[House Report 115-878]
[From the U.S. Government Publishing Office]


115th Congress   }                                          {   Report
                        HOUSE OF REPRESENTATIVES
 2d Session      }                                          {  115-878

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



 
              EXPANDING INVESTMENT IN SMALL BUSINESSES ACT

                                _______
                                

 July 31, 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. 6319]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 6319) to require the Securities and Exchange 
Commission to carry out a study of the 10 per centum threshold 
limitation applicable to the definition of a diversified 
company under the Investment Company Act of 1940, and for other 
purposes, having considered the same, report favorably thereon 
without amendment and recommend that the bill do pass.

                          PURPOSE AND SUMMARY

    On July 10, 2018, Representative Randy Hultgren introduced 
H.R. 6319, the ``Expanding Investment in Small Businesses Act'' 
to requires the U.S. Securities and Exchange Commission (SEC) 
to study the current diversified fund limit threshold for 
diversified mutual funds--10 percent of the voting shares in an 
individual company--and determine whether such threshold limits 
capital formation. The SEC is to report its findings to 
Congress and then recommend whether Congress should amend the 
Investment Company Act of 1940. To conduct this study, the SEC 
may take public comments, and shall issue a report of its 
findings to Congress--including any legislative recommendations 
to increase the 10 percent threshold--within 180 days of 
enactment.

                  BACKGROUND AND NEED FOR LEGISLATION

    In the April 26, 2018 report released by the Center for 
Capital Markets Competitiveness at U.S. Chamber of Commerce, 
the American Securities Association, the Biotechnology 
Innovation Association, the Equity Dealers of America, SIFMA, 
TECHNET, NASDAQ and the National Venture Capital Association 
noted, ``the decline in public companies has created fewer 
opportunities for American families and businesses, and we 
present these recommendations to assist more companies in going 
and staying public.''
    The goal of H.R. 6321 is to improve the ability of 
companies, particularly emerging growth companies (EGCS) 
created by Title I of the Jumpstart Our Business Startups or 
JOBS Act or smaller issuers, to attract and retain investment 
capital. Specifically, H.R. 6321 would require the SEC to 
conduct a study to determine if the diversified fund limit 
threshold of 10 percent on mutual funds is constraining their 
ability to take meaningful positions in small-cap companies.
    Under Section 5(b)(1) of the Investment Company Act (ICA) 
of 1940, for a mutual fund to qualify as ``diversified,'' (1) 
75 percent of the fund's assets must be in cash, government 
securities (e.g. bonds, treasury bills, etc.), or in other 
issuers' securities; (2) no more than 5 percent of the fund's 
assets may be invested in any one company; and (3) the fund may 
own no more than 10 percent of an issuer's outstanding 
securities.
    Mutual funds have historically played an important role in 
helping to provide liquid markets for the shares of newly 
public companies. Since 1990, the number of total registered 
mutual funds has grown about ten times, mean fund size has more 
than doubled, and open-end fund holdings of U.S. corporate 
equities has reached approximately 24 percent of the entire 
market. This growth means the investment decisions of mutual 
funds today are an important aspect of our country's public 
capital markets.
    As the size of mutual funds has increased in recent years, 
some industry experts have said that the diversified fund limit 
rules--specifically the cap on a diversified fund's ownership 
of an issuer's outstanding shares at 10 percent--have limited 
funds' ability to take meaningful positions in small-cap 
companies. According to testimony at the Subcommittee on 
Capital Markets, Securities, and Investment hearing on May 23, 
2018, the current 10 percent limit on mutual fund positions 
limits investment interest in small-cap initial public 
offerings (IPOs) because, as large funds' assets under 
management (AUM) grows, the 10 percent limit means that any 
investment in a small IPO will have a negligible impact on 
overall fund return. Declining mutual fund interest in small-
cap IPOs also materially weakens the trading environment for 
small-cap stocks and likely deters small firms from joining our 
public markets.
    To address these concerns, this bill would require the SEC 
to study whether the current diversified fund limit threshold 
for mutual funds of 10 percent constrains their ability to take 
meaningful positions in small-cap companies. Specifically, 
under the bill, the SEC will consider: the size and number of 
diversified funds that are currently restricted in their 
ability to own more than 10% of the voting shares in an 
individual company; if investing preferences of a diversified 
funds have shifted away from companies with smaller market 
capitalizations; the expected increase in the availability of 
capital to small and emerging growth companies if the threshold 
is increased; the ability of registered funds to manage 
liquidity risk; and other considerations the SEC considers 
necessary for the protection of investors.
    A modest increasing in this threshold will allow 
diversified mutual funds to continue to invest in either JOBS 
Act EGCs or small issuers even as their assets under management 
continue to grow.

