79–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 115–431 

SMALL BUSINESS MERGERS, ACQUISITIONS, SALES, AND 

BROKERAGE SIMPLIFICATION ACT OF 2017 

NOVEMBER 30, 2017.—Committed to the Committee of the Whole House on the 

State of the Union and ordered to be printed 

Mr. HENSARLING, from the Committee on Financial Services, 

submitted the following 

R E P O R T 

together with 

MINORITY VIEWS 

[To accompany H.R. 477] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 477) to amend the Securities Exchange Act of 1934 to exempt from registration brokers performing services in connection 

with the transfer of ownership of smaller privately held companies, 

having considered the same, report favorably thereon without 

amendment and recommend that the bill do pass. 

PURPOSE AND SUMMARY

On January 12, 2017, Representative Bill Huizenga introduced 

H.R. 477, the ‘‘Small Business Mergers, Acquisitions, Sales, and 

Brokerage Simplification Act of 2017’’, which amends Section 15(b) 

of the Securities Exchange Act of 1934 (Exchange Act) to create a 

simplified federal registration system for brokers known as merger 

and acquisition (M&A) brokers that perform services in connection 

with the transfer of ownership of smaller privately held companies. 

BACKGROUND AND NEED FOR LEGISLATION

M&A brokers provide crucial services to small businesses whose 

owners want to sell their businesses or merge with others so that 

their enterprises can continue to operate and grow, to preserve existing jobs, and to create new jobs. M&A brokers educate business 

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owners looking to sell their businesses on the selling process; help 

prepare the business for sale; analyze the company’s financials and 

its business; perform or coordinate valuation; advise on potential 

capital sources and capital structure; prepare business offering information packages; identify, screen, and market the business to 

qualified potential buyers; assist in organizing and facilitating the 

buyer’s due diligence; and coordinate with the parties’ lawyers, accountants, and other consultants. 

The goal of H.R. 477 is to clarify the reach of the federal securities laws for M&A brokers. By clarifying and simplifying the registration regime for M&A brokers, H.R. 477 will reduce the burdens on the M&A brokers, which in turn will reduce the costs 

borne by their small businesses clients that need the services of the 

M&A broker to assist them in with merger or acquisition opportunities—thereby facilitating liquidity in the small business market 

and preserving and creating jobs. 

Gayle Hughes previously testified on behalf of the Small Business Investor Alliance in support of amending Section 15(b), stating: 

We do a lot of business with small M&A and business 

brokers who are transacting mostly small private companies. They truly add value. A lot of those companies are 

very interested in dealing with the smaller firms. They are 

a little bit afraid of the larger, bigger houses and would far 

rather deal with the guy down the street who they have 

known for 20 years as they bring their company to market 

because it is their baby that they are transacting, or they 

are trying to raise money to generate fine growth capital. 

Ms. Hughes further testified that ‘‘providing relief for these M&A 

brokers will bolster middle market and lower-middle market M&A, 

which will lower costs for small and mid-size companies seeking to 

unlock their value through a sale or engaging in a financing transaction for future growth.’’ 

On September 29, 2015, the North American Securities Administrators Association, Inc. adopted a model rule similar to H.R. 477 

that would exempt M&A brokers from registration in states that 

adopted the model. 

On April 25, 2015, the International Business Brokers Association (‘‘IBBA’’) wrote to Chairman Hensarling that the need to 

amend Section 15(b) of the Exchange Act ‘‘will help squeeze out the 

obstacles created by counterproductive regulations; ones that add 

risks and costs without demonstrating commensurate benefits to 

any party . . .[and will] enhance private business commerce, protect and create jobs, and improve the efficient flow of capital for 

small to medium businesses.’’ 

More recently, in a March 31, 2017 letter IBBA explained: 

Today’s ‘‘one-size-fits all’’ regime of broker-dealer regulation treats the activities of M&A brokers assisting sellers 

or buyers of private companies like ‘‘Wall Street’’ investment bankers selling passive ownership in public companies. This regime imposes regulatory burdens and related 

costs that are necessarily passed on to private business 

sellers and buyers who use these professional services, but 

who benefit little from the perceived ‘‘investor protections’’ 

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associated with SEC and FINRA regulation in the context 

of these business brokerage activities. 

