[House Report 117-313]
[From the U.S. Government Publishing Office]
117th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 117-313
======================================================================
SMALL BUSINESS MERGERS, ACQUISITIONS, SALES, AND BROKERAGE
SIMPLIFICATION ACT OF 2021
_______
May 10, 2022.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Ms. Waters, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 935]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 935) to amend the Securities Exchange Act of
1934 to exempt from registration brokers performing services in
connection with the transfer of ownership of smaller privately
held companies, having considered the same, reports favorably
thereon with an amendment and recommends that the bill as
amended do pass.
CONTENTS
Page
Purpose and Summary.............................................. 4
Background and Need for Legislation.............................. 4
Section-by-Section Analysis of the Legislation................... 5
Hearings......................................................... 5
Committee Consideration.......................................... 6
Committee Votes.................................................. 6
Statement of Performance Goals and Objectives.................... 8
New Budget Authority and C.B.O. Cost Estimate.................... 8
Committee Cost Estimate.......................................... 9
Federal Mandates Statement....................................... 9
Advisory Committee Statement..................................... 9
Applicability to Legislative Branch.............................. 9
Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits....................................................... 10
Duplicative Federal Programs..................................... 10
Changes in Existing Law.......................................... 10
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 ``Small Business Mergers, Acquisitions,
Sales, and Brokerage Simplification Act of 2021''.
SEC. 2. REGISTRATION EXEMPTION FOR MERGER AND ACQUISITION BROKERS.
Section 15(b) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(b)) is amended by adding at the end the following:
``(13) Registration exemption for merger and acquisition
brokers.--
``(A) In general.--Except as provided in subparagraph
(B), an M&A broker shall be exempt from registration
under this section.
``(B) Excluded activities.--An M&A broker is not
exempt from registration under this paragraph if such
broker does any of the following:
``(i) Directly or indirectly, in connection
with the transfer of ownership of an eligible
privately held company, receives, holds,
transmits, or has custody of the funds or
securities to be exchanged by the parties to
the transaction.
``(ii) Engages on behalf of an issuer in a
public offering of any class of securities that
is registered, or is required to be registered,
with the Commission under section 12 or with
respect to which the issuer files, or is
required to file, period information,
documents, and reports under subsection (d).
``(iii) Engages on behalf of any party in a
transaction involving a shell company, other
than a business combination related shell
company.
``(iv) Directly, or indirectly through any of
its affiliates, provides financing related to
the transfer of ownership of an eligible
privately held company.
``(v) Assists any party to obtain financing
from an unaffiliated third party without--
``(I) complying with all other
applicable laws in connection with such
assistance, including, if applicable,
Regulation T (12 C.F.R. 220 et seq.);
and
``(II) disclosing any compensation in
writing to the party.
``(vi) Represents both the buyer and the
seller in the same transaction without
providing clear written disclosure as to the
parties the broker represents and obtaining
written consent from both parties to the joint
representation.
``(vii) Facilitates a transaction with a
group of buyers formed with the assistance of
the M&A broker to acquire the eligible
privately held company.
``(viii) Engages in a transaction involving
the transfer of ownership of an eligible
privately held company to a passive buyer or
group of passive buyers.
``(ix) Binds a party to a transfer of
ownership of an eligible privately held
company.
``(C) Disqualification.--An M&A broker is not exempt
from registration under this paragraph if such broker
(and if and as applicable, including any officer,
director, member, manager, partner, or employee of such
broker)--
``(i) has been barred from association with a
broker or dealer by the Commission, any State,
or any self-regulatory organization; or
``(ii) is suspended from association with a
broker or dealer.
``(D) Rule of construction.--Nothing in this
paragraph shall be construed to limit any other
authority of the Commission to exempt any person, or
any class of persons, from any provision of this title,
or from any provision of any rule or regulation
thereunder.
``(E) Definitions.--In this paragraph:
``(i) Business combination related shell
company.--The term `business combination
related shell company' means a shell company
that is formed by an entity that is not a shell
company--
``(I) solely for the purpose of
changing the corporate domicile of that
entity solely within the United States;
or
``(II) solely for the purpose of
completing a business combination
transaction (as defined under section
230.165(f) of title 17, Code of Federal
Regulations) among one or more entities
other than the company itself, none of
which is a shell company.
``(ii) Control.--The term `control' means the
power, directly or indirectly, to direct the
management or policies of a company, whether
through ownership of securities, by contract,
or otherwise. There is a presumption of control
if, upon completion of a transaction, the buyer
or group of buyers--
``(I) has the right to vote 25
percent or more of a class of voting
securities or the power to sell or
direct the sale of 25 percent or more
of a class of voting securities; or
``(II) in the case of a partnership
or limited liability company, has the
right to receive upon dissolution, or
has contributed, 25 percent or more of
the capital.
``(iii) Eligible privately held company.--The
term `eligible privately held company' means a
privately held company that meets both of the
following conditions:
``(I) The company does not have any
class of securities registered, or
required to be registered, with the
Commission under section 12 or with
respect to which the company files, or
is required to file, periodic
information, documents, and reports
under subsection (d).
``(II) In the fiscal year ending
immediately before the fiscal year in
which the services of the M&A broker
are initially engaged with respect to
the securities transaction, the company
meets either or both of the following
conditions (determined in accordance
with the historical financial
accounting records of the company):
``(aa) The earnings of the
company before interest, taxes,
depreciation, and amortization
are less than $25,000,000.
``(bb) The gross revenues of
the company are less than
$250,000,000.
For purposes of this subclause, the
Commission may by rule modify the
dollar figures if the Commission
determines that such a modification is
necessary or appropriate in the public
interest or for the protection of
investors.
``(iv) M&A broker.--The term `M&A broker'
means a broker, and any person associated with
a broker, engaged in the business of effecting
securities transactions solely in connection
with the transfer of ownership of an eligible
privately held company, regardless of whether
the broker acts on behalf of a seller or buyer,
through the purchase, sale, exchange, issuance,
repurchase, or redemption of, or a business
combination involving, securities or assets of
the eligible privately held company, if the
broker reasonably believes that--
``(I) upon consummation of the
transaction, any person acquiring
securities or assets of the eligible
privately held company, acting alone or
in concert--
``(aa) will control the
eligible privately held company
or the business conducted with
the assets of the eligible
privately held company; and
``(bb) directly or
indirectly, will be active in
the management of the eligible
privately held company or the
business conducted with the
assets of the eligible
privately held company,
including without limitation,
for example, by--
``(AA) electing
executive officers;
``(BB) approving the
annual budget;
``(CC) serving as an
executive or other
executive manager; or
``(DD) carrying out
such other activities
as the Commission may,
by rule, determine to
be in the public
interest; and
``(II) if any person is offered
securities in exchange for securities
or assets of the eligible privately
held company, such person will, prior
to becoming legally bound to consummate
the transaction, receive or have
reasonable access to the most recent
fiscal year-end financial statements of
the issuer of the securities as
customarily prepared by the management
of the issuer in the normal course of
operations and, if the financial
statements of the issuer are audited,
reviewed, or compiled, any related
statement by the independent
accountant, a balance sheet dated not
more than 120 days before the date of
the offer, and information pertaining
to the management, business, results of
operations for the period covered by
the foregoing financial statements, and
material loss contingencies of the
issuer.
``(v) Shell company.--The term `shell
company' means a company that at the time of a
transaction with an eligible privately held
company--
``(I) has no or nominal operations;
and
``(II) has--
``(aa) no or nominal assets;
``(bb) assets consisting
solely of cash and cash
equivalents; or
``(cc) assets consisting of
any amount of cash and cash
equivalents and nominal other
assets.
``(F) Inflation adjustment.--
``(i) In general.--On the date that is 5
years after the date of the enactment of this
paragraph, and every 5 years thereafter, each
dollar amount in subparagraph (E)(iii)(II)
shall be adjusted by--
``(I) dividing the annual value of
the Employment Cost Index For Wages and
Salaries, Private Industry Workers (or
any successor index), as published by
the Bureau of Labor Statistics, for the
calendar year preceding the calendar
year in which the adjustment is being
made by the annual value of such index
(or successor) for the calendar year
ending December 31, 2020; and
``(II) multiplying such dollar amount
by the quotient obtained under
subclause (I).
``(ii) Rounding.--Each dollar amount
determined under clause (i) shall be rounded to
the nearest multiple of $100,000.''.
SEC. 3. EFFECTIVE DATE.
This Act and any amendment made by this Act shall take effect on the
date that is 90 days after the date of the enactment of this Act.
