[House Report 115-1009]
[From the U.S. Government Publishing Office]


115th Congress     }                                         {   Report
                          HOUSE OF REPRESENTATIVES
 2d Session        }                                         {  115-1009

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



 
             STREAMLINING COMMUNICATIONS FOR INVESTORS ACT

                                _______
                                

 November  2, 2018.--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. 6035]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 6035) to direct the Securities and Exchange 
Commission to revise section 230.163 of title 17, Code of 
Federal Regulations, to apply the exemption offered in such 
section to communications made by underwriters and dealers 
acting by or on behalf of a well-known seasoned issuer, having 
considered the same, report favorably thereon without amendment 
and recommend that the bill do pass.

                          PURPOSE AND SUMMARY

    On June 7, 2018, Representative Ted Budd introduced H.R. 
6035, the ``Streamlining Communications for Investors Act''. 
H.R. 6035 directs the U.S. Securities and Exchange Commission 
(SEC) to revise SEC Rule 163(c) to allow a well-known seasoned 
issuer (WKSI) to authorize an underwriter or dealer to act as 
its agent or representative in communicating about offerings of 
the issuer's securities prior to the filing of a registration 
statement. The legislation allows a WKSI to rely on the 
exemption provided in Rule 163 if, before such a communication 
is made, the underwriter or dealer making such communication 
receives written authorization from the WKSI to act as its 
agent or representative and the WKSI authorized or approved 
such communication. Additionally, a WKSI must identify, in the 
prospectus filed for an offering, each underwriter or dealer 
that has made oral or written communications related to the 
offering in reliance on the exemption.

                  BACKGROUND AND NEED FOR LEGISLATION

    The goal of H.R. 6035 is to enhance the efficiency of the 
U.S. capital markets by removing unnecessary regulatory 
impediments that inhibit a WKSI's ability to reach a broader 
group of prospective investors.
    The SEC's 2005 Securities Offering Reform adopted various 
modifications to the registration, communication, and offering 
processes under the Securities Act of 1933, including creating 
a new category of issuer, the WKSI. WKSIs benefit from the 
communications and registration flexibilities provided in the 
Securities Offering Reform and can register their offerings on 
shelf registration statements that become effective 
automatically upon filing, which means they are not required to 
wait until the SEC reviews and declares its statement effective 
before making sales.
    Rule 163 of the SEC's 2005 Securities Offering Reform eased 
many of the ``gun jumping'' restrictions on communications by 
issuers and others in connection with securities offerings. 
Although Rule 163 permits a WKSI to offer securities before 
filing a registration statement, as currently drafted, Rule 163 
only applies to communications made by the issuer itself. This 
means that other participants involved in the offering, such as 
underwriters or dealers, may not rely on this exception.
    In 2009, the SEC proposed amending Rule 163 to allow 
underwriters or dealers to engage in offers or communications 
on behalf of WKSIs. But in the wake of the financial crisis and 
the various directed rulemaking mandates in the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, the SEC ultimately 
never finalized its 2009 proposal. In a comment letter to the 
SEC on its 2009 proposal Wilson, Sonsini, Goodrich & Rosati 
commented on January 27, 2010 that the WKSI proposal ``. . . 
will remove an unnecessary barrier to communication and allow 
WKSIs and their advisers to make better decisions concerning 
their ability to access the capitalmarkets, without impairing 
investor protection. In addition, investors will benefit from 
the Proposed Amendments through the efficiencies of direct 
communication with financial advisers to WKSIs.''
    Similar to what the 2009 proposal envisioned, this 
legislation would amend Rule 163 to allow underwriters and 
dealers to act as agents on behalf of WKSIs in making efforts 
in advance of the filing of the registration statement based on 
three conditions: (1) the underwriter or dealer making such 
communication receives written authorization from the WKSI to 
act as its agent or representative; (2) the WKSI must authorize 
or approve such communications; and (3) WKSIs are required to 
identify in the prospectus any underwriter or dealer that made 
communications related to the offering in reliance on the 
exemption under Rule 163. The Center for Capital Markets 
Competitiveness at the U.S. Chamber of Commerce told the 
Subcommittee on Capital Markets, Securities and Investment on 
May 23, 2018, ``Allowing WKSIs to authorize an underwriter or 
dealer to communicate about offerings of the issuer's 
securities prior to the filing of a registration statement 
would help these companies better gauge investor interest 
before having to expand the time and resources to file a formal 
registration statement.''
    Brett Paschke, Managing Director, Head of Capital Markets, 
William Blair, shared similar support for the legislation, ``We 
also support many of the draft bills that have been released 
alongside this hearing. Some of these proposals . . . --such as 
allowing underwriters to communicate with prospective investors 
on behalf of well-known seasoned issuers (WKSIs)--are examples 
of thoughtful updates to our securities laws that will help 
those laws keep pace with the intense changes our public 
markets have undergone.''
    The Committee agrees with the comments of Cravath, Swaine & 
Moore's comment letter to the SEC from 2010 in support of the 
WKSI proposal, ``. . . the Commission's proposed amendments to 
Rule 163 are a welcome and practical extension of the existing 
rule that would further facilitate capital formation for WKSIs 
by allowing underwriters and dealers to gauge broader market 
interest in the issuer's securities prior to filing a 
registration statement'' H.R. 6130 simply codifies a proposal 
that would promote capital formation and in the SEC's absence, 
Congress has the obligation to amend the law and provide more 
opportunities to issuers to reach more investors.

