H.R. 5405, Promoting Job Creation and Reducing Small Business Burdens Ac

H.R. 5405

Promoting Job Creation and Reducing Small Business Burdens Ac

Date
September 15, 2014 (113th Congress, 2nd Session)

Staff Contact
Communications

Floor Situation

On Monday, September 15, 2014, the House will consider H.R. 5405, the Promoting Job Creation and Reducing Small Business Burdens Act, under a suspension of the rules.  H.R. 5405 was introduced on September 8, 2014 by Rep. Mike Fitzpatrick (R-PA) and referred to the Committees on Financial Services and Agriculture.

Bill Summary

H.R. 5405 combines the text of 11 bills.  The provisions of the bill are as follows:

Title I – Business Risk Mitigation and Price Stabilization Act

Title I, originally passed in the House as H.R. 634 under suspension, amends the Dodd-Frank Act to clarify that the Act’s margin requirements do not apply to the end-users of derivatives.  The bill also stipulates that the bill is to be implemented through a modified regulatory process, precluding the regulatory process from starting de novo.

 

Title II – Treatment of AffiliateTransactions

Title II was originally introduced as H.R. 677 (and reported in the Financial Services Committee by a vote of 50-10 and reported by the Agriculture Committee by a voice vote).  However, Title II now mirrors Section 321 of H.R. 4413, which passed the House on June 24, 2014.   Title II amends the Commodity Exchange Act and the Securities Exchange Act of 1934 to exempt the inter-affiliate derivatives transactions from requirements of Title VII of the Dodd-Frank Act so long as transactions seeks to hedge or mitigate the commercial risk of the person or other affiliate of the person that is not a financial entity, provided that if the transfer of commercial risk is addressed by entering into a security-based swap with a security-based swap dealer or major security-based swap participant, an appropriate credit support measure or other mechanism is utilized.  Treasurers of non-financial end-users of derivatives operate central treasury units or “CTUs” that serve the risk-mitigating function of aggregating exposures on the books of one or more affiliates within their corporate group.  The CTU nets the inter-affiliate exposures, and then enters into smaller and fewer derivatives trades with a bank or other swap dealer counterparty for the net amounts.  The Dodd-Frank Act could force businesses have to wind down those efficient units or meet burdensome new regulatory requirements that will be hard to justify. CTUs are risk-reducing, best practice to centralize and net the hedging needs of affiliates.

 

Title III – Holding Company Registration Threshold Equalization Act

Title III, originally passed in the House as H.R. 801 under suspension, amends the Securities Exchange Act of 1934 to increase the threshold required of savings and loan holding companies when registering with the Securities Exchange Commission (SEC).  A savings and loans holding company (SLHC) must register if its assets exceed $10 million and it has 2,000 shareholders of record, an increase from the current requirement of 500 shareholders of record.  This legislation also raises the deregistration threshold from 300 shareholders of record to 1,200 shareholders of record.

Title IV – Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act

Title IV, originally passed in the House as H.R. 2274 under suspension. H.R. 2274 amends Section 15(b) of the Securities Exchange Act of 1934 to exempt Mergers and Acquisitions (M&A) brokers from registration with the Securities Exchange Commission (SEC).[1]  A M&A broker is not exempt from registration if the broker: 1) 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 transitions; or 2) 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 SEC.  This bill would apply to M&A deals involving companies with annual earnings of less than $25 million and annual gross revenue of less than $250 million.[2]

Title V – Small Cap Liquidity Reform Act

Title V, originally passed in the House as H.R. 3448 under suspension, amends section 11A(c)(6) of the Securities Exchange Act of 1934 to establish a five-year pilot program administered by the Securities and Exchange Commission (SEC) to permit Emerging Growth Companies (EGCs) to increase the minimum price variation, or “tick size,” at which their securities would be quoted to increments of five or ten cents.[3]  Currently, all stocks listed on U.S. securities exchanges carry a “tick size” of one cent.  Moreover, the SEC would determine, in its discretion, the maximum tick size at which a participating EGC’s stock would be traded.

