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Selected Securities Legislation in the
114th Congress
Gary Shorter
Specialist in Financial Economics
October 28, 2015
Congressional Research Service
7-5700
www.crs.gov
R44255
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Selected Securities Legislation in the 114th Congress
Summary
In the aftermath of the 2008-2009 financial crisis, Congress passed the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (Dodd-Frank Act; P.L. 111-203), a wide-ranging
package of regulatory reform legislation. Some provisions mandated new securities regulations
that expanded required corporate disclosures to the Securities and Exchange Commission (SEC)
and the investing public. Some Members of Congress have characterized provisions of the act,
including several requiring additional corporate disclosures, as regulatorily excessive.
Enacted in the 112th Congress, the Jumpstart Our Businesses Startup Act of 2012 (JOBS Act; P.L.
112-106) generally reflected a different regulatory strategy than did the Dodd-Frank Act. The
legislation was broadly aimed at stimulating corporate capital formation, particularly for newer
and smaller firms. It largely attempts to do so by giving such firms regulatory relief from various
SEC disclosures generally required by federal securities laws.
Congress is currently considering securities legislation that in many instances would extend the
JOBS Act’s focus on corporate regulatory relief. The securities bills examined in this report have
been marked up by committee and reported to the floor or have been approved in floor action in
the 114th Congress. Most attempt to foster capital formation, potentially trading off some
disclosure-based investor protections. Such bills include the following:
H.R. 37 (Titles III, VI, VII, IX, X, XI; passed the House)
H.R. 414 (reported from the House Committee on Financial Services)
H.R. 1334 (passed the House)
H.R. 2064 (passed the House)
H.R. 432 (passed the House)
H.R. 1525 (passed the House)
H.R. 1675 (reported from the House Committee on Financial Services)
H.R. 1723 (passed the House)
H.R. 1839 (passed the House)
H.R. 1965 (reported from the House Committee on Financial Services)
S. 1484 (Sections 601, 602, 604; reported from the Senate Banking, Housing and
Urban Affairs Committee)
S. 1910 (Sections 971, 972, 974; reported from the Senate Committee on
Appropriations)
In addition to these bills reducing disclosure requirements, a number of other bills addressing
securities regulation have been reported from committee or taken up on the floor. H.R. 1975
would require the agency to award certain SEC-regulated trading-related entities (such as
NASDAQ) future credit for earlier excessive fees that they paid the agency. H.R. 2354 would
require the SEC to evaluate and vote on all “significant regulations” within the first five years
after enactment and then every 10 years thereafter. H.R. 2356 would require the SEC to provide a
legal safe harbor for research reports issued by brokers or dealers on Exchange Traded Funds.
H.R. 2357 would amend the SEC’s Form S-3 (shelf) registration statement to give companies
with public floats (i.e., regular shares that a company has issued to the public and are available for
investor trades) below $75 million greater access to that registration protocol. H.R. 3032 would
repeal a requirement that the SEC annually report to Congress on how often it sought financial
institutions’ customer records.
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Contents
Introduction ..................................................................................................................................... 1
Changing Shareholder Threshold Requirements (H.R. 37, Title III; H.R. 1334; S. 1484,
Section 601; and S. 1910, Section 971) ........................................................................................ 6
Regulatory Relief for Small Business Merger and Acquisition Brokers (H.R. 37, Title IV
and H.R. 686) ............................................................................................................................... 7
Regulatory Relief for Emerging Growth Companies (H.R. 37, Title VI; H.R. 2064; S.
1484, Section 604; and S. 1910, Section 974) .............................................................................. 9
Regulatory Relief for Small Companies for Their XBRL Disclosures (H.R. 37, Title VII
and H.R. 1965) ............................................................................................................................ 11
Regulatory Relief for Advisers to Small Business Investment Companies (H.R. 37, Title
IX of and H.R. 432) .................................................................................................................... 13
Modernizing SEC Disclosures (H.R. 37, Title X and H.R. 1525) ................................................. 14
Increasing the Threshold Amounts of Securities That Can Be Sold to Corporate
Employees and Directors (H.R. 37, Title XI; H.R. 1675; S. 1484, Section 602; and S.
1910, Section 972) ...................................................................................................................... 16
Enabling Broker-Dealers to Publish Research on Exchange Traded Funds (H.R. 2356) .............. 18
Requiring the SEC to Evaluate and Vote on Its Significant Regulations (H.R. 2354) .................. 18
Requiring the SEC to Provide Future Credits for Previous Excessive Fee Payments to it
by Various Entities (H.R. 1975) ................................................................................................. 20
Requiring the SEC to Revise Directions for Initial Registration Form S-1 (H.R. 1723) .............. 20
Expanding Smaller Reporting Company Access to Form S-3 Shelf Registration (H.R.
2357) .......................................................................................................................................... 21
Making It Easier for Holders of Privately Placed Securities to Resell Them (H.R. 1839) ........... 22
Removing the SEC’s Obligation to Report on its Requests for Customer Information from
Financial Institutions (H.R. 3032) .............................................................................................. 23
Repealing a Public Company’s Obligation to Report on the Pay Ratio between the CEO
and the Median Corporate Employee (H.R. 414) ....................................................................... 24
Contacts
Author Contact Information .......................................................................................................... 27
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Introduction
To help restore confidence in the securities markets after the stock market crash of 1929,
Congress passed the Securities Act of 1933 (P.L. 73-22). The act sought to ensure that investors
receive salient information on securities offered for public sale and to ban fraud in the sale of
securities. The act requires companies issuing securities to disclose information deemed germane
to investors. Potential investors must also receive an offering prospectus containing disclosed
securities data. Certain offerings are exempt from such registration requirements, including
private offerings and offerings made to a limited number of sophisticated persons or institutions.
Shortly afterwards, Congress passed the Securities Exchange Act of 1934 (P.L. 73-291), which
authorized creation of the Securities and Exchange Commission (SEC), an independent and
nonpartisan regulatory agency responsible for administering federal securities laws. As such, the
agency exercises broad regulatory authority over significant parts of the securities industry,
including stock exchanges, mutual funds, investment advisers, and brokerage firms.
In subsequent years, Congress enacted a number of other federal securities laws, including the
Investment Advisers Act of 1940 (P.L. 76-768), which defined the role and responsibilities of
investment advisers and imposed SEC registration and disclosure requirements on them.
As noted above, the federal securities laws are responsible for a bevy of regulations that are
overseen and enforced by the SEC, which apply to various entities involved in the securities
markets entities as well as companies that issue securities. Statutorily, the regulations that the
SEC oversees—whether specifically directed by Congress or regulatory rules adopted
independently by the SEC per its authority under the securities laws—are supposed to facilitate
the agency’s broad mission to (1) ensure investor protection through a regime of information
transparency aimed at facilitating informed investment decision making; (2) maintain fair,
orderly, and efficient markets; and (3) facilitate capital formation.
Historically, there have been a number of instances when certain policy and legislative proposals
involved potential tradeoffs between the investor protection mission and the capital formation
mission.
After the recent financial crisis, Congress passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (P.L. 111-203), a wide-ranging package of regulatory reform legislation.
Some provisions mandated new securities regulations expanding required corporate disclosures to
the SEC and the investing public. In subsequent congressional sessions, some Members have
depicted various provisions of the act, including several requiring new corporate disclosures, as
regulatorily excessive.
Enacted in the 112th Congress, the Jumpstart Our Businesses Startup Act of 2012 (JOBS Act, P.L.
112-106) generally reflected a different regulatory strategy than did Dodd-Frank. While various
securities-related provisions in the earlier statute sought to expand disclosure-based investor
protections, various provisions in the JOBS Act sought to help foster capital formation especially
among smaller companies through various forms of regulatory relief.
Often in a securities context, providing regulatory relief to boost capital formation involves a
diminution in required investor-based SEC disclosures, reflecting the potential tradeoffs between
the two goals. However, this dynamic may be complicated, as some studies have found that
markets may punish assets through lowered pricing after their corporate issuers were exempted
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from certain required investor disclosures.1 The policy tradeoff dynamic may get even more
complicated when some of the many mandatory corporate disclosures may not necessarily
facilitate informed investing because they may be superfluous or may contribute to investor
information overload. For example, in a 2013 speech, SEC chair Mary Jo White noted that the
agency would be examining whether investors’ needs are served by the “detailed and lengthy
disclosures about all of the topics that companies currently provide in the reports they are
required to prepare and file with us … [and] whether information overload is occurring.”2
The 114th Congress is currently considering securities legislation that in many instances would
extend the JOBS Act’s focus on providing corporate regulatory relief to foster capital formation.
Some Perspectives on Regulatory Relief
In determining whether to provide regulatory relief, a central question is whether an appropriate tradeoff has been
struck between the benefits and costs of regulation. In other words, can relief be provided while stil maintaining the
stability of the financial system and ensuring consumers are protected, or would relief undermine those goals?
Regulatory relief is generally focused on the providers of financial services—such as banks, broker-dealers, and other
institutions—but what effect would relief have on consumers, investors, particular markets, and market stability more
broadly? Understanding the benefits and costs of regulation is a precondition for deciding whether the appropriate
balance has been achieved.
Financial regulation has different objectives and potential benefits, including enhancing the safety and soundness of
certain institutions; protecting consumers and investors from fraud, manipulation, and discrimination; and promoting
financial stability while reducing systemic risk. Regulators employ different tools to achieve these goals. Regulators
issue rules; supervise and examine institutions to verify that the rules are fol owed; and take certain enforcement
actions, such as imposing fines, when the regulations are not fol owed. In other cases, regulators require companies
or individuals to meet certain standards and receive a license before engaging in a particular business practice. The
specific goals regulators attempt to achieve and the tools they used vary by market. For example, risk management is
emphasized for banking regulation and disclosure is a priority in securities regulation.
The costs associated with government regulation—rulemaking, supervision, and enforcement—are referred to as
regulatory burden. The presence of regulatory burden does not necessarily mean that a regulation is undesirable or
should be repealed. A regulation can have benefits that could outweigh its costs, but the presence of costs means,
tautologically, that there is regulatory burden. The concept of regulatory burden can be contrasted with the phrase
unduly burdensome. Whereas regulatory burden is about the costs associated with a regulation, unduly burdensome
refers to the balance between benefits and costs. For example, some would consider a regulation to be unduly
burdensome if costs are in excess of benefits or the same benefits could be achieved at a lower cost. But the mere
presence of regulatory burden does not mean that a regulation is unduly burdensome. Regulatory requirements are
often imposed on providers of financial services [as well as the companies that issue securities], but costs associated
with regulation can flow through the providers and be ultimately borne, in part, by different entities, including financial
institutions; consumers; the government; corporations and their stakeholders; and the economy at large. Regulatory
relief may face tradeoffs between reducing regulatory burden and potentially reducing the benefits of regulation (e.g.,
safety and soundness, consumer and investor protection, and financial stability).
