[House Report 114-401]
[From the U.S. Government Publishing Office]


114th Congress }                                            {  Report
                        HOUSE OF REPRESENTATIVES
 2d Session    }                                            {  114-401

======================================================================
 
             FAIR ACCESS TO INVESTMENT RESEARCH ACT OF 2015

                                _______
                                

January 28, 2016.--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

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 2356]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2356) to direct the Securities and Exchange 
Commission to provide a safe harbor related to certain 
investment fund research reports, and for other purposes, 
having considered the same, report favorably thereon without 
amendment and recommend that the bill do pass.

                          PURPOSE AND SUMMARY

    Introduced by Representative Hill on May 15, 2015, H.R. 
2356, the Fair Access to Investor Research Act, directs the 
Securities and Exchange Commission (SEC) to provide a safe 
harbor for research reports that cover Exchange Traded Funds 
(ETFs) so that these reports are not considered ``offers'' 
under Section 5 of the Securities Act of 1933. H.R. 2356 
requires the SEC to revise applicable regulations within 120 
days of the Act's enactment and, if the deadline is not met, 
H.R. 2356 provides that an interim safe harbor will take effect 
until the SEC's rules are finalized. To qualify for H.R. 2356's 
safe harbor, a broker or dealer must distribute the research 
report in the regular course of business and the report must 
relate to an ETF issuer that (1) has a class of securities 
listed on a national securities exchange for at least 12 months 
prior to the publishing or distribution of the report, (2) has 
an aggregate market value of at least $75 million, and (3) is 
either a unit investment or an open-ended company or a trust 
whose assets consist primarily of interests in commodities, 
currencies, or derivative instruments referring commodities or 
currencies.

                  BACKGROUND AND NEED FOR LEGISLATION

    An ETF is an investment company whose shares are traded 
intraday on stock exchanges at market-determined prices. 
Investors may buy or sell ETF shares through a broker or in a 
brokerage account just as they would the shares of any publicly 
traded company. In the United States, most ETFs are structured 
as open-end investment companies (open-end funds) or unit 
investment trusts, but other structures also exist--primarily 
for ETFs investing in commodities, currencies, and futures. 
Investor interest in ETFs has increased significantly in recent 
years, with 5.7 million U.S. households holding ETF shares in 
2013. Yet despite their growing popularity and increasing 
importance to retail investors, anomalies in the SEC's safe 
harbor rules have discouraged most broker-dealers from 
publishing research regarding ETFs.
    The SEC has implemented safe harbors for research issued in 
support of other asset classes, including listed equities, 
corporate debt, and closed-end funds. Congress has also 
provided safe harbors for research covering certain securities 
offerings. Most recently, in Title I of the Jumpstart Our 
Business Startups Act, Congress codified a safe harbor for 
research related to offerings of EGC securities. Yet despite 
their similarities to these other asset classes, research that 
covers open-ended funds and ETFs does not benefit from similar 
safe harbors. As such, most broker-dealers do not publish 
research regarding ETFs, depriving investors of useful 
information when deciding whether to invest in this product.
    In 2004, as part of its Securities Offering Reform 
proposal, the SEC requested public comment on whether research 
relating to ETFs should be protected by a safe harbor. While 
comments were universally supportive, the SEC did not adopt a 
final rule.
    At a May 13, 2015 Capital Markets and Government Sponsored 
Enterprises Subcommittee hearing, U.S. Chamber of Commerce 
Senior Vice President Tom Quaadman testified that:

        existing impediments prevent investors from obtaining 
        decision-useful information regarding ETFs . . . Under 
        the Exchange Acts, broker-dealers currently have safe 
        harbors to public research on equity offerings. 
        However, ETFs and openended funds do not have similar 
        specific safe harbors, thereby causing enough legal 
        vagueness to restrict information and research that may 
        be helpful to investors. Despite receiving comments 
        supporting an extension of the safe harbor rules to 
        ETFs and open ended funds, the SEC has not adopted a 
        final rule.

                                HEARINGS

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing examining matters relating to H.R. 2356 on May 13, 
2015.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
May 20, 2015, and ordered H.R. 2356 to be reported favorably to 
the House without amendment by a recorded vote of 48 yeas to 9 
nays (recorded vote no. FC-41), a quorum being present. An 
amendment offered by Representative Waters was not agreed to by 
voice vote.

                            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. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 48 yeas to 9 nays 
(Record vote no. FC-41), a quorum being present.


                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of 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. 2356 
will enhance the quantity and quality of information available 
to investors by providing for a safe harbor for research 
reports covering Exchange Traded Funds.

