Small Cap Liquidity Reform Act of 2014

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Cap Liquidity Reform Act of 
2014''.

SEC. 2. LIQUIDITY PILOT PROGRAM FOR SECURITIES OF CERTAIN EMERGING 
              GROWTH COMPANIES.

    (a) In General.--Section 11A(c)(6) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78k-1(c)(6)) is amended to read as follows:
    ``(6) Liquidity Pilot Program for Securities of Certain Emerging 
Growth Companies.--
            ``(A) Quoting increment.--Beginning on the date that is 90 
        days after the date of the enactment of the Small Cap Liquidity 
        Reform Act of 2014, the securities of a covered emerging growth 
        company shall be quoted using--
                    ``(i) a minimum increment of $0.05; or
                    ``(ii) if, not later than 60 days after such date 
                of enactment, the company so elects in the manner 
                described in subparagraph (D)--
                            ``(I) a minimum increment of $0.10; or
                            ``(II) the increment at which such 
                        securities would be quoted without regard to 
                        the minimum increments established under this 
                        paragraph.
            ``(B) Trading increment.--In the case of a covered emerging 
        growth company the securities of which are quoted at a minimum 
        increment of $0.05 or $0.10 under this paragraph, the 
        Commission shall determine the increment at which the 
        securities of such company are traded.
            ``(C) Future right to opt out or change minimum 
        increment.--
                    ``(i) In general.--At any time beginning on the 
                date that is 90 days after the date of the enactment of 
                the Small Cap Liquidity Reform Act of 2014, a covered 
                emerging growth company the securities of which are 
                quoted at a minimum increment of $0.05 or $0.10 under 
                this paragraph may elect in the manner described in 
                subparagraph (D)--
                            ``(I) for the securities of such company to 
                        be quoted at the increment at which such 
                        securities would be quoted without regard to 
                        the minimum increments established under this 
                        paragraph; or
                            ``(II) to change the minimum increment at 
                        which the securities of such company are quoted 
                        from $0.05 to $0.10 or from $0.10 to $0.05.
                    ``(ii) When election effective.--An election under 
                this subparagraph shall take effect on the date that is 
                30 days after such election is made.
                    ``(iii) Single election to change minimum 
                increment.--A covered emerging growth company may not 
                make more than one election under clause (i)(II).
            ``(D) Manner of election.--
                    ``(i) In general.--An election is made in the 
                manner described in this subparagraph by informing the 
                Commission of such election.
                    ``(ii) Notification of exchanges and other trading 
                venues.--Upon being informed of an election under 
                clause (i), the Commission shall notify each exchange 
                or other trading venue where the securities of the 
                covered emerging growth company are quoted or traded.
            ``(E) Issuers ceasing to be covered emerging growth 
        companies.--
                    ``(i) In general.--If an issuer the securities of 
                which are quoted at a minimum increment of $0.05 or 
                $0.10 under this paragraph ceases to be a covered 
                emerging growth company, the securities of such issuer 
                shall be quoted at the increment at which such 
                securities would be quoted without regard to the 
                minimum increments established under this paragraph.
                    ``(ii) Exceptions.--The Commission may by 
                regulation, as the Commission considers appropriate, 
                specify any circumstances under which an issuer shall 
                continue to be considered a covered emerging growth 
                company for purposes of this paragraph after the issuer 
                ceases to meet the requirements of subparagraph (L)(i).
            ``(F) Securities trading below $1.--
                    ``(i) Initial price.--
                            ``(I) At effective date.--If the trading 
                        price of the securities of a covered emerging 
                        growth company is below $1 at the close of the 
                        last trading day before the date that is 90 
                        days after the date of the enactment of the 
                        Small Cap Liquidity Reform Act of 2014, the 
                        securities of such company shall be quoted 
                        using the increment at which such securities 
                        would be quoted without regard to the minimum 
                        increments established under this paragraph.
                            ``(II) At ipo.--If a covered emerging 
                        growth company makes an initial public offering 
                        after the day described in subclause (I) and 
                        the first share of the securities of such 
                        company is offered to the public at a price 
                        below $1, the securities of such company shall 
                        be quoted using the increment at which such 
                        securities would be quoted without regard to 
                        the minimum increments established under this 
                        paragraph.
                    ``(ii) Average trading price.--If the average 
                trading price of the securities of a covered emerging 
                growth company falls below $1 for any 90-day period 
                beginning on or after the day before the date of the 
                enactment of the Small Cap Liquidity Reform Act of 
                2014, the securities of such company shall, after the 
                end of such period, be quoted using the increment at 
                which such securities would be quoted without regard to 
                the minimum increments established under this 
                paragraph.
            ``(G) Fraud or manipulation.--If the Commission determines 
        that a covered emerging growth company has violated any 
        provision of the securities laws prohibiting fraudulent, 
        manipulative, or deceptive acts or practices, the securities of 
        such company shall, after the date of the determination, be 
        quoted using the increment at which such securities would be 
        quoted without regard to the minimum increments established 
        under this paragraph.
            ``(H) Ineligibility for increased minimum increment 
        permanent.--The securities of an issuer may not be quoted at a 
        minimum increment of $0.05 or $0.10 under this paragraph at any 
        time after--
                    ``(i) such issuer makes an election under 
                subparagraph (A)(ii)(II);
                    ``(ii) such issuer makes an election under 
                subparagraph (C)(i)(I), except during the period before 
                such election takes effect; or
                    ``(iii) the securities of such issuer are required 
                by this paragraph to be quoted using the increment at 
                which such securities would be quoted without regard to 
                the minimum increments established under this 
                paragraph.
            ``(I) Additional reports and disclosures.--The Commission 
        shall require a covered emerging growth company the securities 
        of which are quoted at a minimum increment of $0.05 or $0.10 
        under this paragraph to make such reports and disclosures as 
        the Commission considers necessary or appropriate in the public 
        interest or for the protection of investors.
            ``(J) Limitation of liability.--An issuer (or any officer, 
        director, manager, or other agent of such issuer) shall not be 
        liable to any person (other than such issuer) under any law or 
        regulation of the United States, any constitution, law, or 
        regulation of any State or political subdivision thereof, or 
        any contract or other legally enforceable agreement (including 
        any arbitration agreement) for any losses caused solely by the 
        quoting of the securities of such issuer at a minimum increment 
        of $0.05 or $0.10, by the trading of such securities at the 
        increment determined by the Commission under subparagraph (B), 
        or by both such quoting and trading, as provided in this 
        paragraph.
            ``(K) Report to congress.--Not later than 6 months after 
        the date of the enactment of the Small Cap Liquidity Reform Act 
        of 2014, and every 6 months thereafter, the Commission, in 
        coordination with each exchange on which the securities of 
        covered emerging growth companies are quoted or traded, shall 
        submit to Congress a report on the quoting and trading of 
        securities in increments permitted by this paragraph and the 
        extent to which such quoting and trading are increasing 
        liquidity and active trading by incentivizing capital 
        commitment, research coverage, and brokerage support, together 
        with any legislative recommendations the Commission may have.
            ``(L) Definitions.--In this paragraph:
                    ``(i) Covered emerging growth company.--The term 
                `covered emerging growth company' means an emerging 
                growth company, as defined in the first paragraph (80) 
                of section 3(a), except that--
                            ``(I) such paragraph shall be applied by 
                        substituting `$750,000,000' for 
                        `$1,000,000,000' each place it appears; and
                            ``(II) subparagraphs (B), (C), and (D) of 
                        such paragraph do not apply.
                    ``(ii) Security.--The term `security' means an 
                equity security.
            ``(M) Savings provision.--Notwithstanding any other 
        provision of this paragraph, the Commission may--
                    ``(i) make such adjustments to the pilot program 
                specified in this paragraph as the Commission considers 
                necessary or appropriate to ensure that such program 
                can provide statistically meaningful or reliable 
                results, including adjustments to eliminate selection 
                bias among participants, expand the number of 
                participants eligible to participate in such program, 
                and change the duration of such program for one or more 
                participants; and
                    ``(ii) conduct any other study or pilot program, in 
                conjunction with or separate from the pilot program 
                specified in this paragraph (as such program may be 
                adjusted pursuant to clause (i)), to evaluate quoting 
                or trading in various minimum increments.''.
    (b) Sunset.--Effective on the date that is 5 years after the date 
of the enactment of this Act, section 11A(c)(6) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78k-1(c)(6)) is repealed.