Source: CRS In Focus IF10162, Introduction to Financial Services: “Regulatory Relief”, by Sean M. Hoskins and Marc
Labonte.
This report examines securities legislation that has been marked up by committee or has seen
floor action in the 114th Congress. Most can be characterized as backward-looking regulatory
relief proposals, meaning that they would modify existing regulations. A few—such as Title X of
H.R. 37, which was passed by the House on January 14, 2015; H.R. 1525, which passed the
1 For example, see Susan Chaplinsky, Kathleen Weiss Hanley, and S. Katie Moon, “The JOBS Act and the Costs of
Going Public,” SSRN, August 14, 2014, at http://ssrn.com/abstract=2492241 or http://dx.doi.org/10.2139/
ssrn.249224.1.
2 U.S. Securities and Exchange Commission (SEC), “Speech on the Path Forward on Disclosure by Chair Mary Jo
White before the National Association of Corporate Directors—Leadership Conference 2013,” October 15, 2013, at
http://www.sec.gov/News/Speech/Detail/Speech/1370539878806.
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House on October 6, 2015; and H.R. 2354—can be characterized as forward-looking legislative
proposals, meaning that they would modify or potentially modify the regulatory rulemaking
process to reduce burdens associated with future rulemakings, offering the possibility of future
regulatory relief. At least one bill, H.R. 3032, can be described as regulatory relief for the SEC
itself since it would relieve the agency of certain reporting obligations to Congress.
Section 601 of S. 1484, the Financial Regulatory Improvement Act of 2015 reported by the
Senate Committee on Banking, Housing, and Urban Affairs on July 23, 2015—later Section 971
of S. 1910. S. 1910, the Financial Services and General Government Appropriations Act of 2016,
reported by the Senate Appropriations Committee on July 30, 2015. The provisions give
regulatory relief to savings and loan institutions. Similarly, Section 972 of S. 1910 derived from
Section 602 of S. 1484. Both would provide regulatory relief to private companies with respect to
their obligations to provide certain disclosures to employees who have been awarded company
securities. Likewise, Section 974 of H.R. 1910 derived from Section 604 of S. 1484. They would
provide regulatory relief to Emerging Growth Companies (EGCs), smaller companies conducting
initial public offerings that enjoy a number of regulatory exemptions under the JOBS Act.
In addition, all of the House bills examined in this report were marked up by the House Financial
Services Committee. H.R. 37, which has a number of provisions that are examined in this report,
passed the House on January 14, 2015. H.R. 434, H.R. 1334, and H.R. 2064 all passed the House
on July 14, 2015.
As also displayed in the table below, this report specifically examines legislation that would
Ease shareholder threshold requirements for savings and loans to make it easier
for them to either remain private companies or to move from public company to
private company status: Title III of H.R. 37 (which passed the House on January
14, 2015), H.R. 1334 (which passed the House on July 14, 2015), Section 601 of
S. 1484, and Section 971 of S. 1910.
Provide regulatory relief from registration requirements for brokers who facilitate
the acquisition of small companies: Title IV of H.R. 37 and H.R. 686.
Provide regulatory relief to EGCs: Title VI of H.R. 37, H.R. 2064 (which passed
the House on July 14, 2015), Section 604 of S. 1484, and Section 974 of S. 1910.
Provide regulatory relief from certain SEC registration requirements for advisers
to Small Business Investment Companies: Title IX of H.R. 37 and H.R. 432
(which passed the House on July 14, 2015).
Increase the threshold amounts of securities sales to employees and directors
under compensatory benefit plans over a 12-month period at non-public
companies before the companies must provide additional disclosure to such
employee-investors: Title XI of H.R. 37, H.R. 1675, Section 602 of S. 1484, and
Section 972 of S. 1910.
Provide regulatory relief to certain smaller companies by exempting them from
the required submission of their financial disclosures to the SEC through
eXtensible Business Reporting Language (XBRL), a digital reporting protocol:
Title VII of H.R. 37 and H.R. 1965.
Repeal the requirement the companies disclose the ratio between their CEO’s
compensation and the pay of their median worker outside of the CEO: H.R. 414.
Revise initial registration Form S-1 to permit companies with less than a public
float of $75 million (smaller reporting companies) to use the form for forward
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incorporation by reference, referring to the information in the form to reduce the
burden of obligation of some subsequent SEC filings: H.R. 1723.
Allow certain SEC-regulated entities, such as national securities trading entities
that are assessed transaction fees by the SEC, to have the agency credit earlier fee
overpayments to future fee obligations: H.R. 1975.
Streamline disclosure rules for EGCs and certain smaller publicly traded
companies and eliminate duplicative, outdated, or unnecessary disclosure
requirements for all publicly traded companies. Title X of H.R. 37 and H.R.
1525.
Statutorily codify the right of holders of certain privately placed securities to
resell them to private entities outside of public securities trading markets: H.R.
1839.
Require the SEC to evaluate and vote on all “significant regulations” within the
first five years after enactment and then every 10 years thereafter: H.R. 2354.
Require the SEC to provide a legal safe harbor for research reports issued by
brokers or dealers on Exchange Traded Funds (ETFs) so that these reports are not
considered securities “offers” and thus proscribed under federal securities laws:
H.R. 2356.
Amend the SEC’s Form S-3 registration statement to give smaller reporting
companies greater access to that shelf registration protocol (registering a new
securities issue in advance so that later it can be quickly offered to the public
during favorable market conditions): H.R. 2357.
Repeal a statutory requirement that the SEC annually report to Congress on how
often it sought customer records at financial institutions: H.R. 3032.
Table. Securities Legislation in the 114th Congress
(reported from committee or considered on the floor)
Regulatory Reform
Legislation or Legislative Provision
Would ease shareholder threshold requirements for savings and
H.R. 37, Title III (passed by the House on
loans to make it easier for them to either remain private
January 14, 2015)
companies or shift from public company to private company
H.R. 1334 (passed by the House on July 14,
status.
2015)
S. 1484, Section 601
S. 1910, Section 971
Would provide regulatory relief to brokers who facilitate the
H.R. 37, Title IV
acquisitions of small companies.
H.R. 686
Would provide regulatory relief to Emerging Growth Companies
H.R. 37, Title VI
(smaller companies conducting IPOs that were granted certain
H.R. 2064 (passed the House on July 14, 2015)
regulatory exemptions under the JOBS Act of 2012, P.L. 112-
106).
S. 1484, Section 604
S. 1910, Section 974
Would exempt certain smaller companies from financial reporting H.R. 37, Title VII
obligations to the SEC through eXtensible Business Reporting
H.R. 1965
Language, a digital reporting protocol.
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Regulatory Reform
Legislation or Legislative Provision
Would provide regulatory relief from certain SEC registration
H.R. 37, Title IX,
requirements for advisers to Smal Business Investment
H.R. 432
Companies.
Would streamline disclosure rules for EGCs and smaller publicly
H.R. 37, Title X
traded companies and eliminate duplicative, outdated, or
H.R. 1525
unnecessary disclosure requirements for all publicly traded
companies.
Would increase the threshold amount of securities sales to
H.R. 37, Title XI
employees and directors under compensatory benefit plans
H.R. 1675
before non-public companies would be required to provide
additional disclosures to such investors.
S. 1484, Section 602
S. 1910, Section 972
Would repeal the requirement that companies disclose the ratio
between their CEO’s compensation and the pay of their median
H.R. 414
worker.
Would revise initial registration Form S-1 to permit companies
H.R. 1723
with less than a public float of $75 mil ion (called smaller
reporting companies) to use forward incorporation by reference
for such forms.
Would codify the right of holders of certain privately placed
H.R. 1839
securities to resel them to private entities outside of public
securities trading markets.
Would give certain SEC-regulated entities such as national
H.R. 1975
securities exchanges future credits for earlier fee overpayments
to the agency.
Would require the SEC to evaluate and vote on all “significant
H.R. 2354
regulations" within the first five years after enactment and then
every 10 years thereafter.
Would require the SEC to provide a legal safe harbor for
H.R. 2356
research reports issued by brokers or dealers on Exchange
Traded Funds so that these reports are not considered securities
“offers,” which are currently proscribed under federal securities
laws.
Would amend the SEC’s Form S-3 (shelf) registration statement
H.R. 2357
to give smaller reporting companies (companies with public floats
below $75 mil ion) greater access to that shelf registration
protocol (registering a new securities issue in advance to enable it
to be quickly offered to the public later during favorable market
conditions).
Would repeal a statutory requirement that the SEC annually
H.R. 3032
report to Congress on how often it sought the customer records
at financial institutions.
Source: Congressional Research Service (CRS) using information derived from www.congress.gov.
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Changing Shareholder Threshold Requirements
(H.R. 37, Title III; H.R. 1334; S. 1484, Section 601; and
S. 1910, Section 971)
Traditionally, under the Securities Act of 1933, banks and bank holding companies (BHCs)3 were
generally required to register securities with the SEC if they had total assets exceeding $10
million and the shares were held (as per shareholders of record) by 500 shareholders or more, as
was the case with nonfinancial firms. Banks and BHCs were also allowed to stop registering
securities with the SEC, a process known as deregistration, if the number of their shareholders of
record fell to 300 or fewer.
Generally speaking, a central perceived benefit of SEC registration is enhancing investor
protection by ensuring that investors have access to significant financial and nonfinancial data
about firms and the securities they issue. The cost of SEC registration is a regulatory burden on
the firm issuing securities associated with complying with SEC requirements, which potentially
raises the cost of capital and reduces how much capital a firm can raise. For small firms, the
regulatory burden of registration is thought to be greater than for larger firms.4 Policymakers
often strive to reach the optimal trade-off between costs and benefits of SEC registration by
exempting firms below a certain size from registration requirements.
Title VI of the JOBS Act raised the SEC shareholder registration threshold from 500 to 2,000 and
increased the upper limit for deregistration from 300 to 1,200 for those banks and nonfinancial
firms. In other words, the JOBS Act made it easier for banks and BHCs to increase the number of
their shareholders while remaining unregistered private banks and, if already registered, to
voluntarily deregister while also adding more shareholders.5 The provision went into effect
immediately upon the enactment of the JOBS Act on April 5, 2012.
These changes made by the JOBS Act did not apply to savings and loan holding companies
(SLHCs).6 Title III, H.R. 37; H.R. 1334; Section 601, S. 1484; and Section 971, S. 1910 would
extend the higher registration and deregistration shareholder thresholds in the JOBS Act for banks
and BHCs to SLHCs. Savings and loans (also known as thrifts and savings banks) are similar to
banks in that they take deposits and make loans, but their regulation is somewhat different.7
Under the provision, an SLHC would be required to register with the SEC if its assets exceed $10
million and it has 2,000 shareholders of record, up from the current requirement of 500
shareholders of record. SLHCs that want to deregister from the SEC would have to have no more
than 1,200 shareholders of record, an increase over the current 300 or fewer shareholders.
