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House Financial Services Committee Passes Slate of Deregulatory Bills

The House Financial Services Committee approved a large slate of financial deregulation bills for consideration on the House floor. The nearly two dozen measures include bills to let more investors take part in private stock offerings, expand provisions of the JOBS Act, and overhaul the Dodd-Frank Act’s systemic risk designation process for banks.

The House Financial Services Committee on October 12, 2017, cleared a long list of financial deregulatory bills for the full House of Representatives to vote on.

The nearly two dozen measures include bills to let more investors take part in private stock offerings, expand provisions of the JOBS Act, and overhaul the Dodd-Frank Act systemic risk designation process for banks. and

The vote comes a day after a marathon markup session that saw bipartisan agreement on some bills, and sharp ideological divides on others. The debate underscored the lack of unity among Democrats on the panel on issues surrounding investor protection.

Nowhere was that split clearer than with H.R. 1645, the Fostering Innovation Act of 2017, a Democratic bill to expand small company exemptions from the auditor attestation requirements of the Sarbanes-Oxley Act of 2002 that drew criticism from the panel’s top Democrat, Rep. Maxine Waters of California.

Waters urged opposition to H.R. 1645, which is sponsored by Rep. Kyrsten Sinema, an Arizona Democrat. The ranking member said she had “serious concerns with a bill that allows companies to have weak internal controls” and makes it harder for investors to access needed information.

Sinema touted her bill as a “narrowly tailored, bipartisan solution” that would benefit fledging public biopharma companies looking to put new drugs on the market.

The JOBS Act created a new category of public issuer called an emerging growth company (EGC), giving them a host of accounting and disclosure benefits. Among the most attractive benefits for EGCs is an exemption from the requirements of Section 404(b) of Sarbanes-Oxley , which requires companies to hire an outside auditor to attest to the quality of management’s internal controls over financial reporting (ICFR).

Today, a company loses its EGC status — and its Section 404(b) exemption — if it hits $1 billion in annual revenue, reaches a public float of more than $700 million, or passes the five year anniversary of its IPO date.

H.R. 1645 would free a company from Section 404(b) compliance for an additional five years after it loses its EGC status, as long as the business remains below $50 million in revenue and keeps its public float under $700 million.

Despite Waters’ opposition, the bill advanced out of the committee on a 46 to 14 vote.

Other measures were less contentious. H.R. 1585, Fair Investment Opportunities for Professional Experts Act, would implement a change to the SEC’s accredited investor standard that has broad bipartisan support.

The bill, sponsored by David Schweikert, an Arizona Republican, grants accredited investor status to individual investors who have obtained a securities-related license, or have other characteristics that the SEC determines provide them with investment knowledge.

The wealth-based standard in Rule 501 in Regulation D of the Securities Act, says an investor must make $200,000 individually, or $300,000 jointly with a spouse, or have a net worth of at least $1 million, not including a primary residence.

The accredited investor standard generally sets out who can invest in restricted securities offerings. H.R. 1585 will broaden that group to include investors who “might not necessarily meet the strict net worth or income test, but have greater expertise in the area of investment, maybe even more so than others who have higher net worth,” said Rep. Jeb Hensarling, a Texas Republican and the committee’s chair.

H.R. 1585 passed on a vote of 58-2.

Other bills Financial Services Committee voted on include:

  • H.R. 3903, the Encouraging Public Offerings Act of 2017, would extend two key benefits of the JOBS Act to all companies. H.R. 3903, sponsored by Rep. Ted Budd, a North Carolina Republican, would allow all companies to file draft IPO paperwork with the SEC prior to making the registration statement public, codifying a change put in place by the market regulator earlier this year. The bill would also allow any company to take advantage of the JOBS Act’s “test the waters” provisions to test investor interest prior to an IPO filing. The JOBS Act originally made both of the benefits available only to EGCs. The bill passed on a 60-0 vote.
  • H.R. 3312, the Systemic Risk Designation Improvement Act of 2017, sponsored by Rep. Blaine Luetkemeyer, a Missouri Republican, would abolish the $50 billion asset threshold under which a bank is automatically designated as a Systemically Important Financial Institution (SIFI). Institutions marked as SIFIs under the Dodd-Frank Act are subject to tougher Federal Reserve oversight and must meet tighter rules on regulatory capital. In place of the $50 billion threshold, the bill would require regulators to consider size, the bank’s dealings with other financial institutions, complexity and other factors to measure whether a bank’s failure would have widespread repercussions to the financial system and should be designated as a SIFI. The bill passed on a 47-12 vote.
  • H.R. 1116, the Taking Account of Institutions with Low Operation Risk (TAILOR) Act, sponsored by Rep. Scott Tipton, a Colorado Republican. The TAILOR Act would require banking regulators to account for the “risk profiles and business models” of the entities they regulate, and shape any new regulation accordingly, among other requirements. The bill advanced on a 39-21 vote.
  • H.R. 2201, the Micro Offering Safe Harbor Act, sponsored by Rep. Tom Emmer, a Republican from Minnesota, would relax registration requirements from the Securities Act of 1933 for private securities offerings of less than $500,000. The bill passed 34-26.
  • H.R. 3973, the Market Data Protection Act of 2017, would require the SEC and others to beef up their cybersecurity controls before implementing the Consolidated Audit Trail (CAT). The bill, sponsored by Rep. Warren Davidson, an Ohio Republican, comes on the heels of the commission’s disclosure of a 2016 hack of its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) filing system. The hack intensified existing industry fears over the security of data collected as part of the CAT, which will require stock exchanges and self-regulatory organizations such as the Financial Industry Regulatory Authority (FINRA) to establish a tracking and record-keeping system for all stock and options trades. The bill passed 59-1.
  • H.R. 477, the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2017, which carves out an exemption from SEC registration for brokers involved in small, private company mergers. The bill is sponsored by Rep. Bill Huizenga, a Michigan Republican. The bill advanced out of the committee on a 37-23 vote.