                                HEARINGS

    The Committee on Financial Services held a hearing 
examining matters relating to H.R. 6035 on May 23, 2018.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
June 14, 2018, and ordered H.R. 6035 to be reported favorably 
to the House without amendment by a recorded vote of 31 yeas to 
23 nays (recorded vote no. FC-189), 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 was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 31 yeas to 23 nays 
(Record vote no. FC-189), 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. 6035 
will make U.S. capital markets more efficient by reducing 
compliance costs and helping companies better gauge investor 
interest and market conditions by allowing WKSIs to authorize 
an underwriter or dealer to communicate about offerings prior 
to the filing of a registration statement so long as certain 
conditions are met.

   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.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 20, 2018.
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. 6035, the 
Streamlining Communications for Investors 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,
                                                          Director.
    Enclosure.

H.R. 6035--Streamlining Communications for Investors Act

    Under current law, companies that sell securities must 
register their offerings with the Securities and Exchange 
Commission (SEC) before communicating with investors about 
those securities. Some public companies, called well-known 
seasoned issuers (WKSIs), are exempt from this communication 
limitation if they meet specific information disclosure 
conditions. H.R. 6035 would expand that exemption to include 
communication by an underwriter or dealer acting by or on 
behalf of a WKSI if the WKSI provides them written 
authorization to act as its agent, authorizes the 
communication, and identifies each underwriter or dealer that 
made use of the exemption in the prospectus for the offering.
    Using information from the SEC, CBO estimates that 
implementing H.R. 6035 would cost less than $500,000 for the 
agency to conduct a rulemaking to expand the current exemption. 
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 appropriation actions consistent with that authority.
    Enacting H.R. 6035 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    CBO estimates that enacting H.R. 6035 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2029.
    H.R. 6035 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA).
    If the SEC increased fees to offset its costs to conduct a 
rulemaking, H.R. 6035 would increase the cost of an existing 
mandate on private entities required to pay those fees. Using 
information from the SEC, CBO estimates that the incremental 
cost of the mandate would be small and fall well below the 
annual threshold for private-sector mandates established in 
UMRA ($160 million in 2018, adjusted annually for inflation).
    The CBO staff contacts for this estimate are Stephen Rabent 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      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

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    DUPLICATION OF FEDERAL PROGRAMS

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires one 
directed rulemaking within the meaning of such section to 
direct the SEC to revise section 230.163(c) of title 17, Code 
of Federal Regulations, to allow underwriters and dealers to 
act as agents on behalf of WKSIs in making efforts in advance 
of the filing of the registration statement.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This section cites H.R. 6035 as the ``Streamlining 
Communications for Investors Act''.

