[House Report 114-609]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-609
======================================================================
MAIN STREET GROWTH ACT
_______
June 8, 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. 4638]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4638) to amend the Securities Exchange Act of
1934 to allow for the creation of venture exchanges to promote
liquidity of venture securities, and for other purposes, 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 ``Main Street Growth Act''.
SEC. 2. VENTURE EXCHANGES.
(a) Securities Exchange Act of 1934.--Section 6 of the Securities
Exchange Act of 1934 (15 U.S.C. 78f) is amended by adding at the end
the following:
``(m) Venture Exchange.--
``(1) Registration.--
``(A) In general.--A national securities exchange may
elect to be treated (or for a listing tier of such
exchange to be treated) as a venture exchange by
notifying the Commission of such election, either at
the time the exchange applies to be registered as a
national securities exchange or after registering as a
national securities exchange.
``(B) Determination time period.--With respect to a
securities exchange electing to be treated (or for a
listing tier of such exchange to be treated) as a
venture exchange--
``(i) at the time the exchange applies to be
registered as a national securities exchange,
such application and election shall be deemed
to have been approved by the Commission unless
the Commission denies such application before
the end of the 6-month period beginning on the
date the Commission received such application;
and
``(ii) after registering as a national
securities exchange, such election shall be
deemed to have been approved by the Commission
unless the Commission denies such approval
before the end of the 6-month period beginning
on the date the Commission received
notification of such election.
``(2) Powers and restrictions.--A venture exchange--
``(A) may only constitute, maintain, or provide a
market place or facilities for bringing together
purchasers and sellers of venture securities;
``(B) may determine the increment to be used for
quoting and trading venture securities on the exchange;
``(C) shall disseminate last sale and quotation
information on terms that are fair and reasonable and
not unreasonably discriminatory;
``(D) may choose to carry out periodic auctions for
the sale of a venture security instead of providing
continuous trading of the venture security; and
``(E) may not extend unlisted trading privileges to
any venture security.
``(3) Exemptions from certain national security exchange
regulations.--A venture exchange shall not be required to--
``(A) comply with any of sections 242.600 through
242.612 of title 17, Code of Federal Regulations;
``(B) comply with any of sections 242.300 through
242.303 of title 17, Code of Federal Regulations;
``(C) submit any data to a securities information
processor; or
``(D) use decimal pricing.
``(4) Treatment of certain exempted securities.--A security
that is exempt from registration pursuant to section 3(b) of
the Securities Act of 1933 shall be exempt from section 12(a)
of this title with respect to the trading of such security on a
venture exchange, if the issuer of such security is in
compliance with all disclosure obligations of such section 3(b)
and the regulations issued under such section.
``(5) Definitions.--For purposes of this subsection:
``(A) Early-stage, growth company.--
``(i) In general.--The term `early-stage,
growth company' means an issuer--
``(I) that has not made an initial
public offering of any securities of
the issuer; and
``(II) with a market capitalization
of $1,000,000,000 (as such amount is
indexed for inflation every 5 years by
the Commission to reflect the change in
the Consumer Price Index for All Urban
Consumers published by the Bureau of
Labor Statistics, setting the threshold
to the nearest $1,000,000) or less.
``(ii) Treatment when market capitalization
exceeds threshold.--
``(I) In general.--In the case of an
issuer that is an early-stage, growth
company the securities of which are
traded on a venture exchange, such
issuer shall not cease to be an early-
stage, growth company by reason of the
market capitalization of such issuer
exceeding the threshold specified in
clause (i)(II) until the end of the
period of 24 consecutive months during
which the market capitalization of such
issuer exceeds $2,000,000,000 (as such
amount is indexed for inflation every 5
years by the Commission to reflect the
change in the Consumer Price Index for
All Urban Consumers published by the
Bureau of Labor Statistics, setting the
threshold to the nearest $1,000,000).
``(II) Exemptions.--If an issuer
would cease to be an early-stage,
growth company under subclause (I), the
venture exchange may, at the request of
the issuer, exempt the issuer from the
market capitalization requirements of
this subparagraph for the 1-year period
that begins on the day after the end of
the 24-month period described in such
subclause. The venture exchange may, at
the request of the issuer, extend the
exemption for 1 additional year.
``(B) Venture security.--The term `venture security'
means--
``(i) securities of an early-stage, growth
company that are exempt from registration
pursuant to section 3(b) of the Securities Act
of 1933; and
``(ii) securities of an emerging growth
company.''.
(b) Securities Act of 1933.--Section 18(b)(1) of the Securities Act
of 1933 (15 U.S.C. 77r(b)(1)) is amended--
(1) in subparagraph (B), by striking ``or'' at the end;
(2) in subparagraph (C), by striking the period and inserting
``; or''; and
(3) by adding at the end the following:
``(D) a venture security, as defined under section
6(m)(5) of the Securities Exchange Act of 1934.''.
(c) Sense of Congress.--It is the sense of the Congress that the
Securities and Exchange Commission should--
(1) when necessary or appropriate in the public interest and
consistent with the protection of investors, make use of the
Commission's general exemptive authority under section 36 of
the Securities Exchange Act of 1934 (15 U.S.C. 78mm) with
respect to the provisions added by this section; and
(2) if the Commission determines appropriate, create an
Office of Venture Exchanges within the Commission's Division of
Trading and Markets.
(d) Rule of Construction.--Nothing in this section or the amendments
made by this section shall be construed to impair or limit the
construction of the antifraud provisions of the securities laws (as
defined in section 3(a) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a))) or the authority of the Securities and Exchange
Commission under those provisions.
(e) Effective Date for Tiers of Existing National Securities
Exchanges.--In the case of a securities exchange that is registered as
a national securities exchange under section 6 of the Securities
Exchange Act of 1934 (15 U.S.C. 78f) on the date of the enactment of
this Act, any election for a listing tier of such exchange to be
treated as a venture exchange under subsection (m) of such section
shall not take effect before the date that is 180 days after such date
of enactment.
Purpose and Summary
Introduced by Representative Scott Garrett on February 26,
2016, H.R. 4638, the Main Street Growth Act, allows for the
creation and registration of venture exchanges with the U.S.
Securities and Exchange Commission (SEC). Venture exchanges are
a logical extension of the Jumpstart Our Business Startups
(JOBS) Act for companies that are seeking a dedicated, liquid
and vibrant secondary market for the trading of their
securities. Companies that take advantage of the Emerging
Growth Company designation under Title I and Regulation A+
offerings under Title IV of the JOBS Act could choose to list
their securities on a venture exchange. H.R. 4638 defines a
venture security, establishes the types of securities eligible
for a venture exchange listing, and provides the rules and
regulations with which venture exchanges must comply.
Background and Need for Legislation
The U.S. capital markets have been, 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 a wide array of
businesses, from the smallest start-ups to the largest
international companies. However, a company's size has often
impacted how easily it can access capital, as larger companies
have generally found the capital markets easier to access than
smaller ones. While the number of initial public offerings
(IPOs) in the U.S. has risen since 2012 as a result of Title I
of the JOBS Act, the total number of IPOs has dropped
significantly since 1999, particularly the number of smaller
IPOs, or those with a deal size less than $50 million. At a May
13, 2015, Subcommittee on Capital Markets and Government
Sponsored Enterprises hearing to consider the discussion draft
of the Main Street Growth Act, David Weild of Weild & Co.
testified that ``The ``Main Street Growth Act . . . has the
potential to go down as one of the most important Acts to come
out of this, or any, Congress by creating essential
infrastructure in support of U.S. economic growth.''
