[House Report 115-102]
[From the U.S. Government Publishing Office]


115th Congress    }                                    {        Report
                        HOUSE OF REPRESENTATIVES
 1st Session      }                                    {       115-102

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



 
             FAIR ACCESS TO INVESTMENT RESEARCH ACT OF 2017

                                _______
                                

  May 1, 2017.--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. 910]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 910) to direct the Securities and Exchange 
Commission to provide a safe harbor related to certain 
investment fund research reports, and for other purposes, 
having considered the same, report favorably thereon 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 ``Fair Access to Investment Research Act 
of 2017''.

SEC. 2. SAFE HARBOR FOR INVESTMENT FUND RESEARCH.

  (a) Expansion of the Safe Harbor.--Not later than the end of the 180-
day period beginning on the date of enactment of this Act, the 
Securities and Exchange Commission shall propose, and not later than 
the end of the 270-day period beginning on such date, the Commission 
shall adopt, upon such terms, conditions, or requirements as the 
Commission may determine necessary or appropriate in the public 
interest, for the protection of investors, and for the promotion of 
capital formation, revisions to section 230.139 of title 17, Code of 
Federal Regulations, to provide that a covered investment fund research 
report that is published or distributed by a broker or dealer--
          (1) shall be deemed, for purposes of sections 2(a)(10) and 
        5(c) of the Securities Act of 1933 (15 U.S.C. 77b(a)(10), 
        77e(c)), not to constitute an offer for sale or an offer to 
        sell a security that is the subject of an offering pursuant to 
        a registration statement that is effective, even if the broker 
        or dealer is participating or will participate in the 
        registered offering of the covered investment fund's 
        securities; and
          (2) shall be deemed to satisfy the conditions of subsection 
        (a)(1) or (a)(2) of section 230.139 of title 17, Code of 
        Federal Regulations, or any successor provisions, for purposes 
        of the Commission's rules and regulations under the Federal 
        securities laws and the rules of any self-regulatory 
        organization.
  (b) Implementation of Safe Harbor.--In implementing the safe harbor 
pursuant to subsection (a), the Commission shall--
          (1) not, in the case of a covered investment fund with a 
        class of securities in substantially continuous distribution, 
        condition the safe harbor on whether the broker's or dealer's 
        publication or distribution of a covered investment fund 
        research report constitutes such broker's or dealer's 
        initiation or reinitiation of research coverage on such covered 
        investment fund or its securities;
          (2) not--
                  (A) require the covered investment fund to have been 
                registered as an investment company under the 
                Investment Company Act of 1940 (15 U.S.C. 80a-1 et 
                seq.) or subject to the reporting requirements of 
                section 13 or 15(d) of the Securities Exchange Act of 
                1934 (15 U.S.C. 78m, 78o(d)) for any period exceeding 
                the period of time referenced under paragraph 
                (a)(1)(i)(A)(1) of section 230.139 of title 17, Code of 
                Federal Regulations; or
                  (B) impose a minimum float provision exceeding that 
                referenced in paragraph (a)(1)(i)(A)(1)(i) of section 
                230.139 of title 17, Code of Federal Regulations;
          (3) provide that a self-regulatory organization may not 
        maintain or enforce any rule that would--
                  (A) prohibit the ability of a member to publish or 
                distribute a covered investment fund research report 
                solely because the member is also participating in a 
                registered offering or other distribution of any 
                securities of such covered investment fund; or
                  (B) prohibit the ability of a member to participate 
                in a registered offering or other distribution of 
                securities of a covered investment fund solely because 
                the member has published or distributed a covered 
                investment fund research report about such covered 
                investment fund or its securities; and
          (4) provide that a covered investment fund research report 
        shall not be subject to section 24(b) of the Investment Company 
        Act of 1940 (15 U.S.C. 80a-24(b)) or the rules and regulations 
        thereunder, except that such report may still be subject to 
        such section and the rules and regulations thereunder to the 
        extent that it is otherwise not subject to the content 
        standards in the rules of any self-regulatory organization 
        related to research reports, including those contained in the 
        rules governing communications with the public regarding 
        investment companies or substantially similar standards.
  (c) Rules of Construction.--Nothing in this Act shall be construed as 
in any way limiting--
          (1) the applicability of the antifraud or antimanipulation 
        provisions of the Federal securities laws and rules adopted 
        thereunder to a covered investment fund research report, 
        including section 17 of the Securities Act of 1933 (15 U.S.C. 