Purpose and Summary
On February 8, 2021, Representative Huizenga introduced
H.R. 935, the Small Business Mergers, Acquisitions, Sales, and
Brokerage Simplification Act of 2021, which would codify a
longstanding SEC no-action letter that exempts certain merger-
and-acquisition brokers from securities registration
requirements that facilitate the transfer of ownership in
privately held companies with earnings or revenues under
specified thresholds, provided such brokers meet certain
conditions.
Background and Need for Legislation
Pursuant to the Securities Exchange Act of 1934, a broker-
dealer must file an application to register with the SEC in
order to facilitate any sale or purchase of securities.
Registration is intended to protect investors and sellers from
brokers who may violate antitrust laws or otherwise disregard
securities laws. However, the services of a brokerage firms can
become expensive for small or medium businesses.\1\ Smaller
companies may lack the resources and knowledge about the
Securities Exchange Act of 1934 (Exchange Act) to properly deal
with what is required of them. Further, smaller companies do
not pose the same potential for systemic risks as larger
companies.
---------------------------------------------------------------------------
\1\Investopedia. Selecting Mergers & Acquisitions Advisory Firms
for Small Businesses, (March 19, 2020).
---------------------------------------------------------------------------
In 2014, the SEC issued a no-action letter (2014 NAL) in
response to a letter regarding the sale of a privately held
company without registering as a broker-dealer pursuant to
Section 15(b) of the Exchange Act.\2\ This letter provides
exemptive relief to privately held companies without securities
registered regarding the registration of broker-dealers. Under
the 2014 NAL, if a private company does not have securities, or
is not required to register securities with SEC pursuant to the
Exchange Act, it may use an unregistered broker to facilitate
mergers, acquisitions, etc. This provides reasonable
flexibilities for small and medium businesses that need the
services of a broker to merge with or acquire other small or
medium size businesses without creating undue systemic risks.
By codifying the 2014 NAL, this bill would help ensure these
flexibilities remain in place.
---------------------------------------------------------------------------
\2\See SEC Division of Trading and Markets, No-Action Letter re:
M&A Brokers, (Jan. 31, 2014).
---------------------------------------------------------------------------
H.R. 935 is supported by: the U.S. Chamber of Commerce3 and
the North American Securities Administrators Association.4 The
bill or a similar version is opposed by SIFMA5 and Americans
for Financial Reform.6 A similar version of this bill, H.R.
477, passed the House in 2017 by a vote of 426-0.
Section-by-Section Analysis
Section 1. Short title
This section establishes the short title of
the bill as the ``Small Business Mergers, Acquisitions,
Sales, and Brokerage Simplification Act of 2021.''
Section 2. Registration exemption for merger and acquisition brokers
Section 2 would amend Section 15(b) of the
Securities Exchange Act of 1934 by adding new
subsections that permits a registration exemption for
merger and acquisition brokers (M&A broker) for
``excluded activities'' if such broker does the
following: (1) in connection with the transfer of an
eligible privately held company, receives, holds,
transmits, or has custody of funds or securities that
are exchanged between parties in the transaction; (2)
engages on behalf of an issuer in a public offering of
securities under Section 12 or to which an issuer files
periodic information, documents or reports; (3) engages
on behalf of any party in a transaction involving a
shell company, other than a business combination
related shell company; (4) provides financing to the
transfer of ownership; (5) assists any party to obtain
financing from an unaffiliated third party; (6)
represents both the buyer and seller in the same
transaction; (7) facilitates a transaction with a group
of buyers formed by the M&A broker to acquire the
eligible privately held company; (8) engages in a
transaction involving the transfer of ownership of a
privately held company to a passive buyer or group of
passive buyers; and (9) binds a party to a transfer of
ownership of an eligible privately held company.
Section 2 also would statutorily disqualify
certain brokers from the exemption to registration if
such broker is subject to: (1) suspension or revocation
of registration; (2) statutorily disqualified; (3)
disqualified under rules adopted by the SEC under
section 926 of the Investor Protection and Securities
Reform Act of 2010; or by a final order.
Section 3. Effective date
Section 3 establishes that this Act will
take effect 90 days after the enactment of this Act.
Hearings
For the purposes of section 3(c)(6) of House rule XIII, the
Committee on Financial Services' held a hearing on October 5,
2021, entitled, ``Oversight of the U.S. Securities and Exchange
Commission: Wall Street's Cop Is Finally Back on the Beat,'' to
consider matters related to H.R. 935.
Committee Consideration
The Committee on Financial Services met in open session on
July 29, 2021, and ordered H.R. 935 to be reported favorably to
the House with an amendment in the nature of a substitute by a
voice vote.
Committee Votes and Roll Call Votes
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
following roll call votes occurred during the Committee's
consideration of H.R. 935: An amendment in the nature of a
substitute, no. 7, offered by Mr. Huizenga was AGREED TO by
voice vote.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Statement of Oversight Findings and Recommendations of the Committee
In compliance with clause 3(c)(1) of rule XIII and clause
2(b)(1) of rule X of the Rules of the House of Representatives,
the Committee's oversight findings and recommendations are
reflected in the descriptive portions of this report.
Statement of Performance Goals and Objectives
Pursuant to clause (3)(c) of rule XIII of the Rules of the
House of Representatives, the goals of H.R. 935 are to
facilitate the sale of businesses. To do so, a broker must be
registered with the SEC. However, it is expensive for small and
mid-sized businesses to contract with a broker for their
services. The SEC issued a no action letter that provided
exemptions for companies without securities and not required to
register their securities to use unregistered brokers to
facilitate mergers, sales, and acquisitions. This bill codifies
the SEC's no action letter permitting for M&A brokers to help
facilitate the transfer of ownership in privately held
companies.
New Budget Authority and CBO Cost Estimate
Pursuant to clause 3(c)(2) of rule XIII of the Rules of the
House of Representatives and section 308(a) of the
Congressional Budget Act of 1974, and pursuant to clause
3(c)(3) of Rule XIII of the Rules of the House of
Representatives and section 402 of the Congressional Budget Act
of 1974, the Committee has received the following estimate for
H.R. 935 from the Director of the Congressional Budget Office:
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
H.R. 935 would exempt certain brokers that perform
transactions related to ownership transfers of eligible
privately held companies from the requirement to register with
the Securities and Exchange Commission (SEC).
Using information from the SEC, CBO estimates that
implementing H.R. 935 would cost less than $500,000 for the
agency to clarify the applicability of regulations regarding
registration requirements for brokers of mergers and
acquisitions. Moreover, because the SEC is authorized to
collect fees each year to offset its annual appropriation, CBO
expects that the net effect on discretionary spending over the
2022-2026 period would be negligible, assuming appropriation
actions consistent with that authority.
If the SEC increased fees to offset the costs associated
with implementing the bill, H.R. 935 would increase the cost of
an existing mandate on private entities required to pay those
fees. CBO estimates that, on average, the annual incremental
cost of the mandate would be less than $500,000--well below the
annual threshold established in the Unfunded Mandates Reform
Act (UMRA) for private-sector mandates ($170 million in 2021,
adjusted annually for inflation).
H.R. 935 contains no intergovernmental mandates as defined
in UMRA.
The CBO staff contact for this estimate is David Hughes.
The estimate was reviewed by H. Samuel Papenfuss, Deputy
Director of Budget Analysis.
Committee Cost Estimate
Clause 3(d)(1) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison of the
costs that would be incurred in carrying out H.R. 935. However,
clause 3(d)(2)(B) of that rule provides that this requirement
does not apply when the committee has included in its report a
timely submitted cost estimate of the bill prepared by the
Director of the Congressional Budget Office under section 402
of the Congressional Budget Act.
Unfunded Mandate Statement
Pursuant to Section 423 of the Congressional Budget and
Impoundment Control Act (as amended by Section 101(a)(2) of the
Unfunded Mandates Reform Act, Pub. L. 104-4), the Committee
adopts as its own the estimate of federal mandates regarding
H.R. 935, as amended prepared by the Director of the
Congressional Budget Office.
Advisory Committee
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Application of Law to the Legislative Branch
Pursuant to section 102(b)(3) of the Congressional
Accountability Act, Pub. L. No. 104-1, H.R. 935, as amended,
does not apply to terms and conditions of employment or to
access to public services or accommodations within the
legislative branch.
Earmark Statement
In accordance with clause 9 of rule XXI of the Rules of the
House of Representatives, H.R. 935 does not contain any
congressional earmarks, limited tax benefits, or limited tariff
benefits as described in clauses 9(e), 9(f), and 9(g) of rule
XXI.
Duplication of Federal Programs
Pursuant to clause 3(c)(5) of rule XIII of the Rules of the
House of Representatives, the Committee states that no
provision of H.R. 935 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.