   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, September 28, 2015.
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. 2356, the Fair 
Access to Investment Research Act of 2015.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

H.R. 2356--Fair Access to Investment Research Act of 2015

    Under current law, the Securities Exchange Commission's 
(SEC's) rules generally prohibit an issuer from offering 
securities for sale without filing a registration statement 
with the agency. H.R. 2356 would establish a safe harbor that 
would allow broker-dealers to issue research reports about 
certain investment funds without such reports being considered 
as an offering for sale of shares of those funds. To be 
eligible for the safe harbor, the research reports would need 
to meet certain requirements (for example being distributed 
with reasonable regularity in the normal course of business).
    Based on information from the SEC, CBO expects that the 
commission would need six additional staff positions working 
across several divisions within the agency to propose and 
implement the broadened rule. CBO estimates that implementing 
H.R. 2356 would cost $2 million over the 2016-2020 period, 
assuming appropriation of the necessary amounts. Under current 
law, the SEC is authorized to collect fees sufficient to offset 
its annual appropriation; therefore, CBO estimates that the net 
budgetary effect would be negligible. Because enacting the 
legislation would not affect direct spending or revenues, pay-
as-you-go procedures do not apply.
    If the SEC increases fees to offset the costs of 
implementing requirements in the bill, H.R. 2356 would increase 
the cost of an existing mandate as defined in the Unfunded 
Mandates Reform Act (UMRA) on private entities required to pay 
those fees. Based on information from the SEC, CBO estimates 
that the incremental cost of the mandate would be about $2 
million in fiscal year 2016.
    To the extent that H.R. 2356 would eliminate an existing 
right of action for investors related to research reports for 
exchange traded funds, it would impose an additional mandate on 
public and private entities. The cost of the mandate would be 
the forgone value of the awards and settlements in such cases. 
To date, CBO has found no cases successfully establishing 
liability for information contained in or missing from such 
research reports and expects few, if any, in the future.
    Therefore, CBO estimates the total cost of the mandates on 
public and private entities would be small and would fall well 
below the annual thresholds established in UMRA for 
intergovernmental and private-sector mandates ($77 million and 
$154 million in fiscal year 2015, respectively, adjusted 
annually for inflation).
    The CBO staff contacts for this estimate are Susan Willie 
(for federal costs), Logan Smith (for private-sector mandates), 
and Melissa Merrell (for intergovernmental mandates). The 
estimate was approved by H. Samuel Papenfuss, 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. 2356 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(g) of H. Res. 5, 114th Cong. (2015), 
the Committee states that no provision of H.R. 2356 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(i) of H. Res. 5, 114th Cong. (2015), 
the Committee states that H.R. 2356 contains one directed 
rulemaking.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This Section cites H.R. 2356 as the ``Fair Access to 
Investment Research Act of 2015''

Section 2. Safe Harbor for Investment Fund Research

    This section directs the Securities and Exchange Commission 
to revise its rules to establish a safe harbor for covered 
investment fund research reports and provides an interim safe 
harbor if the SEC fails to revise such rules within the time 
period covered by the Act.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 2356 does not repeal or amend any section of a 
statute. Therefore, the Office of Legislative Counsel did not 
prepare the report contemplated by Clause 3(e)(1)(B) of rule 
XIII of the House of Representatives.

                             MINORITY VIEWS

    H.R. 2356 would provide a safe harbor from certain investor 
liability for broker-dealers to distribute research related to 
Exchange Traded Funds (ETFs) and other similar products. While 
the goal of providing retail investors with additional 
important information deserves merit, the bill as it stands 
does not appear necessary to achieve this goal nor does it 
address concerns raised by SEC and FINRA staff.
    Today, several broker-dealers provide ETF research to 
retail investors, notwithstanding this threat of liability from 
the purchasers of ETFs, which only arises when the report 
contains material misstatements or omissions. It is not clear 
that any broker-dealers have ever been sued by investors or 
been subject to an enforcement action by the SEC or FINRA 
related to their ETF research reports.
    In addition, there are several concerns with the bill, 
echoed by staffs of the SEC and FINRA, which have not yet been 
addressed. Specifically, those concerns include: the overly 
broad definition of research reports; the lack of clarity about 
whether important FINRA content regulations would apply to ETF 
research reports, as they apply to other research reports; the 
permanent ban on requiring any ETF research reports to be filed 
with FINRA, regardless of future abuses; the constraint on the 
SEC and FINRA's ability to enforce the antimanipulation and 
antifraud provisions of the securities laws; the fact that the 
bill may permit brokers to offer ETFs comprised of commodities 
and derivatives, as well as, registered investment companies 
and business development companies (BDCs); and the broad 
interim safe harbor that fails to protect investors and goes 
into effect before the SEC has enough time to finalize its 
rulemaking.
    An amendment was offered to address these concerns, but was 
withdrawn during the markup as the bill's sponsors pledged to 
continue working to modify the language before the bill moves 
to the House floor. We look forward to working with the sponsor 
of the bill to address these concerns.

                                   Maxine Waters.
                                   Al Green.
                                   Joyce Beatty.
                                   Gwen Moore.
                                   Wm. Lacy Clay.
                                   Keith Ellison.

                                  [all]