There are differing perspectives as to why fewer companies,
particularly small companies, have gone public over the past
few decades. A recent whitepaper by SEC staff discussed trading
in the shares of small public companies. The whitepaper found
that during 2013, U.S.-listed, U.S.-domiciled small cap stocks
with market capitalizations below $1 billion were much less
liquid than stocks with capitalizations between $1 billion and
$5 billion. Small cap stocks had larger quoted and effective
spreads and traded much lower volumes than mid cap stocks.
Liquidity improved with market capitalization: the smallest
stocks with capitalizations below $100 million exhibited the
least liquidity and mid cap stocks with capitalizations between
$2 billion and $5 billion exhibited the greatest liquidity.
These data suggest that in fulfilling its capital formation
mandate, the SEC needs to tailor its approach to account for
the varying nature and size of companies. Venture exchanges
offer one possible solution to the liquidity and capital access
challenges faced by smaller issuers, as venture exchanges would
aggregate all trading activity on the specific exchange
selected by the issuer. At the May 13th hearing, David Burton
from the Heritage Foundation noted, ``A robust and liquid
secondary market for the securities of entrepreneurial firms
helps investors, helps companies and helps promote general
prosperity. Investors usually do not want to hold their
investment indefinitely.''
In a recent speech, SEC Chair Mary Jo White noted that
``SEC staff in the Divisions of Corporation Finance and Trading
and Markets have been looking at various means to facilitate
the secondary market trading of securities issued by small
businesses. Among a number of other possible avenues, the staff
is considering whether the development of appropriately
structured venture exchanges could provide more liquidity for
the securities of smaller companies.'' However, SEC staff
informed the Financial Services Committee in 2014 that the
Securities Exchange Act of 1934 does not provide the SEC with
the complete legal authority to register venture exchanges and
exempt these entities from certain regulatory requirements.
The U.S. recently fell from first place to 12th in small
IPO output behind many smaller economies, and fell to 24th out
of 26 developed countries in small IPO output on a gross
domestic product-weighted basis ahead of only Mexico and
Brazil. Venture exchanges could help remedy this negative trend
and could expand access to capital to entrepreneurs, enable
earlier public participation in the company's life-cycle, and
attract post-issuance support to include research, sales and
capital commitments by market makers.
Hearings
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing examining matters relating to H.R. 4638 on May 13,
2015.
Committee Consideration
The Committee on Financial Services met in open session on
March 2, 2016, and ordered H.R. 4638 to be reported favorably
to the House as amended by a recorded vote of 32 yeas to 25
nays (recorded vote no. FC-103), a quorum being present. An
amendment in the nature of a substitute offered by Mr. Garrett
was agreed to by voice vote. Prior to the adoption of Mr.
Garrett's amendment, an amendment to the amendment in the
nature of a substitute offered by Mrs. Waters was not agreed to
by a recorded vote of 25 ayes to 32 nays (recorded vote no. FC-
102), 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. The
amendment to the amendment in the nature of a substitute
offered by Mrs. Waters was not agreed to by a record vote of 25
ayes to 32 nays (Record vote no. FC-102), a quorum being
present. The second and final record vote in Committee was a
motion by Chairman Hensarling to report the bill favorably to
the House as amended. That motion was agreed to by a recorded
vote of 32 yeas to 25 nays (Record vote no. FC-103), 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. 4638
will increase capital for small companies by creating venture
exchanges that expand access to capital for entrepreneurs,
enable earlier public participation in the company's life-
cycle, and attract post-issuance support to include research,
sales and capital commitments by market-makers.
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, May 5, 2016.
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. 4638, the Main
Street Growth Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall.
Enclosure.
H.R. 4638--Main Street Growth Act
Under current law, the Securities and Exchange Commission
(SEC) registers and approves marketplaces for trading
securities (known as national securities exchanges) and
regulates aspects of their operation. H.R. 4638 would allow
current national securities exchanges to elect to operate as
newly defined venture exchanges for trading stocks of certain
small companies. New exchanges could elect to operate as
venture exchanges at the time they register with the SEC.
Venture exchanges would be exempt from some regulations that
national security exchanges must comply with. Finally, H.R.
4638 would allow SEC to create an Office of Venture Exchanges.
The cost to implement the legislation would depend on the
number of venture exchanges that apply for registration. On the
basis of information provided by the SEC, CBO estimates that
the SEC would need two or three full-time staff members to
register venture exchanges and monitor their activity at a cost
of about $1 million a year. However, the SEC is authorized to
collect fees sufficient to offset its annual appropriation;
therefore, CBO estimates that the net effect on discretionary
spending would be negligible, assuming appropriations actions
consistent with that authority.
Because enacting H.R. 4638 would not affect direct spending
or revenues, pay-as-you-go procedures do not apply. CBO
estimates that enacting H.R. 4638 would not increase net direct
spending or on-budget deficits in any of the four consecutive
10-year periods beginning in 2027.
H.R. 4638 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) and would not affect
the budgets of state, local, or trial governments.
If the SEC increases fees to offset the costs of
implementing the bill, H.R. 4638 would increase the cost of an
existing mandate on private entities required to pay those
fees. Based on information from the SEC, CBO estimates that the
aggregate cost of the mandate, if imposed, would be small and
would fall well below the annual threshold for private-sector
mandates established in UMRA ($154 million in 2016, adjusted
annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Logan Smith (for private-sector
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 section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 4638 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. 4638 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. 4638 contains no directed
rulemaking.
Section-by-Section Analysis of the Legislation
Section 1: Short title
This section cites H.R. 3638 as the ``Main Street Growth
Act''.
Section 2: Venture exchanges
This section amends Section 6 of the Securities Exchange
Act of 1934 to require the SEC to approve or deny the
application of a venture exchange within six months or the
application would be deemed approved. Additionally, to ensure
the aggregation of liquidity for companies listed on a venture
exchange, the bill would exempt venture exchanges from SEC
regulations ``National Market System'' (NMS) and ``Alternative
Trading System'' (ATS). Venture exchanges will also be exempt
from decimalization, and the bill would prohibit a venture
exchange from extending unlisted trading privileges to any
venture security.
Furthermore, this section defines the securities eligible
to trade on venture exchanges as ``venture securities.'' To
qualify as a ``venture security,'' a security must either be an
exempted transaction under Regulation A or A+ from an ``early-
stage, growth company'' or a security offered by an Emerging
Growth Company as defined by the JOBS Act. Venture securities
will be covered securities for purposes of the National
Securities Market Improvement Act and thereby exempt from state
securities registration requirements.
The bill also expresses the sense of Congress that the SEC
should use its general exemptive authority to respond to
unforeseen circumstances and that the SEC should create an
Office of Venture Exchanges, if appropriate. H.R. 4638 also
includes a rule of construction providing that the Act does not
impair or limit the application of the antifraud provisions of
the Federal securities laws or the SEC's authority under such
antifraud provisions.