Although the Securities and Exchange Commission (SEC) issued 

a ‘‘no-action letter’’ on January 31, 2014, indicating that the SEC 

would not enforce registration requirements against certain M&A 

brokers, a no-action letter does not formally change the law, the 

limit of the no-action relief pertains to the specific fact found in the 

no-action letter and most importantly the SEC can rescind the noaction letter at any time. Thus, this legislation—which is consistent 

with the SEC’s no-action letter—will provide small businesses and 

M&A brokers the clarification, simplification, legal certainty and 

predictability needed within the federal securities to allow small 

businesses to more freely explore merger and acquisition opportunities. 

Importantly, nothing in this bill prevents the SEC or the Department of Justice from investigating or bringing actions against M&A 

brokers who violate the federal securities laws, and nothing in this 

legislation prevents any of the States from regulating M&A brokers. Further, this bill includes safeguards to protect consumers 

and small businesses through a ‘‘bad actor’’ disqualification provision, exclusion of transactions involving public shell companies, 

and not extending registration relief to any M&A broker who handles or has custody of the funds or securities to be exchanged by 

the parties in the transaction. 

HEARINGS

The Committee on Financial Services held a hearing examining 

matters relating to H.R. 477 on April 26, 2017 and April 28, 2017. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on October 11, 2017, and October 12, 2017, and ordered H.R. 477 to be 

reported favorably to the House without amendment by a recorded 

vote of 37 yeas to 23 nays (Record vote no. FC–83), a quorum being 

present. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. The sole recorded 

vote was on a motion by Chairman Hensarling to report the bill favorably to the House without amendment. The motion was agreed 

to by a recorded vote of 37 yeas to 23 nays (Record vote no. FC– 

83), a quorum being present. 

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Insert offset folio 5 here HR431.001
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COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X 

of the Rules of the House of Representatives, are incorporated in 

the descriptive portions of this report. 

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee states that H.R. 477 will reduce 

the burdensome and extensive regulations imposed on merger and 

acquisition brokers, which are passed onto the small businesses 

they serve, by amending Section 15(b) of the Exchange Act to simplify the registration requirements for M&A brokers. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the following is the cost estimate provided by 

the Congressional Budget Office pursuant to section 402 of the 

Congressional Budget Act of 1974: 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, November 30, 2017. 

Hon. JEB HENSARLING, 

Chairman, Committee on Financial Services, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 477, the Small Business 

Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 

2017. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Stephen Rabent. 

Sincerely, 

MARK P. HADLEY

(For Keith Hall, Director). 

Enclosure. 

H.R. 477—Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2017 

H.R. 477 would exempt certain brokers that perform transactions 

related to ownership transfers of eligible privately held companies 

from the requirement to register with the Securities and Exchange 

Commission (SEC). 

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Using information from the SEC, CBO estimates that imple- menting H.R. 477 would cost less than $500,000 for the agency to 

clarify the applicability of regulations regarding registration requirements for brokers of mergers and acquisitions. Moreover, the 

SEC is authorized to collect fees sufficient to offset its annual appropriation; therefore, assuming appropriation actions consistent 

with that authority, CBO estimates that the net effect of the bill 

on discretionary spending would be negligible. 

Enacting H.R. 477 would not affect direct spending or revenues; 

therefore, pay-as-you-go procedures do not apply. 

CBO estimates that enacting H.R. 477 would not increase net direct spending or on-budget deficits in any of the four consecutive 

10-year periods beginning in 2028. 

H.R. 477 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act. 

The CBO staff contact for this estimate is Stephen Rabent. The 

estimate was approved by H. Samuel Papenfuss, Deputy Assistant 

Director for Budget Analysis. 

FEDERAL MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995. 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of the section 102(b)(3) of the 

Congressional Accountability Act. 