                                HEARINGS

    The Subcommittee on Capital Markets, Securities, and 
Investment held a hearing examining matters relating to H.R. 
6319 on May 23, 2018.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
July 11, 2018, and ordered H.R. 6319 to be reported favorably 
to the House, without amendment, 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 vote was on a motion by Chairman Hensarling to report the 
bill favorably to the House without amendment. The motion was 
agreed to by voice vote, 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. 6319 
mandate the SEC to conduct a study on the effect of the 10% 
diversified fund limit threshold on mutual funds and their 
ability to take investment positions within small-cap companies 
that will help provide liquid markets for newly-listed 
companies.

   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, July 17, 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. 3555, H.R. 6177, 
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R. 
6324.
    If you wish further details on these estimates, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                             Mark P. Hadley
                                        (For Keith Hall, Director).
    Enclosure.

Securities and Exchange Commission Legislation

    On July 11, the House Committee on Financial Services 
ordered eight bills to be reported related to the rules, 
regulations, and operations of the Securities and Exchange 
Commission (SEC). The bills are:
           H.R. 3555, the Exchange Regulatory 
        Improvement Act, would require the Securities and 
        Exchange Commission (SEC) to issue regulations 
        regarding its definition of what constitutes a facility 
        used by a national securities exchange;
           H.R. 6177, the Developing and Empowering our 
        Aspiring Leaders Act of 2018, would direct the SEC to 
        conduct a rulemaking to expand what types of asset 
        acquisitions are considered qualifying investments for 
        a venture capital fund;
           H.R. 6319, the Expanding Investment in Small 
        Business Act, would require the SEC to conduct a study 
        on the limitation on the amount of outstanding 
        securities a closed-end fund may hold from a single 
        issuer and still be classified as diversified;
           H.R. 6320, the Promoting Transparent 
        Standards for Corporate Insiders Act, would require the 
        SEC to conduct a study of various proposals to change 
        agency rules regarding the use of written trading plans 
        by certain securities traders;
           H.R. 6321, the Investment Adviser Regulatory 
        Flexibility Improvement Act, would require the SEC to 
        revise the definitions of a small business and small 
        organization applicable for assessing the effect of the 
        agency's rulemakings under the Investment Advisers Act 
        of 1940 on those entities;
           H.R. 6322, the Enhancing Multi-Class Share 
        Disclosures Act, would direct the SEC to issue a rule 
        requiring securities issuers with multi-class stock 
        structures to make disclosures regarding the voting 
        power of certain individuals;
           H.R. 6323, the National Senior Investor 
        Initiative Act of 2018, would direct the SEC to 
        establish a taskforce to identify challenges that 
        senior investors face and to report on its findings 
        every two years; and
           H.R. 6324, the Middle Market IPO 
        Underwriting Cost Act, would direct the SEC to study 
        the costs associated with small and medium-sized 
        companies undertaking an initial public offering and to 
        report on its findings.
    Using information from the SEC regarding the costs of 
similar activities, CBO estimates that implementing seven of 
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R. 
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of 
about $1 million for the agency to conduct the required studies 
and rulemakings and to issue reports. CBO estimates that 
implementing the eighth bill--H.R. 6323--would have a gross 
cost of $7 million over the 2019-2023 period for the SEC to 
establish and carry out the functions of the taskforce 
established under the bill.
    However, the SEC is authorized to collect fees sufficient 
to offset its annual appropriation; therefore, CBO estimates 
that the net effect on discretionary spending of implementing 
each of those bills would be negligible, assuming appropriation 
actions consistent with that authority. H.R. 6323 also would 
require the Government Accountability Office (GAO) to conduct a 
study on the economic costs of the financial exploitation of 
senior citizens and CBO estimates that implementing that 
section would cost GAO less than $500,000; such spending would 
be subject to the availability of appropriated funds.
    None of the bills would affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply for any of the 
eight bills.
    None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods 
beginning in 2029, CBO estimates.
    None of the bills contain intergovernmental mandates as 
defined in the Unfunded Mandate Reform Act (UMRA) and would not 
affect the budgets of state, local, or tribal governments. All 
of them would require the SEC to take actions that could raise 
the agency's administrative costs and the fees it collects to 
offset those costs. If the SEC increased fees, it would 
increase the cost of an existing mandate on private entities 
required to pay those fees. CBO estimates that none of the 
bills would increase fees in an amount that would exceed 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 no 
directed rule makings within the meaning of such section.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This section cites H.R. 6319 as the ``Expanding Investment 
in Small Businesses Act.''

Section 2. SEC study

    This section directs the SEC to carry out a study on the 
10% threshold limitation applicable to the definition of a 
diversified company under section 5(b)(1) of the Investment 
Company Act of 1940. In conducting this study, the SEC may take 
public comments, and the SEC shall issue a report of its 
findings--including any legislative recommendations--within 180 
days of enactment of the bill.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 6319 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.