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, and existing law in which no
change is proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
national securities exchanges
Sec. 6. (a) An exchange may be registered as a national
securities exchange under the terms and conditions hereinafter
provided in this section and in accordance with the provisions
of section 19(a) of this title, by filing with the Commission
an application for registration in such form as the Commission,
by rule, may prescribe containing the rules of the exchange and
such other information and documents as the Commission, by
rule, may prescribe as necessary or appropriate in the public
interest or for the protection of investors.
(b) An exchange shall not be registered as a national
securities exchange unless the Commission determines that--
(1) Such exchange is so organized and has the
capacity to be able to carry out the purposes of this
title and to comply, and (subject to any rule or order
of the Commission pursuant to section 17(d) or 19(g)(2)
of this title) to enforce compliance by its members and
persons associated with its members, with the
provisions of this title, the rules and regulations
thereunder, and the rules of the exchange.
(2) Subject to the provisions of subsection (c) of
this section, the rules of the exchange provide that
any registered broker or dealer or natural person
associated with a registered broker or dealer may
become a member of such exchange and any person may
become associated with a member thereof.
(3) The rules of the exchange assure a fair
representation of its members in the selection of its
directors and administration of its affairs and provide
that one or more directors shall be representative of
issuers and investors and not be associated with a
member of the exchange, broker, or dealer.
(4) The rules of the exchange provide for the
equitable allocation of reasonable dues, fees, and
other charges among its members and issuers and other
persons using its facilities.
(5) The rules of the exchange are designed to prevent
fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to
foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing
information with respect to, and facilitating
transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect
investors and the public interest; and are not designed
to permit unfair discrimination between customers,
issuers, brokers, or dealers, or to regulate by virtue
of any authority conferred by this title matters not
related to the purposes of this title or the
administration of the exchange.
(6) The rules of the exchange provide that (subject
to any rule or order of the Commission pursuant to
section 17(d) or 19(g)(2) of this title) its members
and persons associated with its members shall be
appropriately disciplined for violation of the
provisions of this title, the rules or regulations
thereunder, or the rules of the exchange, by expulsion,
suspension, limitation of activities, functions, and
operations, fine, censure, being suspended or barred
from being associated with a member, or any other
fitting sanction.
(7) The rules of the exchange are in accordance with
the provisions of subsection (d) of this section, and
in general, provide a fair procedure for the
disciplining of members and persons associated with
members, the denial of membership to any person seeking
membership therein, the barring of any person from
becoming associated with a member thereof, and the
prohibition or limitation by the exchange of any person
with respect to access to services offered by the
exchange or a member thereof.
(8) The rules of the exchange do not impose any
burden on competition not necessary or appropriate in
furtherance of the purposes of this title.
(9)(A) The rules of the exchange prohibit the listing
of any security issued in a limited partnership rollup
transaction (as such term is defined in paragraphs (4)
and (5) of section 14(h)), unless such transaction was
conducted in accordance with procedures designed to
protect the rights of limited partners, including--
(i) the right of dissenting limited partners
to one of the following:
(I) an appraisal and compensation;
(II) retention of a security under
substantially the same terms and
conditions as the original issue;
(III) approval of the limited
partnership rollup transaction by not
less than 75 percent of the outstanding
securities of each of the participating
limited partnerships;
(IV) the use of a committee of
limited partners that is independent,
as determined in accordance with rules
prescribed by the exchange, of the
general partner or sponsor, that has
been approved by a majority of the
outstanding units of each of the
participating limited partnerships, and
that has such authority as is necessary
to protect the interest of limited
partners, including the authority to
hire independent advisors, to negotiate
with the general partner or sponsor on
behalf of the limited partners, and to
make a recommendation to the limited
partners with respect to the proposed
transaction; or
(V) other comparable rights that are
prescribed by rule by the exchange and
that are designed to protect dissenting
limited partners;
(ii) the right not to have their voting power
unfairly reduced or abridged;
(iii) the right not to bear an unfair portion
of the costs of a proposed limited partnership
rollup transaction that is rejected; and
(iv) restrictions on the conversion of
contingent interests or fees into non-
contingent interests or fees and restrictions
on the receipt of a non-contingent equity
interest in exchange for fees for services
which have not yet been provided.
(B) As used in this paragraph, the term ``dissenting
limited partner'' means a person who, on the date on
which soliciting material is mailed to investors, is a
holder of a beneficial interest in a limited
partnership that is the subject of a limited
partnership rollup transaction, and who casts a vote
against the transaction and complies with procedures
established by the exchange, except that for purposes
of an exchange or tender offer, such person shall file
an objection in writing under the rules of the exchange
during the period during which the offer is
outstanding.
(10)(A) The rules of the exchange prohibit any member
that is not the beneficial owner of a security
registered under section 12 from granting a proxy to
vote the security in connection with a shareholder vote
described in subparagraph (B), unless the beneficial
owner of the security has instructed the member to vote
the proxy in accordance with the voting instructions of
the beneficial owner.
(B) A shareholder vote described in this subparagraph
is a shareholder vote with respect to the election of a
member of the board of directors of an issuer,
executive compensation, or any other significant
matter, as determined by the Commission, by rule, and
does not include a vote with respect to the uncontested
election of a member of the board of directors of any
investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80b-1 et seq.).
(C) Nothing in this paragraph shall be construed to
prohibit a national securities exchange from
prohibiting a member that is not the beneficial owner
of a security registered under section 12 from granting
a proxy to vote the security in connection with a
shareholder vote not described in subparagraph (A).
(c)(1) A national securities exchange shall deny membership
to (A) any person, other than a natural person, which is not a
registered broker or dealer or (B) any natural person who is
not, or is not associated with, a registered broker or dealer.
(2) A national securities exchange may, and in cases in which
the Commission, by order, directs as necessary or appropriate
in the public interest or for the protection of investors
shall, deny membership to any registered broker or dealer or
natural person associated with a registered broker or dealer,
and bar from becoming associated with a member any person, who
is subject to a statutory disqualification. A national
securities exchange shall file notice with the Commission not
less than thirty days prior to admitting any person to
membership or permitting any person to become associated with a
member, if the exchange knew, or in the exercise of reasonable
care should have known, that such person was subject to a
statutory disqualification. The notice shall be in such form
and contain such information as the Commission, by rule, may
prescribe as necessary or appropriate in the public interest or
for the protection of investors.
(3)(A) A national securities exchange may deny membership to,
or condition the membership of, a registered broker or dealer
if (i) such broker or dealer does not meet such standards of
financial responsibility or operational capability or such
broker or dealer or any natural person associated with such
broker or dealer does not meet such standards of training,
experience, and competence as are prescribed by the rules of
the exchange or (ii) such broker or dealer or person associated
with such broker or dealer has engaged and there is a
reasonable likelihood he may again engage in acts or practices
inconsistent with just and equitable principles of trade. A
national securities exchange may examine and verify the
qualifications of an applicant to become a member and the
natural persons associated with such an applicant in accordance
with procedures established by the rules of the exchange.
