[House Report 118-134]
[From the U.S. Government Publishing Office]


118th Congress }                                          { Report 
                        HOUSE OF REPRESENTATIVES
 1st Session   }                                          { 118-134

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    TO AMEND THE INVESTMENT ADVISERS ACT OF 1940 TO CODIFY CERTAIN 
   SECURITIES AND EXCHANGE COMMISSION NO-ACTION LETTERS THAT EXCLUDE 
BROKERS AND DEALERS COMPENSATED FOR CERTAIN RESEARCH SERVICES FROM THE 
        DEFINITION OF INVESTMENT ADVISER, AND FOR OTHER PURPOSES

                                _______
                                

 July 11, 2023.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. McHenry, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2622]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2622) to amend the Investment Advisers Act of 
1940 to codify certain Securities and Exchange Commission no-
action letters that exclude brokers and dealers compensated for 
certain research services from the definition of investment 
adviser, and for other purposes, having considered the same, 
reports favorably thereon with an amendment and recommends that 
the bill as amended do pass.
    The amendment is as follows:
    Strike all after the enacting clause and insert the 
following:

SECTION 1. EXTENSION OF NO-ACTION LETTER; STUDY.

  (a) Findings.--Congress finds the following:
          (1) The Securities and Exchange Commission staff first 
        granted temporary no-action relief in 2017, prior to the 
        implementation of European rules designed to protect European 
        investors from excessive costs and conflicts of interest.
          (2) The Commission staff did not engage in any meaningful 
        cost-benefit analysis of the issues raised by the no-action 
        relief requested either prior to or following the granting of 
        no-action relief in 2017.
          (3) The Commission staff revised and extended the temporary 
        no-action relief in 2019, again without any meaningful cost-
        benefit analysis of the issues raised by the no-action relief 
        requested prior to or following the granting of the relief.
          (4) There are currently approximately 15,300 registered 
        investment advisers, including affiliates that provide the vast 
        majority of investment research.
          (5) The Commission has received complaints from investors and 
        investor advocacy groups expressing concerns with the no-action 
        relief, as it currently exists.
          (6) The Commission has received concerns from broker-dealers 
        related to the potential expiration of the no-action relief.
  (b) Extension of No-action Letter.--The Commission shall provide an 
additional 6-month extension of the October 26, 2017, Securities 
Industry and Financial Markets Association, SEC Staff No-Action Letter, 
set to expire on July 3, 2023.
  (c) Study Required.--After the announcement extending the expiration 
date of the no-action letter under subsection (b), the Commission shall 
conduct, through notice and comment, a study of the impact of allowing 
the no-action letter's expiration or maintenance of the no-action 
letter, and give due regard to any comments received in conducting the 
study. The Commission or delegated staff shall report their findings 
and conclusions, including findings related to the expiration of the 
no-action relief, to the Committee on Financial Services of the House 
of Representatives and the Committee on Banking, Housing, and Urban 
Affairs of the Senate.
  (d) Contents of Study.--The study required under subsection (c) shall 
include potential impacts on the research market for smaller issuers, 
including--
          (1) the availability of such research, including--
                  (A) the number and types of firms who provide such 
                research;
                  (B) the volume of such research over time; and
                  (C) competition in the research market;
          (2) any unique challenges faced by minority-owned, women-
        owned, and veteran owned small issuers in obtaining research 
        coverage;
          (3) the impact on the availability of research coverage for 
        small issuers due to Commission rules;
          (4) a cost-benefit analysis of regulatory options that will 
        support research coverage of small entities and increase 
        transparency in the cost of research provided by broker-
        dealers;
          (5) the impact of the no-action relief on investors in 
        registered investment companies and exempt investment funds, 
        pension funds, endowments, and other asset owners, investment 
        advisers, broker-dealers that provide both investment research 
        and trading services, independent investment advisers that do 
        not provide trading services, broker-dealers that do not 
        provide investment research, and other market participants, 
        including issuers of securities; and
          (6) the potential impacts of the expiration of the no-action 
        relief on investors in registered investment companies and 
        exempt investment funds, pension funds, endowments, investment 
        advisers, and other asset owners, broker-dealers that provide 
        both investment research and trading services, independent 
        investment advisers that do not provide trading services, 
        broker-dealers that do not provide investment research, and 
        other market participants, including issuers of securities.