3 A bank holding company is a corporation that holds at least a quarter of the voting stock of a commercial bank.
4 See Independent Community Bankers of America (ICBA), “ICBA Statement on Senate Passage of JOBS Act,” press
release, March 22, 2012, at http://www.icba.org/news/newsreleasedetail.cfm?ItemNumber=123582.
5 This section largely derives from Katherine Koops, “The JOBS Act and SEC Deregistration: New Thresholds and
Special Considerations for Banks and Bank Holding Companies,” Bank Bryan Cave Law Firm, June 8, 2012, at
http://www.bankbryancave.com/2012/06/the-jobs-act-and-sec-deregistration-new-thresholds-and-special-
considerations-for-banks-and-bank-holding-companies/.
6 Under federal law, a savings and loan holding company includes any company that directly or indirectly controls
either a savings association or any other company that is a savings and loan holding company.
7 See CRS Report R42572, The Consumer Financial Protection Bureau (CFPB): A Legal Analysis, by David H.
Carpenter.
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Reports indicate that after passage of the JOBS Act, a number of privately held banks and BHCs
took advantage of Title VI’s reduction in shareholder ownership registration triggers by raising
capital from additional shareholders without having to register with the SEC.8 Some banks have
also taken the opportunity to deregister from the SEC.9 One study found that the act was
generally financially beneficial to banks. For example, it found that, on average, the legislation
resulted in $1.31 in higher net bank income and $3.28 lower pretax expenses for every $1.00 of
bank assets and was responsible for $1.54 million in increased assets per bank employee.10 The
study did not attempt to estimate the costs to investors of reduced disclosure under the changes
made by the JOBS Act.11
Potentially expanding the exemption threshold on SEC registration for thrift holding companies,
raises two main points to consider. First, should exemption levels from SEC registration
requirements be different for thrifts and savings and loans than for banks? Current law makes it
more difficult for small thrifts to raise capital than for small banks. Second, are the costs and
benefits of registration requirements for small banks better balanced at the higher thresholds
enacted for banks in the JOBS Act or the lower thresholds in current law for thrifts?
Regulatory Relief for Small Business Merger and
Acquisition Brokers (H.R. 37, Title IV and H.R. 686)
Merger and acquisitions (M&A) brokers, often referred to as Main Street brokers, are
intermediaries who negotiate privately negotiated “sale of business” transactions involving small
and mid-sized companies that often do not involve the exchange of securities. This role has been
described as somewhat akin to the role that “Wall Street” investment firms play as intermediaries
for transactions involving changes in ownership of the securities of publicly traded firms.12 As is
the case with other broker-dealers—such as Wall Street investment firms, which can act as
broker-dealers themselves and also employ individuals who also perform that role—M&A
brokers are also required to register as broker-dealers with the SEC and to be members of
Financial Industry Regulatory Authority (FINRA, the frontline regulator of securities brokerage
firms and their brokers overseen by the SEC).
M&A brokers are commonly described as doing a fairly small volume of corporate sales
transactions, which some observers say limits their ability to spread fixed regulatory costs among
large numbers of transaction clients. Given these conditions, there are significant concerns that
brokers oftentimes end up passing their regulatory costs on to the handful of the relatively small-
sized corporate clients they serve.
8 For example, see ICBA, “Key JOBS Act Provision Must Be Addressed to Benefit Thrifts,” press release, September
13, 2012, at http://www.icba.org/files/ICBASites/PDFs/test091312.pdf.
9 For example, see Jeff Blumenthal, “100-plus Banks Deregister Stock Since JOBS Act,” Philadelphia Business
Journal, February 15, 2013, at http://www.bizjournals.com/philadelphia/print-edition/2013/02/15/100-plus-banks-
deregister-stock-since.html; Brian Yurcan, “Small Banks Deregister in Droves Due to JOBS Act,” Bank Tech, May 30,
2012, http://www.banktech.com/compliance/small-banks-deregister-in-droves-due-to-jobs-act/d/d-id/1295425.
10 Joshua Mitts, “Did the JOBS Act Benefit Community Banks? A Regression Discontinuity,” SSRN, April 25, 2013, at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2233502.
11 Ibid.
12 For example, see written statement by Shane B. Hansen, Partner, Warner Norcross & Judd, LLP, in U.S. Congress,
House Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises,
Reducing Barriers to Capital Formation, hearing, June 12, 2013, at http://financialservices.house.gov/uploadedfiles/
hhrg-113-ba16-wstate-shansen-20130612.pdf.
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Some observers say that initial SEC registration costs for M&A brokers can run more than
$150,000, with annual registration running as high as $75,000.13 To avoid these costs, some
sellers and acquirers have reportedly fled to unregistered M&A brokers, who are said to be a
majority of such brokers.14 Unregistered brokers are, however, in technical violation of the
registration requirements under federal securities laws. And a major concern with the use of
unregistered brokers is that the absence of registration may ultimately put their clients’ corporate
sales transactions at risk of being rescinded in the event that the newly owned business falters.15
H.R. 37, Title IV and H.R. 686 would exempt M&A brokers from registration with the SEC and
FINRA for M&A transactions involving companies with annual earnings of less than $25 million
and annual gross revenue of less than $250 million unless 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 securities offering that is registered or
is required to be registered with the SEC.
Similar legislation in the 113th Congress, H.R. 2274, received support from various entities in the
M&A industry. After that bill passed the House, proponents argued:
[It] would create a simplified system for brokers performing services in connection with
the transfer of ownership of smaller privately held companies. By simplifying the
regulation and reducing the cost of these business brokerage services, these smaller
privately-owned companies would be able to safely, efficiently and effectively transfer
their company.16
In late January 2014, the staff of the SEC’s Division of Trading and Markets of the Securities and
Exchange Commission issued a no-action letter, which had the effect of permitting certain M&A
brokers to business sale intermediation services involving a “privately-held company,” without
having to register as broker-dealers with the agency under the Federal securities laws.17
While some could argue that the letter effectively precludes the need for M&A exemptive relief
legislation, others stressed that “[t]he SEC interprets the laws of Congress, and until a bill is
passed into law, the no-action letter serves as interpretive guidance, effectively granting M&A
Brokers relief from broker-dealer registration, subject to the conditions therein…. M&A Brokers
should proceed with caution – relief is transaction-based and state regulations will still apply.”18
By contrast, the North American Securities Administrators Association (NASAA), an association
of state and provincial securities regulators and a frequent investor advocate, lent its support to
the original version of H.R. 2274. The group, however, subsequently withdrew its support for the
bill after an amended version of the legislation “removed key investor protection features,
including the bill’s statutory ‘bad actor’ disqualification requirements, prohibitions on ‘shell’
13 Office of Representative Bill Huizenga, “Huizenga Legislation to Boost Long-Term Growth for Small Businesses,”
June 17, 2013, at http://huizenga.house.gov/news/documentsingle.aspx?DocumentID=339334.
14 For example, see the testimony by Hansen.
15 Ibid.
16 Office of Representative Bill Huizenga, “Huizenga Legislation Soars Through House,” press release, January 14,
2014, at http://huizenga.house.gov/news/documentsingle.aspx?DocumentID=366805.
17 The letter is available at https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf.
18 Matt Catalano, “What the SEC’s No-Action Letter Means for M&A Brokers, March 25, 2014, Axial, at
http://www.axial.net/forum/sec-action-letter-2/.
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transactions; and a requirement for electronic registration by notice filing with the SEC.”19 That
version of the bill can currently be found as Title IV of H.R. 37 and as H.R. 686.
Elaborating on concerns raised over the inclusion of “bad actors,”20 a critic of the current
legislation argued that it “would allow brokers who have been barred from the industry to
continue to hold themselves as qualified professionals to the business owners that rely on them....
There is no rational basis for barring bad actors in virtually every other similar situation but not in
this context.”21
Regulatory Relief for Emerging Growth Companies
(H.R. 37, Title VI; H.R. 2064; S. 1484, Section 604; and
S. 1910, Section 974)
One goal of the JOBS Act was helping to reduce the direct costs of corporate issuance of publicly
traded securities. To that end, the act created a new class of public company known as an
emerging growth company (EGC), which generally must have less than $1 billion in revenues in
its last fiscal year. Among other things, the act phased in certain regulatory requirements for
EGCs during a five-year period known as an initial public offering (IPO) “on-ramp.” EGCs are
also permitted to confidentially file their registration statement with the SEC, reduce their
mandatory SEC financial disclosures for their IPOs and subsequent mandatory public filings, and
delay the implementation of various Sarbanes-Oxley Act of 2002 and Dodd-Frank Act corporate
governance requirements. Among them is a Sarbanes-Oxley requirement that a company’s
external auditor attest to the company management’s report on the effectiveness of the company’s
internal controls.22
Between April 2012 (when EGCs began) and mid-2014, EGCs reportedly dominated initial
public offerings, accounting for about 84% of domestic IPOs that went into effect during that
time.
Unlike other companies that pursue IPOs, an EGC may submit its IPO registration statement
confidentially as a draft for informal SEC staff review, enabling it to have a non-public “back and
forth” with the agency over the contours of the projected IPO. In the event of unfavorable market
conditions and thus perceived weak investor demand, under the confidential SEC review, an EGC
may withdraw its draft registration statement, ending its pursuit of an IPO. Having that
preliminary confidential SEC review option thus gives EGCs greater flexibility with respect to
“pulling the trigger” to launch an IPO.
19 NASAA, “Letter to the Honorable Joe Manchin and the Honorable David Vitter re: The Small Business Mergers,
Acquisitions, Sales, and Brokerage Simplification Act of 2014 (S. 1923),” September 8, 2014, at http://www.nasaa.org/
wp-content/uploads/2013/10/NASAA-Letter-to-Senators-Manchin-and-Vitter-Re-S.-1923-09.08.2014-Final-PDF.pdf.
20 Generally, bad actors are described as relevant parties who have been convicted of, or are subject to, court or
administrative sanctions for securities fraud or other violations of specified laws.
21 Testimony by Mercer Bullard, Distinguished Lecturer and Professor of Law, University of Mississippi School of
Law, in U.S. Congress, House Committee on Financial Services, Subcommittee on Capital Markets and Government
Sponsored Enterprises, Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens, Part II,
hearing, May 13, 2015, at http://financialservices.house.gov/uploadedfiles/hhrg-114-ba16-wstate-mbullard-
20150513.pdf.
22 Internal controls are corporate protocols aimed at helping to ensure the integrity of corporate financial and
accounting information meet operational and profitability targets, and transmit management policies throughout the
firm.
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If an EGC does decide to move forward with its IPO, its initial confidential submission,
registration statement, and prospectus must be formally submitted to the SEC at least 21 days
before commencing an IPO roadshow. Companies must also provide the SEC with their latest as
well as some historical financial disclosures prior to an IPO launch.