(B) A national securities exchange may bar a natural person
from becoming a member or associated with a member, or
condition the membership of a natural person or association of
a natural person with a member, if such natural person (i) does
not meet such standards of training, experience, and competence
as are prescribed by the rules of the exchange or (ii) has
engaged and there is a reasonable likelihood he may again
engage in acts or practices inconsistent with just and
equitable principles of trade. A national securities exchange
may examine and verify the qualifications of an applicant to
become a person associated with a member in accordance with
procedures established by the rules of the exchange and require
any person associated with a member, or any class of such
persons, to be registered with the exchange in accordance with
procedures so established.
(C) A national securities exchange may bar any person from
becoming associated with a member if such person does not agree
(i) to supply the exchange with such information with respect
to its relationship and dealings with the member as may be
specified in the rules of the exchange and (ii) to permit the
examination of its books and records to verify the accuracy of
any information so supplied.
(4) A national securities exchange may limit (A) the number
of members of the exchange and (B) the number of members and
designated representatives of members permitted to effect
transactions on the floor of the exchange without the services
of another person acting as broker: Provided, however, That no
national securities exchange shall have the authority to
decrease the number of memberships in such exchange, or the
number of members and designated representatives of members
permitted to effect transactions on the floor of such exchange
without the services of another person acting as broker, below
such number in effect on May 1, 1975, or the date such exchange
was registered with the Commission, whichever is later: And
provided further, That the Commission, in accordance with the
provisions of section 19(c) of this title, may amend the rules
of any national securities exchange to increase (but not to
decrease) or to remove any limitation on the number of
memberships in such exchange or the number of members or
designated representatives of members permitted to effect
transactions on the floor of the exchange without the services
of another person acting as broker, if the Commission finds
that such limitation imposes a burden on competition not
necessary or appropriate in furtherance of the purposes of this
title.
(d)(1) In any proceeding by a national securities exchange to
determine whether a member or person associated with a member
should be disciplined (other than a summary proceeding pursuant
to paragraph (3) of this subsection), the exchange shall bring
specific charges, notify such member or person of, and give him
an opportunity to defend against, such charges, and keep a
record. A determination by the exchange to impose a
disciplinary sanction shall be supported by a statement setting
forth--
(A) any act or practice in which such member or
person associated with a member has been found to have
engaged, or which such member or person has been found
to have omitted;
(B) the specific provision of this title, the rules
or regulations thereunder, or the rules of the exchange
which any such act or practice, or omission to act, is
deemed to violate; and
(C) the sanction imposed and the reasons therefor.
(2) In any proceeding by a national securities exchange to
determine whether a person shall be denied membership, barred
from becoming associated with a member, or prohibited or
limited with respect to access to services offered by the
exchange or a member thereof (other than a summary proceeding
pursuant to paragraph (3) of this subsection), the exchange
shall notify such person of, and give him an opportunity to be
heard upon, the specific grounds for denial, bar, or
prohibition or limitation under consideration and keep a
record. A determination by the exchange to deny membership, bar
a person from becoming associated with a member, or prohibit or
limit a person with respect to access to services offered by
the exchange or a member thereof shall be supported by a
statement setting forth the specific grounds on which the
denial, bar, or prohibition or limitation is based.
(3) A national securities exchange may summarily (A) suspend
a member or person associated with a member who has been and is
expelled or suspended from any self-regulatory organization or
barred or suspended from being associated with a member of any
self-regulatory organization, (B) suspend a member who is in
such financial or operating difficulty that the exchange
determines and so notifies the Commission that the member
cannot be permitted to continue to do business as a member with
safety to investors, creditors, other members, or the exchange,
or (C) limit or prohibit any person with respect to access to
services offered by the exchange if subparagraph (A) or (B) of
this paragraph is applicable to such person or, in the case of
a person who is not a member, if the exchange determines that
such person does not meet the qualification requirements or
other prerequisites for such access and such person cannot be
permitted to continue to have such access with safety to
investors, creditors, members, or the exchange. Any person
aggrieved by any such summary action shall be promptly afforded
an opportunity for a hearing by the exchange in accordance with
the provisions of paragraph (1) or (2) of this subsection. The
Commission, by order, may stay any such summary action on its
own motion or upon application by any person aggrieved thereby,
if the Commission determines summarily or after notice and
opportunity for hearing (which hearing may consist solely of
the submission of affidavits or presentation of oral arguments)
that such stay is consistent with the public interest and the
protection of investors.
(e)(1) On and after the date of enactment of the Securities
Acts Amendments of 1975, no national securities exchange may
impose any schedule or fix rates of commissions, allowances,
discounts, or other fees to be charged by its members:
Provided, however, That until May 1, 1976, the preceding
provisions of this paragraph shall not prohibit any such
exchange from imposing or fixing any schedule of commissions,
allowances, discounts, or other fees to be charged by its
members for acting as broker on the floor of the exchange or as
odd-lot dealer: And provided further, That the Commission, in
accordance with the provisions of section 19(b) of this title
as modified by the provisions of paragraph (3) of this
subsection, may--
(A) permit a national securities exchange, by rule,
to impose a reasonable schedule or fix reasonable rates
of commissions, allowances, discounts, or other fees to
be charged by its members for effecting transactions on
such exchange prior to November 1, 1976, if the
Commission finds that such schedule or fixed rates of
commissions, allowances, discounts, or other fees are
in the public interest; and
(B) permit a national securities exchange, by rule,
to impose a schedule or fix rates of commissions,
allowances, discounts, or other fees to be charged by
its members for effecting transactions on such exchange
after November 1, 1976, if the Commission finds that
such schedule or fixed rates of commissions,
allowances, discounts, or other fees (i) are reasonable
in relation to the costs of providing the service for
which such fees are charged (and the Commission
publishes the standards employed in adjudging
reasonableness) and (ii) do not impose any burden on
competition not necessary or appropriate in furtherance
of the purposes of this title, taking into
consideration the competitive effects of permitting
such schedule or fixed rates weighed against the
competitive effects of other lawful actions which the
Commission is authorized to take under this title.
(2) Notwithstanding the provisions of section 19(c) of this
title, the Commission, by rule, may abrogate any exchange rule
which imposes a schedule or fixes rates of commissions,
allowances, discounts, or other fees, if the Commission
determines that such schedule or fixed rates are no longer
reasonable, in the public interest, or necessary to accomplish
the purposes of this title.
(3)(A) Before approving or disapproving any proposed rule
change submitted by a national securities exchange which would
impose a schedule or fix rates of commissions, allowances,
discounts, or other fees to be charged by its members for
effecting transactions on such exchange, the Commission shall
afford interested persons (i) an opportunity for oral
presentation of data, views, and arguments and (ii) with
respect to any such rule concerning transactions effected after
November 1, 1976, if the Commission determines there are
disputed issues of material fact, to present such rebuttal
submissions and to conduct (or have conducted under
subparagraph (B) of this paragraph) such cross-examination as
the Commission determines to be appropriate and required for
full disclosure and proper resolution of such disputed issues
of material fact.
(B) The Commission shall prescribe rules and make rulings
concerning any proceeding in accordance with subparagraph (A)
of this paragraph designed to avoid unnecessary costs or delay.
Such rules or rulings may (i) impose reasonable time limits on
each interested person's oral presentations, and (ii) require
any cross-examination to which a person may be entitled under
subparagraph (A) of this paragraph to be conducted by the
Commission on behalf of that person in such manner as the
Commission determines to be appropriate and required for full
disclosure and proper resolution of disputed issues of material
fact.