        77q), section 34(b) of the Investment Company Act of 1940 (15 
        U.S.C. 80a-33), and sections 9 and 10 of the Securities 
        Exchange Act of 1934 (15 U.S.C. 78i, 78j); or
          (2) the authority of any self-regulatory organization to 
        examine or supervise a member's practices in connection with 
        such member's publication or distribution of a covered 
        investment fund research report for compliance with applicable 
        provisions of the Federal securities laws or self-regulatory 
        organization rules related to research reports, including those 
        contained in rules governing communications with the public, or 
        to require the filing of communications with the public the 
        purpose of which is not to provide research and analysis of 
        covered investment funds.
  (d) Interim Effectiveness of Safe Harbor.--
          (1) In general.--From and after the 270-day period beginning 
        on the date of enactment of this Act, if the Commission has not 
        adopted revisions to section 230.139 of title 17, Code of 
        Federal Regulations, as required by subsection (a), and until 
        such time as the Commission has done so, a broker or dealer 
        distributing or publishing a covered investment fund research 
        report after such date shall be able to rely on the provisions 
        of section 230.139 of title 17, Code of Federal Regulations, 
        and the broker or dealer's publication of such report shall be 
        deemed to satisfy the conditions of subsection (a)(1) or (a)(2) 
        of section 230.139 of title 17, Code of Federal Regulations, if 
        the covered investment fund that is the subject of such report 
        satisfies the reporting history requirements (without regard to 
        Form S-3 or Form F-3 eligibility) and minimum float provisions 
        of such subsections for purposes of the Commission's rules and 
        regulations under the Federal securities laws and the rules of 
        any self-regulatory organization, as if revised and implemented 
        in accordance with subsections (a) and (b).
          (2) Status of covered investment fund.--After such period and 
        until the Commission has adopted revisions to section 230.139 
        and FINRA has revised rule 2210, for purposes of subsection 
        (c)(7)(O) of such rule, a covered investment fund shall be 
        deemed to be a security that is listed on a national securities 
        exchange and that is not subject to section 24(b) of the 
        Investment Company Act of 1940 (15 U.S.C. 80a-24(b)).
          (3) Covered investment funds communications.--
                  (A) In general.--Except as provided in subparagraph 
                (B), communications that concern only covered 
                investment funds that fall within the scope of section 
                24(b) of the Investment Company Act of 1940 (15 U.S.C. 
                80a-24(b)) shall not be required to be filed with 
                FINRA.
                  (B) Exception.--FINRA may require the filing of 
                communications with the public if the purpose of those 
                communications is not to provide research and analysis 
                of covered investment funds.
  (e) Definitions.--For purposes of this Act:
          (1) The term ``covered investment fund research report'' 
        means a research report published or distributed by a broker or 
        dealer about a covered investment fund or any securities issued 
        by the covered investment fund, but not including a research 
        report to the extent that it is published or distributed by the 
        covered investment fund or any affiliate of the covered 
        investment fund.
          (2) The term ``covered investment fund'' means--
                  (A) an investment company registered under, or that 
                has filed an election to be treated as a business 
                development company under, the Investment Company Act 
                of 1940 and that has filed a registration statement 
                under the Securities Act of 1933 for the public 
                offering of a class of its securities, which 
                registration statement has been declared effective by 
                the Commission; and
                  (B) a trust or other person--
                          (i) issuing securities in an offering 
                        registered under the Securities Act of 1933 and 
                        which class of securities is listed for trading 
                        on a national securities exchange;
                          (ii) the assets of which consist primarily of 
                        commodities, currencies, or derivative 
                        instruments that reference commodities or 
                        currencies, or interests in the foregoing; and
                          (iii) that provides in its registration 
                        statement under the Securities Act of 1933 that 
                        a class of its securities are purchased or 
                        redeemed, subject to conditions or limitations, 
                        for a ratable share of its assets.
          (3) The term ``FINRA'' means the Financial Industry 
        Regulatory Authority.
          (4) The term ``research report'' has the meaning given that 
        term under section 2(a)(3) of the Securities Act of 1933 (15 
        U.S.C. 77b(a)(3)), except that such term shall not include an 
        oral communication.
          (5) The term ``self-regulatory organization'' has the meaning 
        given to that term under section 3(a)(26) of the Securities 
        Exchange Act of 1934 (15 U.S.C. 78c(a)(26)).