Changes to Existing Law
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, H.R. 935, as reported, are shown as follows:
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italics and existing law in which no change is
proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
registration and regulation of brokers and dealers
Sec. 15. (a)(1) It shall be unlawful for any broker or dealer
which is either a person other than a natural person or a
natural person not associated with a broker or dealer which is
a person other than a natural person (other than such a broker
or dealer whose business is exclusively intrastate and who does
not make use of any facility of a national securities exchange)
to make use of the mails or any means or instrumentality of
interstate commerce to effect any transactions in, or to induce
or attempt to induce the purchase or sale of, any security
(other than an exempted security or commercial paper, bankers'
acceptances, or commercial bills) unless such broker or dealer
is registered in accordance with subsection (b) of this
section.
(2) The Commission, by rule or order, as it deems consistent
with the public interest and the protection of investors, may
conditionally or unconditionally exempt from paragraph (1) of
this subsection any broker or dealer or class of brokers or
dealers specified in such rule or order.
(b)(1) A broker or dealer may be registered by filing with
the Commission an application for registration in such form and
containing such information and documents concerning such
broker or dealer and any persons associated with such broker or
dealer as the Commission, by rule, may prescribe as necessary
or appropriate in the public interest or for the protection of
investors. Within forty-five days of the date of the filing of
such application (or within such longer period as to which the
applicant consents), the Commission shall--
(A) by order grant registration, or
(B) institute proceedings to determine whether
registration should be denied. Such proceedings shall
include notice of the grounds for denial under
consideration and opportunity for hearing and shall be
concluded within one hundred twenty days of the date of
the filing of the application for registration. At the
conclusion of such proceedings, the Commission, by
order, shall grant or deny such registration. The
Commission may extend the time for conclusion of such
proceedings for up to ninety days if it finds good
cause for such extension and publishes its reasons for
so finding or for such longer period as to which the
applicant consents.
The Commission shall grant such registration if the Commission
finds that the requirements of this section are satisfied. The
order granting registration shall not be effective until such
broker or dealer has become a member of a registered securities
association, or until such broker or dealer has become a member
of a national securities exchange, if such broker or dealer
effects transactions solely on that exchange, unless the
Commission has exempted such broker or dealer, by rule or
order, from such membership. The Commission shall deny such
registration if it does not make such a finding or if it finds
that if the applicant were so registered, its registration
would be subject to suspension or revocation under paragraph
(4) of this subsection.
(2)(A) An application for registration of a broker or dealer
to be formed or organized may be made by a broker or dealer to
which the broker or dealer to be formed or organized is to be
the successor. Such application, in such form as the
Commission, by rule, may prescribe, shall contain such
information and documents concerning the applicant, the
successor, and any persons associated with the applicant or the
successor, as the Commission, by rule, may prescribe as
necessary or appropriate in the public interest or for the
protection of investors. The grant or denial of registration to
such an applicant shall be in accordance with the procedures
set forth in paragraph (1) of this subsection. If the
Commission grants such registration, the registration shall
terminate on the forty-fifth day after the effective date
thereof, unless prior thereto the successor shall, in
accordance with such rules and regulations as the Commission
may prescribe, adopt the application for registration as its
own.
(B) Any person who is a broker or dealer solely by reason of
acting as a municipal securities dealer or municipal securities
broker, who so acts through a separately identifiable
department or division, and who so acted in such a manner on
the date of enactment of the Securities Acts Amendments of
1975, may, in accordance with such terms and conditions as the
Commission, by rule, prescribes as necessary and appropriate in
the public interest and for the protection of investors,
register such separately identifiable department or division in
accordance with this subsection. If any such department or
division is so registered, the department or division and not
such person himself shall be the broker or dealer for purposes
of this title.
(C) Within six months of the date of the granting of
registration to a broker or dealer, the Commission, or upon the
authorization and direction of the Commission, a registered
securities association or national securities exchange of which
such broker or dealer is a member, shall conduct an inspection
of the broker or dealer to determine whether it is operating in
conformity with the provisions of this title and the rules and
regulations thereunder: Provided, however, That the Commission
may delay such inspection of any class of brokers or dealers
for a period not to exceed six months.
(3) Any provision of this title (other than section 5 and
subsection (a) of this section) which prohibits any act,
practice, or course of business if the mails or any means or
instrumentality of interstate commerce is used in connection
therewith shall also prohibit any such act, practice, or course
of business by any registered broker or dealer or any person
acting on behalf of such a broker or dealer, irrespective of
any use of the mails or any means or instrumentality of
interstate commerce in connection therewith.
(4) The Commission, by order, shall censure, place
limitations on the activities, functions, or operations of,
suspend for a period not exceeding twelve months, or revoke the
registration of any broker or dealer if it finds, on the record
after notice and opportunity for hearing, that such censure,
placing of limitations, suspension, or revocation is in the
public interest and that such broker or dealer, whether prior
or subsequent to becoming such, or any person associated with
such broker or dealer, whether prior or subsequent to becoming
so associated--
(A) has willfully made or caused to be made in any
application for registration or report required to be
filed with the Commission or with any other appropriate
regulatory agency under this title, or in any
proceeding before the Commission with respect to
registration, any statement which was at the time and
in the light of the circumstances under which it was
made false or misleading with respect to any material
fact, or has omitted to state in any such application
or report any material fact which is required to be
stated therein.
(B) has been convicted within ten years preceding the
filing of any application for registration or at any
time thereafter of any felony or misdemeanor or of a
substantially equivalent crime by a foreign court of
competent jurisdiction which the Commission finds--
(i) involves the purchase or sale of any
security, the taking of a false oath, the
making of a false report, bribery, perjury,
burglary, any substantially equivalent activity
however denominated by the laws of the relevant
foreign government, or conspiracy to commit any
such offense;
(ii) arises out of the conduct of the
business of a broker, dealer, municipal
securities dealer municipal advisor,,
government securities broker, government
securities dealer, investment adviser, bank,
insurance company, fiduciary, transfer agent,
nationally recognized statistical rating
organization, foreign person performing a
function substantially equivalent to any of the
above, or entity or person required to be
registered under the Commodity Exchange Act (7
U.S.C. 1 et seq.) or any substantially
equivalent foreign statute or regulation;
(iii) involves the larceny, theft, robbery,
extortion, forgery, counterfeiting, fraudulent
concealment, embezzlement, fraudulent
conversion, or misappropriation of funds, or
securities, or substantially equivalent
activity however denominated by the laws of the
relevant foreign government; or
(iv) involves the violation of section 152,
1341, 1342, or 1343 or chapter 25 or 47 of
title 18, United States Code, or a violation of
a substantially equivalent foreign statute.
(C) is permanently or temporarily enjoined by order,
judgment, or decree of any court of competent
jurisdiction from acting as an investment adviser,
underwriter, broker, dealer, municipal securities
dealer municipal advisor,, government securities
broker, government securities dealer, security-based
swap dealer, major security-based swap participant,
transfer agent, nationally recognized statistical
rating organization, foreign person performing a
function substantially equivalent to any of the above,
or entity or person required to be registered under the
Commodity Exchange Act or any substantially equivalent
foreign statute or regulation, or as an affiliated
person or employee of any investment company, bank,
insurance company, foreign entity substantially
equivalent to any of the above, or entity or person
required to be registered under the Commodity Exchange
Act or any substantially equivalent foreign statute or
regulation, or from engaging in or continuing any
conduct or practice in connection with any such
activity, or in connection with the purchase or sale of
any security.
(D) has willfully violated any provision of the
Securities Act of 1933, the Investment Advisers Act of
1940, the Investment Company Act of 1940, the Commodity
Exchange Act, this title, the rules or regulations
under any of such statutes, or the rules of the
Municipal Securities Rulemaking Board, or is unable to
comply with any such provision.
(E) has willfully aided, abetted, counseled,
commanded, induced, or procured the violation by any
other person of any provision of the Securities Act of
1933, the Investment Advisers Act of 1940, the
Investment Company Act of 1940, the Commodity Exchange
Act, this title, the rules or regulations under any of
such statutes, or the rules of the Municipal Securities
Rulemaking Board, or has failed reasonably to
supervise, with a view to preventing violations of the
provisions of such statutes, rules, and regulations,
another person who commits such a violation, if such
other person is subject to his supervision. For the
purposes of this subparagraph (E) no person shall be
deemed to have failed reasonably to supervise any other
person, if--
(i) there have been established procedures,
and a system for applying such procedures,
which would reasonably be expected to prevent
and detect, insofar as practicable, any such
violation by such other person, and
(ii) such person has reasonably discharged
the duties and obligations incumbent upon him
by reason of such procedures and system without
reasonable cause to believe that such
procedures and system were not being complied
with.