(C)(i) If any class of persons, the members of which are
entitled to conduct (or have conducted) cross-examination under
subparagraphs (A) and (B) of this paragraph and which have, in
the view of the Commission, the same or similar interests in
the proceeding, cannot agree upon a single representative of
such interests for purposes of cross-examination, the
Commission may make rules and rulings specifying the manner in
which such interests shall be represented and such cross-
examination conducted.
(ii) No member of any class of persons with respect to which
the Commission has specified the manner in which its interests
shall be represented pursuant to clause (i) of this
subparagraph shall be denied, pursuant to such clause (i), the
opportunity to conduct (or have conducted) cross-examination as
to issues affecting his particular interests if he satisfies
the Commission that he has made a reasonable and good faith
effort to reach agreement upon group representation and there
are substantial and relevant issues which would not be
presented adequately by group representation.
(D) A transcript shall be kept of any oral presentation and
cross-examination.
(E) In addition to the bases specified in subsection 25(a), a
reviewing Court may set aside an order of the Commission under
section 19(b) approving an exchange rule imposing a schedule or
fixing rates of commissions, allowances, discounts, or other
fees, if the Court finds--
(1) a Commission determination under subparagraph (A)
of this paragraph that an interested person is not
entitled to conduct cross-examination or make rebuttal
submissions, or
(2) a Commission rule or ruling under subparagraph
(B) of this paragraph limiting the petitioner's cross-
examination or rebuttal submissions,
has precluded full disclosure
and proper resolution of
disputed issues of material
fact which were necessary for
fair determination by the
Commission.
(f) The Commission, by rule or order, as it deems necessary
or appropriate in the public interest and for the protection of
investors, to maintain fair and orderly markets, or to assure
equal regulation, may require--
(1) any person not a member or a designated
representative of a member of a national securities
exchange effecting transactions on such exchange
without the services of another person acting as a
broker, or
(2) any broker or dealer not a member of a national
securities exchange effecting transactions on such
exchange on a regular basis,
to comply with such rules of such exchange as the Commission
may specify.
(g) Notice Registration of Security Futures Product
Exchanges.--
(1) Registration required.--An exchange that lists or
trades security futures products may register as a
national securities exchange solely for the purposes of
trading security futures products if--
(A) the exchange is a board of trade, as that
term is defined by the Commodity Exchange Act
(7 U.S.C. 1a(2)), that has been designated a
contract market by the Commodity Futures
Trading Commission and such designation is not
suspended by order of the Commodity Futures
Trading Commission; and
(B) such exchange does not serve as a market
place for transactions in securities other
than--
(i) security futures products; or
(ii) futures on exempted securities
or groups or indexes of securities or
options thereon that have been
authorized under section 2(a)(1)(C) of
the Commodity Exchange Act.
(2) Registration by notice filing.--
(A) Form and content.--An exchange required
to register only because such exchange lists or
trades security futures products may register
for purposes of this section by filing with the
Commission a written notice in such form as the
Commission, by rule, may prescribe containing
the rules of the exchange and such other
information and documents concerning such
exchange, comparable to the information and
documents required for national securities
exchanges under section 6(a), as the
Commission, by rule, may prescribe as necessary
or appropriate in the public interest or for
the protection of investors. If such exchange
has filed documents with the Commodity Futures
Trading Commission, to the extent that such
documents contain information satisfying the
Commission's informational requirements, copies
of such documents may be filed with the
Commission in lieu of the required written
notice.
(B) Immediate effectiveness.--Such
registration shall be effective
contemporaneously with the submission of
notice, in written or electronic form, to the
Commission, except that such registration shall
not be effective if such registration would be
subject to suspension or revocation.
(C) Termination.--Such registration shall be
terminated immediately if any of the conditions
for registration set forth in this subsection
are no longer satisfied.
(3) Public availability.--The Commission shall
promptly publish in the Federal Register an
acknowledgment of receipt of all notices the Commission
receives under this subsection and shall make all such
notices available to the public.
(4) Exemption of exchanges from specified
provisions.--
(A) Transaction exemptions.--An exchange that
is registered under paragraph (1) of this
subsection shall be exempt from, and shall not
be required to enforce compliance by its
members with, and its members shall not, solely
with respect to those transactions effected on
such exchange in security futures products, be
required to comply with, the following
provisions of this title and the rules
thereunder:
(i) Subsections (b)(2), (b)(3),
(b)(4), (b)(7), (b)(9), (c), (d), and
(e) of this section.
(ii) Section 8.
(iii) Section 11.
(iv) Subsections (d), (f), and (k) of
section 17.
(v) Subsections (a), (f), and (h) of
section 19.
(B) Rule change exemptions.--An exchange that
registered under paragraph (1) of this
subsection shall also be exempt from submitting
proposed rule changes pursuant to section 19(b)
of this title, except that--
(i) such exchange shall file proposed
rule changes related to higher margin
levels, fraud or manipulation,
recordkeeping, reporting, listing
standards, or decimal pricing for
security futures products, sales
practices for security futures products
for persons who effect transactions in
security futures products, or rules
effectuating such exchange's obligation
to enforce the securities laws pursuant
to section 19(b)(7);
(ii) such exchange shall file
pursuant to sections 19(b)(1) and
19(b)(2) proposed rule changes related
to margin, except for changes resulting
in higher margin levels; and
(iii) such exchange shall file
pursuant to section 19(b)(1) proposed
rule changes that have been abrogated
by the Commission pursuant to section
19(b)(7)(C).
(5) Trading in security futures products.--
(A) In general.--Subject to subparagraph (B),
it shall be unlawful for any person to execute
or trade a security futures product until the
later of--
(i) 1 year after the date of the
enactment of the Commodity Futures
Modernization Act of 2000; or
(ii) such date that a futures
association registered under section 17
of the Commodity Exchange Act has met
the requirements set forth in section
15A(k)(2) of this title.
(B) Principal-to-principal transactions.--
Notwithstanding subparagraph (A), a person may
execute or trade a security futures product
transaction if--
(i) the transaction is entered into--
(I) on a principal-to-
principal basis between parties
trading for their own accounts
or as described in section
1a(18)(B)(ii) of the Commodity
Exchange Act; and
(II) only between eligible
contract participants (as
defined in subparagraphs (A),
(B)(ii), and (C) of such
section 1a(18)) at the time at
which the persons enter into
the agreement, contract, or
transaction; and
(ii) the transaction is entered into
on or after the later of--
(I) 8 months after the date
of the enactment of the
Commodity Futures Modernization
Act of 2000; or
(II) such date that a futures
association registered under
section 17 of the Commodity
Exchange Act has met the
requirements set forth in
section 15A(k)(2) of this
title.
(h) Trading in Security Futures Products.--
(1) Trading on exchange or association required.--It
shall be unlawful for any person to effect transactions
in security futures products that are not listed on a
national securities exchange or a national securities
association registered pursuant to section 15A(a).
(2) Listing standards required.--Except as otherwise
provided in paragraph (7), a national securities
exchange or a national securities association
registered pursuant to section 15A(a) may trade only
security futures products that (A) conform with listing
standards that such exchange or association files with
the Commission under section 19(b) and (B) meet the
criteria specified in section 2(a)(1)(D)(i) of the
Commodity Exchange Act.
