[House Report 114-673]
[From the U.S. Government Publishing Office]


114th Congress   }                                      {       Report
                        HOUSE OF REPRESENTATIVES
 2d Session      }                                      {      114-673

======================================================================



 
            U.S. TERRITORIES INVESTOR PROTECTION ACT OF 2016

                                _______
                                

 July 11, 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

                        [To accompany H.R. 5322]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 5322) to amend the Investment Company Act of 
1940 to terminate an exemption for companies located in Puerto 
Rico, the Virgin Islands, and any other possession of the 
United States, having considered the same, report favorably 
thereon without amendment and recommend that the bill do pass.

                          Purpose and Summary

    Introduced by Representative Nydia Velasquez on May 25, 
2016, H.R. 5322, the U.S. Territories Investor Protection Act 
of 2016, amends Section 6(a)(1) of the Investment Company Act 
of 1940 (Act) to terminate an exemption for investment 
companies located in Puerto Rico, the Virgin Islands, and any 
other possession of the United States. Under current law, such 
companies are exempt from registration under the Act provided 
that their shares are sold solely to the residents of the 
territory or possession in which they are located.
    The bill provides a three-year safe harbor for investment 
companies that currently enjoy this exemption. Additionally, 
the bill authorizes the Securities and Exchange Commission 
(SEC) to further delay the effective date (or end of the 
exemption) for a maximum of three years following the initial 
three year safe harbor.

                  Background and Need for Legislation

    When Congress enacted the Investment Company Act of 1940, 
it was prohibitively expensive and logistically difficult for 
SEC personnel to travel and inspect investment companies 
located in certain U.S. territories, including Alaska, Hawaii, 
the Philippines, the Panama Canal Zone, Puerto Rico and the 
U.S. Virgin Islands.
    Consequently, those investment companies were exempt from 
registration with, and oversight by, the SEC, but the 
investment company had to follow the laws of the jurisdiction 
in which the investment company operated. As U.S. territories 
and possessions became states or independent nations no longer 
under U.S. control, amendments were made to Section 6(a)(1) of 
the Act. The burdens and costs of travel are not the same today 
as they were in 1940, and therefore it is appropriate to 
modernize the Act. Consequently, H.R. 5322 terminates the 
anachronistic exemption from registration under the Act. Thus, 
the bill ensures that investment companies in Puerto Rico, 
Guam, and elsewhere will operate subject to the same rules as 
their mainland counterparts, consistent with the SEC's ability 
to gather information quickly using modern technology 
regardless of distance.

                                Hearings

    The Committee on Financial Services' held no hearings 
examining matters relating to H.R. 5322.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
June 15, 2016 and June 16, 2016, and ordered H.R. 5322 to be 
reported favorably to the House without amendment by a recorded 
vote of 59 yeas to 0 nays (recorded vote no. FC-118), 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 
sole recorded vote in committee was a motion by Chairman 
Hensarling to report the bill favorably to the House without 
amendment. That motion was agreed to by a recorded vote of 59 
yeas to 0 nays (Record vote no. FC-118), a quorum being 
present.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                      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. 5322 
will protect U.S. territories investments by terminating the 
exemptions for investment companies located in U.S. 
territories, and ensuring that they are subject to the same 
requirements and oversight by the SEC.

   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

    Pursuant to section 402 of the Congressional Budget Act of 
1974, the Committee estimates that enacting this legislation 
would not have any significant impact on direct or 
discretionary spending or revenues.

                 Congressional Budget Office Estimates

    With respect to clause 3(c)(3) of rule XIII of the Rules of 
the House of Representatives, an estimate and comparison 
prepared by the Director of the Congressional Budget Office 
pursuant to section 402 of the Congressional Budget Act of 1974 
was not submitted to the Committee before the filing of this 
report.

                       Federal Mandates Statement

    Pursuant to section 423 of the Unfunded Mandates reform 
Act, the Committee estimates that H.R. 5322 contains no 
intergovernmental or private mandates and/or that the cost of 
any such mandates falls below the annual thresholds established 
in the 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. 5322 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. 5322 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. 5322 contains no directed 
rulemaking.

             Section-by-Section Analysis of the Legislation


Section 1: Short title

    This section cites H.R. 5322 as the ``U.S. Territories 
Investor Protection Act of 2016.''

Section 2: Termination of exemption

    This section amends the Investment Company Act of 1940 by 
eliminating the exemption provided to U.S. possessions under 
section 6(a)(1) of the Act. The exemption will take effect 
three years after enactment. This section also provides the SEC 
with the authority to extend the safe harbor to a maximum of 
three years, in addition to the initial three year period.

