such
securities would be quoted without
regard to the minimum increments
established under this paragraph.
[(B) Trading increment.--In the case of a covered
emerging growth company the securities of which are
quoted at a minimum increment of $0.05 or $0.10 under
this paragraph, the Commission shall determine the
increment at which the securities of such company are
traded.
[(C) Future right to opt out or change minimum
increment.--
[(i) In general.--At any time beginning on
the date that is 90 days after the date of the
enactment of the Small Cap Liquidity Reform Act
of 2013, a covered emerging growth company the
securities of which are quoted at a minimum
increment of $0.05 or $0.10 under this
paragraph may elect in the manner described in
subparagraph (D)--
[(I) for the securities of such
company to be quoted at the increment
at which such securities would be
quoted without regard to the minimum
increments established under this
paragraph; or
[(II) to change the minimum increment
at which the securities of such company
are quoted from $0.05 to $0.10 or from
$0.10 to $0.05.
[(ii) When election effective.--An election
under this subparagraph shall take effect on
the date that is 30 days after such election is
made.
[(iii) Single election to change minimum
increment.--A covered emerging growth company
may not make more than one election under
clause (i)(II).
[(D) Manner of election.--
[(i) In general.--An election is made in the
manner described in this subparagraph by
informing the Commission of such election.
[(ii) Notification of exchanges and other
trading venues.--Upon being informed of an
election under clause (i), the Commission shall
notify each exchange or other trading venue
where the securities of the covered emerging
growth company are quoted or traded.
[(E) Issuers ceasing to be covered emerging growth
companies.--
[(i) In general.--If an issuer the securities
of which are quoted at a minimum increment of
$0.05 or $0.10 under this paragraph ceases to
be a covered emerging growth company, the
securities of such issuer shall be quoted at
the increment at which such securities would be
quoted without regard to the minimum increments
established under this paragraph.
[(ii) Exceptions.--The Commission may by
regulation, as the Commission considers
appropriate, specify any circumstances under
which an issuer shall continue to be considered
a covered emerging growth company for purposes
of this paragraph after the issuer ceases to
meet the requirements of subparagraph (L)(i).
[(F) Securities trading below $1.--
[(i) Initial price.--
[(I) At effective date.--If the
trading price of the securities of a
covered emerging growth company is
below $1 at the close of the last
trading day before the date that is 90
days after the date of the enactment of
the Small Cap Liquidity Reform Act of
2013, the securities of such company
shall be quoted using the increment at
which such securities would be quoted
without regard to the minimum
increments established under this
paragraph.
[(II) At ipo.--If a covered emerging
growth company makes an initial public
offering after the day described in
subclause (I) and the first share of
the securities of such company is
offered to the public at a price below
$1, the securities of such company
shall be quoted using the increment at
which such securities would be quoted
without regard to the minimum
increments established under this
paragraph.
[(ii) Average trading price.--If the average
trading price of the securities of a covered
emerging growth company falls below $1 for any
90-day period beginning on or after the day
before the date of the enactment of the Small
Cap Liquidity Reform Act of 2013, the
securities of such company shall, after the end
of such period, be quoted using the increment
at which such securities would be quoted
without regard to the minimum increments
established under this paragraph.
[(G) Fraud or manipulation.--If the Commission
determines that a covered emerging growth company has
violated any provision of the securities laws
prohibiting fraudulent, manipulative, or deceptive acts
or practices, the securities of such company shall,
after the date of the determination, be quoted using
the increment at which such securities would be quoted
without regard to the minimum increments established
under this paragraph.
[(H) Ineligibility for increased minimum increment
permanent.--The securities of an issuer may not be
quoted at a minimum increment of $0.05 or $0.10 under
this paragraph at any time after--
[(i) such issuer makes an election under
subparagraph (A)(ii)(II);
[(ii) such issuer makes an election under
subparagraph (C)(i)(I), except during the
period before such election takes effect; or
[(iii) the securities of such issuer are
required by this paragraph to be quoted using
the increment at which such securities would be
quoted without regard to the minimum increments
established under this paragraph.
[(I) Additional reports and disclosures.--The
Commission shall require a covered emerging growth
company the securities of which are quoted at a minimum
increment of $0.05 or $0.10 under this paragraph to
make such reports and disclosures as the Commission
considers necessary or appropriate in the public
interest or for the protection of investors.
[(J) Limitation of liability.--An issuer (or any
officer, director, manager, or other agent of such
issuer) shall not be liable to any person (other than
such issuer) under any law or regulation of the United
States, any constitution, law, or regulation of any
State or political subdivision thereof, or any contract
or other legally enforceable agreement (including any
arbitration agreement) for any losses caused solely by
the quoting of the securities of such issuer at a
minimum increment of $0.05 or $0.10, by the trading of
such securities at the increment determined by the
Commission under subparagraph (B), or by both such
quoting and trading, as provided in this paragraph.
[(K) Report to congress.--Not later than 6 months
after the date of the enactment of the Small Cap
Liquidity Reform Act of 2013, and every 6 months
thereafter, the Commission, in coordination with each
exchange on which the securities of covered emerging
growth companies are quoted or traded, shall submit to
Congress a report on the quoting and trading of
securities in increments permitted by this paragraph
and the extent to which such quoting and trading are
increasing liquidity and active trading by
incentivizing capital commitment, research coverage,
and brokerage support, together with any legislative
recommendations the Commission may have.
[(L) Definitions.--In this paragraph:
[(i) Covered emerging growth company.--The
term ``covered emerging growth company'' means
an emerging growth company, as defined in the
first paragraph (80) of section 3(a), except
that--
[(I) such paragraph shall be applied
by substituting ``$750,000,000'' for
``$1,000,000,000'' each place it
appears; and
[(II) subparagraphs (B), (C), and (D)
of such paragraph do not apply.
[(ii) Security.--The term ``security'' means
an equity security.
[(M) Savings provision.--Notwithstanding any other
provision of this paragraph, the Commission may--
[(i) make such adjustments to the pilot
program specified in this paragraph as the
Commission considers necessary or appropriate
to ensure that such program can provide
statistically meaningful or reliable results,
including adjustments to eliminate selection
bias among participants, expand the number of
participants eligible to participate in such
program, and change the duration of such
program for one or more participants; and
[(ii) conduct any other study or pilot
program, in conjunction with or separate from
the pilot program specified in this paragraph
(as such program may be adjusted pursuant to
clause (i)), to evaluate quoting or trading in
various minimum increments.]
* * * * * * *