Title VI of H.R. 37 would provide regulatory relief to EGCs in several areas. It would reduce the
minimum amount of time between their initial confidential draft registration statements and
roadshows from the current 21 days to 15 days. The legislation would also exempt EGCs from
having to submit certain historical financial disclosures to the SEC before to launching an IPO.
Title VI of H.R. 37, Section 604 of S. 1484, and Section 974 of S. 1910 would enable a company
that was an EGC when it filed a confidential registration statement for SEC review, but is no
longer an EGC, to still be treated as an EGC for regulatory purposes through the earliest of these
two events: (1) when the company completes its IPO; or (2) one year after the company ceases to
be an EGC. Currently, a company that qualified as an EGC when it filed its confidential
registration statement with the SEC, but later lost that qualification, would have no recourse for
regaining EGC status for regulatory purposes.
Proponents have argued that reducing the time between registration and the roadshow would
reduce the likelihood that external events could have a negative impact on an IPO.23 The
provisions have, however, been criticized by those who argue that while a number of EGCs are
relatively large in size and are likely to garner “fairly immediate” attention from securities
analysts, some will likely be rather small and will not attract such immediate analytical attention.
As such, the concern is that compressing the time for public reaction to such smaller and
unanalyzed EGCs in particular could be “a poor and untested idea.”24
A 2014 study of EGCs concluded that a sample of EGCs began their roadshows an average of 43
days after they had publicly filed their registration statements with the SEC. That 43-day average,
more than twice the current 21-day minimum window, suggests that a reduction to 15 days is not
likely to have a significant overall impact on the EGC IPO process.25
Advocates have also argued that not having to provide historical information to the SEC would
translate into meaningful cost savings. Critics, however, have countered that, due to the central
role that financial statements play in the overall scheme of mandatory corporate disclosures to the
SEC and investors, the ability to compare multiple years of such statements is critical.26
By contrast, there appears to be little substantial criticism of enabling an EGC that filed
confidential registrations statements but subsequently no longer qualified for EGC status to still
be treated as an EGC from a regulatory perspective.
23 Testimony of A. Heath Abshure, Arkansas Securities Commissioner and Immediate Past-President of the North
American Securities Administrators Association, in U.S. Congress, House Committee on Financial Services,
Subcommittee on Capital Markets and Government Sponsored Enterprises, Legislation to Further Reduce Impediments
to Capital Formation, hearing, October 23, 2013.
24 Statement of Theresa A. Gabaldon, Lyle T. Alverson Professor of Law at the George Washington University Law
School, in U.S. Congress, House Committee on Financial Services, Subcommittee on Capital Markets and Government
Sponsored Enterprises, hearing, April 29, 2015, at http://financialservices.house.gov/uploadedfiles/hhrg-114-ba16-
wstate-tgabaldon-20150429.pdf.
25 “The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape,” Latham and Watkins, April 5 2014, at
http://www.jdsupra.com/legalnews/the-jobs-act-two-years-later-an-update-11568/.
26 “Statement of Professor Theresa A. Gabaldon.”
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Regulatory Relief for Small Companies for Their
XBRL Disclosures (H.R. 37, Title VII and H.R. 1965)
EXtensible Business Reporting Language (XBRL) is a freely available global standard developed
to improve the way financial data is disseminated, compiled, and shared. XBRL employs tags to
identify individual components of each piece of financial data, which then allows it to be used
programmatically by an XBRL-compatible program.
Historically, publicly traded companies were required to submit paper-based filings of mandatory
financial statement disclosures to the SEC. In 2009, the SEC adopted additional requirements that
such disclosures would also have to be submitted to the agency in XBRL. Phased in over the next
four years, the XBRL requirement began with larger companies, eventually extending to all
publicly traded firms.27
XBRL imposes a computer-readable data structure on the financial statements and their
associated notes and footnotes through assigning electronic tags to each item. The protocol also
reports on the relationship between individual items in the financial statements. And unlike the
conventional paper-based disclosures, data in the XBRL format can be easily converted into
spreadsheets for analysis.
When it adopted the XBRL protocol, also known as interactive data, the SEC claimed that it
would provide an array of investor information benefits, including the fact that such data “can be
dynamically searched and analyzed, facilitating the comparison of financial and business
performance across companies, reporting periods, and industries.... Interactive data [will] also
provide a significant opportunity to automate regulatory filings and business information
processing, with the potential to increase the speed, accuracy, and usability of financial
disclosure. Such automation could eventually reduce costs.”28
Through the years, concerns have emerged that the costs of compliance with the XBRL protocol
tends to have a particularly disproportionately burdensome impact on smaller companies. For
example, a report based on a survey of New York Stock Exchange–listed small public companies
found that exempting them from XBRL requirements “would save time and money for smaller
reporting companies ... [which] have less complicated financial statements and therefore the value
associated with being able to hyperlink to financial schedules and tagged footnotes [through
XBRL] is very low.”29
Title VII of H.R. 37 and H.R. 1965 would provide a voluntary exemption to both EGCs and
public companies with total annual gross revenues of less than $250 million from current
requirements to do their SEC financial reporting via XBRL. In addition, within a year of
enactment, the legislation would require the SEC to provide an analysis of the costs and benefits
to issuers of the XBRL financial statement requirements to Congress.
Proponents of this provision argue that the overall costs of conforming with the XBRL reporting
protocol generally exceed its benefits.
27 U.S. Securities and Exchange Commission, “Interactive Data to Improve Financial Reporting. Final Rule,” January
30, 2009, at http://www.sec.gov/rules/final/2009/33-9002.pdf.
28 Ibid.
29 Paul Dorfman, “SEC Advisory Committee on Small and Emerging Companies,” NYSE Euronext, 2012, at
http://www.sec.gov/news/otherwebcasts/2012/dorfman_060812.pdf.
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With respect to smaller public firms in particular, the legislation’s proponents give special
emphasis to the observation that those companies frequently spend tens of thousands of dollars or
more annually on XBRL compliance.30
In this context, the American Institute of Certified Public Accountants and XBRL US, a national
XBRL consortium, surveyed XBRL vendors who provide XBRL tagging and filing services to
some 1,300 smaller reporting companies (public companies with $75 million or less in market
capitalization). The survey found that (1) 69% of the companies paid $10,000 or less annually for
fully outsourced creation and filing solutions of their XBRL filings; (2) 18% of the companies
had annual costs of $10,000 to $20,000 for full-service outsourced XBRL solutions; (3) 8% of the
companies paid in excess of $25,000 annually; and (4) no annual XBRL-based costs exceeded
$50,000.
The survey also found that in the case of companies with higher XBRL-based expenditures, their
outsized costs derived from exceptional circumstances, namely the “complexities in their
financial statements and rush charges imposed given the many last minute changes to the filings
(e.g., filing changes for an IPO).”31
Overall, the study concluded that XBRL “is not overly burdensome on small companies and in
fact [is] ... worth the additional cost.”32 Examining trends in the cost of XBRL compliance for
companies in general, a complementary study reported that for many companies, costs were
declining as many companies moved to financial management programs that incorporate the
XBRL process.33
The other side of the XBRL cost/benefit debate involves the XBRL user side, which a few studies
have tried to throw some light on.
For example, one survey of smaller reporting companies34 listed on the New York Stock
Exchange found that many of the firms believed that because smaller companies tended to
produce relatively less complicated financial statements, the benefit from XBRL-based attributes
(such as the ability to hyperlink to financial schedules and tagged footnotes) is insignificant.35
In addition, a study from the Columbia University Business School found that less than 10% of
investors and analysts surveyed used XBRL-tagged SEC data, and none tried to access XBRL
data from corporate websites. It also reported that the relatively small number of analysts and
investors who had attempted to use the data tended to be disappointed with both its usability and
its general quality.36
30 For example, see Office of Representative Robert Hurt, “Robert Hurt Introduces Bill to Reduce the Regulatory
Burden on Small Companies,” press release, April 29, 2015, at http://hurt.house.gov/index.cfm/press-releases?ID=
919047B9-E08F-420A-9243-FF439694EE43.
31 Ibid.
32 Ibid.
33 Jason Bramwell, “Opposition Mounts for House XBRL Exemption Legislation,” Accounting Web, March 17, 2014,
at http://m.accountingweb.com/article/opposition-mounts-house-xbrl-exemption-legislation/223155. (Hereinafter,
Bramwell, “Opposition Mounts.”)
34 Generally, the SEC defines a smaller reporting company as one that has a public float of less than $75 million.
35 Dorfman, “SEC Advisory Committee on Small and Emerging Companies.”
36 Trevor S. Harris and Suzanne Morsfield, “An Evaluation of the Current State and Future of XBRL and Interactive
Data for Investors and Analysts,” Columbia University Business School, December 2012, at
http://www8.gsb.columbia.edu/rtfiles/ceasa/
An%20Evaluation%20of%20the%20Current%20State%20and%20Future%20of%20XBRL%20and%20Interactive%20
Data%20for%20Investors%20and%20Analysts.pdf.
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Some of the legislations’ detractors, however, counter that exempting smaller firms from using it
would ultimately harm investors because they would lose access to small company financial data
that they had benefited from heretofore.37 Relatedly, the head of the SEC’s Office of the Investor
Advocate, an SEC office charged with assisting retail investors in their dealings with the agency,
has argued that the XBRL regulatory relief legislation “would seriously impede the ability of the
SEC to bring disclosure into the 21st Century” and that proper congressional intervention would
entail urging the SEC to continue in its efforts to make corporate disclosures “more accessible
and useful” to the investing public.38
Regulatory Relief for Advisers to Small Business
Investment Companies (H.R. 37, Title IX of and
H.R. 432)
Small business investment companies (SBICs) are privately owned, pooled investment companies
that are licensed by the Small Business Administration (SBA). The SBIC program was conceived
in 1958 as a vehicle to bolster small business access to venture capital by stimulating and
supplementing the flow of private equity capital and long-term loan funds to them. SBICs fund
small businesses through the private capital that each SBIC raises in addition to funds that they
generally borrow at favorable rates (as the SBA guarantees the loan obligations).39 SBICs are
generally created as limited partnerships, with their managers generally acting as both general
partner and investment adviser. The limited partners, who supply the majority of the private
funding, are typically institutional investors, including banks and high-net-worth individual
investors.40
Historically, SBIC advisers were generally not required by federal securities law to register with
the SEC as investment advisers due to an exemption available to advisers with fewer than 15
clients or funds. The Dodd-Frank Act eliminated that broad exemption for entities that fell within
a generic category of pooled investment entities, called private funds, including SBICs and
venture capital funds. The act basically replaced that broad exemption with several narrower
registration exemptions, including exemptions for advisers who solely advise SBICs and venture
capital funds. However, advisers who manage at least one SBIC and one venture capital funds, as
many have historically done, must now register with the SEC. According to various sources, the
costs of such adviser registration can be significant.41
The Dodd-Frank Act also created a new category of advisers known as mid-sized advisers, who
manage between $25 million and $100 million for their clients and are generally not required to
register with the SEC. They, however, are subject to state registration from the states where they
have their principal offices and places of business. The act also requires advisers to private funds
37 Bramwell, “Opposition Mounts.”
38 SEC, “Speech by Rick A. Fleming, SEC Investor Advocate, Effective Disclosure for the 21st Century Investor,”
February 20, 2015, at http://www.sec.gov/news/speech/022015-spchraf.html.