(F) is subject to any order of the Commission barring
or suspending the right of the person to be associated
with a broker, dealer, security-based swap dealer, or a
major security-based swap participant;
(G) has been found by a foreign financial regulatory
authority to have--
(i) made or caused to be made in any
application for registration or report required
to be filed with a foreign financial regulatory
authority, or in any proceeding before a
foreign financial regulatory authority with
respect to registration, any statement that was
at the time and in the light of the
circumstances under which it was made false or
misleading with respect to any material fact,
or has omitted to state in any application or
report to the foreign financial regulatory
authority any material fact that is required to
be stated therein;
(ii) violated any foreign statute or
regulation regarding transactions in
securities, or contracts of sale of a commodity
for future delivery, traded on or subject to
the rules of a contract market or any board of
trade;
(iii) aided, abetted, counseled, commanded,
induced, or procured the violation by any
person of any provision of any statutory
provisions enacted by a foreign government, or
rules or regulations thereunder, empowering a
foreign financial regulatory authority
regarding transactions in securities, or
contracts of sale of a commodity for future
delivery, traded on or subject to the rules of
a contract market or any board of trade, or has
been found, by a foreign financial regulatory
authority, to have failed reasonably to
supervise, with a view to preventing violations
of such statutory provisions, rules, and
regulations, another person who commits such a
violation, if such other person is subject to
his supervision; or
(H) is subject to any final order of a State
securities commission (or any agency or officer
performing like functions), State authority that
supervises or examines banks, savings associations, or
credit unions, State insurance commission (or any
agency or office performing like functions), an
appropriate Federal banking agency (as defined in
section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813(q))), or the National Credit Union
Administration, that--
(i) bars such person from association with an
entity regulated by such commission, authority,
agency, or officer, or from engaging in the
business of securities, insurance, banking,
savings association activities, or credit union
activities; or
(ii) constitutes a final order based on
violations of any laws or regulations that
prohibit fraudulent, manipulative, or deceptive
conduct.
(5) Pending final determination whether any registration
under this subsection shall be revoked, the Commission, by
order, may suspend such registration, if such suspension
appears to the Commission, after notice and opportunity for
hearing, to be necessary or appropriate in the public interest
or for the protection of investors. Any registered broker or
dealer may, upon such terms and conditions as the Commission
deems necessary or appropriate in the public interest or for
the protection of investors, withdraw from registration by
filing a written notice of withdrawal with the Commission. If
the Commission finds that any registered broker or dealer is no
longer in existence or has ceased to do business as a broker or
dealer, the Commission, by order, shall cancel the registration
of such broker or dealer.
(6)(A) With respect to any person who is associated, who is
seeking to become associated, or, at the time of the alleged
misconduct, who was associated or was seeking to become
associated with a broker or dealer, or any person
participating, or, at the time of the alleged misconduct, who
was participating, in an offering of any penny stock, the
Commission, by order, shall censure, place limitations on the
activities or functions of such person, or suspend for a period
not exceeding 12 months, or bar any such person from being
associated with a broker, dealer, investment adviser, municipal
securities dealer, municipal advisor, transfer agent, or
nationally recognized statistical rating organization, or from
participating in an offering of penny stock, if the Commission
finds, on the record after notice and opportunity for a
hearing, that such censure, placing of limitations, suspension,
or bar is in the public interest and that such person--
(i) has committed or omitted any act, or is subject
to an order or finding, enumerated in subparagraph (A),
(D), (E), (H), or (G) of paragraph (4) of this
subsection;
(ii) has been convicted of any offense specified in
subparagraph (B) of such paragraph (4) within 10 years
of the commencement of the proceedings under this
paragraph; or
(iii) is enjoined from any action, conduct, or
practice specified in subparagraph (C) of such
paragraph (4).
(B) It shall be unlawful--
(i) for any person as to whom an order under
subparagraph (A) is in effect, without the consent of
the Commission, willfully to become, or to be,
associated with a broker or dealer in contravention of
such order, or to participate in an offering of penny
stock in contravention of such order;
(ii) for any broker or dealer to permit such a
person, without the consent of the Commission, to
become or remain, a person associated with the broker
or dealer in contravention of such order, if such
broker or dealer knew, or in the exercise of reasonable
care should have known, of such order; or
(iii) for any broker or dealer to permit such a
person, without the consent of the Commission, to
participate in an offering of penny stock in
contravention of such order, if such broker or dealer
knew, or in the exercise of reasonable care should have
known, of such order and of such participation.
(C) For purposes of this paragraph, the term ``person
participating in an offering of penny stock'' includes any
person acting as any promoter, finder, consultant, agent, or
other person who engages in activities with a broker, dealer,
or issuer for purposes of the issuance or trading in any penny
stock, or inducing or attempting to induce the purchase or sale
of any penny stock. The Commission may, by rule or regulation,
define such term to include other activities, and may, by rule,
regulation, or order, exempt any person or class of persons, in
whole or in part, conditionally or unconditionally, from such
term.
(7) No registered broker or dealer or government securities
broker or government securities dealer registered (or required
to register) under section 15C(a)(1)(A) shall effect any
transaction in, or induce the purchase or sale of, any security
unless such broker or dealer meets such standards of
operational capability and such broker or dealer and all
natural persons associated with such broker or dealer meet such
standards of training, experience, competence, and such other
qualifications as the Commission finds necessary or appropriate
in the public interest or for the protection of investors. The
Commission shall establish such standards by rules and
regulations, which may--
(A) specify that all or any portion of such standards
shall be applicable to any class of brokers and dealers
and persons associated with brokers and dealers;
(B) require persons in any such class to pass tests
prescribed in accordance with such rules and
regulations, which tests shall, with respect to any
class of partners, officers, or supervisory employees
(which latter term may be defined by the Commission's
rules and regulations and as so defined shall include
branch managers of brokers or dealers) engaged in the
management of the broker or dealer, include questions
relating to bookkeeping, accounting, internal control
over cash and securities, supervision of employees,
maintenance of records, and other appropriate matters;
and
(C) provide that persons in any such class other than
brokers and dealers and partners, officers, and
supervisory employees of brokers or dealers, may be
qualified solely on the basis of compliance with such
standards of training and such other qualifications as
the Commission finds appropriate.
The Commission, by rule, may prescribe reasonable fees and
charges to defray its costs in carrying out this paragraph,
including, but not limited to, fees for any test administered
by it or under its direction. The Commission may cooperate with
registered securities associations and national securities
exchanges in devising and administering tests and may require
registered brokers and dealers and persons associated with such
brokers and dealers to pass tests administered by or on behalf
of any such association or exchange and to pay such association
or exchange reasonable fees or charges to defray the costs
incurred by such association or exchange in administering such
tests.
(8) It shall be unlawful for any registered broker or dealer
to effect any transaction in, or induce or attempt to induce
the purchase or sale of, any security (other than or commercial
paper, bankers' acceptances, or commercial bills), unless such
broker or dealer is a member of a securities association
registered pursuant to section 15A of this title or effects
transactions in securities solely on a national securities
exchange of which it is a member.
(9) The Commission by rule or order, as it deems consistent
with the public interest and the protection of investors, may
conditionally or unconditionally exempt from paragraph (8) of
this subsection any broker or dealer or class of brokers or
dealers specified in such rule or order.
(10) For the purposes of determining whether a person is
subject to a statutory disqualification under section 6(c)(2),
15A(g)(2), or 17A(b)(4)(A) of this title, the term
``Commission'' in paragraph (4)(B) of this subsection shall
mean ``exchange'', ``association'', or ``clearing agency'',
respectively.
(11) Broker/dealer registration with respect to
transactions in security futures products.--
(A) Notice registration.--
(i) Contents of notice.--
Notwithstanding paragraphs (1) and (2),
a broker or dealer required to register
only because it effects transactions in
security futures products on an
exchange registered pursuant to section
6(g) may register for purposes of this
section by filing with the Commission a
written notice in such form and
containing such information concerning
such broker or dealer and any persons
associated with such broker or dealer
as the Commission, by rule, may
prescribe as necessary or appropriate
in the public interest or for the
protection of investors. A broker or
dealer may not register under this
paragraph unless that broker or dealer
is a member of a national securities
association registered under section
15A(k).
(ii) Immediate effectiveness.--Such
registration shall be effective
contemporaneously with the submission
of notice, in written or electronic
form, to the Commission, except that
such registration shall not be
effective if the registration would be
subject to suspension or revocation
under paragraph (4).
(iii) Suspension.--Such registration
shall be suspended immediately if a
national securities association
registered pursuant to section 15A(k)
of this title suspends the membership
of that broker or dealer.
(iv) Termination.--Such registration
shall be terminated immediately if any
of the above stated conditions for
registration set forth in this
paragraph are no longer satisfied.