(3) Requirements for listing standards and conditions
for trading.--Such listing standards shall--
(A) except as otherwise provided in a rule,
regulation, or order issued pursuant to
paragraph (4), require that any security
underlying the security future, including each
component security of a narrow-based security
index, be registered pursuant to section 12 of
this title;
(B) require that if the security futures
product is not cash settled, the market on
which the security futures product is traded
have arrangements in place with a registered
clearing agency for the payment and delivery of
the securities underlying the security futures
product;
(C) be no less restrictive than comparable
listing standards for options traded on a
national securities exchange or national
securities association registered pursuant to
section 15A(a) of this title;
(D) except as otherwise provided in a rule,
regulation, or order issued pursuant to
paragraph (4), require that the security future
be based upon common stock and such other
equity securities as the Commission and the
Commodity Futures Trading Commission jointly
determine appropriate;
(E) require that the security futures product
is cleared by a clearing agency that has in
place provisions for linked and coordinated
clearing with other clearing agencies that
clear security futures products, which permits
the security futures product to be purchased on
one market and offset on another market that
trades such product;
(F) require that only a broker or dealer
subject to suitability rules comparable to
those of a national securities association
registered pursuant to section 15A(a) effect
transactions in the security futures product;
(G) require that the security futures product
be subject to the prohibition against dual
trading in section 4j of the Commodity Exchange
Act (7 U.S.C. 6j) and the rules and regulations
thereunder or the provisions of section 11(a)
of this title and the rules and regulations
thereunder, except to the extent otherwise
permitted under this title and the rules and
regulations thereunder;
(H) require that trading in the security
futures product not be readily susceptible to
manipulation of the price of such security
futures product, nor to causing or being used
in the manipulation of the price of any
underlying security, option on such security,
or option on a group or index including such
securities;
(I) require that procedures be in place for
coordinated surveillance among the market on
which the security futures product is traded,
any market on which any security underlying the
security futures product is traded, and other
markets on which any related security is traded
to detect manipulation and insider trading;
(J) require that the market on which the
security futures product is traded has in place
audit trails necessary or appropriate to
facilitate the coordinated surveillance
required in subparagraph (I);
(K) require that the market on which the
security futures product is traded has in place
procedures to coordinate trading halts between
such market and any market on which any
security underlying the security futures
product is traded and other markets on which
any related security is traded; and
(L) require that the margin requirements for
a security futures product comply with the
regulations prescribed pursuant to section
7(c)(2)(B), except that nothing in this
subparagraph shall be construed to prevent a
national securities exchange or national
securities association from requiring higher
margin levels for a security futures product
when it deems such action to be necessary or
appropriate.
(4) Authority to modify certain listing standard
requirements.--
(A) Authority to modify.--The Commission and
the Commodity Futures Trading Commission, by
rule, regulation, or order, may jointly modify
the listing standard requirements specified in
subparagraph (A) or (D) of paragraph (3) to the
extent such modification fosters the
development of fair and orderly markets in
security futures products, is necessary or
appropriate in the public interest, and is
consistent with the protection of investors.
(B) Authority to grant exemptions.--The
Commission and the Commodity Futures Trading
Commission, by order, may jointly exempt any
person from compliance with the listing
standard requirement specified in subparagraph
(E) of paragraph (3) to the extent such
exemption fosters the development of fair and
orderly markets in security futures products,
is necessary or appropriate in the public
interest, and is consistent with the protection
of investors.
(5) Requirements for other persons trading security
future products.--It shall be unlawful for any person
(other than a national securities exchange or a
national securities association registered pursuant to
section 15A(a)) to constitute, maintain, or provide a
marketplace or facilities for bringing together
purchasers and sellers of security future products or
to otherwise perform with respect to security future
products the functions commonly performed by a stock
exchange as that term is generally understood, unless a
national securities association registered pursuant to
section 15A(a) or a national securities exchange of
which such person is a member--
(A) has in place procedures for coordinated
surveillance among such person, the market
trading the securities underlying the security
future products, and other markets trading
related securities to detect manipulation and
insider trading;
(B) has rules to require audit trails
necessary or appropriate to facilitate the
coordinated surveillance required in
subparagraph (A); and
(C) has rules to require such person to
coordinate trading halts with markets trading
the securities underlying the security future
products and other markets trading related
securities.
(6) Deferral of options on security futures
trading.--No person shall offer to enter into, enter
into, or confirm the execution of any put, call,
straddle, option, or privilege on a security future,
except that, after 3 years after the date of the
enactment of this subsection, the Commission and the
Commodity Futures Trading Commission may by order
jointly determine to permit trading of puts, calls,
straddles, options, or privileges on any security
future authorized to be traded under the provisions of
this Act and the Commodity Exchange Act.
(7) Deferral of linked and coordinated clearing.--
(A) Notwithstanding paragraph (2), until the
compliance date, a national securities exchange
or national securities association registered
pursuant to section 15A(a) may trade a security
futures product that does not--
(i) conform with any listing standard
promulgated to meet the requirement
specified in subparagraph (E) of
paragraph (3); or
(ii) meet the criterion specified in
section 2(a)(1)(D)(i)(IV) of the
Commodity Exchange Act.
(B) The Commission and the Commodity Futures
Trading Commission shall jointly publish in the
Federal Register a notice of the compliance
date no later than 165 days before the
compliance date.
(C) For purposes of this paragraph, the term
``compliance date'' means the later of--
(i) 180 days after the end of the
first full calendar month period in
which the average aggregate comparable
share volume for all security futures
products based on single equity
securities traded on all national
securities exchanges, any national
securities associations registered
pursuant to section 15A(a), and all
other persons equals or exceeds 10
percent of the average aggregate
comparable share volume of options on
single equity securities traded on all
national securities exchanges and any
national securities associations
registered pursuant to section 15A(a);
or
(ii) 2 years after the date on which
trading in any security futures product
commences under this title.
(i) Consistent with this title, each national securities
exchange registered pursuant to subsection (a) of this section
shall issue such rules as are necessary to avoid duplicative or
conflicting rules applicable to any broker or dealer registered
with the Commission pursuant to section 15(b) (except paragraph
(11) thereof), that is also registered with the Commodity
Futures Trading Commission pursuant to section 4f(a) of the
Commodity Exchange Act (except paragraph (2) thereof), with
respect to the application of--
(1) rules of such national securities exchange of the
type specified in section 15(c)(3)(B) involving
security futures products; and
(2) similar rules of national securities exchanges
registered pursuant to section 6(g) and national
securities associations registered pursuant to section
15A(k) involving security futures products.
(j) Procedures and Rules for Security Future Products.--A
national securities exchange registered pursuant to subsection
(a) shall implement the procedures specified in section
6(h)(5)(A) of this title and adopt the rules specified in
subparagraphs (B) and (C) of section 6(h)(5) of this title not
later than 8 months after the date of receipt of a request from
an alternative trading system for such implementation and
rules.