                          PURPOSE AND SUMMARY

    Introduced by Representative Hill on February 7, 2017, H.R. 
910, the Fair Access to Investment Research Act, fixes a 
problem that the Securities and Exchange Commission (SEC) has 
known about since 2001, which inhibits the free flow of 
investment research. The bill directs the SEC to revise its 
regulations to create a safe harbor for certain publications or 
distributions of research reports by brokers or dealers 
distributing securities, such as Exchange Traded Funds (ETFs). 
The revised regulation shall declare that the investment funds 
research report shall not be deemed to constitute an offer for 
sale nor an offer to sell a security that is the subject of the 
offering pursuant to a registration statement that the issuer 
proposes to file, or has filed, or that is effective. The 
covered investment fund research report would satisfy the 
regulation's requirements as well as those of any self-
regulatory organization. The bill prohibits the SEC from 
imposing specified conditions and requirements when 
implementing the safe harbor.

                  BACKGROUND AND NEED FOR LEGISLATION

    An ETF is an investment company whose shares are traded 
intraday on securities exchanges at market-determined prices. 
Investors may buy or sell ETF shares through a broker or 
brokerage account just as they would the shares of any publicly 
traded company. In the U.S., most ETFs are structured as open-
end investment companies or unit investment trusts, but other 
structures also exist--primarily for ETFs investing in 
commodities, currencies, and futures. Investor interest in ETFs 
has increased significantly in recent years. Over the past 
three decades, ETFs have grown from about 100 funds with $100 
billion in assets to over 6,000 worldwide funds with almost $3 
trillion in assets. Yet despite their growing popularity and 
increasing importance to retail investors, anomalies in the 
safe harbor rules have discouraged most broker-dealers from 
publishing research regarding ETFs.
    The SEC has implemented safe harbors, which the bill 
largely mirrors, for research issued in support of other asset 
classes, including listed equities, corporate debt, and closed-
end funds. Congress also has provided explicit safe harbors for 
research covering certain securities offerings. Title I of the 
JOBS Act explicitly provided a safe harbor for research related 
to offerings of EGC securities. Yet despite their similarities 
to these other asset classes, research that covers open-ended 
funds and ETFs does not benefit from similar safe harbors. 
Consequently, broker-dealers do not publish research regarding 
ETFs, depriving investors of useful information when deciding 
whether to invest in this product.
    In 2004, as part of its Securities Offering Reform 
proposal, the SEC requested public comment on whether research 
relating to ETFs should be protected by a safe harbor. While 
comments were universally supportive, the SEC did not adopt a 
final rule.
    At a May 13, 2015 Capital Markets and Government Sponsored 
Enterprises Subcommittee hearing, U.S. Chamber of Commerce 
Senior Vice President Tom Quaadman testified that:

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

                                HEARINGS

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing examining matters relating to a previous version of 
this legislation on May 13, 2015.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
March 9, 2017, and ordered H.R. 910 to be reported favorably to 
the House as amended by a recorded vote of 56 yeas to 2 nays 
(recorded vote no. FC-32), a quorum being present. An amendment 
offered by Representative Hill was agreed to by voice vote.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. An 
amendment offered by Mr. Hill was agreed to by a voice vote. 
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 56 yeas to 2 
nays (Record vote no. FC-32), 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. 910 
will enhance the quantity and quality of information available 
to investors by providing for a safe harbor for research 
reports covering Exchange Traded Funds.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        COMMITTEE COST ESTIMATE

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

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

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 30, 2017.
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. 910, the Fair 
Access to Investment Research Act of 2017.
    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. 910--Fair Access to Investment Research Act of 2017

    H.R. 910 would expand an existing safe harbor to allow 
brokers and dealers to issue or distribute a broader set of 
research reports about certain investment funds or securities 
without such reports being considered as an offering for the 
sale of shares of those funds or securities. Under current law, 
such reports would be considered an offering for sale and the 
broker or dealer would be required to file a registration 
statement with the Securities and Exchange Commission (SEC) for 
that offering.
    Based on an analysis of information from the SEC, CBO 
estimates that the agency would require six additional staff to 
conduct a rulemaking and implement the broadened safe harbor 
exemption. CBO estimates that implementing H.R. 910 would cost 
$2 million over the 2017-2022 period. However, under current 
law, 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. 910 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply. CBO 
estimates that enacting H.R. 910 would not increase net direct 
spending or on-budget deficits in any of the four consecutive 
10-year periods beginning in 2028.
    If the SEC increases fees to offset the costs of 
implementing the requirements in the bill, H.R. 910 would 
increase the cost of an existing mandate, as defined in the 
Unfunded Mandates Reform Act (UMRA), on private entities 
required to pay those fees. Based on information from the SEC, 
CBO estimates that the incremental cost of the mandate would 
amount to no more than $2 million over the 2018-2022 period.
    The bill also would impose intergovernmental and private-
sector mandates as defined in UMRA to the extent that it would 
eliminate an existing right of action that allows plaintiffs 
(public and private investors) to pursue damage claims against 
broker-dealers who issue research reports on exchange-traded 
funds. If enacted, the bill could cause investors to lose the 
ability to sue broker-dealers who provide their own research 
about such funds on grounds other than fraud. To date, CBO has 
found no cases that successfully establish liability for 
information contained in or missing from such research reports 
and expects few, if any, in the future.
    Therefore, CBO estimates the total cost of the mandates on 
public and private entities would fall well below the annual 
thresholds established in UMRA for intergovernmental and 
private-sector mandates ($78 million and $156 million in fiscal 
year 2017, respectively, adjusted annually for inflation).
    On March 30, 2017 CBO transmitted a cost estimate for S. 
327, the Fair Access to Investment Research Act of 2017, as 
reported by the Senate Committee on Banking, Housing, and Urban 
Affairs on March 13, 2017. The two bills are similar and CBO's 
estimate of their budgetary effects is the same.
    The CBO staff contacts for this estimate are Stephen Rabent 
(for federal costs), Logan Smith (for private-sector mandates), 
and Rachel Austin (for intergovernmental mandates). The 
estimate was approved by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    H.R. 910 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(c)(5) of rule XIII, the Committee 
states that no provision of H.R. 910 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, 115th Cong. (2017), 
the Committee states that H.R. 910 contains one directed 
rulemaking.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This Section cites H.R. 910 as the ``Fair Access to 
Investment Research Act of 2017.''

Section 2. Safe harbor for investment fund research

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

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 910 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.

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