(B) Exemptions for registered brokers and
dealers.--A broker or dealer registered
pursuant to the requirements of subparagraph
(A) shall be exempt from the following
provisions of this title and the rules
thereunder with respect to transactions in
security futures products:
(i) Section 8.
(ii) Section 11.
(iii) Subsections (c)(3) and (c)(5)
of this section.
(iv) Section 15B.
(v) Section 15C.
(vi) Subsections (d), (e), (f), (g),
(h), and (i) of section 17.
(12) Exemption for security futures product exchange
members.--
(A) Registration exemption.--A natural person
shall be exempt from the registration
requirements of this section if such person--
(i) is a member of a designated
contract market registered with the
Commission as an exchange pursuant to
section 6(g);
(ii) effects transactions only in
securities on the exchange of which
such person is a member; and
(iii) does not directly accept or
solicit orders from public customers or
provide advice to public customers in
connection with the trading of security
futures products.
(B) Other exemptions.--A natural person
exempt from registration pursuant to
subparagraph (A) shall also be exempt from the
following provisions of this title and the
rules thereunder:
(i) Section 8.
(ii) Section 11.
(iii) Subsections (c)(3), (c)(5), and
(e) of this section.
(iv) Section 15B.
(v) Section 15C.
(vi) Subsections (d), (e), (f), (g),
(h), and (i) of section 17.
(13) Registration exemption for merger and
acquisition brokers.--
(A) In general.--Except as provided in
subparagraph (B), an M&A broker shall be exempt
from registration under this section.
(B) Excluded activities.--An M&A broker is
not exempt from registration under this
paragraph if such broker does any of the
following:
(i) Directly or indirectly, in
connection with the transfer of
ownership of an eligible privately held
company, receives, holds, transmits, or
has custody of the funds or securities
to be exchanged by the parties to the
transaction.
(ii) Engages on behalf of an issuer
in a public offering of any class of
securities that is registered, or is
required to be registered, with the
Commission under section 12 or with
respect to which the issuer files, or
is required to file, period
information, documents, and reports
under subsection (d).
(iii) Engages on behalf of any party
in a transaction involving a shell
company, other than a business
combination related shell company.
(iv) Directly, or indirectly through
any of its affiliates, provides
financing related to the transfer of
ownership of an eligible privately held
company.
(v) Assists any party to obtain
financing from an unaffiliated third
party without--
(I) complying with all other
applicable laws in connection
with such assistance,
including, if applicable,
Regulation T (12 C.F.R. 220 et
seq.); and
(II) disclosing any
compensation in writing to the
party.
(vi) Represents both the buyer and
the seller in the same transaction
without providing clear written
disclosure as to the parties the broker
represents and obtaining written
consent from both parties to the joint
representation.
(vii) Facilitates a transaction with
a group of buyers formed with the
assistance of the M&A broker to acquire
the eligible privately held company.
(viii) Engages in a transaction
involving the transfer of ownership of
an eligible privately held company to a
passive buyer or group of passive
buyers.
(ix) Binds a party to a transfer of
ownership of an eligible privately held
company.
(C) Disqualification.--An M&A broker is not
exempt from registration under this paragraph
if such broker (and if and as applicable,
including any officer, director, member,
manager, partner, or employee of such broker)--
(i) has been barred from association
with a broker or dealer by the
Commission, any State, or any self-
regulatory organization; or
(ii) is suspended from association
with a broker or dealer.
(D) Rule of construction.--Nothing in this
paragraph shall be construed to limit any other
authority of the Commission to exempt any
person, or any class of persons, from any
provision of this title, or from any provision
of any rule or regulation thereunder.
(E) Definitions.--In this paragraph:
(i) Business combination related
shell company.--The term ``business
combination related shell company''
means a shell company that is formed by
an entity that is not a shell company--
(I) solely for the purpose of
changing the corporate domicile
of that entity solely within
the United States; or
(II) solely for the purpose
of completing a business
combination transaction (as
defined under section
230.165(f) of title 17, Code of
Federal Regulations) among one
or more entities other than the
company itself, none of which
is a shell company.
(ii) Control.--The term ``control''
means the power, directly or
indirectly, to direct the management or
policies of a company, whether through
ownership of securities, by contract,
or otherwise. There is a presumption of
control if, upon completion of a
transaction, the buyer or group of
buyers--
(I) has the right to vote 25
percent or more of a class of
voting securities or the power
to sell or direct the sale of
25 percent or more of a class
of voting securities; or
(II) in the case of a
partnership or limited
liability company, has the
right to receive upon
dissolution, or has
contributed, 25 percent or more
of the capital.
(iii) Eligible privately held
company.--The term ``eligible privately
held company'' means a privately held
company that meets both of the
following conditions:
(I) The company does not have
any class of securities
registered, or required to be
registered, with the Commission
under section 12 or with
respect to which the company
files, or is required to file,
periodic information,
documents, and reports under
subsection (d).
(II) In the fiscal year
ending immediately before the
fiscal year in which the
services of the M&A broker are
initially engaged with respect
to the securities transaction,
the company meets either or
both of the following
conditions (determined in
accordance with the historical
financial accounting records of
the company):
(aa) The earnings of
the company before
interest, taxes,
depreciation, and
amortization are less
than $25,000,000.
(bb) The gross
revenues of the company
are less than
$250,000,000.
For purposes of this subclause,
the Commission may by rule
modify the dollar figures if
the Commission determines that
such a modification is
necessary or appropriate in the
public interest or for the
protection of investors.
(iv) M&A broker.--The term ``M&A
broker'' means a broker, and any person
associated with a broker, engaged in
the business of effecting securities
transactions solely in connection with
the transfer of ownership of an
eligible privately held company,
regardless of whether the broker acts
on behalf of a seller or buyer, through
the purchase, sale, exchange, issuance,
repurchase, or redemption of, or a
business combination involving,
securities or assets of the eligible
privately held company, if the broker
reasonably believes that--
(I) upon consummation of the
transaction, any person
acquiring securities or assets
of the eligible privately held
company, acting alone or in
concert--
(aa) will control the
eligible privately held
company or the business
conducted with the
assets of the eligible
privately held company;
and
(bb) directly or
indirectly, will be
active in the
management of the
eligible privately held
company or the business
conducted with the
assets of the eligible
privately held company,
including without
limitation, for
example, by--
(AA) electing
executive
officers;
(BB)
approving the
annual budget;
(CC) serving
as an executive
or other
executive
manager; or
(DD) carrying
out such other
activities as
the Commission
may, by rule,
determine to be
in the public
interest; and
(II) if any person is offered
securities in exchange for
securities or assets of the
eligible privately held
company, such person will,
prior to becoming legally bound
to consummate the transaction,
receive or have reasonable
access to the most recent
fiscal year-end financial
statements of the issuer of the
securities as customarily
prepared by the management of
the issuer in the normal course
of operations and, if the
financial statements of the
issuer are audited, reviewed,
or compiled, any related
statement by the independent
accountant, a balance sheet
dated not more than 120 days
before the date of the offer,
and information pertaining to
the management, business,
results of operations for the
period covered by the foregoing
financial statements, and
material loss contingencies of
the issuer.
(v) Shell company.--The term ``shell
company'' means a company that at the
time of a transaction with an eligible
privately held company--
(I) has no or nominal
operations; and
(II) has--
(aa) no or nominal
assets;
(bb) assets
consisting solely of
cash and cash
equivalents; or
(cc) assets
consisting of any
amount of cash and cash
equivalents and nominal
other assets.
(F) Inflation adjustment.--
(i) In general.--On the date that is
5 years after the date of the enactment
of this paragraph, and every 5 years
thereafter, each dollar amount in
subparagraph (E)(iii)(II) shall be
adjusted by--
(I) dividing the annual value
of the Employment Cost Index
For Wages and Salaries, Private
Industry Workers (or any
successor index), as published
by the Bureau of Labor
Statistics, for the calendar
year preceding the calendar
year in which the adjustment is
being made by the annual value
of such index (or successor)
for the calendar year ending
December 31, 2020; and
(II) multiplying such dollar
amount by the quotient obtained
under subclause (I).
(ii) Rounding.--Each dollar amount
determined under clause (i) shall be
rounded to the nearest multiple of
$100,000.
(c)(1)(A) No broker or dealer shall make use of the mails or
any means or instrumentality of interstate commerce to effect
any transaction in, or to induce or attempt to induce the
purchase or sale of, any security (other than commercial paper,
bankers' acceptances, or commercial bills), or any security-
based swap agreement by means of any manipulative, deceptive,
or other fraudulent device or contrivance.
