[House Report 115-517]
[From the U.S. Government Publishing Office]



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115th Congress   }                                 {         Report
                        HOUSE OF REPRESENTATIVES
 2d Session      }                                 {          115-517
======================================================================



 
                 EXPANDING INVESTMENT OPPORTUNITIES ACT

                                _______
                                

January 16, 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

                        [To accompany H.R. 4279]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4279) to direct the Securities and Exchange 
Commission to revise any rules necessary to enable closed-end 
companies to use the securities offering and proxy rules that 
are available to other issuers of securities, 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 ``Expanding Investment Opportunities 
Act''.

SEC. 2. PARITY FOR CLOSED-END COMPANIES REGARDING OFFERING AND PROXY 
                    RULES.

  (a) Revision to Rules.--Not later than the end of the 180 period 
beginning on the date of enactment of this Act, the Securities and 
Exchange Commission shall propose and, not later than 1 year after the 
date of enactment of this Act, the Securities and Exchange Commission 
shall finalize any rules, as appropriate, to allow any closed-end 
company, as defined in section 5(a)(2) of the Investment Company Act of 
1940 (15 U.S.C. 80a-5), that is registered as an investment company 
under such Act, and is listed on a national securities exchange or that 
makes periodic repurchase offers pursuant to section 270.23c-3 of title 
17, Code of Federal Regulations, to use the securities offering and 
proxy rules, subject to conditions the Commission determines 
appropriate, that are available to other issuers that are required to 
file reports under section 13 or section 15(d) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78m; 78o(d)). Any action that the 
Commission takes pursuant to this subsection shall consider the 
availability of information to investors, including what disclosures 
constitute adequate information to be designated as a ``well-known 
seasoned issuer''.
  (b) Treatment if Revisions Not Completed in a Timely Manner.--If the 
Commission fails to complete the revisions required by subsection (a) 
by the time required by such subsection, any registered closed-end 
company that is listed on a national securities exchange or that makes 
periodic repurchase offers pursuant to section 270.23c-3 of title 17, 
Code of Federal Regulations, shall be deemed not to be an ineligible 
issuer under the final rule of the Commission titled ``Securities 
Offering Reform'' (70 Fed. Reg. 44722; published August 3, 2005).
  (c) Rules of Construction.--
          (1) No effect on rule 482.--Nothing in this section or the 
        amendments made by this section shall be construed to impair or 
        limit in any way a registered closed-end company from using 
        section 230.482 of title 17, Code of Federal Regulations, to 
        distribute sales material.
          (2) References.--Any reference in this section to a section 
        of title 17, Code of Federal Regulations, or to any form or 
        schedule means such rule, section, form, or schedule, or any 
        successor to any such rule, section, form, or schedule.

                          PURPOSE AND SUMMARY

    On November 15, 2017, Representative Trey Hollingsworth 
introduced H.R. 4279, the ``Expanding Investment Opportunities 
Act'' to direct the Securities and Exchange Commission (SEC) to 
amend its rules to enable closed-end funds that meet certain 
requirements to be considered ``well-known seasoned issuers'' 
(WKSIs) and to conform the filing and offering regulations for 
closed-end funds to those of traditional operating companies, 
which will simplify the registration process and enable these 
funds to more easily provide information to investors.