EARMARK IDENTIFICATION

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 

DUPLICATION OF FEDERAL PROGRAMS

In compliance with clause 3(c)(5) of rule XIII of the Rules of the 

House of Representatives, the Committee states that no provision 

of the bill establishes or reauthorizes: (1) a program of the Federal 

Government known to be duplicative of another Federal program; 

(2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public 

Law 111–139; or (3) a program related to a program identified in 

the most recent Catalog of Federal Domestic Assistance, published 

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pursuant to the Federal Program Information Act (Pub. L. No. 95– 

220, as amended by Pub. L. No. 98–169). 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, (115th Congress), the following statement is made concerning directed rulemakings: The 

Committee estimates that the bill requires no directed rulemakings 

within the meaning of such section. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title 

This section cites H.R. 477 as the ‘‘Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2017’’. 

Section 2. Registration exemption for merger and acquisition brokers 

This section amends Section 15(b) of the Securities and Exchange 

Act of 1934 by adding language that exempts M&A brokers from 

registration provided that such brokers do not undertake an excluded activity or are not subject to a disqualification set forth in 

the section. It also provides for a rule of construction specifying 

that the bill does not limit any other authority of the SEC to exempt any person, or any class of persons, from any provision of this 

title, or from any provision of any rule or regulation thereunder. Finally, it contains certain definitions applicable to the section. 

Section 3. Effective date 

This section issues the effective date of the act, 90 days after the 

enactment of the said act. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

and existing law in which no change is proposed is shown in 

roman): 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italic 

and existing law in which no change is proposed is shown in 

roman): 

SECURITIES EXCHANGE ACT OF 1934 

TITLE I—REGULATION OF SECURITIES EXCHANGES 

* * * * * * * 

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REGISTRATION AND REGULATION OF BROKERS AND DEALERS

SEC. 15. (a)(1) It shall be unlawful for any broker or dealer which 

is either a person other than a natural person or a natural person 

not associated with a broker or dealer which is a person other than 

a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails 

or any means or instrumentality of interstate commerce to effect 

any transactions in, or to induce or attempt to induce the purchase 

or sale of, any security (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) unless 

such broker or dealer is registered in accordance with subsection 

(b) of this section. 

(2) The Commission, by rule or order, as it deems consistent with 

the public interest and the protection of investors, may conditionally or unconditionally exempt from paragraph (1) of this subsection any broker or dealer or class of brokers or dealers specified 

in such rule or order. 

(b)(1) A broker or dealer may be registered by filing with the 

Commission an application for registration in such form and containing such information and documents concerning such broker or 

dealer and any persons associated with such broker or dealer as 

the Commission, by rule, may prescribe as necessary or appropriate 

in the public interest or for the protection of investors. Within 

forty-five days of the date of the filing of such application (or within such longer period as to which the applicant consents), the Commission shall— 

(A) by order grant registration, or 

(B) institute proceedings to determine whether registration 

should be denied. Such proceedings shall include notice of the 

grounds for denial under consideration and opportunity for 

hearing and shall be concluded within one hundred twenty 

days of the date of the filing of the application for registration. 

At the conclusion of such proceedings, the Commission, by 

order, shall grant or deny such registration. The Commission 

may extend the time for conclusion of such proceedings for up 

to ninety days if it finds good cause for such extension and 

publishes its reasons for so finding or for such longer period as 

to which the applicant consents. 

The Commission shall grant such registration if the Commission 

finds that the requirements of this section are satisfied. The order 

granting registration shall not be effective until such broker or 

dealer has become a member of a registered securities association, 

or until such broker or dealer has become a member of a national 

securities exchange, if such broker or dealer effects transactions 

solely on that exchange, unless the Commission has exempted such 

broker or dealer, by rule or order, from such membership. The 

Commission shall deny such registration if it does not make such 

a finding or if it finds that if the applicant were so registered, its 

registration would be subject to suspension or revocation under 

paragraph (4) of this subsection. 