Title VI – Improving Access to Capital for Emerging Growth Companies Act

Title VI was originally introduced as H.R. 3623 (and reported by the Financial Services Committee by a vote of 56-0).  Title VI reduces the number of days before a “road show” that an emerging growth company (EGC), before its IPO date, may publicly file a draft registration statement for confidential nonpublic review by the Securities Exchange Commission (SEC) staff.[4]  In addition, it provides a grace period during which an issuer that was an EGC at the time it filed (but is no longer one) shall continue to be treated as one.  Title VI authorizes EGCs to submit confidential draft registration statements to the SEC within one year of its IPO for any securities to be issued subsequent to its IPO.  Finally, it amends the Jumpstart Our Business Startups Act (JOBS) to include a notice on Form S-1 to indicate that a registration statement filed by an issuer prior to an IPO may omit financial information for certain historical periods.

Title VII – Small Company Disclosure Simplification Act

Title VII was originally introduced as H.R. 4164 (and reported by the Financial Services Committee by a vote of 51-5).  Title VII provides a voluntary exemption to EGCs and issuers with total annual gross revenues of less than $250 million from the requirements to use Extensible Business Reporting Language (XBRL) for financial statement and other mandatory periodic reporting filed by the SEC.  Furthermore, it directs the SEC to conduct an analysis of the costs and benefits to issuers of the requirements to use XBRL for financial statements.  This analysis would include an assessment of: 1) how such costs and benefits may differ from the costs and benefits identified by the SEC; and 2) the effect on efficiency, competition, capital formation, financing, and costs of using XBRL.  Within one year of enactment, the SEC would be required to report to Congress of its findings.

Title VIII – Restoring Proven Financing for American Employers Act

Title II, originally passed by the House as H.R. 4167 by voice vote under suspension on April 29, 2014,, corrects a provision of the final rule issued on December 10, 2013, to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)(P.L. 111-203), also known as the “Volcker Rule,” regarding the treatment of collateralized loan obligations (“CLOs”) as impermissible covered fund investments.  H.R. 4167 amends Section 13(g) of the Bank Holding Company Act to: (i) clarify that nothing in Section 13(g) shall be construed to require the divestiture of any debt securities of CLOs, if such CLOs were issued before January 31, 2014; (ii) clarify that a banking entity shall not be considered to have an ownership interest in a CLO because it acquired or retains a debt security in the CLO, if such debt security has no indicia of ownership other than the right to participate in the removal for cause or in the selection of a replacement investment manager or investment adviser of the CLO; (iii) define the term “collateralized loan obligation” as any issuing entity of an asset-backed security, as defined in section 3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)), that is comprised primarily of commercial loans; and (iv) clarify the conditions by which an investment manager or investment adviser shall be deemed to be removed “for cause.”

 

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known more commonly as the “Volcker Rule,” prohibiting U.S. bank holding companies and their affiliates from engaging in proprietary trading, as well as sponsoring hedge funds and private equity funds.[5]  The final Volcker Rule approved by five Federal regulators on December 10, 2013[2], would force many banks, of all sizes, that own interests in CLOs to divest them on or before July 21, 2105.  The CLO divestment will disrupt a market for business loans that have provided financing to companies such as Sears, JC Penny, DollarGeneral, Rite Aid, Regal Cinema, JCrew, Michael’s Craft Stores, Tempurpedic, Delta Airlines, and American Airlines.   In addition, the historic default for CLOs is less than 1% H.R. 4167 would allow CLO investments to be permissible under the Volcker Rule’s covered funds defintion and not force banks to divest of these debt securities issued before January 31, 2014.

Title IX – SBIC Advisers Relief Act

Title IX was originally introduced as H.R. 4200 (and reported by the Financial Services Committee by a vote of 56-0).  The Dodd-Frank Act exempted from registration advisers to one or more venture capital funds and also exempted from registration advisers to Small Business Investment Companies (SBICs). If an adviser, however, advises both venture capital funds and SBICs, that adviser must register with the SEC.  Title IX amends the Investment Advisers Act of 1940 to exempt specified advisers of small business investment companies (SBICs) from: 1) certain SEC registration requirements with respect to the provision of investment advice relating to venture capital funds; and 2) certain SEC registration and reporting requirements with respect to assets under management of private funds.  Moreover, it provides the same exemption with respect to any state or local law requiring the registration, licensing, or qualifications of investment advisers.