(k)(1) To the extent necessary or appropriate in the public
interest, to promote fair competition, and consistent with the
promotion of market efficiency, innovation, and expansion of
investment opportunities, the protection of investors, and the
maintenance of fair and orderly markets, the Commission and the
Commodity Futures Trading Commission shall jointly issue such
rules, regulations, or orders as are necessary and appropriate
to permit the offer and sale of a security futures product
traded on or subject to the rules of a foreign board of trade
to United States persons.
(2) The rules, regulations, or orders adopted under paragraph
(1) shall take into account, as appropriate, the nature and
size of the markets that the securities underlying the security
futures product reflect.
(l) Security-based Swaps.--It shall be unlawful for any
person to effect a transaction in a security-based swap with or
for a person that is not an eligible contract participant,
unless such transaction is effected on a national securities
exchange registered pursuant to subsection (b).
(m) Venture Exchange.--
(1) Registration.--
(A) In general.--A national securities
exchange may elect to be treated (or for a
listing tier of such exchange to be treated) as
a venture exchange by notifying the Commission
of such election, either at the time the
exchange applies to be registered as a national
securities exchange or after registering as a
national securities exchange.
(B) Determination time period.--With respect
to a securities exchange electing to be treated
(or for a listing tier of such exchange to be
treated) as a venture exchange--
(i) at the time the exchange applies
to be registered as a national
securities exchange, such application
and election shall be deemed to have
been approved by the Commission unless
the Commission denies such application
before the end of the 6-month period
beginning on the date the Commission
received such application; and
(ii) after registering as a national
securities exchange, such election
shall be deemed to have been approved
by the Commission unless the Commission
denies such approval before the end of
the 6-month period beginning on the
date the Commission received
notification of such election.
(2) Powers and restrictions.--A venture exchange--
(A) may only constitute, maintain, or provide
a market place or facilities for bringing
together purchasers and sellers of venture
securities;
(B) may determine the increment to be used
for quoting and trading venture securities on
the exchange;
(C) shall disseminate last sale and quotation
information on terms that are fair and
reasonable and not unreasonably discriminatory;
(D) may choose to carry out periodic auctions
for the sale of a venture security instead of
providing continuous trading of the venture
security; and
(E) may not extend unlisted trading
privileges to any venture security.
(3) Exemptions from certain national security
exchange regulations.--A venture exchange shall not be
required to--
(A) comply with any of sections 242.600
through 242.612 of title 17, Code of Federal
Regulations;
(B) comply with any of sections 242.300
through 242.303 of title 17, Code of Federal
Regulations;
(C) submit any data to a securities
information processor; or
(D) use decimal pricing.
(4) Treatment of certain exempted securities.--A
security that is exempt from registration pursuant to
section 3(b) of the Securities Act of 1933 shall be
exempt from section 12(a) of this title with respect to
the trading of such security on a venture exchange, if
the issuer of such security is in compliance with all
disclosure obligations of such section 3(b) and the
regulations issued under such section.
(5) Definitions.--For purposes of this subsection:
(A) Early-stage, growth company.--
(i) In general.--The term ``early-
stage, growth company'' means an
issuer--
(I) that has not made an
initial public offering of any
securities of the issuer; and
(II) with a market
capitalization of
$1,000,000,000 (as such amount
is indexed for inflation every
5 years by the Commission to
reflect the change in the
Consumer Price Index for All
Urban Consumers published by
the Bureau of Labor Statistics,
setting the threshold to the
nearest $1,000,000) or less.
(ii) Treatment when market
capitalization exceeds threshold.--
(I) In general.--In the case
of an issuer that is an early-
stage, growth company the
securities of which are traded
on a venture exchange, such
issuer shall not cease to be an
early-stage, growth company by
reason of the market
capitalization of such issuer
exceeding the threshold
specified in clause (i)(II)
until the end of the period of
24 consecutive months during
which the market capitalization
of such issuer exceeds
$2,000,000,000 (as such amount
is indexed for inflation every
5 years by the Commission to
reflect the change in the
Consumer Price Index for All
Urban Consumers published by
the Bureau of Labor Statistics,
setting the threshold to the
nearest $1,000,000).
(II) Exemptions.--If an
issuer would cease to be an
early-stage, growth company
under subclause (I), the
venture exchange may, at the
request of the issuer, exempt
the issuer from the market
capitalization requirements of
this subparagraph for the 1-
year period that begins on the
day after the end of the 24-
month period described in such
subclause. The venture exchange
may, at the request of the
issuer, extend the exemption
for 1 additional year.
(B) Venture security.--The term ``venture
security'' means--
(i) securities of an early-stage,
growth company that are exempt from
registration pursuant to section 3(b)
of the Securities Act of 1933; and
(ii) securities of an emerging growth
company.
* * * * * * *
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SECURITIES ACT OF 1933
TITLE I--SHORT TITLE
* * * * * * *
SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.
(a) Scope of Exemption.--Except as otherwise provided in this
section, no law, rule, regulation, or order, or other
administrative action of any State or any political subdivision
thereof--
(1) requiring, or with respect to, registration or
qualification of securities, or registration or
qualification of securities transactions, shall
directly or indirectly apply to a security that--
(A) is a covered security; or
(B) will be a covered security upon
completion of the transaction;
(2) shall directly or indirectly prohibit, limit, or
impose any conditions upon the use of--
(A) with respect to a covered security
described in subsection (b), any offering
document that is prepared by or on behalf of
the issuer; or
(B) any proxy statement, report to
shareholders, or other disclosure document
relating to a covered security or the issuer
thereof that is required to be and is filed
with the Commission or any national securities
organization registered under section 15A of
the Securities Exchange Act of 1934, except
that this subparagraph does not apply to the
laws, rules, regulations, or orders, or other
administrative actions of the State of
incorporation of the issuer; or
(3) shall directly or indirectly prohibit, limit, or
impose conditions, based on the merits of such offering
or issuer, upon the offer or sale of any security
described in paragraph (1).
(b) Covered Securities.--For purposes of this section, the
following are covered securities:
(1) Exclusive federal registration of nationally
traded securities.--A security is a covered security if
such security is--
(A) listed, or authorized for listing, on the
New York Stock Exchange or the American Stock
Exchange, or listed, or authorized for listing,
on the National Market System of the Nasdaq
Stock Market (or any successor to such
entities);
(B) listed, or authorized for listing, on a
national securities exchange (or tier or
segment thereof) that has listing standards
that the Commission determines by rule (on its
own initiative or on the basis of a petition)
are substantially similar to the listing
standards applicable to securities described in
subparagraph (A); [or]
(C) a security of the same issuer that is
equal in seniority or that is a senior security
to a security described in subparagraph (A) or
(B)[.]; or
(D) a venture security, as defined under
section 6(m)(5) of the Securities Exchange Act
of 1934.
(2) Exclusive federal registration of investment
companies.--A security is a covered security if such
security is a security issued by an investment company
that is registered, or that has filed a registration
statement, under the Investment Company Act of 1940.
(3) Sales to qualified purchasers.--A security is a
covered security with respect to the offer or sale of
the security to qualified purchasers, as defined by the
Commission by rule. In prescribing such rule, the
Commission may define the term ``qualified purchaser''
differently with respect to different categories of
securities, consistent with the public interest and the
protection of investors.
