H.R. 1675 – Capital Markets Improvement Act of 2016

The House Resolution 1675 for Capital Markets Improvement Act of 2016 passed on February 3, 2016 and is currently awaiting Senate approval. H.R. 1675 directs the SEC to revise its rules to increase the threshold amount, after which issuers are required to disclose certain information relating to compensatory benefit plans. This act includes 5 smaller acts which are described below. The Executive Office strongly opposes this bill on the basis that it causes risks to investors.

Title I – Encouraging Employee Ownership

Title I strongly encouraged employee ownership and increased the threshold amount for disclosures. The SEC will have to revise section 230.701 of title 17, the Code of Federal Regulations within 60 days after the enactment of this act. This increased the aggregate sales price or amount of securities sold from $5,000,000 to $10,000,000 within any 12-month period, in addition to what the issuer is required to disclose to investors. The SEC will reconsider this pricing every 5 years to account for inflation.

Title II – Fair Access to Investment Research

Title II provided a safe harbor for investment research. Within 45 days of the enactment of this Act, the SEC will determine what terms and conditions are required for the public interest and the protection of investors to provide a covered investment fund research report. A covered investment fund is any investment company that is registered under the Investment Company Act or filed registration within the Securities Act for the public offering of its respective securities, and been approved by the SEC. A covered investment fund research report is any research report that has been produced by a broker about a particular covered investment fund.

These terms must:

  • Not constitute a sale or offer that is pursuant to a registration statement that the issuer has previously filed or intends to file and
  • Satisfy the conditions of title 17 of the Federal Regulations Code.

The SEC must also:

  • Restrict the safe harbor on broker’s investment fund research when settling a covered investment case with securities being continuously distributed,
  • Not require the investment fund to have been registered under the Investment Company Act or section 13 or 15(d) of the Securities Exchange Act within the last 12 months, and
  • Implement a minimum float provision.

Under Title II, a self-regulatory organization cannot enforce any rule that:

  • Restricts the ability of any member to publish a covered investment fund research report,
  • Restricts the ability of a member to participate in the offering or sale of securities under a covered investment fund,
  • Requires covered investment fund research reports be filed with a self-regulatory organization, or
  • Require a covered investment fund research report to be subject to sections 24(b) or 34(b) of the Investment Company Act.

None of these rules that the SEC must implement can:

  • Restrict the Federal securities laws antifraud provisions or
  • Limit the authority of any self-regulatory organization to review any member’s practices regarding their respective publications of covered investment fund research reports.

Title III – Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification

Title III requires provisions for the registration exemption for merger and acquisition brokers. This amended Section 15(b) of the Securities Exchange Act. Nothing in this section is designed to limit any authority the SEC previously had.

A merger and acquisition broker (M&A) is not exempt from registration if:

  • They are directly or indirectly connected to the transfer of ownership of any eligible privately held company, or has the custody of the securities to be exchanged by the respective company.
  • They participate in public offerings of any securities on behalf of an issuer.
  • They participate in a transaction involving a public shell company (any company with nominal operations or assets, or assets only consisting of cash) on behalf of any respective member.
  • They have violated any of the rules the SEC implemented under the Investor Protection and Securities Reform Act.

Any M&A broker not meeting these restrictions is exempt from registration. This provision will be implemented within 90 days after the enactment of this act.

Title IV – Small Company Disclosure Simplification

This act provides for the exemption of XBRL requirements for any emerging growth companies or smaller companies.

Issuers with less than $250,000,000 are considered smaller companies and are exempt from the requirements that utilize XBRL financial statements. This exemption will continue for either:

  • 5 years after the enactment of this Act or
  • 2 years after the Commission determines if the requirements to issuers are too costly, but this cannot be before three years after this act is implemented.

The Commission must provide the Committee on Financial Services a report showing the progress that has been made of implementing XBRL reports, as well as how the SEC has utilized XBRL data.

Title V – Streamlining Excessive and Costly Regulations Review

Within 10 years, the SEC must review each regulation issued and determine if each regulation is effective. This helps streamline excessive and costly regulations review.

Shelby Wayment
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