A legislative package passed by the House of Representatives is drawing fire from Democrats and the White House amid fears they would erode investor protections.
The bills, bundled as the Capital Markets Improvement Act of 2016, include the Encouraging Employee Ownership Act. Under the current SEC Rule 701 all private companies must disclose certain information to employee investors if the value of certain securities issued by the company exceeds $5 million. The legislation directs the SEC to raise that amount from $5 million to $10 million and to adjust the threshold every five years for inflation.
The Fair Access to Investment Research Act (H.R. 2356) establishes a safe harbor that would allow broker-dealers to issue research reports that cover Exchange Traded Funds so that these reports are not considered “offers” under the securities law. The research reports would need to meet certain requirements to be eligible for this safe harbor. Under current law, the SEC’s rules generally prohibit an issuer from offering securities for sale to the public without filing a registration statement with the agency.
The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act (H.R. 686) seeks to simplify small business mergers, acquisitions, and sales by exempting M&A brokers that perform services in connection with the transfer of ownership of smaller privately held companies, from SEC registration, with certain exceptions.
The Small Company Disclosure Simplification Act (H.R. 1965) provides for both a voluntary and time-limited exemption for all Emerging Growth Companies (EGCs) and other issuers known as smaller reporting companies with annual gross revenues under $250 million from the SEC’s requirements to file their financial statements in eXtensible Business Reporting Language (XBRL), an interactive data format known as. The reporting exemption would last up to five years, although the bill would allow EGCs to submit information in XBRL format if they so desired. H.R. 1965 would direct the SEC to conduct an analysis of the costs and benefits of requiring EGCs to file reports using XBRL and report the results to the Congress.
The Streamlining Excessive and Costly Regulations Review Act (H.R. 2354) requires the SEC to engage in a retrospective review of significant regulations within the first five years after enactment, and every ten years thereafter, to identify regulations that are outmoded, ineffective, insufficient, excessively burdensome, or no longer necessary in the public interest. The bill requires that the SEC Commissioners vote to amend or repeal any regulation identified as having met such criteria and provides for certain public disclosure and commenting.
The bill defines “significant regulations” as those with an annual economic impact of $100 million or more as defined by the Office of Management and Budget; that result in a major increase in costs or prices for consumers, individual industries, federal, state, or local governments, or geographic regions; or cause significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S. enterprises to compete against their foreign counterparts.
“Small businesses, private companies and entrepreneurs need access to capital in order to succeed and create jobs. Yet burdensome Washington regulations from the Securities and Exchange Commission (SEC) prevent many of them from accessing the capital they need to start their businesses,” Rep. Kevin Cramer (R-N.D.) said in a statement.
Among the outspoken Democrats who voted against the bills was Maxine Waters (D-Calif.). H.R. 1675 will harm investors “by ignoring and supplanting the good judgment of the Securities and Exchange Commission, which has already sought to provide small businesses with regulatory relief in these same areas, while also ensuring that investors in those businesses have the protections they deserve,” she said in recent testimony.
The Encouraging Employee Ownership Act would “encourage overinvestment by employees in a company that they cannot value and that may never permit them to sell, except back to the company at a price set by the company,: she added. “This type of deregulation invites more Enron-style fraud onto the market, where employees have to trust the accounting of their companies but instead are left with valueless stock.
Exempting more than 60 percent of public companies from XBRL “would prevent those companies from being easily compared to other companies that use XBRL to the disadvantage of analysts, researchers, the SEC, investors, and even the companies themselves.”
Requiring the SEC to conduct a retrospective review of its rules “is a thinly veiled Republican attempt to impose cost-benefit type analysis on our regulators as a means of eliminating rules designed to benefit the public and protect investors,” waters charged.
President Obama has pledged to veto the legislation. “Among other flaws, this bill includes several provisions that pose risks to investors, are overly broad, allow financial institutions to avoid appropriate oversight, and are duplicative of existing administrative authorities,” a statement from the White House said.