(B) No broker, dealer, or municipal securities dealer shall
make use of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to induce
or attempt to induce the purchase or sale of, any municipal
security or any security-based swap agreement involving a
municipal security by means of any manipulative, deceptive, or
other fraudulent device or contrivance.
(C) No government securities broker or government securities
dealer shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or to induce or to attempt to induce the
purchase or sale of, any government security or any security-
based swap agreement involving a government security by means
of any manipulative, deceptive, or other fraudulent device or
contrivance.
(2)(A) No broker or dealer shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security or
commercial paper, bankers' acceptances, or commercial bills)
otherwise than on a national securities exchange of which it is
a member, in connection with which such broker or dealer
engages in any fraudulent, deceptive, or manipulative act or
practice, or makes any fictitious quotation.
(B) No broker, dealer, or municipal securities dealer shall
make use of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to induce
or attempt to induce the purchase or sale of, any municipal
security in connection with which such broker, dealer, or
municipal securities dealer engages in any fraudulent,
deceptive, or manipulative act or practice, or makes any
fictitious quotation.
(C) No government securities broker or government securities
dealer shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or induce or attempt to induce the purchase or
sale of, any government security in connection with which such
government securities broker or government securities dealer
engages in any fraudulent, deceptive, or manipulative act or
practice, or makes any fictitious quotation.
(D) The Commission shall, for the purposes of this paragraph,
by rules and regulations define, and prescribe means reasonably
designed to prevent, such acts and practices as are fraudulent,
deceptive, or manipulative and such quotations as are
fictitious.
(E) The Commission shall, prior to adopting any rule or
regulation under subparagraph (C), consult with and consider
the views of the Secretary of the Treasury and each appropriate
regulatory agency. If the Secretary of the Treasury or any
appropriate regulatory agency comments in writing on a proposed
rule or regulation of the Commission under such subparagraph
(C) that has been published for comment, the Commission shall
respond in writing to such written comment before adopting the
proposed rule. If the Secretary of the Treasury determines, and
notifies the Commission, that such rule or regulation, if
implemented, would, or as applied does (i) adversely affect the
liquidity or efficiency of the market for government
securities; or (ii) impose any burden on competition not
necessary or appropriate in furtherance of the purposes of this
section, the Commission shall, prior to adopting the proposed
rule or regulation, find that such rule or regulation is
necessary and appropriate in furtherance of the purposes of
this section notwithstanding the Secretary's determination.
(3)(A) No broker or dealer (other than a government
securities broker or government securities dealer, except a
registered broker or dealer) shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security
(except a government security) or commercial paper, bankers'
acceptances, or commercial bills) in contravention of such
rules and regulations as the Commission shall prescribe as
necessary or appropriate in the public interest or for the
protection of investors to provide safeguards with respect to
the financial responsibility and related practices of brokers
and dealers including, but not limited to, the acceptance of
custody and use of customers' securities and the carrying and
use of customers' deposits or credit balances. Such rules and
regulations shall (A) require the maintenance of reserves with
respect to customers' deposits or credit balances, and (B) no
later than September 1, 1975, establish minimum financial
responsibility requirements for all brokers and dealers.
(B) Consistent with this title, the Commission, in
consultation with the Commodity Futures Trading Commission,
shall issue such rules, regulations, or orders as are necessary
to avoid duplicative or conflicting regulations applicable to
any broker or dealer registered with the Commission pursuant to
section 15(b) (except paragraph (11) thereof), that is also
registered with the Commodity Futures Trading Commission
pursuant to section 4f(a) of the Commodity Exchange Act (except
paragraph (2) thereof), with respect to the application of: (i)
the provisions of section 8, section 15(c)(3), and section 17
of this title and the rules and regulations thereunder related
to the treatment of customer funds, securities, or property,
maintenance of books and records, financial reporting, or other
financial responsibility rules, involving security futures
products; and (ii) similar provisions of the Commodity Exchange
Act and rules and regulations thereunder involving security
futures products.
(C) Notwithstanding any provision of sections
2(a)(1)(C)(i) or 4d(a)(2) of the Commodity Exchange Act
and the rules and regulations thereunder, and pursuant
to an exemption granted by the Commission under section
36 of this title or pursuant to a rule or regulation,
cash and securities may be held by a broker or dealer
registered pursuant to subsection (b)(1) and also
registered as a futures commission merchant pursuant to
section 4f(a)(1) of the Commodity Exchange Act, in a
portfolio margining account carried as a futures
account subject to section 4d of the Commodity Exchange
Act and the rules and regulations thereunder, pursuant
to a portfolio margining program approved by the
Commodity Futures Trading Commission, and subject to
subchapter IV of chapter 7 of title 11 of the United
States Code and the rules and regulations thereunder.
The Commission shall consult with the Commodity Futures
Trading Commission to adopt rules to ensure that such
transactions and accounts are subject to comparable
requirements to the extent practicable for similar
products.
(4) If the Commission finds, after notice and opportunity for
a hearing, that any person subject to the provisions of section
12, 13, 14, or subsection (d) of section 15 of this title or
any rule or regulation thereunder has failed to comply with any
such provision, rule, or regulation in any material respect,
the Commission may publish its findings and issue an order
requiring such person, and any person who was a cause of the
failure to comply due to an act or omission the person knew or
should have known would contribute to the failure to comply, to
comply, or to take steps to effect compliance, with such
provision or such rule or regulation thereunder upon such terms
and conditions and within such time as the Commission may
specify in such order.
(5) No dealer (other than a specialist registered on a
national securities exchange) acting in the capacity of market
maker or otherwise shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security or a
municipal security) in contravention of such specified and
appropriate standards with respect to dealing as the
Commission, by rule, shall prescribe as necessary or
appropriate in the public interest and for the protection of
investors, to maintain fair and orderly markets, or to remove
impediments to and perfect the mechanism of a national market
system. Under the rules of the Commission a dealer in a
security may be prohibited from acting as broker in that
security.
(6) No broker or dealer shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security,
municipal security, commercial paper, bankers' acceptances, or
commercial bills) in contravention of such rules and
regulations as the Commission shall prescribe as necessary or
appropriate in the public interest and for the protection of
investors or to perfect or remove impediments to a national
system for the prompt and accurate clearance and settlement of
securities transactions, with respect to the time and method
of, and the form and format of documents used in connection
with, making settlements of and payments for transactions in
securities, making transfers and deliveries of securities, and
closing accounts. Nothing in this paragraph shall be construed
(A) to affect the authority of the Board of Governors of the
Federal Reserve System, pursuant to section 7 of this title, to
prescribe rules and regulations for the purpose of preventing
the excessive use of credit for the purchase or carrying of
securities, or (B) to authorize the Commission to prescribe
rules or regulations for such purpose.
(7) In connection with any bid for or purchase of a
government security related to an offering of government
securities by or on behalf of an issuer, no government
securities broker, government securities dealer, or bidder for
or purchaser of securities in such offering shall knowingly or
willfully make any false or misleading written statement or
omit any fact necessary to make any written statement made not
misleading.
(8) Prohibition of referral fees.--No broker or dealer, or
person associated with a broker or dealer, may solicit or
accept, directly or indirectly, remuneration for assisting an
attorney in obtaining the representation of any person in any
private action arising under this title or under the Securities
Act of 1933.
(d) Supplementary and Periodic Information.--
(1) In general.--Each issuer which has filed a
registration statement containing an undertaking which
is or becomes operative under this subsection as in
effect prior to the date of enactment of the Securities
Acts Amendments of 1964, and each issuer which shall
after such date file a registration statement which has
become effective pursuant to the Securities Act of
1933, as amended, shall file with the Commission, in
accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors,
such supplementary and periodic information, documents,
and reports as may be required pursuant to section 13
of this title in respect of a security registered
pursuant to section 12 of this title. The duty to file
under this subsection shall be automatically suspended
if and so long as any issue of securities of such
issuer is registered pursuant to section 12 of this
title. The duty to file under this subsection shall
also be automatically suspended as to any fiscal year,
other than the fiscal year within which such
registration statement became effective, if, at the
beginning of such fiscal year, the securities of each
class, other than any class of asset-backed securities,
to which the registration statement relates are held of
record by less than 300 persons, or, in the case of a
bank, a savings and loan holding company (as defined in
section 10 of the Home Owners' Loan Act), or a bank
holding company, as such term is defined in section 2
of the Bank Holding Company Act of 1956 (12 U.S.C.
1841), 1,200 persons persons. For the purposes of this
subsection, the term ``class'' shall be construed to
include all securities of an issuer which are of
substantially similar character and the holders of
which enjoy substantially similar rights and
privileges. The Commission may, for the purpose of this
subsection, define by rules and regulations the term
``held of record'' as it deems necessary or appropriate
in the public interest or for the protection of
investors in order to prevent circumvention of the
provisions of this subsection. Nothing in this
subsection shall apply to securities issued by a
foreign government or political subdivision thereof.