            Passed the House of Representatives February 11, 2014.

            Attest:

                                                 KAREN L. HAAS,

                                                                 Clerk.

Summary: Small Cap Liquidity Reform Act of 2014 - Amends the Securities Exchange Act of 1934 to establish a pilot liquidity program for equity securities of emerging growth companies (EGCs) with total annual gross revenues of less than $750 million, under which those securities shall be quoted using either: (1) a minimum increment of $0.05 or $0.10, or (2) the increment at which the securities would be quoted without regard to such minimum increments. Repeals the requirement for an SEC study examining the transition to trading and quoting securities in one penny increments, known as decimalization. Directs the Securities and Exchange Commission (SEC) to determine, in the case of an EGC whose securities are quoted at a minimum increment of either $0.05 or $0.10, the increment at which such securities are traded. Requires EGC securities quoted at a minimum increment of $0.05 or $0.10 to be traded at either such minimum increment or at one permitted by SEC regulations. Permits an EGC to opt out or change such minimum increment upon notifying the SEC 90 days after enactment of this Act. Limits any EGC to a single change of minimum increment . Requires the SEC, upon notification of an EGC election, to inform each trading venue where the EGC securities are quoted or traded. Requires that securities of issuers that cease to be EGCs be quoted at the increment at which such securities would be quoted without regard to the minimum increments established under this Act. Prescribes pricing and trading procedures governing securities trading below $1.00. Directs the SEC to require an EGC under this Act to submit additional reports and disclosures. Shields an issuer from liability for losses caused solely by the quoting or trading of its securities at a minimum increment of $0.05 or $0.10, another SEC-authorized increment, or by both such quoting and trading. Directs the SEC to report biannually to Congress on: (1) the quoting and trading of securities in increments permitted by this Act, and (2) the extent to which such quoting and trading increases liquidity and active trading by incentivizing capital commitment, research coverage, and brokerage support. Authorizes the SEC to: (1) make adjustments to the pilot program to ensure that it can provide statistically meaningful or reliable results, and (2) conduct any other study or pilot program to evaluate quoting or trading in various minimum increments. Sunsets the pilot program five years after enactment of this Act.