(2)(A) An application for registration of a broker or dealer to be 

formed or organized may be made by a broker or dealer to which 

the broker or dealer to be formed or organized is to be the sucVerDate Sep 11 2014 02:41 Dec 01, 2017 Jkt 079006 PO 00000 Frm 00008 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431
9 

cessor. Such application, in such form as the Commission, by rule, 

may prescribe, shall contain such information and documents concerning the applicant, the successor, and any persons associated 

with the applicant or the successor, as the Commission, by rule, 

may prescribe as necessary or appropriate in the public interest or 

for the protection of investors. The grant or denial of registration 

to such an applicant shall be in accordance with the procedures set 

forth in paragraph (1) of this subsection. If the Commission grants 

such registration, the registration shall terminate on the forty-fifth 

day after the effective date thereof, unless prior thereto the successor shall, in accordance with such rules and regulations as the 

Commission may prescribe, adopt the application for registration 

as its own. 

(B) Any person who is a broker or dealer solely by reason of acting as a municipal securities dealer or municipal securities broker, 

who so acts through a separately identifiable department or division, and who so acted in such a manner on the date of enactment 

of the Securities Acts Amendments of 1975, may, in accordance 

with such terms and conditions as the Commission, by rule, prescribes as necessary and appropriate in the public interest and for 

the protection of investors, register such separately identifiable department or division in accordance with this subsection. If any such 

department or division is so registered, the department or division 

and not such person himself shall be the broker or dealer for purposes of this title. 

(C) Within six months of the date of the granting of registration 

to a broker or dealer, the Commission, or upon the authorization 

and direction of the Commission, a registered securities association 

or national securities exchange of which such broker or dealer is 

a member, shall conduct an inspection of the broker or dealer to 

determine whether it is operating in conformity with the provisions 

of this title and the rules and regulations thereunder: Provided, 

however, That the Commission may delay such inspection of any 

class of brokers or dealers for a period not to exceed six months. 

(3) Any provision of this title (other than section 5 and subsection (a) of this section) which prohibits any act, practice, or 

course of business if the mails or any means or instrumentality of 

interstate commerce is used in connection therewith shall also prohibit any such act, practice, or course of business by any registered 

broker or dealer or any person acting on behalf of such a broker 

or dealer, irrespective of any use of the mails or any means or instrumentality of interstate commerce in connection therewith. 

(4) The Commission, by order, shall censure, place limitations on 

the activities, functions, or operations of, suspend for a period not 

exceeding twelve months, or revoke the registration of any broker 

or dealer if it finds, on the record after notice and opportunity for 

hearing, that such censure, placing of limitations, suspension, or 

revocation is in the public interest and that such broker or dealer, 

whether prior or subsequent to becoming such, or any person associated with such broker or dealer, whether prior or subsequent to 

becoming so associated— 

(A) has willfully made or caused to be made in any application for registration or report required to be filed with the 

Commission or with any other appropriate regulatory agency 

under this title, or in any proceeding before the Commission 

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with respect to registration, any statement which was at the 

time and in the light of the circumstances under which it was 

made false or misleading with respect to any material fact, or 

has omitted to state in any such application or report any material fact which is required to be stated therein. 

(B) has been convicted within ten years preceding the filing 

of any application for registration or at any time thereafter of 

any felony or misdemeanor or of a substantially equivalent 

crime by a foreign court of competent jurisdiction which the 

Commission finds— 

(i) involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, 

perjury, burglary, any substantially equivalent activity 

however denominated by the laws of the relevant foreign 

government, or conspiracy to commit any such offense; 

(ii) arises out of the conduct of the business of a broker, 

dealer, municipal securities dealer municipal advisor, government securities broker, government securities dealer, 

investment adviser, bank, insurance company, fiduciary, 

transfer agent, nationally recognized statistical rating organization, foreign person performing a function substantially equivalent to any of the above, or entity or person 

required to be registered under the Commodity Exchange 

Act (7 U.S.C. 1 et seq.) or any substantially equivalent foreign statute or regulation; 

(iii) involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, 

or securities, or substantially equivalent activity however 

denominated by the laws of the relevant foreign government; or 

(iv) involves the violation of section 152, 1341, 1342, or 

1343 or chapter 25 or 47 of title 18, United States Code, 

or a violation of a substantially equivalent foreign statute. 