(4) Exemption in connection with certain exempt
offerings.--A security is a covered security with
respect to a transaction that is exempt from
registration under this title pursuant to--
(A) paragraph (1) or (3) of section 4, and
the issuer of such security files reports with
the Commission pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934;
(B) section 4(4);
(C) section 4(6);
(D) a rule or regulation adopted pursuant to
section 3(b)(2) and such security is--
(i) offered or sold on a national
securities exchange; or
(ii) offered or sold to a qualified
purchaser, as defined by the Commission
pursuant to paragraph (3) with respect
to that purchase or sale;
(E) section 3(a), other than the offer or
sale of a security that is exempt from such
registration pursuant to paragraph (4), (10),
or (11) of such section, except that a
municipal security that is exempt from such
registration pursuant to paragraph (2) of such
section is not a covered security with respect
to the offer or sale of such security in the
State in which the issuer of such security is
located;
(F) Commission rules or regulations issued
under section 4(2), except that this
subparagraph does not prohibit a State from
imposing notice filing requirements that are
substantially similar to those required by rule
or regulation under section 4(2) that are in
effect on September 1, 1996; or
(G) section 4(a)(7).
(c) Preservation of Authority.--
(1) Fraud authority.--Consistent with this section,
the securities commission (or any agency or office
performing like functions) of any State shall retain
jurisdiction under the laws of such State to
investigate and bring enforcement actions, in
connection with securities or securities transactions
(A) with respect to--
(i) fraud or deceit; or
(ii) unlawful conduct by a broker or
dealer; and
(B) in connection to a transaction described
under section 4(6), with respect to--
(i) fraud or deceit; or
(ii) unlawful conduct by a broker,
dealer, funding portal, or issuer.
(2) Preservation of filing requirements.--
(A) Notice filings permitted.--Nothing in
this section prohibits the securities
commission (or any agency or office performing
like functions) of any State from requiring the
filing of any document filed with the
Commission pursuant to this title, together
with annual or periodic reports of the value of
securities sold or offered to be sold to
persons located in the State (if such sales
data is not included in documents filed with
the Commission), solely for notice purposes and
the assessment of any fee, together with a
consent to service of process and any required
fee.
(B) Preservation of fees.--
(i) In general.--Until otherwise
provided by law, rule, regulation, or
order, or other administrative action
of any State or any political
subdivision thereof, adopted after the
date of enactment of the National
Securities Markets Improvement Act of
1996, filing or registration fees with
respect to securities or securities
transactions shall continue to be
collected in amounts determined
pursuant to State law as in effect on
the day before such date.
(ii) Schedule.--The fees required by
this subparagraph shall be paid, and
all necessary supporting data on sales
or offers for sales required under
subparagraph (A), shall be reported on
the same schedule as would have been
applicable had the issuer not relied on
the exemption provided in subsection
(a).
(C) Availability of preemption contingent on
payment of fees.--
(i) In general.--During the period
beginning on the date of enactment of
the National Securities Markets
Improvement Act of 1996 and ending 3
years after that date of enactment, the
securities commission (or any agency or
office performing like functions) of
any State may require the registration
of securities issued by any issuer who
refuses to pay the fees required by
subparagraph (B).
(ii) Delays.--For purposes of this
subparagraph, delays in payment of fees
or underpayments of fees that are
promptly remedied shall not constitute
a refusal to pay fees.
(D) Fees not permitted on listed
securities.--Notwithstanding subparagraphs (A),
(B), and (C), no filing or fee may be required
with respect to any security that is a covered
security pursuant to subsection (b)(1), or will
be such a covered security upon completion of
the transaction, or is a security of the same
issuer that is equal in seniority or that is a
senior security to a security that is a covered
security pursuant to subsection (b)(1).
(F) Fees not permitted on crowdfunded
securities.--Notwithstanding subparagraphs (A),
(B), and (C), no filing or fee may be required
with respect to any security that is a covered
security pursuant to subsection (b)(4)(B), or
will be such a covered security upon completion
of the transaction, except for the securities
commission (or any agency or office performing
like functions) of the State of the principal
place of business of the issuer, or any State
in which purchasers of 50 percent or greater of
the aggregate amount of the issue are
residents, provided that for purposes of this
subparagraph, the term ``State'' includes the
District of Columbia and the territories of the
United States.
(3) Enforcement of requirements.--Nothing in this
section shall prohibit the securities commission (or
any agency or office performing like functions) of any
State from suspending the offer or sale of securities
within such State as a result of the failure to submit
any filing or fee required under law and permitted
under this section.
(d) Definitions.--For purposes of this section, the following
definitions shall apply:
(1) Offering document.--The term ``offering
document''--
(A) has the meaning given the term
``prospectus'' in section 2(a)(10), but without
regard to the provisions of subparagraphs (a)
and (b) of that section; and
(B) includes a communication that is not
deemed to offer a security pursuant to a rule
of the Commission.
(2) Prepared by or on behalf of the issuer.--Not
later than 6 months after the date of enactment of the
National Securities Markets Improvement Act of 1996,
the Commission shall, by rule, define the term
``prepared by or on behalf of the issuer'' for purposes
of this section.
(3) State.--The term ``State'' has the same meaning
as in section 3 of the Securities Exchange Act of 1934.
(4) Senior security.--The term ``senior security''
means any bond, debenture, note, or similar obligation
or instrument constituting a security and evidencing
indebtedness, and any stock of a class having priority
over any other class as to distribution of assets or
payment of dividends.
* * * * * * *
MINORITY VIEWS
H.R. 4638 would prematurely and proscriptively create a new
national trading venue known as a venture exchange for the
trading of securities of emerging growth companies and early
stage growth companies. While creating such venture exchanges
by statute may be warranted, we have yet to see sufficient,
reliable data showing that is the case.
Rather, Republicans hastily pushed H.R. 4638 through the
Committee, a bill that fails to balance the needs of small
companies and their investors in the secondary markets.
Specifically, the bill removes state regulatory oversight over
these small companies, which are prone to fraud and failure;
threatens to create monopolistic trading rights for a venture
exchange, risking market integrity; and creates additional
costs for investors who would have to trade with artificially
widened spreads. Such sweeping changes to our equity markets
should not be done without robust study and analysis.
Indeed, our state securities regulators, the Security
Traders Association, the New York Stock Exchange, and the
Chamber of Commerce all agree that additional study of the
existing venture markets here and abroad is warranted. For that
reason, Democrats offered an amendment, which was rejected on a
party-line basis, to require the SEC to study and report to
Congress on the past efforts to create venture exchanges, the
effectiveness of existing venture markets, and whether venture
exchanges should be provided with additional regulatory relief.
The results of this study will help us understand what works
for small companies and their investors and will allow Congress
to move forward on a bipartisan basis to provide for a venture
venue, if necessary.
Democrats agree that H.R. 4638 is the wrong approach and
unanimously opposed it in Committee. Consumer advocates like
Public Citizen and Americans for Financial Reform, the North
American Securities Administrators Association, representing
the state securities regulators, and even members of industry
from OTC Markets Group, also oppose H.R. 4638.
Because H.R. 4638 would completely overhaul our U.S. equity
market structure without any supporting data, we oppose.
Maxine Waters.
Ruben Hinojosa.
Michael E. Capuano.
Joyce Beatty.
Keith Ellison.
Wm. Lacy Clay.
[all]