Title X – Disclosure Modernization and Simplification Act

Title X was originally introduced as H.R. 4569 (and reported by the Financial Services Committee by a vote of 59-0).  Title X directs the SEC to issue regulations to permit issuers to submit a summary page on form 10-K.  Within 180 days of enactment, the SEC is required to revise regulation S-K to: 1) further scale or eliminate requirements of regulation S-K[5] to reduce the burden on EGCs, accelerated filers, and smaller reporting companies; and 2) eliminate provisions of regulation S-K that are duplicative, overlapping, outdated, or unnecessary.  Moreover, Title X directs the SEC to study ways to: 1) modernize and simplify requirements in regulation S-K; 2) improve the readability of disclosure documents; and 3) discourage repetition and disclosure of immaterial information.

Title XI – Encouraging Employee Ownership Act

Title XI was originally introduced as H.R. 4571 (and reported by the Financial Services Committee by a vote of 36-23).  Title XI directs the SEC to revise its rules to increase the threshold amount for requiring issuers to provide certain disclosures relating to compensatory benefit plans.  Within 60 days of enactment, the SEC would revise Section 230.701(e) of Title 17, Code of Federal Regulations, to increase the aggregate sales price or amount of sales threshold for disclosure from $5 million to $10 million.  The SEC is directed to index the aggregate sales price or amount every five years to reflect the change in the Consumer Price Index, rounding to the near $1 million.

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[1] According to the legislation, “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, re-purchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company.”
[2] http://huizenga.house.gov/news/documentsingle.aspx?DocumentID=339334
[3] Emergency Growth Companies are defined as companies with total gross revenue of less than $750 million.
[4] A financial road show is an offer that contains a presentation regarding an offering by one or more members of the issuer’s management and includes discussion of one or more of the issuer, such management, and the securities being offered.  A road show is commonly a series of meeting across different cities before an IPO in which top executives from a company have the opportunity to talk with current or potential investors.
[5] Regulation S-K sets out reporting requirements for the SEC filings of publicly traded companies/issuers.

Cost

A CBO cost estimate for the entire is currently unavailable.  CBO estimates for specific titles are as follows:

  • CBO estimates that Title I (H.R. 634) would affect direct spending and revenues, but that those effects would be insignificant. Title I would not affect discretionary spending.[6]
  • An updated CBO cost estimate is currently unavailable.
  • CBO estimates that Title III (H.R. 801) would not affect direct spending, revenues, or discretionary spending.[7]
  • CBO estimates that Title IV (H.R. 2274) would lead to a minor increase in spending by the SEC, subject to availability of appropriations. Title IV would not affect direct spending or revenues.[8]
  • CBO estimates that Title V (H.R. 3448) would have an insignificant effect on gross spending by the SEC. Title V would not affect direct spending or revenues.[9]
  • CBO estimates that Title VI (H.R. 3623) would cost less than $500,000 per year over the 2015-2019 period, subject to the availability of appropriations. Title VI would not affect direct spending or revenues.[10]
  • CBO estimates that Title VII (H.R. 4164) would cost less than $500,000 per year over the 2015-2019 period, subject to the availability of appropriations. Title VII would not affect direct spending or revenues.[11]
  • CBO estimates that Title VIII (H.R. 4167) would have an insignificant effect on direct spending or revenues.[12]
  • CBO estimates that Title IX (H.R. 4200) would not significantly affect discretionary spending, direct spending, or revenues.[13]
  • CBO estimates that Title X (H.R. 4569) would cost about $1 million over the 2015-2019 period, assuming appropriation of the necessary amounts. Title X would not affect direct spending or revenues.[14]
  • CBO estimates that Title XI (H.R. 4561) would not affect direct spending or revenues, and would not affect discretionary spending.[15]

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[6] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr634_0.pdf
[7] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr801.pdf
[8] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr2274.pdf
[9] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr3448.pdf
[10] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr3623.pdf
[11] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr4164.pdf
[12] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr4167.pdf
[13] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr4200.pdf
[14] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr4569.pdf
[15] http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr4571.pdf

Additional Information

For questions or further information contact the GOP Conference at 5-5107.