39 For more information, see CRS Report R41456, SBA Small Business Investment Company Program, by Robert Jay
Dilger.
40 Law360, “SBIC Relief Act Will Be Good for Advisers—And Business,” April 07, 2014, at http://www.law360.com/
articles/525896/sbic-relief-act-will-be-good-for-advisers-and-business.
41 For example, see Tom Quaadman, “Statement of the U.S. Chamber of Commerce,” October 23, 2013,
http://financialservices.house.gov/uploadedfiles/hhrg-113-ba16-wstate-tquaadman-20131023.pdf.
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to register with the SEC if in the aggregate they control $150 million or more in assets under
management42 (AUM) in those private funds.
Title IX of H.R. 37 and H.R. 432 would exempt SBIC advisers from SEC registration
requirements if they also advise venture capital funds. The provision would also exempt the
inclusion of an SBIC’s assets in the calculation of AUM and exempt advisers to SBICs from state
and local registration requirements. Currently, if such an adviser advises both venture capital
funds and SBICs, the adviser must register with the SEC. And according to industry testimony, 25
states and the District of Columbia have exemptions from registration for advisers to SBIC
funds.43
Supporters of the legislative provisions, including the U.S. Chamber of Commerce and the Small
Business Investor Alliance, have said that the overall small business capital funding market will
benefit from the ability of venture capital fund advisers to use their expertise to build SBICs.
They have also argued that the SBA operates a robust oversight regime for SBICs and that
subjecting SBIC advisers to registration requirements constitutes costly (especially for the many
small SBICS) and essentially duplicative regulation.44
NASAA indicated that adviser relief legislation similar to Title IX of H.R. 37 did not appear “to
directly threaten retail investors.” Having said that, the group expressed concerns that the
legislation’s preemption of both state and federal registration for SBIC advisers could have
unforeseen negative consequences for retail investors. It then recommended that the legislation be
amended to give states the authority to register entities who acted solely as advisers to SBICs.45
Modernizing SEC Disclosures (H.R. 37, Title X and
H.R. 1525)
As described earlier, one element of the SEC’s statutory mission “is to protect investors,”46 and a
central means by which the agency strives to do this is by ensuring that investors and prospective
investors “have access to certain basic facts about an investment prior to buying it, and so long as
42 Assets under management refers to the market value of assets that an investment company manages on behalf of
investors.
43 Testimony of William Spell, president, Spell Capital Partners, before U.S. Congress, Senate Banking Committee
Subcommittee on Securities, Insurance, and Investment, March 25, 2015, at http://www.banking.senate.gov/public/
index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=72b34807-258f-41be-ae69-42bcdb0c150a&Witness_ID=
e8eb8d56-6b4c-43a0-a254-a339d869d7e2.
44 For example, see testimony by Gayle G. Hughes, partner and founder, Merion Investment, in U.S. Congress, House
Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises,
Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Barriers, hearing, April 29, 2015, at
http://financialservices.house.gov/uploadedfiles/hhrg-114-ba16-wstate-ghughes-20150429.pdf; and testimony by
Thomas Quaadman, vice president, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, in U.S.
Congress, House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises,
hearing,” Federal Information & News Dispatch, April 29, 2015, at http://financialservices.house.gov/uploadedfiles/
hhrg-114-ba16-wstate-tquaadman-20150429.pdf.
45 See written testimony of William Beatty, Washington Securities Division director and president-elect of NASAA, in
U.S. Congress, House Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored
Enterprises, Legislative Proposals to Enhance Capital Formation for Small and Emerging Growth Companies, Part II,
hearing, May 1, 2014, at http://www.nasaa.org/30660/legislative-proposals-enhance-capital-formation-small-emerging-
growth-companies-part-ii/. (Hereinafter, “Beatty, testimony.”)
46 SEC, “The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital
Formation,” at http://www.sec.gov/about/whatwedo.shtml#.VOemZC7JYm8.
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they hold it … [by requiring] public companies to disclose meaningful financial and other
information to the public.”47
One part of this disclosure regime is Form 10-K, an annual mandatory corporate disclosure that
includes a wealth of corporate information, including a company’s history, organizational
structure, stockholdings, and details about its officials, financial performance, and corporate
subsidiaries.
Another part of the SEC’s investor disclosure regime is Regulation S-K, which lays out the SEC’s
reporting requirements. It consists of a set of SEC rules that dictate non-financial corporate
disclosure requirements for various mandatory corporate disclosure documents under federal
securities laws, including registration statements for securities offerings and proxy statements.48
An additional part of the disclosure regime is Regulation S-X, which provides a framework for
the form and content of financial statements submitted to the SEC by securities issuers.
Through the years, with the encouragement of a range of stakeholders, the SEC has had an
ongoing interest in streamlining, simplifying, and modernizing disclosure documents so that they
are less costly, more efficient for securities issuers to use, and more accessible to and
understandable for investors.49 Some observers, however, say that even more streamlining and
simplification of SEC disclosure documents is needed.
In this context, Title X of H.R. 37 and H.R. 1525 would permit issuers to provide a summary
page for their Form 10-K disclosures and revise Regulation S-K to (1) scale back or eliminate
requirements within the regulation; (2) reduce the burden on EGCs, accelerated filers, and smaller
reporting companies;50 and (3) eliminate provisions of Regulation S-K that are duplicative,
outdated, or unnecessary. The SEC would also be required to provide Congress with a study that
identified ways in which requirements in Regulation S-K could be simplified, made more
readable, and be less repetitious.
In 2008, the SEC-sponsored Advisory Committee on Improvements to Financial Reporting
advised the agency to consider permitting issuers to use an executive summary at the beginning
of their Form 10-K disclosures as well as material updates in their quarterly reports and a page
index indicating where investors could find greater detail on more specific subjects. It argued that
many individual investors may find an issuer’s periodic disclosures to be too complex and overly
detailed and that a summary would concisely describe the most important corporate developments
or other salient managerial issues.51
Others, however, have argued that any expectation that Form 10-Ks can be transformed into a
shorter and more concise summary page is probably unrealistic. It has also been argued that Form
10-Ks are generally not targeted at retail investors—who would probably benefit most from a
47 Ibid.
48 A proxy statement has information that a company is required by the SEC to provide to their shareholders to enable
them to make informed decisions about matters that will be brought up at a company’s annual stockholder meeting.
Proxy statements may include proposals for new members of the board of directors, information on directors’
compensation packages, and declarations by a company’s management.
49 For example, see SEC, “Report of the Task Force on Disclosure Simplification,” March 5, 1996, at
http://www.sec.gov/news/studies/smpl.htm.
50 Accelerated filers are public companies with a market cap between $75 million and $700 million. Smaller reporting
companies are generally defined as public companies with a public float of less than $75 million.
51 SEC, “Final Report of the Advisory Committee on Improvements to Financial Reporting to the United States
Securities and Exchange Commission,” August 1, 2008, at http://www.sec.gov/about/offices/oca/acifr/acifr-
finalreport.pdf.
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Form 10-K summary page—but are basically geared toward professionals, including securities
analysts and other investment intermediaries.52
The JOBS Act required the SEC to determine how Regulation S-K requirements can be updated
to modernize and simplify the SEC registration process.53 The review, completed in December
2013, recommended comprehensively examining the disclosure requirements for SEC registrants,
including for EGCs.54
Title IX of H.R. 37 and H.R. 1525 would require the SEC to complete significant modernization
to the Regulation S-K regime within 180 days of enactment. Proponents of the bills have argued
that the short time frame for SEC action was necessary because there had been too much
“studying [of] disclosure reform” and that it was time for action.55
Others, however, have portrayed the 180-day timetable as unrealistic given the SEC’s substantial
backlog of mandated work, including remaining rulemaking needed to implement parts of the
Dodd-Frank Act.56 Additional rulemaking to implement remaining parts of the JOBS Act are also
a part of the agency’s current agenda.
In early 2014, SEC chair Mary Jo White observed that the Regulation S-K report had given the
agency a framework for future reform of the disclosure regime. To that end, she announced that
she had directed agency staff to provide recommendations for updating its rules that dictate the
contents of corporate disclosures, a venture that would involve input from a range of corporations
and investor stakeholders.57
Increasing the Threshold Amounts of Securities
That Can Be Sold to Corporate Employees and
Directors (H.R. 37, Title XI; H.R. 1675; S. 1484,
Section 602; and S. 1910, Section 972)
Generally, under federal securities laws, when a company issues securities, it is required to
register the securities with the SEC unless the transaction qualifies for an exemption from
registration. Adopted by the SEC in 1988, Rule 701 of the Securities Act provides an exemption
from such registrations requirements to non-public companies (often startups) that offer their own
52 Testimony by John Coffee, Adolf A. Berle Professor of Law, director of the Center on Corporate Governance at
Columbia Law School, in U.S. Congress, House Financial Services Subcommittee on Capital Markets and Government
Sponsored Enterprises, Legislative Proposals to Enhance Capital Formation for Small and Emerging Growth
Companies, hearing, April 9, 2014, at http://financialservices.house.gov/uploadedfiles/hhrg-113-ba16-wstate-jcoffee-
20140409.pdf. (Hereinafter, “Coffee, testimony.”)
53 SEC, “Report on Review of Disclosure Requirements in Regulation S-K as Required by Section 108 of the Jumpstart
Our Business Startups Act,” December 2013, http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-
review.pdf.
54 Ibid.
55 Joe Mont, “SEC Disclosure Simplification Bill Approved in House,” Compliance Week, December 4, 2014, at
http://www.complianceweek.com/blogs/the-filing-cabinet/sec-disclosure-simplification-bill-approved-in-
house#.VO5fki7Jbng.
56 Coffee, testimony.
57 SEC, “Speech by SEC Chair Mary Jo White before the 41st Annual Securities Regulation,” January 27, 2014, at
http://www.sec.gov/News/Speech/Detail/Speech/1370540677500#.VO5mgS7Jbng.
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securities (including stock options and restricted stock58) as part of formal written compensation
agreements to employees, directors, general partners, trustees, officers, and specified advisors and
consultants.59 Certain conditions must be met for eligibility, chiefly: Total sales of stock to the
aforementioned corporate entities during a 12-month period cannot exceed the greater of $1
million, 15% of the issuer’s total assets, or 15% of all the outstanding securities of the class of
securities being offered.
In addition, during any 12-month period, if the sale of securities to the aforementioned corporate
personnel exceeds $5 million, the company must provide the employee/investors with additional
information, including risk factors, copies of the plans under which the offerings are made, and
certain financial statements.