                  BACKGROUND AND NEED FOR LEGISLATION

    Closed-end funds are important retirement savings and 
investment vehicles for retail investors. According to the 
Investment Company Institute's 2017 Investment Company Fact 
Book, in 2016, approximately 2.8 million U.S. households owned 
closed-end funds to meet many investment needs. These funds can 
enhance income and cash flow, which is particularly important 
for retirees, and can maximize after-tax efficiency by 
investing in municipal securities or other tax-free 
investments. They also improve diversification by investing in 
specialized asset classes. Moreover, like mutual funds and 
other registered funds, closed-end funds help promote job 
creation, research and development, and economic growth by 
serving as a long-term source of capital for operating 
companies.
    Specifically, closed-end funds are types of investment 
companies whose shares are listed on a stock exchange or are 
traded in the over-the-counter market. Investment companies 
professionally manage the assets of a closed-end fund in 
accordance with the fund's investment objectives and policies 
and may be invested in equities, bonds, and other securities. 
The market price of a closed-end fund share fluctuates like 
that of other publicly traded securities and is determined by 
supply and demand in the marketplace. Investors typically buy 
and sell closed-end fund shares on an exchange like corporate 
stock, and not directly from the fund.
    An investment company creates a registered closed-end fund 
when it issues a fixed number of common shares to investors 
during an initial public offering. Subsequent issuances of 
common shares can occur through secondary or follow-on 
offerings, at-the-market offerings, rights offerings, or 
dividend reinvestments. Once issued, shares of a registered 
closed-end fund generally are bought and sold by investors in 
the open market and are not purchased or redeemed directly by 
the fund, although some registered closed-end funds may adopt 
stock repurchase programs or periodically tender for shares.
    Notwithstanding their many benefits, there has been a 
steady decline in the number of closed-end funds over the last 
several years. According to the Investment Company Institute, 
since 2007, there has been a decrease in the number of closed-
end funds from 662 funds to 530 funds in 2016, a decline of 20 
percent. The number of new closed-end fund offerings also has 
dropped. In 2007, there were 42 new closed-end fund issuances; 
in 2016, there were 8--an 81% decline.
    A significant cause of the decline in closed-end funds is 
that registered closed-end funds are subject to burdensome 
regulations under the Investment Company Act of 1940, other 
federal securities laws, and related SEC regulations. The 
Investment Company Act restricts, among other things, a closed-
end fund's ability to use leverage and engage in affiliated 
transactions, and it imposes strict requirements on the 
custody, diversification, and transparency of fund assets. 
Registered closed-end funds also must have a board of directors 
that consists of at least a majority of directors who are 
independent of the fund's manager, which oversees the 
management of the fund. Further, registered closed-end funds 
must have a chief compliance officer that oversees the day-to-
day operations of the fund under a board-approved fund 
compliance program and related policies.
    H.R. 4279 would help reverse the trend of the declining 
issuance of closed-end funds as it would reduce onerous filing 
and offering regulations and conform the applicable regulations 
for such funds to ones for traditional operating companies. 
This bill would simplify the registration process for closed-
end funds offerings with the SEC, and closed-end funds would be 
able to provide information to their investors and potential 
investors more easily both before and during the offering 
periods. The legislation's reforms would reduce costs borne by 
fund shareholders for the prospectus delivery.
    The SEC's 2005 rules that significantly modernized and 
streamlined the registration, communications, and offering 
processes for traditional offering companies reflect the type 
of relief that H.R. 4279 will offer closed-end funds. These 
2005 reforms have been very successful, and many companies 
today rely on them. They were primarily designed to streamline 
the securities registration process--especially for large 
reporting issuers referred to as WKSIs; liberalize the flow of 
information from issuers to investors before and during 
offering periods; and implement a new model for prospectuses 
based on electronic availability of the prospectuses, instead 
of physical delivery. But at the time, the SEC excluded 
registered closed-end funds from these reforms.
    To help reduce the declining trend of closed-end funds, 
H.R. 4279 builds on the success of the SEC's 2005 reforms by 
simplifying the registration process for registered closed-end 
funds by directing the SEC to revise its rules to enable closed 
end funds to use the securities offering and proxy rules that 
are available to other issuers of securities.
    For example, WKSIs already enjoy a streamlined registration 
process that gives them the flexibility to take advantage of 
market conditions when offering securities, specifically by 
allowing WKSIs to file ``automatic shelf registration 
statements'' that become effective immediately upon filing 
without the SEC staff's review and comment. Allowing qualifying 
closed-end funds to use this process will help those funds 
better evaluate and assess the market for their offerings and 
would enable them to more quickly access the capital markets.
    In addition, registration statements from WKSIs and other 
qualifying issuers--generally those that have greater than $75 
million in public float--can incorporate by reference 
information from shareholder reports filed with the SEC. 
Issuers, such as registered closed-end funds, that cannot 
incorporate on a forward basis must amend their existing 
registration statements to specifically reference each 
shareholder report or filing that is made after their 
registration statement is declared effective to incorporate 
information from those shareholder reports into the 
registration statement. Permitting closed-end funds to 
incorporate by reference will provide cost and time savings by 
eliminating unnecessary filings and associated costs.
    H.R. 4279 also enables closed-end funds to provide 
information to their investors more easily before and during 
the offering periods, allowing closed-end funds to rely on the 
same safe harbors that traditional operating companies rely on 
when communicating with the public. Closed-end funds that fall 
under these very technical safe harbors would be able to 
communicate with investors more freely during the preparation 
and filing periods for a registered offering and would be 
better able to provide additional information during an 
offering. The safe harbors permit investors to obtain more 
information about a closed-end fund during the offering, and 
the additional information should assist investors in making 
more informed purchasing decisions. By directing the SEC to 
revise its rules to allow closed-end funds to rely on the 
exemptions provided to similar, traditional operating 
companies, closed-end funds will be allowed to conduct their 
offerings efficiently and resulting in cost and time savings.
    H.R. 4279 also holds the SEC accountable to revise its 
rules as provided in section two of the legislation. If the SEC 
fails to complete its revisions and finalize rules within one 
year of enactment, closed-end funds would be deemed eligible to 
use the SEC's 2005 offering reform rules.
    In short, as Investment Company Institute President Paul 
Stevens stated at a November 3, 2017 Capital Markets 
Subcommittee Hearing:

          The bill that Mr. Hollingsworth has in view at the 
        margin at least provides a modernization for closed-end 
        funds with respect to the way they can respond to 
        market developments, bring their new issuances to 
        market, inform their investors and will make them at 
        least marginally more competitive . . . These modest 
        reforms that are in the view here will continue to make 
        them an attractive option for investors without 
        sacrificing any protections.

                                HEARINGS

    The Committee on Financial Services held a hearing 
examining matters relating to H.R. 4279 on November 3, 2017.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
November 14, 2017, and November 15, 2017, and ordered H.R. 4279 
to be reported favorably to the House as amended by a recorded 
vote of 58 yeas to 2 nays (Record vote no. FC-114), a quorum 
being present. Before the motion to report was offered, the 
Committee adopted an amendment offered by Mr. Foster by voice 
vote.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House with amendment. The 
motion was agreed to by a recorded vote of 58 yeas to 2 nays 
(Record vote no. FC-114), 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. 4279 
will reduce unnecessary burdens that raise costs to investors 
and enhance the ability of closed-end funds to act as a source 
of financing in the economy by simplifying the closed-end fund 
offering process and liberalizing existing restrictions on 
communications.

   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, January 16, 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. 4279, the 
Expanding Investment Opportunities 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. 4279--Expanding Investment Opportunities Act

    Under current law, the Securities and Exchange Commission 
(SEC) allows certain public companies, called well-known 
seasoned issuers (WKSIs), to use streamlined registration, 
reporting, and communication when issuing securities. The 
effects of that streamlined process include: having certain 
securities' registration statements take effect automatically 
when filed and without SEC review, the ability to exclude 
certain information from securities' registration statements, 
and the ability to communicate certain information to investors 
before statements are filed. Certain types of investment 
companies currently cannot be granted WKSI status, even if they 
meet the other requirements. H.R. 4279 would direct the SEC to 
allow closed-end companies that meet certain requirements to be 
considered WKSIs.
    Using information from the SEC, CBO estimates that 
implementing H.R. 4279 would cost less than $500,000 over the 
2018-2022 period for the agency to conduct a rulemaking to 
implement the bill. Moreover, 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. 4279 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    CBO estimates that enacting H.R. 4279 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2028.
    H.R. 4279 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA).
    If the SEC increases fees or premiums to offset the costs 
associated with implementing the bill, H.R. 4279 would increase 
the cost of an existing mandate on private entities required to 
pay those assessments. CBO estimates that the incremental cost 
of the mandate would be small and below the annual threshold 
for private-sector mandates established in UMRA ($156 million 
in 2017, 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 approved 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 
rulemakings: The Committee estimates that the bill requires one 
directed rulemaking to require the SEC to revise its rules to 
enable any closed-end fund that is registered as an investment 
company to use the securities offering and proxy rules that are 
available to other issuers that are required to file reports 
under section 13 of section 15(d) of the Securities Exchange 
Act of 1934.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This section cites H.R. 4279 as the ``Expanding Investment 
Opportunities Act''.

Section 2. Parity for closed-end companies regarding offering rules

    This section directs the SEC to revise any rules necessary 
to enable closed-end companies to use the securities offering 
and proxy rules that are available to other issuers of 
securities. If the SEC fails to finalize such revisions within 
one year after enactment, closed-end funds will be deemed 
eligible issuers under the SEC's 2005 Securities Offering 
Reform Rule.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 4279 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.

                                  [all]