Section 2. Exemption of communications made by underwriters and dealers 
        acting by or on behalf of well-known seasoned issuer

    This section requires the SEC to amend Rule 163 to allow 
underwriters and dealers to act as agents on behalf of WKSIs in 
making efforts in advance of the filing of the registration 
statement based on three conditions: (1) the underwriter or 
dealer making such communication receives written authorization 
from the WKSI to act as its agent or representative; (2) the 
WKSI must authorize or approve such communications; and (3) 
WKSIs are required to identify in the prospectus any 
underwriter or dealer that made communications related to the 
offering in reliance on the exemption under Rule 163.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 6035 does not repeal or amend any section of a 
statute. Therefore, the Office of Legislative Counsel did not 
prepare the report contemplated by Clause 3(e)(1)(B) of rule 
XIII of the House of Representatives.

                             MINORITY VIEWS

    H.R. 6035, the so-called ``Streamlining Communications for 
Investors Act,'' would undermine the ability of investors to 
make informed decisions by towing underwriters and securities 
dealers acting on behalf of well-known seasoned issuers 
(``WKSIs'')\1\ to offer securities prior to registering them 
with the Securities and Exchange Commission (``SEC'').
---------------------------------------------------------------------------
    \1\WKSIs are large corporations that are widely followed by 
analysts. To qualify as a WKSI, a public company must have a minimum 
capitalization of $700 million, have been public for at least a year, 
and must not be an ``ineligible issuer'' by, for example, violating the 
securities laws.
---------------------------------------------------------------------------
    The SEC has already granted WKSIs substantial 
accommodations from our federal securities laws, including 
affording them the ability to quickly raise capital through 
automatic ``shelf' registration. Shelf registration provides 
WKSIs the flexibility to register securities for sale to 
investors without waiting for SEC review and approval of the 
registration statement. Additionally, under SEC Rule 163, WKSIs 
enjoy the benefit of an SEC-created safe harbor from Section 
5(c) of the Securities Act of 1933, which prohibits all offers 
of sale in any form prior to the filing of a registration 
statement.
    H.R. 6035 would extend the Rule 163 safe harbor to 
underwriters and dealers acting on behalf of WKSIs. The bill 
would broadly apply to pre-registration offers for all types of 
securities. In 2009, the SEC proposed, but never finalized, a 
similar amendment to Rule 163. In a comment letter to the SEC's 
2009 proposal, the Credit Roundtable, a group of approximately 
65 large fixed income institutional asset managers representing 
over $2 trillion in fixed income assets under management, 
pointed out the unintended consequences such a change would 
impose on our markets. According to the Credit Roundtable, 
expanding Rule 163 to underwriters and dealers would, 
``exacerbate existing weaknesses in the fixed income offering 
process in which institutional investors are often in the 
position of having to make an investment decision within 
minutes of learning of an offering without ready access to key 
disclosure documents.'' The Credit Roundtable recently 
reiterated this position in a letter to the Committee on 
Financial Services regarding H.R. 6035, adding that further 
compressing the time investors have to evaluate the merits of 
new debt offerings could introduce pricing inefficiencies and 
create inequities between investors.
    Democratic witnesses during a May 2018 Capital Markets 
subcommittee hearing also expressed concerns with H.R. 6035. 
Specifically, Tyler Gellasch, Executive Director of Healthy 
Markets Association testified that regulatory accommodations 
afforded to WKSIs have compounded the uneven playing field 
between large corporations and smaller companies seeking to 
access the public markets and have thus contributed to the 
decline in initial public offerings.
    In light of the existing accommodations available to WKSIs, 
H.R. 6035 appears to be unwarranted. Moreover, the bill would 
increase risks to investors by potentially undermining their 
ability to make informed investment decisions. For these 
reasons, we oppose H.R. 6035.
                                   Maxine Waters.
                                   Carolyn B. Maloney.
                                   Wm. Lacy Clay.
                                   Daniel T. Kildee.
                                   Michael E. Capuano.