Title XI of H.R. 37, H.R. 1675, Section 602 of S. 1484, and Section 972 of S. 1910 would
increase the amount of aggregate securities sales to corporate personnel over any 12-month
period to $10 million before the additional disclosure requirement is triggered.
Various business interests, including the U.S. Chamber of Commerce, have said that expanding
the current $5 million cap under Rule 701 to $10 million would (1) encourage more privately held
companies to provide company equity to their employees, as many are reportedly wary that rival
firms could exploit the information;60 and (2) better align the $5 million figure (established in
1999) with its inflation-adjusted current valuation.61
Another supportive argument is that the legislation would not affect retail investors outside of the
companies, since companies with Rule 701 exemptions can issue stock only to corporate-
affiliated personnel.62
Detractors, however, charge that (1) Rule 701 was originally intended exclusively for small
startups and that by expanding the securities sales cap to $10 million, large corporate issuers
would be included under the rule, enabling them to deny their employee/investors corporate
disclosures that are generally available to other investors;63 and (2) the bills would “encourage
employees to problematically “over concentrate” their retirement accounts in employer stock,
potentially moving them away from generally safer, more diversified portfolios.64
58 A stock option gives its holder the right, but not the obligation, to buy or sell a particular stock at an agreed-upon
price within a certain period or on a specific date. Restricted stocks are stocks or other securities that are acquired
directly or indirectly from a public or private company or from an affiliate of the company (for example, a gift) in a
transaction that is not registered by the SEC, also known as a private offering. They are non-transferrable and are
subject to certain trading limitations.
59 See SEC, “Final Rule: Rule 701–Exempt Offerings Pursuant to Compensatory Arrangements,” at
http://www.sec.gov/rules/final/33-7645.htm.
60 For example, see the hearing transcript: “Legislative Proposals to Enhance Capital Formation for Small and
Emerging Growth Companies, Wednesday, House of Representatives, Subcommittee on Capital Markets and
Government Sponsored Enterprises, Committee on Financial Services,” April 9, 2014, at Error! Hyperlink reference
not valid.http://financialservices.house.gov/uploadedfiles/113-74.pdf.
61 Ibid.
62 Beatty, testimony.
63 Gabaldon, testimony.
64 Bullard, testimony.
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Enabling Broker-Dealers to Publish Research on
Exchange Traded Funds (H.R. 2356)
An exchange traded fund (ETF) is fund that tracks a securities index like a mutual fund but is
traded and priced throughout the trading day like a stock. ETFs can target a wide spectrum of
industry sectors, including energy, health, biotech, and finance, thus giving investors an
alternative means to invest in them. Sales of ETFs have grown significantly through the years.65
Currently, SEC-registered broker-dealers face restrictions in the issuing of certain research reports
on ETFs because the reports are broadly defined to be currently prohibited securities “offers.”66
H.R. 2356 would give broker-dealers a legal safe harbor with respect to the publication of
research reports on ETFs if 120 days elapse after the legislation’s enactment and the agency had
not yet done the required rulemaking.
Among other things, the bill’s proponents, including the Securities Industry and Financial
Markets Association (SIFMA), say that as ETFs have become a growing share of retail and
institutional investor portfolios, there is a growing need to bolster what some characterize as the
undeveloped state of ETF research. The legislation is touted as a mechanism that would help
address this perceived shortfall.67
While acknowledging the importance of broadening ETF research, the bill’s critics say that it
would problematically insulate companies and broker-dealers from private antifraud claims under
federal securities laws and preclude SEC enforcement action under Section 17 of the Securities
Act, which prohibits fraud and misrepresentations in the offer or sale of securities.68
Requiring the SEC to Evaluate and Vote on Its
Significant Regulations (H.R. 2354)
Among other things, the Economic Growth and Regulatory Paperwork Reduction Act of 1996
(P.L. 104-208) requires various financial regulatory agencies—including the Federal Financial
Institutions Examination Council, Office of the Comptroller of the Currency, Federal Deposit
Insurance Corporation, and the Board of Governors of the Federal Reserve System—to review
their regulations at least every 10 years and identify any outdated or otherwise unnecessary
regulations that are imposed on insured depository institutions.
The SEC, however, is currently not subject to such required reviews. H.R. 2354 would require (1)
that five years after a regulation’s adoption, and every subsequent 10 years, the SEC must
conduct a retrospective review of all significant agency rules and regulations;69 and (2) a vote by
65 For example, see Investor’s Business Daily, “ETFs Resume Record Growth Pace,” August 12, 2015, at
http://www.nasdaq.com/article/etfs-resume-record-growth-pace-cm508057#ixzz3j6io00cY.
66 For example, see Sanford Bragg, “New Legislation Would Allow ETF Research from Brokers,” Integrity Research,
June 3, 2015, at https://www.integrity-research.com/new-legislation-would-allow-etf-research-from-brokers/.
67 See written statement of Ronald J. Kruszewski, chairman and CEO, Stifel, in U.S. Congress, House Committee on
Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises, May 13, 2015, at
http://financialservices.house.gov/uploadedfiles/hhrg-114-ba16-wstate-rkruszewski-20150513.pdf; Bragg, “New
Legislation Would Allow ETF Research from Brokers.” (Hereinafter, “Kruszewski, testimony.”)
68 Bullard, testimony.
69 Significant regulations would be defined as (1) those with an annual economic impact of $100 million or more as
(continued...)
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the five SEC commissioners on whether each regulation identified by the aforementioned review
is outmoded, ineffective, insufficient, excessively burdensome, or no longer necessary in the
public interest or not consistent with the agency’s statutory mandate to protect investors; maintain
fair, orderly, and efficient markets; and facilitate capital formation. The bill would also prohibit
the judicial review of any decisions made by the agency to eliminate or amend its rules and
regulators as part of the aforementioned regulatory review.
In its support of the legislation, SIFMA argued that the SEC should periodically examine all of its
significant rules and regulations, as is currently done by most executive branch agencies. The
trade group also advocated for policies beyond what H.R. 2354 would require, saying that “SEC
rules that impose a relatively high cost on market participants and investors should be prioritized
and reviewed with a frequency that is directly based on the costs and impact of the rule or
regulation.”70
By contrast, a point made by critics of the bill is that the legislation is simply unnecessary: The
SEC is already said to conduct retrospective regulatory reviews under both the Regulatory
Flexibility Act71 and Paperwork Reduction Act72 and is said to voluntarily comply with Executive
Order 13563,73 which directs the agency to develop a retrospective rule review protocol aimed at
identifying rules “that may be outmoded, ineffective, insufficient, or excessively burdensome, and
(...continued)
defined by the Office of Management and Budget, or (2) those that result in a major increase in costs or prices for
consumers, individual industries, governments, or geographic regions, or (3) cause significant adverse effects on
competition, employment, investment, productivity, innovation, or the ability of U.S. enterprises to compete against
their foreign counterparts.
70 Kruszewski, testimony.
71 “The Regulatory Flexibility Act (RFA) of 1980 (5 U.S.C. §§601-612) requires federal agencies to assess the impact
of their forthcoming regulations on ‘small entities,’ which the act defines as including small businesses, small
governmental jurisdictions, and certain small not-for-profit organizations. Under the RFA, Cabinet departments and
independent agencies as well as independent regulatory agencies must prepare a ‘regulatory flexibility analysis’ at the
time proposed and certain final rules are issued. The RFA requires the analysis to describe, among other things, (1) the
reasons why the regulatory action is being considered; (2) the small entities to which the proposed rule will apply and,
where feasible, an estimate of their number; (3) the projected reporting, recordkeeping, and other compliance
requirements of the proposed rule; and (4) any significant alternatives to the rule that would accomplish the statutory
objectives while minimizing the impact on small entities.” See CRS Report RL32240, The Federal Rulemaking
Process: An Overview, coordinated by Maeve P. Carey.
72 “The Paperwork Reduction Act (PRA) (44 U.S.C. §§3501-3520) was originally enacted in 1980. One of the purposes
of the PRA is to minimize the paperwork burden for individuals, small businesses, and others resulting from the
collection of information by or for the federal government. The act generally defines a ‘collection of information’ as
the obtaining or disclosure of facts or opinions by or for an agency by 10 or more nonfederal persons. Many
information collections, recordkeeping requirements, and third-party disclosures are contained in or are authorized by
regulations as monitoring or enforcement tools. In fact, these paperwork requirements are the essence of many
agencies’ regulatory provisions. The PRA requires agencies to justify any collection of information from the public by
establishing the need and intended use of the information, estimating the burden that the collection will impose on
respondents, and showing that the collection is the least burdensome way to gather the information.” Ibid.
73 “Executive Order 13563, issued by President Obama in January 2011 ... says that covered agencies (Cabinet
departments and independent agencies) must (to the extent permitted by law): (1) propose or adopt a regulation only
upon a reasoned determination that its benefits justify its costs, (2) tailor regulations to impost the least burden on
society, and (3) select regulatory approaches that maximize net benefits. It also directs agencies to ‘use the best
available techniques to quantify anticipated present and future benefits and costs as accurately as possible.’ Section 6 of
the executive order requires covered agencies to develop a plan under which they would periodically review their
existing significant rules. Although the executive order does not apply to independent regulatory agencies, a February
2011 memorandum from the OIRA Administrator encouraged those agencies to give consideration to all its
provisions.” CRS Report R41974, Cost-Benefit and Other Analysis Requirements in the Rulemaking Process,
coordinated by Maeve P. Carey.
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to modify, streamline, expand, or repeal them” as appropriate.74 An additional criticism is that the
legislation would impose additional administrative burdens on the SEC, which is already said to
be both overburdened and inadequately funded.75
Requiring the SEC to Provide Future Credits for
Previous Excessive Fee Payments to it by Various
Entities (H.R. 1975)
Under Section 31 of the Securities Exchange Act of 1934, national securities exchanges and other
securities-related self-regulatory organizations (SROs) are required to pay transaction fees to the
SEC. The fees are used to recoup costs incurred by the government, including the SEC, for
supervising and regulating both securities markets and securities professionals.76
Historically, there have been a number of reported instances when SEC-regulated entities have
remitted such fee payments to the SEC in excess of actual required amounts.77 When that
happens, a SEC staffer told CRS that the agency does not currently believe that it has the
authority to refund requests for such fee overpayments.78 H.R. 1975 would authorize the SEC to
offset future fees levied on regulated entities by the amount of their cumulative excess fee
payments.
Citing a reported SEC staff estimate that FINRA overpaid the SEC by approximately $6 million
between 2005 and 2015, proponents of H.R. 1975 have argued that Section 31 fee overpayments
tend to stem from either human “error” or “system failures.”79
H.R. 1975 has been described as providing a mechanism that would enable the SEC to refund or
credit regulated entities that have paid excessive Section 31 fees.80 In phone conversations with
the SEC in August 2015, an agency staffer told CRS that the agency was currently awaiting
guidance on whether it had the authority to refund overages under Section 31.