         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 and 
existing law in which no change is proposed is shown in roman):

                     INVESTMENT COMPANY ACT OF 1940


TITLE I--INVESTMENT COMPANIES

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                               exemptions

  Sec. 6. (a) The following investment companies are exempt 
from the provisions of this title:
          [(1) Any company organized or otherwise created under 
        the laws of and having its principal office and place 
        of business in Puerto Rico, the Virgin Islands, or any 
        other possession of the United States; but such 
        exemption shall terminate if any security of which such 
        company is the issuer is offered for sale or sold after 
        the effective date of this title, by such company or an 
        underwriter therefor, to a resident of any State other 
        than the State in which such company is organized.]
          (2) Any company which since the effective date of 
        this title or within five years prior to such date has 
        been reorganized under the supervision of a court of 
        competent jurisdiction, if (A) such company was not an 
        investment company at the commencement of such 
        reorganization proceedings, (B) at the conclusion of 
        such proceedings all outstanding securities of such 
        company were owned by creditors of such company or by 
        persons to whom such securities were issued on account 
        of creditors' claims, and (C) more than 50 per centum 
        of the voting securities of such company, and 
        securities representing more than 50 per centum of the 
        net asset value of such company, are currently owned 
        beneficially by not more than twenty-five persons; but 
        such exemption shall terminate if any security of which 
        such company is the issuer is offered for sale or sold 
        to the public after the conclusion of such proceedings 
        by the issuer or by or through any underwriter. For the 
        purposes of this paragraph, any new company organized 
        as part of the reorganization shall be deemed the same 
        company as its predecessor; and beneficial ownership 
        shall be determined in the manner provided in section 
        3(c)(1).
          (3) Any issuer as to which there is outstanding a 
        writing filed with the Commission by the Federal 
        Savings and Loan Insurance Corporation stating that 
        exemption of such issuer from the provisions of this 
        title is consistent with the public interest and the 
        protection of investors and is necessary or appropriate 
        by reason of the fact that such issuer holds or 
        proposes to acquire any assets or any product of any 
        assets which have been segregated (A) from assets of 
        any company which at the filing of such writing is an 
        insured institution within the meaning of section 
        401(a) of the National Housing Act, as heretofore or 
        hereafter amended, or (B) as a part of or in connection 
        with any plan for or condition to the insurance of 
        accounts of any company by said corporation or the 
        conversion of any company into a Federal savings and 
        loan association. Any such writing shall expire when 
        canceled by a writing similarly filed or at the 
        expiration of two years after the date of its filing, 
        whichever first occurs; but said corporation may, 
        nevertheless, before, at, or after the expiration of 
        any such writing file another writing or writings with 
        respect to such issuer.
          (4) Any company which prior to March 15, 1940, was 
        and now is a wholly-owned subsidiary of a registered 
        face-amount certificate company and was prior to said 
        date and now is organized and operating under the 
        insurance laws of any State and subject to supervision 
        and examination by the insurance commissioner thereof, 
        and which prior to March 15, 1940, was and now is 
        engaged, subject to such laws, in business 
        substantially all of which consists of issuing and 
        selling only to residents of such State and investing 
        the proceeds from, securities providing for or 
        representing participations or interests in intangible 
        assets consisting of mortgages or other liens on real 
        estate or notes or bonds secured thereby or in a fund 
        or deposit of mortgages or other liens on real estate 
        or notes or bonds secured thereby or having outstanding 
        such securities so issued and sold.
          (5)(A) Any company that is not engaged in the 
        business of issuing redeemable securities, the 
        operations of which are subject to regulation by the 
        State in which the company is organized under a statute 
        governing entities that provide financial or managerial 
        assistance to enterprises doing business, or proposing 
        to do business, in that State if--
                  (i) the organizational documents of the 
                company state that the activities of the 
                company are limited to the promotion of 
                economic, business, or industrial development 
                in the State through the provision of financial 
                or managerial assistance to enterprises doing 
                business, or proposing to do business, in that 
                State, and such other activities that are 
                incidental or necessary to carry out that 
                purpose;
                  (ii) immediately following each sale of the 
                securities of the company by the company or any 
                underwriter for the company, not less than 80 
                percent of the securities of the company being 
                offered in such sale, on a class-by-class 
                basis, are held by persons who reside or who 
                have a substantial business presence in that 
                State;
                  (iii) the securities of the company are sold, 
                or proposed to be sold, by the company or by 
                any underwriter for the company, solely to 
                accredited investors, as that term is defined 
                in section 2(a)(15) of the Securities Act of 
                1933, or to such other persons that the 
                Commission, as necessary or appropriate in the 