(2) Asset-backed securities.--
(A) Suspension of duty to file.--The
Commission may, by rule or regulation, provide
for the suspension or termination of the duty
to file under this subsection for any class of
asset-backed security, on such terms and
conditions and for such period or periods as
the Commission deems necessary or appropriate
in the public interest or for the protection of
investors.
(B) Classification of issuers.--The
Commission may, for purposes of this
subsection, classify issuers and prescribe
requirements appropriate for each class of
issuers of asset-backed securities.
(e) Notices to Customers Regarding Securities Lending.--Every
registered broker or dealer shall provide notice to its
customers that they may elect not to allow their fully paid
securities to be used in connection with short sales. If a
broker or dealer uses a customer's securities in connection
with short sales, the broker or dealer shall provide notice to
its customer that the broker or dealer may receive compensation
in connection with lending the customer's securities. The
Commission, by rule, as it deems necessary or appropriate in
the public interest and for the protection of investors, may
prescribe the form, content, time, and manner of delivery of
any notice required under this paragraph.
(f) The Commission, by rule, as it deems necessary or
appropriate in the public interest and for the protection of
investors or to assure equal regulation, may require any member
of a national securities exchange not required to register
under section 15 of this title and any person associated with
any such member to comply with any provision of this title
(other than section 15(a)) or the rules or regulations
thereunder which by its terms regulates or prohibits any act,
practice, or course of business by a ``broker or dealer'' or
``registered broker or dealer'' or a ``person associated with a
broker or dealer,'' respectively.
(g) Every registered broker or dealer shall establish,
maintain, and enforce written policies and procedures
reasonably designed, taking into consideration the nature of
such broker's or dealer's business, to prevent the misuse in
violation of this title, or the rules or regulations
thereunder, of material, nonpublic information by such broker
or dealer or any person associated with such broker or dealer.
The Commission, as it deems necessary or appropriate in the
public interest or for the protection of investors, shall adopt
rules or regulations to require specific policies or procedures
reasonably designed to prevent misuse in violation of this
title (or the rules or regulations thereunder) of material,
nonpublic information.
(h) Requirements for Transactions in Penny Stocks.--
(1) In general.--No broker or dealer shall make use
of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to
induce or attempt to induce the purchase or sale of,
any penny stock by any customer except in accordance
with the requirements of this subsection and the rules
and regulations prescribed under this subsection.
(2) Risk disclosure with respect to penny stocks.--
Prior to effecting any transaction in any penny stock,
a broker or dealer shall give the customer a risk
disclosure document that--
(A) contains a description of the nature and
level of risk in the market for penny stocks in
both public offerings and secondary trading;
(B) contains a description of the broker's or
dealer's duties to the customer and of the
rights and remedies available to the customer
with respect to violations of such duties or
other requirements of Federal securities laws;
(C) contains a brief, clear, narrative
description of a dealer market, including
``bid'' and ``ask'' prices for penny stocks and
the significance of the spread between the bid
and ask prices;
(D) contains the toll free telephone number
for inquiries on disciplinary actions
established pursuant to section 15A(i) of this
title;
(E) defines significant terms used in the
disclosure document or in the conduct of
trading in penny stocks; and
(F) contains such other information, and is
in such form (including language, type size,
and format), as the Commission shall require by
rule or regulation.
(3) Commission rules relating to disclosure.--The
Commission shall adopt rules setting forth additional
standards for the disclosure by brokers and dealers to
customers of information concerning transactions in
penny stocks. Such rules--
(A) shall require brokers and dealers to
disclose to each customer, prior to effecting
any transaction in, and at the time of
confirming any transaction with respect to any
penny stock, in accordance with such procedures
and methods as the Commission may require
consistent with the public interest and the
protection of investors--
(i) the bid and ask prices for penny
stock, or such other information as the
Commission may, by rule, require to
provide customers with more useful and
reliable information relating to the
price of such stock;
(ii) the number of shares to which
such bid and ask prices apply, or other
comparable information relating to the
depth and liquidity of the market for
such stock; and
(iii) the amount and a description of
any compensation that the broker or
dealer and the associated person
thereof will receive or has received in
connection with such transaction;
(B) shall require brokers and dealers to
provide, to each customer whose account with
the broker or dealer contains penny stocks, a
monthly statement indicating the market value
of the penny stocks in that account or
indicating that the market value of such stock
cannot be determined because of the
unavailability of firm quotes; and
(C) may, as the Commission finds necessary or
appropriate in the public interest or for the
protection of investors, require brokers and
dealers to disclose to customers additional
information concerning transactions in penny
stocks.
(4) Exemptions.--The Commission, as it determines
consistent with the public interest and the protection
of investors, may by rule, regulation, or order exempt
in whole or in part, conditionally or unconditionally,
any person or class of persons, or any transaction or
class of transactions, from the requirements of this
subsection. Such exemptions shall include an exemption
for brokers and dealers based on the minimal percentage
of the broker's or dealer's commissions, commission-
equivalents, and markups received from transactions in
penny stocks.
(5) Regulations.--It shall be unlawful for any person
to violate such rules and regulations as the Commission
shall prescribe in the public interest or for the
protection of investors or to maintain fair and orderly
markets--
(A) as necessary or appropriate to carry out
this subsection; or
(B) as reasonably designed to prevent
fraudulent, deceptive, or manipulative acts and
practices with respect to penny stocks.
(i) Limitations on State Law.--
(1) Capital, margin, books and records, bonding, and
reports.--No law, rule, regulation, or order, or other
administrative action of any State or political
subdivision thereof shall establish capital, custody,
margin, financial responsibility, making and keeping
records, bonding, or financial or operational reporting
requirements for brokers, dealers, municipal securities
dealers, government securities brokers, or government
securities dealers that differ from, or are in addition
to, the requirements in those areas established under
this title. The Commission shall consult periodically
the securities commissions (or any agency or office
performing like functions) of the States concerning the
adequacy of such requirements as established under this
title.
(2) Funding portals.--
(A) Limitation on state laws.--Except as
provided in subparagraph (B), no State or
political subdivision thereof may enforce any
law, rule, regulation, or other administrative
action against a registered funding portal with
respect to its business as such.
(B) Examination and enforcement authority.--
Subparagraph (A) does not apply with respect to
the examination and enforcement of any law,
rule, regulation, or administrative action of a
State or political subdivision thereof in which
the principal place of business of a registered
funding portal is located, provided that such
law, rule, regulation, or administrative action
is not in addition to or different from the
requirements for registered funding portals
established by the Commission.
(C) Definition.--For purposes of this
paragraph, the term ``State'' includes the
District of Columbia and the territories of the
United States.
(3) De minimis transactions by associated persons.--
No law, rule, regulation, or order, or other
administrative action of any State or political
subdivision thereof may prohibit an associated person
of a broker or dealer from effecting a transaction
described in paragraph (3) for a customer in such State
if--
(A) such associated person is not ineligible
to register with such State for any reason
other than such a transaction;
(B) such associated person is registered with
a registered securities association and at
least one State; and
(C) the broker or dealer with which such
person is associated is registered with such
State.
(4) Described transactions.--
(A) In general.--A transaction is described
in this paragraph if--
(i) such transaction is effected--
(I) on behalf of a customer
that, for 30 days prior to the
day of the transaction,
maintained an account with the
broker or dealer; and
(II) by an associated person
of the broker or dealer--
(aa) to which the
customer was assigned
for 14 days prior to
the day of the
transaction; and
(bb) who is
registered with a State
in which the customer
was a resident or was
present for at least 30
consecutive days during
the 1-year period prior
to the day of the
transaction; or
(ii) the transaction is effected--
(I) on behalf of a customer
that, for 30 days prior to the
day of the transaction,
maintained an account with the
broker or dealer; and
(II) during the period
beginning on the date on which
such associated person files an
application for registration
with the State in which the
transaction is effected and
ending on the earlier of--
(aa) 60 days after
the date on which the
application is filed;
or
(bb) the date on
which such State
notifies the associated
person that it has
denied the application
for registration or has
stayed the pendency of
the application for
cause.
(B) Rules of construction.--For purposes of
subparagraph (A)(i)(II)--
(i) each of up to 3 associated
persons of a broker or dealer who are
designated to effect transactions
during the absence or unavailability of
the principal associated person for a
customer may be treated as an
associated person to which such
customer is assigned; and
(ii) if the customer is present in
another State for 30 or more
consecutive days or has permanently
changed his or her residence to another
State, a transaction is not described
in this paragraph, unless the
associated person of the broker or
dealer files an application for
registration with such State not later
than 10 business days after the later
of the date of the transaction, or the
date of the discovery of the presence
of the customer in the other State for
30 or more consecutive days or the
change in the customer's residence.