Requiring the SEC to Revise Directions for Initial
Registration Form S-1 (H.R. 1723)
Form S-1 is the initial registration form that the SEC requires before a private company may
publicly issue securities in order to become a public company. Among other things, the form
requires a description of the security, the terms of the issuance, and the company’s planned use of
74 Bullard, testimony.
75 Comments of the Hon. Maxine Waters in “House Financial Services Committee Holds Markup on Financial Services
Legislation, CQ Financial Transcripts, May 20, 2015.
76 SEC, “Section 31 Transaction Fees,” https://www.sec.gov/answers/sec31.htm.
77 “Audit of the SEC’s Filing Fee’s Program,” SEC Office of the Inspector General, March 29, 2013, at
http://www.sec.gov/about/offices/oig/reports/audits/2013/514.pdf.
78 Phone conversations between SEC staff and CRS during August 2015.
79 For example, see the comments of Honorable Greg Meeks in “House Financial Services Committee Holds Markup
on Financial Services Legislation,” May 20, 2015, CQ Financial Transcripts, May 20, 2015.
80 Ibid.
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proceeds from the securities issuance. Form S-1 filings are available for public view online on the
SEC’s website.
Some SEC registration statements and other filing documents submitted to the agency under both
the Securities Act and the Securities Exchange Act allow incorporation by reference. This refers
to the ability to incorporate certain data that is required in a filing by referring to other forms,
documents, or registration statements previously filed with the SEC. Incorporation by reference
can enable a company to reduce the amount of text required (and any additional man-hours
required to write the text) for particular filings and can help to simplify the registration or filing
process.
H.R. 1723, which passed the House on July 14, 2015, would allow smaller reporting
companies—generally public companies with less than $75 million in public float—to
incorporate by reference other documents filed with the SEC after registering through Form S-1.
The SEC’s 2012 Government-Business Forum on Small Business Capital Formation
recommended that smaller reporting companies should be permitted to use incorporation by
reference for Form S-1 registration statements. The report noted that, given the advanced state of
the SEC’s EDGAR database and the ease of accessing supplementary documents through the
Internet, such a policy change made good sense.81
Similarly supportive sentiments have come from a variety of business interests, including the U.S.
Chamber of Commerce. An official with the group has argued that smaller reporting companies
are particularly burdened by copious amounts of disclosure obligations and that H.R. 1723 would
enable smaller reporting companies to avoid repetitive disclosures while still enabling investors to
receive material information on the firms.82
Columbia law professor John Coffee Jr. said that the legislation would “have real efficiency
justifications and could help smaller issuers.”83
Expanding Smaller Reporting Company Access to
Form S-3 Shelf Registration (H.R. 2357)
Form S-3, known as shelf registration, is a simplified SEC securities registration form for public
companies that is also known as a shelf offering. It is less detailed than the Form S-1 and can be
used only by companies that fulfill a certain set of SEC guidelines. A company may file Form S-3
a couple of years in advance of an IPO, allowing it to immediately issue securities when market
conditions are the most favorable for going public.
Generally, companies registering via Form S-3 must (1) have been filing with the SEC for at least
a year, and (2) have a float of at least $75 million. Smaller reporting companies, however, are
allowed to conduct Form S-3 registrations if they (1) are traded on a national securities exchange,
(2) are not shell companies, and (3) have not issued common stock greater than one-third of the
value of their public floats in the last 12 months.
81 SEC, “2012 SEC Government-Business Forum on Small Business Capital Formation Final Report.” April 2013, at
http://www.sec.gov/info/smallbus/gbfor31.pdf.
82 Quaadman, statement.
83 Coffee, testimony.
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H.R. 2357 would allow companies to register primary securities offerings that exceed one-third of
the aggregate market value of their combined voting and non-voting common equity held by their
non-affiliates. Smaller reporting companies that are not traded on a national securities exchange
would then be able to register primary security offerings via Form S-3 of up to one-third of their
public floats.
Proponents of H.R. 2357 argue that the bill would bolster smaller companies’ opportunities to
secure securities-based funding.84 Relatedly, a report from the SEC’s Government-Business
Forum on Small Business Capital Formation also recommended giving smaller reporting
companies more generous access to Form S-3 registration, arguing that traditional investor
protection concerns over doing so have been “substantially eliminated with [the advent of]
advanced information technology, including EDGAR.”85
By contrast, critics of similar legislation to H.R. 2357 have warned that expanding smaller
reporting company eligibility to Form S-3 registration would constitute a major shift in “long-
standing” policies at the SEC. Historically, they note that Form S-3-based shelf registration was
generally confined to seasoned corporate issuers with significantly sized public floats and
generally benefited from an established network of securities analysts who tracked them.
However, under such legislation, the concern is that less reputable companies that are exclusively
traded on the Pink Sheets or the OTC Bulletin Board86 might then be able to use shelf registration
to make large securities offerings without giving prior notice to the public.87
Making It Easier for Holders of Privately Placed
Securities to Resell Them (H.R. 1839)
Currently, after holding securities for a certain length of time, investors in securities issued in a
private placement88 are allowed to resell the securities in a public trading market. An investor’s
ability to resell such securities on the private market, however, is more limited. Investors,
particularly institutional investors, often circumvent this restriction through reference to what is
84 For example, see the comments of Hon. Ann Wagner in “Rep. Scott Garrett Holds a Hearing on Legislative
Proposals to Enhance Capital Formation and Reduce Regulatory Burdens, Committee Hearing,” SEC Wire, May 13,
2015.
85 EDGAR is the electronic disclosure filing system administered by the SEC. SEC, “32nd Annual SEC Government-
Business Forum on Small Business Capital Formation, Final Report,” June 2014, at http://www.sec.gov/info/smallbus/
gbfor32.pdf.
86 Over-the-counter (OTC) securities are traded outside of a formal exchange such as the New York Stock Exchange or
the American Stock Exchange. The companies that are traded in the OTC market tend to be smaller companies that do
not meet the listing requirements to be traded on exchanges. Instead, OTC securities are traded by broker-dealers. The
OTC Bulletin Board is a regulated electronic trading service offered by the National Association of Securities Dealers
that shows real-time quotes, last-sale prices, and volume information for OTC equity securities. Companies listed on
this exchange are required to file current financial statements with the SEC or a banking or insurance regulator. The
Pink Sheets are a daily publication compiled by the National Quotation Bureau with bid and ask prices of OTC stocks
and the market makers who trade them. Unlike companies on a stock exchange, companies quoted on the Pink Sheets
do not need to meet minimum requirements or file with the SEC. Pink sheets also refers to OTC trading.
87 See Coffee, testimony.
88 A private placement is a securities offering that is not registered with the SEC and is not available to the general
public. Generally, one must be an “accredited investor” to invest in a private placement. Accredited investors include
financial institutions such as banks and mutual funds. They also include individuals with a net worth (excluding their
primary residence) of over $1 million—either alone or with a spouse. Alternatively, such an investor must have income
greater than $200,000 during each of the last two years or $300,000 if that person has a spouse.
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popularly known as Section 4(a)(1½) of the Securities Act of 1933. While Section 4(a)(1½) does
not formally appear in the Securities Act of 1933, reference to it has developed through years of
case law and SEC no-action letters.89 The section is often invoked to provide a non-statutory
federal exemption of sorts for the resale of restricted securities (securities acquired in an
unregistered, private sale from the corporate issuer) via a private placement.90
H.R. 1839, which passed the House on October 6, 2015, would codify the ability of holders of
restricted securities to resell those securities in private markets as is currently done through
reference to the non-statutory reference Section 4(a)(1½).
H.R. 1839’s proponents say that codifying the ability of holders of restricted securities to resell
those securities in private markets, issuers of such securities should benefit from a more robust
secondary market for them.91
The legislation’s detractors, however, say that the bill lacks important investor protections that are
a part of private placements under the Securities Act’s Rule 506, which governs private
placements made to accredited investors, and Rule 144A, which permits the resale of securities
solely to qualified institutional buyers—i.e., institutional entities that have portfolios of at least
$100 million in assets (or meet other criteria). In contrast to various investor restrictions
associated with private placement conducted under Rule 506, critics also warn that the bill would
allow securities to be resold to “much smaller, and presumably less sophisticated, buyers,
including individuals who have one million in net worth.”92
Removing the SEC’s Obligation to Report on its
Requests for Customer Information from Financial
Institutions (H.R. 3032)
The Right to Financial Privacy Act of 1978 (RFPA; P.L. 95-630) established procedures that
government authorities must follow when they request a customer’s financial records from a bank
or another financial institution. Generally, federal agencies must provide individuals with a notice
and an opportunity to object before a bank or another financial institution can disclose their
personal financial information to such agencies. The act also required federal agencies to annually
report to Congress on the number of requests made to financial institutions for their customer’s
financial records.93
The SEC was not initially subject to the RFPA. However, in 1980, the agency was given access to
customer from a financial institution without giving prior notice to the customer when it
demonstrated to an appropriate district court that it (1) sought such records pursuant to a
89 A no-action letter is a letter from the SEC indicating that the agency does not intent to take a civil or criminal action
against an individual who engages in a particular activity. It is typically sent in response to a request for clarification
when the legality of an activity in question has not been well established.
90 For example, see “The Section ‘4(1½)’ Phenomenon: Private Resales of ‘Restricted’ Securities,” The Business
Lawyer, vol. 34, no. 4, July 1979, pp. 1961-1978, at http://www.jstor.org/stable/40686262?seq=
1#page_scan_tab_contents.
91 Quaadman, statement.
92 Gabaldon, testimony.
93 See Federal Reserve, “The Right to Financial Privacy Act,” at http://www.federalreserve.gov/boarddocs/supmanual/
cch/200601/priv.pdf.
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subpoena issued in conformity with the requirements of federal securities laws; and (2) has reason
to believe that specified acts or results would occur.
In 1995, under the Federal Reports Elimination and Sunset Act of 1995 (P.L. 104-66) Congress
repealed the congressional reporting mandate under the RFPA. The repeal generally rescinded the
requirement that federal agencies had to provide the annual RFPA reports to Congress. The
repeal, however, did not apply to the SEC.94
H.R. 3032 would repeal the requirement that the SEC annually report to Congress on the number
of times that it sought the customer records of financial institutions.
Proponents of the legislation argue that it would address what they describe as a regulatory
oversight when other federal agencies were removed from the RFPA’s congressional reporting
requirements (through P.L. 96-433) but the SEC was not.95 The legislation received unanimous
approval at the House Financial Service Committee’s markup on July 29, 2015.
Repealing a Public Company’s Obligation to Report
on the Pay Ratio between the CEO and the Median
Corporate Employee (H.R. 414)
Section 953(b) of the Dodd-Frank Act, known as the pay ratio provision, requires the SEC to
write rules to implement a requirement that public companies disclose the ratio between the total
compensation of a company’s chief executive officer (CEO) and the median compensation of all
other employees. Before the rule, SEC regulations required public companies to disclose various
data on CEO compensation. Although a few companies have voluntarily done so, disclosing data
comparing CEO compensation with that of other employees was not traditionally required.