                public interest and consistent with the 
                protection of investors, may permit by rule, 
                regulation, or order; and
                  (iv) the company does not purchase any 
                security issued by an investment company or by 
                any company that would be an investment company 
                except for the exclusions from the definition 
                of the term ``investment company'' under 
                paragraph (1) or (7) of section 3(c), other 
                than--
                          (I) any debt security that meets such 
                        standards of credit-worthiness as the 
                        Commission shall adopt; or
                          (II) any security issued by a 
                        registered open-end investment company 
                        that is required by its investment 
                        policies to invest not less than 65 
                        percent of its total assets in 
                        securities described in subclause (I) 
                        or securities that are determined by 
                        such registered open-end investment 
                        company to be comparable in quality to 
                        securities described in subclause (I).
          (B) Notwithstanding the exemption provided by this 
        paragraph, section 9 (and, to the extent necessary to 
        enforce section 9, sections 38 through 51) shall apply 
        to a company described in this paragraph as if the 
        company were an investment company registered under 
        this title.
          (C) Any company proposing to rely on the exemption 
        provided by this paragraph shall file with the 
        Commission a notification stating that the company 
        intends to do so, in such form and manner as the 
        Commission may prescribe by rule.
          (D) Any company meeting the requirements of this 
        paragraph may rely on the exemption provided by this 
        paragraph upon filing with the Commission the 
        notification required by subparagraph (C), until such 
        time as the Commission determines by order that such 
        reliance is not in the public interest or is not 
        consistent with the protection of investors.
          (E) The exemption provided by this paragraph may be 
        subject to such additional terms and conditions as the 
        Commission may by rule, regulation, or order determine 
        are necessary or appropriate in the public interest or 
        for the protection of investors.
  (b) Upon application by any employees' security company, the 
Commission shall by order exempt such company from the 
provisions of this title and of the rules and regulations 
hereunder, if and to the extent that such exemption is 
consistent with the protection of investors. In determining the 
provisions to which such an order of exemption shall apply, the 
Commission shall give due weight, among other things, to the 
form of organization and the capital structure of such company, 
the persons by whom its voting securities, evidences of 
indebtedness, and other securities are owned and controlled, 
the prices at which securities issued by such company are sold 
and the sales load thereon, the disposition of the proceeds of 
such sales, the character of the securities in which such 
proceeds are invested, and any relationship between such 
company and the issuer of any such security.
  (c) The Commission, by rules and regulations upon its own 
motion, or by order upon application, may conditionally or 
unconditionally exempt any person, security, or transaction, or 
any class or classes of persons, securities, or transactions, 
from any provision or provisions of this title or of any rule 
or regulation thereunder, if and to the extent that such 
exemption is necessary or appropriate in the public interest 
and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of this 
title.
  (d) The Commission, by rules and regulations or order, shall 
exempt a closed-end investment company from any or all 
provisions of this title, but subject to such terms and 
conditions as may be necessary or appropriate in the public 
interest or for the protection of investors, if--
          (1) the aggregate sums received by such company from 
        the sale of all its outstanding securities, plus the 
        aggregate offering price of all securities of which 
        such company is the issuer and which it proposes to 
        offer for sale, do not exceed $10,000,000, or such 
        other amount as the Commission may set by rule, 
        regulation, or order;
          (2) no security of which such company is the issuer 
        has been or is proposed to be sold by such company or 
        any underwriter therefor, in connection with a public 
        offering, to any person who is not a resident of the 
        State under the laws of which such company is organized 
        or otherwise created; and
          (3) such exemption is not contrary to the public 
        interest or inconsistent with the protection of 
        investors.
  (e) If, in connection with any rule, regulation, or order 
under this section exempting any investment company from any 
provision of section 7, the Commission deems it necessary or 
appropriate in the public interest or for the protection of 
investors that certain specified provisions of this title 
pertaining to registered investment companies shall be 
applicable in respect of such company, the provisions so 
specified shall apply to such company, and to other persons in 
their transactions and relations with such company, as though 
such company were a registered investment company.
  (f) Any closed-end company which--
          (1) elects to be treated as a business development 
        company pursuant to section 54; or
          (2) would be excluded from the definition of an 
        investment company by section 3(c)(1), except that it 
        presently proposes to make a public offering of its 
        securities as a business development company, and has 
        notified the Commission, in a form and manner which the 
        Commission may, by rule, prescribe, that it intends in 
        good faith to file, within 90 days, a notification of 
        election to become subject to the provisions of 
        sections 55 through 65,
shall be exempt from sections 1 through 53, except to the 
extent provided in sections 59 through 65.

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