(j) Rulemaking To Extend Requirements to New Hybrid
Products.--
(1) Consultation.--Prior to commencing a rulemaking
under this subsection, the Commission shall consult
with and seek the concurrence of the Board concerning
the imposition of broker or dealer registration
requirements with respect to any new hybrid product. In
developing and promulgating rules under this
subsection, the Commission shall consider the views of
the Board, including views with respect to the nature
of the new hybrid product; the history, purpose,
extent, and appropriateness of the regulation of the
new product under the Federal banking laws; and the
impact of the proposed rule on the banking industry.
(2) Limitation.--The Commission shall not--
(A) require a bank to register as a broker or
dealer under this section because the bank
engages in any transaction in, or buys or
sells, a new hybrid product; or
(B) bring an action against a bank for a
failure to comply with a requirement described
in subparagraph (A),
unless the Commission has imposed such requirement by
rule or regulation issued in accordance with this
section.
(3) Criteria for rulemaking.--The Commission shall
not impose a requirement under paragraph (2) of this
subsection with respect to any new hybrid product
unless the Commission determines that--
(A) the new hybrid product is a security; and
(B) imposing such requirement is necessary
and appropriate in the public interest and for
the protection of investors.
(4) Considerations.--In making a determination under
paragraph (3), the Commission shall consider--
(A) the nature of the new hybrid product; and
(B) the history, purpose, extent, and
appropriateness of the regulation of the new
hybrid product under the Federal securities
laws and under the Federal banking laws.
(5) Objection to commission regulation.--
(A) Filing of petition for review.--The Board
may obtain review of any final regulation
described in paragraph (2) in the United States
Court of Appeals for the District of Columbia
Circuit by filing in such court, not later than
60 days after the date of publication of the
final regulation, a written petition requesting
that the regulation be set aside. Any
proceeding to challenge any such rule shall be
expedited by the Court of Appeals.
(B) Transmittal of petition and record.--A
copy of a petition described in subparagraph
(A) shall be transmitted as soon as possible by
the Clerk of the Court to an officer or
employee of the Commission designated for that
purpose. Upon receipt of the petition, the
Commission shall file with the court the
regulation under review and any documents
referred to therein, and any other relevant
materials prescribed by the court.
(C) Exclusive jurisdiction.--On the date of
the filing of the petition under subparagraph
(A), the court has jurisdiction, which becomes
exclusive on the filing of the materials set
forth in subparagraph (B), to affirm and
enforce or to set aside the regulation at
issue.
(D) Standard of review.--The court shall
determine to affirm and enforce or set aside a
regulation of the Commission under this
subsection, based on the determination of the
court as to whether--
(i) the subject product is a new
hybrid product, as defined in this
subsection;
(ii) the subject product is a
security; and
(iii) imposing a requirement to
register as a broker or dealer for
banks engaging in transactions in such
product is appropriate in light of the
history, purpose, and extent of
regulation under the Federal securities
laws and under the Federal banking
laws, giving deference neither to the
views of the Commission nor the Board.
(E) Judicial stay.--The filing of a petition
by the Board pursuant to subparagraph (A) shall
operate as a judicial stay, until the date on
which the determination of the court is final
(including any appeal of such determination).
(F) Other authority to challenge.--Any
aggrieved party may seek judicial review of the
Commission's rulemaking under this subsection
pursuant to section 25 of this title.
(6) Definitions.--For purposes of this subsection:
(A) New hybrid product.--The term ``new
hybrid product'' means a product that--
(i) was not subjected to regulation
by the Commission as a security prior
to the date of the enactment of the
Gramm-Leach-Bliley Act;
(ii) is not an identified banking
product as such term is defined in
section 206 of such Act; and
(iii) is not an equity swap within
the meaning of section 206(a)(6) of
such Act.
(B) Board.--The term ``Board'' means the
Board of Governors of the Federal Reserve
System.
(j) The authority of the Commission under this section with
respect to security-based swap agreements shall be subject to
the restrictions and limitations of section 3A(b) of this
title.
(k) Registration or Succession to a United States Broker or
Dealer.--In determining whether to permit a foreign person or
an affiliate of a foreign person to register as a United States
broker or dealer, or succeed to the registration of a United
States broker or dealer, the Commission may consider whether,
for a foreign person, or an affiliate of a foreign person that
presents a risk to the stability of the United States financial
system, the home country of the foreign person has adopted, or
made demonstrable progress toward adopting, an appropriate
system of financial regulation to mitigate such risk.
(l) Termination of a United States Broker or Dealer.--For a
foreign person or an affiliate of a foreign person that
presents such a risk to the stability of the United States
financial system, the Commission may determine to terminate the
registration of such foreign person or an affiliate of such
foreign person as a broker or dealer in the United States, if
the Commission determines that the home country of the foreign
person has not adopted, or made demonstrable progress toward
adopting, an appropriate system of financial regulation to
mitigate such risk.
(k) Standard of Conduct.--
(1) In general.--Notwithstanding any other provision
of this Act or the Investment Advisers Act of 1940, the
Commission may promulgate rules to provide that, with
respect to a broker or dealer, when providing
personalized investment advice about securities to a
retail customer (and such other customers as the
Commission may by rule provide), the standard of
conduct for such broker or dealer with respect to such
customer shall be the same as the standard of conduct
applicable to an investment adviser under section 211
of the Investment Advisers Act of 1940. The receipt of
compensation based on commission or other standard
compensation for the sale of securities shall not, in
and of itself, be considered a violation of such
standard applied to a broker or dealer. Nothing in this
section shall require a broker or dealer or registered
representative to have a continuing duty of care or
loyalty to the customer after providing personalized
investment advice about securities.
(2) Disclosure of range of products offered.--Where a
broker or dealer sells only proprietary or other
limited range of products, as determined by the
Commission, the Commission may by rule require that
such broker or dealer provide notice to each retail
customer and obtain the consent or acknowledgment of
the customer. The sale of only proprietary or other
limited range of products by a broker or dealer shall
not, in and of itself, be considered a violation of the
standard set forth in paragraph (1).
(l) Other Matters.--The Commission shall--
(1) facilitate the provision of simple and clear
disclosures to investors regarding the terms of their
relationships with brokers, dealers, and investment
advisers, including any material conflicts of interest;
and
(2) examine and, where appropriate, promulgate rules
prohibiting or restricting certain sales practices,
conflicts of interest, and compensation schemes for
brokers, dealers, and investment advisers that the
Commission deems contrary to the public interest and
the protection of investors.
(m) Harmonization of Enforcement.--The enforcement authority
of the Commission with respect to violations of the standard of
conduct applicable to a broker or dealer providing personalized
investment advice about securities to a retail customer shall
include--
(1) the enforcement authority of the Commission with
respect to such violations provided under this Act; and
(2) the enforcement authority of the Commission with
respect to violations of the standard of conduct
applicable to an investment adviser under the
Investment Advisers Act of 1940, including the
authority to impose sanctions for such violations, and
the Commission shall seek to prosecute and sanction violators
of the standard of conduct applicable to a broker or dealer
providing personalized investment advice about securities to a
retail customer under this Act to same extent as the Commission
prosecutes and sanctions violators of the standard of conduct
applicable to an investment advisor under the Investment
Advisers Act of 1940.
(n) Disclosures to Retail Investors.--
(1) In general.--Notwithstanding any other provision
of the securities laws, the Commission may issue rules
designating documents or information that shall be
provided by a broker or dealer to a retail investor
before the purchase of an investment product or service
by the retail investor.
(2) Considerations.--In developing any rules under
paragraph (1), the Commission shall consider whether
the rules will promote investor protection, efficiency,
competition, and capital formation.
(3) Form and contents of documents and information.--
Any documents or information designated under a rule
promulgated under paragraph (1) shall--
(A) be in a summary format; and
(B) contain clear and concise information
about--
(i) investment objectives,
strategies, costs, and risks; and
(ii) any compensation or other
financial incentive received by a
broker, dealer, or other intermediary
in connection with the purchase of
retail investment products.
(o) Authority to Restrict Mandatory Pre-dispute
Arbitration.--The Commission, by rule, may prohibit, or impose
conditions or limitations on the use of, agreements that
require customers or clients of any broker, dealer, or
municipal securities dealer to arbitrate any future dispute
between them arising under the Federal securities laws, the
rules and regulations thereunder, or the rules of a self-
regulatory organization if it finds that such prohibition,
imposition of conditions, or limitations are in the public
interest and for the protection of investors.
* * * * * * *
[all]