On September 18, 2013, the agency released proposals to implement the pay ratio provision.
Roughly two years later, on August 5, 2015, the agency’s commissioners voted to adopt a rule to
implement the pay ratio provision.
Under the rule, which will go into effect on January 1, 2017, the SEC is directed to amend any
existing executive compensation disclosure rules to require companies to disclose (1) the median
of the annual total compensation of all of the company’s employees, except for the CEO; (2) the
annual total compensation of its CEO; and (3) the ratio of the two. Generally, under the rule,
companies are required to identify the median employee once every three years.
Subject to certain exceptions, the company would be required to include all employees—
U.S. and non-U.S., full-time, part-time, temporary and seasonal—employed by the
company or any of its consolidated subsidiaries in performing its pay ratio calculation.
Individuals employed by unaffiliated third parties or independent contractors would not
be considered to be employees of the company. A company could exclude non-U.S.
employees from the determination of its median employee in two circumstances:
Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make
the company unable to comply with the rule without violating those laws. The company
would be required to obtain a legal opinion from counsel on the inability of the company
94 See 21(h)(6) of the Securities Exchange Act of 1934, at http://www.gpo.gov/fdsys/pkg/PLAW-104publ66/pdf/
PLAW-104publ66.pdf.
95 For example, see “Financial Services Committee Staff Memo on Full Committee Markup of 14 Bills,” July 28, 2015.
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to obtain or process the information necessary for compliance with the rule without
violating the jurisdiction’s laws or regulations governing data privacy.
Up to 5 percent of its total employees who are non-U.S. employees, including any non-
U.S. employees excluded using the data privacy exemption. If a company excludes any
non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in
that jurisdiction.96
In addition, under the rule, a company’s pay ratio will have to be disclosed in its registration
statements, proxy statements, and annual reports, but not in certain other mandatory corporate
disclosures, including quarterly reports. A company will also have to choose the methodology for
identifying its median employee and the employee’s compensation as the chosen methodology is
“reasonable.” Such methodologies may involve a statistical sampling of a company’s eligible
worker population.97
The rule would also allow companies to exclude non-U.S. employees from the pay ratio formula
if the foreign company data privacy laws or other regulations proscribe companies from
disclosing worker compensation data. Certain small companies with public floats of less than $75
million and investment companies are not required to comply with the rule.98
Supporters of Section 953(b), including unions and investor interests, have said that the pay ratio
data would give investors valuable corporate data that would enhance their capacity to assess
workforce morale and potential employee productivity.99 Additionally, supporters, including its
sponsor Senator Robert Menendez,100 have argued that the public company data on CEO-worker
pay disparity that will result from the provision will help to pressure corporate boards to be more
restrained in their pay packages to company CEOs, which some contend are often unjustifiably
large and others assert are generally justifiable. Advocates also have argued that the data would
better inform investors in their exercise of the Dodd-Frank Act’s right of say-on-pay. Say-on-pay
refers to Section 951 of the act, which requires companies to include a provision in certain proxy
statements for a nonbinding shareholder vote on the compensation of their executives.
The pay ratio provision has been criticized by various companies and groups who represent them.
Among others, they have charged that the provision is a politically motivated act designed to
shame companies for their levels of CEO pay. They have also argued that the provision does not
provide valuable information to investors since such a ratio would be potentially misleading to
investors since it would have little value for making corporate comparisons given the variety of
corporate operational structures, sizes, industry sectors, geographic locales, and business models.
As such, critics have also claimed that the considerable costs of implementing the pay ratio
provision lack little justification.
96 SEC “SEC Adopts Rule for Pay Ratio Disclosure Rule Implements Dodd-Frank Mandate While Providing
Companies with Flexibility to Calculate Pay Ratio,” August 5, 2015, at http://www.sec.gov/news/pressrelease/2015-
160.html.
97 SEC, “Pay Ratio Disclosure, Final Rule,” August 5, 2015, at http://www.sec.gov/rules/final/2015/33-9877.pdf.
98 Ibid.
99 For example, see “Dodd-Frank Section 953(b): Why CEO-to-Worker Pay Ratios Matter For Investors,” AFL-CIO, at
http://www.aflcio.org/content/download/1090/9807/version/1/file/Why-CEO-to-Worker-Pay-Ratios-Matter-For-
Investors.pdf.
100 For example, see “Menendez Calls on SEC to Expedite Adoption of CEO-to-Median Pay Disclosure Rule,” press
release, March 12, 2013, at http://www.menendez.senate.gov/news-and-events/press/menendez-calls-on-sec-to-
expedite-adoption-of-ceo-to-median-pay-disclosure-rule.
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For example, in response to the SEC’s earlier pay ratio proposals, some individual commenters
indicated that initial compliance costs for provision of pay ratio data at large corporations
registrant would range from $15,000 to $2 million annually. Also in response to the SEC
proposals, corporate surveys conducted by the Center on Executive Compensation Survey and the
U.S. Chamber of Commerce found markedly higher compliance cost estimates. Between the two
surveys, aggregate initial external compliance cost estimates for a company’s provision of pay
ratio data were found to range between $187 million and $711 million.101 In its final rule, the SEC
indicated that the various cost estimates appeared to be reasonable, also noting that the estimates
might eventually prove to be too high given the greater amount of flexibility in calculating the
employee pay median allowed in its final rule vis a vis the earlier proposed rule.102
On the utility of the pay ratio’s value for inter-corporate and single company intertemporal
investor comparisons, the SEC also argued in its final rule that “using the ratios to compare
compensation practices between registrants, and for a registrant over time … without taking into
account inherent differences in business models between registrants and for a registrant over
time… could potentially lead to unwarranted conclusions.”103
Regarding the question of the pay ratio provision’s potential benefit, the SEC said that the
benefits could not be quantified: In its final rule, the agency noted that the statutory language
accompanying the provision did not provide an explicit goal for the pay ratio data but that
“despite our inability to quantify the benefits, Congress has directed us to promulgate this
disclosure rule [and that it is thus] … reasonable to rely on Congress’s determination that the rule
will produce benefits for shareholders and that its costs … are necessary and appropriate in
furthering shareholders’ ability to meaningfully exercise their say-on-pay voting rights.”104
One rather limited experimental empirical study from Singapore on the impact of CEO-worker
pay ratios found that (1) incrementally disclosing a higher-than-industry pay ratio in addition to
higher-than-industry CEO pay decreased perceived CEO pay fairness and perceived employee
satisfaction, while not affecting a company’s perceived ability to attract and retain CEO talent;
and (2) neither disclosing higher-than-industry CEO pay nor incrementally disclosing higher-
than-industry CEO-worker ratios affected the potential judgments of investors about such a
company.105
Another somewhat limited empirical study investigated CEO-worker pay ratios among companies
in the banking sector. It found a relationship between both comparatively high and more
pronounced shareholder say-on-pay voting dissent over executive pay levels. On the reported
relationship between banking sector companies with higher CEO-worker pay ratios and
heightened shareholder say-on-pay dissent, the study’s argued that the increased shareholder
voting dissent in the face of higher pay ratios was consistent with arguments that disclosure of the
ratios could be a catalyst for reigning in CEO pay that is perceived to be excessive. But,
potentially undercutting the significance of that perspective, the research also found a positive
101 “Pay Ratio Disclosure, Final Rule,” p. 183.
102 Ibid., p. 90.
103 Ibid., p. 209.
104 Ibid., p. 176.
105 Khim Kelly and Jean Lin Seow, “Investor Reactions to Company Disclosure of High CEO Pay and High CEO-to-
Employee Pay Ratio: An Experimental Investigation,” Singapore Management University School of Accountancy
Research Paper Series vol. 3, no. 2 , 2015, at http://ssrn.com/abstract=2498308.
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Selected Securities Legislation in the 114th Congress
relationship between relatively low bank sector CEO-worker pay ratios and more pronounced
say-on-pay shareholder dissent.106
Immediately after the SEC adopted the final pay ratio rule, an official with the U.S. Chamber of
Commerce Center for Capital Markets Competitiveness Congress, an affiliate of the large
business trade group, the U.S. Chamber of Commerce, a consistent critic of the pay ratio
provision, said that the new disclosure requirement was “... a favor to union lobbyists who
misguidedly think it will help their organizing efforts [and] [w]hen disclosure is used to advance
special interest agendas rather than provide investors with better information, it is a step in the
wrong direction.”107
By contrast, Senator Bob Menendez, an original sponsor of the pay ratio provision, said “I am
pleased to see the SEC take the final step to clear the way for the CEO-to-Worker Pay Ratio to
become a reality. While this common-sense proposal never should’ve fallen victim to
controversy, today’s rule is an important step towards fairness and transparency. The CEO-to-
Worker Pay Ratio will provide a valuable tool for investors who have every right to weigh this
important metric in their investment decisions.”108
H.R. 414 would repeal the pay ratio provision in Dodd-Frank Act. The bill was marked up by the
House Financial Services Committee, which on September 30, 2015, voted 32-25 to report it.
During the legislation’s markup, some supporters argued that the pay ratio provision would
effectively reduce corporate jobs, so that its supporters could score political points.109 Some of the
bill’s critics, however, countered during the markup that by repealing the provision, the
legislation would effectively help to exacerbate national income inequality.110
Outside of Congress, legal challenges to the pay ratio disclosure mandate are also a possibility.111
Author Contact Information
Gary Shorter
Specialist in Financial Economics
gshorter@crs.loc.gov, 7-7772
106 Brian Rountree, Karen Nelson, and Steve Crawford, “The CEO-Employee Pay Ratio,” HLS Forum on Corporate
Governance and Financial Regulation,” February 23, 2015, at http://corpgov.law.harvard.edu/2015/02/23/the-ceo-
employee-pay-ratio/.
107 Eric Nelson, “SEC’s New Pay-Ratio Rule in LeBron Terms: Hoops and Some Harm,” U.S. Chamber of Commerce,
August 5, 2015, at https://www.uschamber.com/above-the-fold/sec-s-new-pay-ratio-rule-lebron-terms-hoops-and-
some-harm.
108 Office of Senator Bob Menendez, “Menendez Reacts to SEC Vote Approving CEO-to-Worker Pay Ratio Rule,”
press release, August 5, 2015, at http://www.menendez.senate.gov/news-and-events/press/menendez-reacts-to-sec-vote-
approving-ceo-to-worker-pay-ratio-rule.
109 “House Financial Services Committee Holds Markup on Consumer Protection Legislation,” CQ Financial
Transcripts, September 30, 2015, at http://www.cq.com/doc/financialtranscripts-4765440?5&print=true.
110 Ibid.
111 For example, see CRS Legal Sidebar WSLG1368, SEC’s New Rule on CEO Pay Ratio, by Michael V. Seitzinger.
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