[House Report 115-808]
[From the U.S. Government Publishing Office]


115th Congress    }                                     {      Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                     {     115-808

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



 
    IMPROVING INVESTMENT RESEARCH FOR SMALL AND EMERGING ISSUERS ACT

                                _______
                                

 July 10, 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. 6139]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 6139) to require the Securities and Exchange 
Commission to carry out a study to evaluate the issues 
affecting the provision of and reliance upon investment 
research into small issuers, having considered the same, report 
favorably thereon without amendment and recommend that the bill 
do pass.

                          PURPOSE AND SUMMARY

    On June 19, 2018, Representative Bill Huizenga introduced 
H.R. 6139, the ``Improving Investment Research for Small and 
Emerging Issuers Act'', which requires the U.S. Securities and 
Exchange Commission (SEC) to report to Congress within 180 days 
after enactment on issues that affect the provision of and 
reliance upon investment research into small issuers, including 
emerging growth companies (EGCs), other small issuers, such as 
nano-cap and microcap issuers, and companies considering 
initial public offerings (IPOs). Among the issues the SEC must 
consider are factors related to the demand for such research by 
institutional and retail investors, cost considerations for 
such research, and the impact on the availability of research 
coverage for small issuers due to a variety of market and 
regulatory conditions. The SEC's report must include 
recommendations to increase the demand for, volume of, and 
quality of investment research into small issuers and pre-IPO 
companies.

                  BACKGROUND AND NEED FOR LEGISLATION

    The goal of H.R. 6139 is to help understand the issues 
affecting the ability of smaller cap issuers and emerging 
growth companies in obtaining research coverage.
    Section 105 of the Jumpstart or Business Startups (JOBS) 
Act (P.L. 112-106) changed the ``gun-jumping rules'' to provide 
an exception from the definition of an offer to allow for the 
publication or distribution by a broker or dealer of a research 
report about an emerging growth company that is the subject of 
a proposed public offering. However, few investment banks have 
published any pre-IPO research since passage of the JOBS Act, 
and research coverage in general on small issuers continues to 
be a problem--which affects investor interest in these growth 
companies, their trading liquidity, and their ability to access 
investment firm capital.
    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, popular 
investment options for retail investors, 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. 
The Fair Access to Investment Research (FAIR) Act (P.L. 115-66) 
corrects a problem that the Securities and Exchange Commission 
(SEC) had known about since 2001, but failed to address. Prior 
to the FAIR Act, federal securities law inhibited the free flow 
of investment research. The law 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.
    A recent report by Cowen to the SEC Investor Advisory 
Committee noted that about 61% of all companies listed on a 
major exchange with less than a $100 million market 
capitalization have no research coverage at all. For equities 
with a market cap below $750 million, the average number of 
research analysts covering that stock is 1, while equities 
above $750 million in market cap have an average of 12 research 
analysts covering the stock. Moreover, a 2017 survey by OTC 
Markets reported that 68% of respondents stated they had no 
research coverage and another 5% stated they did not know if 
they had any research coverage.
    Additionally, the amount of research written on smaller cap 
companies has declined even as the percentage of individual 
investor ownership in smaller cap companies has increased. 
Little-to-no research coverage generally corresponds with lower 
stock liquidity, and since investment firms typically avoid 
investing in illiquid stocks, the lack of research coverage 
effectively precludes smaller cap issuers with illiquid stocks 
from accessing investment firm capital. Moreover, reduced 
research coverage may be particularly disadvantageous to 
individual investors who have limited research capabilities on 
their own.
    One study also found that an increase in the number of 
analysts covering an industry improved the quality of analyst 
forecasts and information flow to investors.
    For that reason, it is important to examine current SEC 
rules and regulations that affect the ability of investment 
analysts to provide research coverage about small issuers. The 
Treasury Report on Capital Markets recommended a holistic 
review of rules and regulations regarding investment analyst 
research, including the Global Analyst Research Settlement, to 
determine which provisions should be retained, amended, or 
removed.

                                HEARINGS

    The subcommittee on Capital Markets, Securities, and 
Investment held a hearing examining matters relating to H.R. 
6139 on May 23, 2018.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
June 21, 2018, and ordered H.R. 6139 to be reported favorably 
to the House without amendment by a recorded vote of 58 yeas to 
0 nays (recorded vote no. FC-192), 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 58 yeas to 0 nays 
(Record vote no. FC-192), 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. 6139 
will help to identify the challenges small issuers face in 
obtaining research coverage and the subsequent impact this has 
on the trading liquidity of their securities and their ability 
to access investment firm capital by directing the SEC to 
conduct a study on the causes affecting the ability of such 
issuers to obtain research coverage.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    The Committee has not received an estimate of new budget 
authority contained in the cost estimate prepared by the 
Director of the Congressional Budget Office pursuant to Sec. 
402 of the Congressional Budget Act of 1974. In compliance with 
clause 3(c)(2) of rule XIII of the Rules of the House, the 
Committee opines that H.R. 6139 will not establish any new 
budget or entitlement authority or create any tax expenditures.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    The cost estimate prepared by the Director of the 
Congressional Budget Office pursuant to Sec. 402 of the 
Congressional Budget Act of 1974 was not submitted timely to 
the Committee.

                       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 no 
directed rulemaking within the meaning of such section.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This Section cites H.R. 6139 as the ``Improving Investment 
Research for Small and Emerging Issuers Act.''

Section 2. Research study

    This section requires the SEC to conduct a study to 
evaluate the issues affecting the provision of and reliance 
upon investment analyst research for small issuers, including 
emerging growth companies, and other small cap issuers like 
nano-cap and microcap companies at the lower end of the market 
capitalization spectrum, and companies considering initial 
public offerings. The SEC is required to report to Congress 
within 180 days on its results and on recommendations to 
increase the demand for, volume of, and quality of investment 
research into small issuers.

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