                          PURPOSE AND SUMMARY

    Introduced on April 13, 2023, by Representative Pete 
Sessions, H.R. 2622, a bill to amendment the Investment 
Advisers Act of 1940 to codify certain Securities and Exchange 
Commission no-action letters that exclude brokers and dealers 
compensated for certain research services from the definition 
of investment adviser, and for other purposes, would codify 
certain Securities and Exchange Commission no-action letters 
that allow broker-dealers to continue accepting cash or ``hard 
dollar'' payments for research reports, in order to comply with 
international regulations such as MiFID and MiFID II.

                  BACKGROUND AND NEED FOR LEGISLATION

    In general, MiFID II is a European Union Directive that 
affects investment managers located outside of the European 
Union and the United Kingdom. Non-U.S. investment managers rely 
on research provided by U.S. broker-dealers, and U.S. investors 
invest in funds that are managed by investment managers that 
are subject to MiFID II. MiFID II requires, among other things, 
the unbundling of research payments from trade execution 
payments.
    However, the receipt of payments for research services, 
directly or indirectly out of an investment manager's own 
money, subjects broker-dealers' research services to the 
Investment Advisers Act (the Act). The Act has different 
requirements and subjects broker-dealers to an additional and 
entirely different regulatory regime, as well as the broker-
dealers' current regulatory regimes overseen by the SEC and the 
Financial Industry Regulatory Authority (FINRA). The 
availability of research is essential to well-functioning 
capital markets, but there has been a reduction in the amount 
of research available since the introduction of MiFID II. Given 
the importance of research in creating markets for small- and 
medium-sized companies, it is important to codify the SEC's no-
action letters, which are set to expire in July, that have 
provided relief from MiFID II and allow broker-dealers to 
receive cash payments for research without being deemed to be 
subject to the Act. Codifying the SEC staff's no-action letter 
relief would forestall further negative impacts while necessary 
additional regulatory changes are assessed and evaluated.

                                HEARING

    Pursuant to clause 3(c)(6) of rule XIII, the following 
hearing was used to develop H.R. 2622: The Subcommittee on 
Capital Markets of the Committee on Financial Services held a 
hearing on March 9, 2023, titled ``U.S. Public Markets Built 
for the 21st Century: Exploring Reforms to Make Our Public 
Markets Attractive for Small and Emerging Companies Raising 
Capital.''

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
May 24, 2023, and ordered H.R. 2622 to be reported favorably to 
the House as amended by a recorded vote of 45 ayes to 2 nays 
(Record vote no. FC-72), a quorum being present. Before the 
question was called to order the bill favorably reported, the 
Committee adopted an amendment in the nature of a substitute 
offered by Mr. Sessions 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 order to report legislation and amendments thereto. H.R. 
2622 was ordered reported favorably to the House as amended by 
a recorded vote of 45 ayes to 2 nays (Record vote no. FC-72), a 
quorum being present.
    An amendment offered by Mr. Gottheimer, no. 13, was agreed 
to by a voice vote, a quorum being present.


                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c) 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 goal of H.R. 2622 is to codify 
certain Securities and Exchange Commission no action letters 
that allow broker-dealers to continue accepting cash or ``hard 
dollar'' payments for research reports, to comply with 
international regulations such as MiFID and MiFID II.

             NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, 
                          AND TAX EXPENDITURES

    The Committee has requested but not received from the 
Director of the Congressional Budget Office an estimate. 
However, once an estimate has been prepared, pursuant to clause 
3(c)(2) of rule XIII of the Rules of the House of 
Representatives, the Committee will adopt 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 
1973.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    The Committee has requested but not received from the 
Director of the Congressional Budget Office a cost estimate. 
However, pursuant to clause 3(d)(1) of House rule XIII, the 
Committee will adopt as its own the cost estimate by the 
Director of the Congressional Budget Office, once it has been 
prepared.

                       FEDERAL MANDATES STATEMENT

    The Committee has requested but not received from the 
Director of the Congressional Budget Office an estimate of the 
Federal mandates pursuant to section 423 of the Unfunded 
Mandates Reform Act. The Committee will adopt the estimate once 
it has been prepared by the Director.

                      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 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

    Pursuant to 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 a program of 
the Federal Government known to be duplicative of another 
Federal program, including any program that was included in a 
report to Congress pursuant to section 21 of the Public Law 
111-139 or the most recent Catalog of Federal Domestic 
Assistance.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Definition of investment adviser amended to exclude brokers 
        and dealers compensated for certain research services

    This section amends Section 202(a)(11) of the Investment 
Advisers Act of 1940 by clarifying that the term ``special 
compensation'' does not include compensation provided by any 
person who is an investment adviser, who would be an investment 
advisor, or is an insurance company, for research services 
whether paid from the resources of such person or the resources 
of a client of such person.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 2622 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) of rule XIII of 
the House of Representatives.

                                  [all]