(C) is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, dealer, municipal securities dealer municipal advisor,, government securities broker, government securities dealer, security-based swap 

dealer, major security-based swap participant, transfer agent, 

nationally recognized statistical rating organization, foreign 

person performing a function substantially equivalent to any of 

the above, or entity or person required to be registered under 

the Commodity Exchange Act or any substantially equivalent 

foreign statute or regulation, or as an affiliated person or employee of any investment company, bank, insurance company, 

foreign entity substantially equivalent to any of the above, or 

entity or person required to be registered under the Commodity Exchange Act or any substantially equivalent foreign 

statute or regulation, or from engaging in or continuing any 

conduct or practice in connection with any such activity, or in 

connection with the purchase or sale of any security. 

(D) has willfully violated any provision of the Securities Act 

of 1933, the Investment Advisers Act of 1940, the Investment 

Company Act of 1940, the Commodity Exchange Act, this title, 

11 

the rules or regulations under any of such statutes, or the 

rules of the Municipal Securities Rulemaking Board, or is unable to comply with any such provision. 

(E) has willfully aided, abetted, counseled, commanded, induced, or procured the violation by any other person of any 

provision of the Securities Act of 1933, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the 

Commodity Exchange Act, this title, the rules or regulations 

under any of such statutes, or the rules of the Municipal Securities Rulemaking Board, or has failed reasonably to supervise, 

with a view to preventing violations of the provisions of such 

statutes, rules, and regulations, another person who commits 

such a violation, if such other person is subject to his supervision. For the purposes of this subparagraph (E) no person 

shall be deemed to have failed reasonably to supervise any 

other person, if— 

(i) there have been established procedures, and a system 

for applying such procedures, which would reasonably be 

expected to prevent and detect, insofar as practicable, any 

such violation by such other person, and 

(ii) such person has reasonably discharged the duties 

and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe 

that such procedures and system were not being complied 

with. 

(F) is subject to any order of the Commission barring or suspending the right of the person to be associated with a broker, 

dealer, security-based swap dealer, or a major security-based 

swap participant; 

(G) has been found by a foreign financial regulatory authority to have— 

(i) made or caused to be made in any application for registration or report required to be filed with a foreign financial regulatory authority, or in any proceeding before a foreign financial regulatory authority with respect to registration, any statement that was at the time and in the light 

of the circumstances under which it was made false or 

misleading with respect to any material fact, or has omitted to state in any application or report to the foreign financial regulatory authority any material fact that is required to be stated therein; 

(ii) violated any foreign statute or regulation regarding 

transactions in securities, or contracts of sale of a commodity for future delivery, traded on or subject to the rules 

of a contract market or any board of trade; 

(iii) aided, abetted, counseled, commanded, induced, or 

procured the violation by any person of any provision of 

any statutory provisions enacted by a foreign government, 

or rules or regulations thereunder, empowering a foreign 

financial regulatory authority regarding transactions in securities, or contracts of sale of a commodity for future delivery, traded on or subject to the rules of a contract market or any board of trade, or has been found, by a foreign 

financial regulatory authority, to have failed reasonably to 

supervise, with a view to preventing violations of such 

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statutory provisions, rules, and regulations, another person who commits such a violation, if such other person is 

subject to his supervision; or 

(H) is subject to any final order of a State securities commission (or any agency or officer performing like functions), State 

authority that supervises or examines banks, savings associations, or credit unions, State insurance commission (or any 

agency or office performing like functions), an appropriate Federal banking agency (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(q))), or the National Credit 

Union Administration, that— 

(i) bars such person from association with an entity regulated by such commission, authority, agency, or officer, or 

from engaging in the business of securities, insurance, 

banking, savings association activities, or credit union activities; or 

(ii) constitutes a final order based on violations of any 

laws or regulations that prohibit fraudulent, manipulative, 

or deceptive conduct. 

(5) Pending final determination whether any registration under 

this subsection shall be revoked, the Commission, by order, may 

suspend such registration, if such suspension appears to the Commission, after notice and opportunity for hearing, to be necessary 

or appropriate in the public interest or for the protection of investors. Any registered broker or dealer may, upon such terms and 

conditions as the Commission deems necessary or appropriate in 

the public interest or for the protection of investors, withdraw from 

registration by filing a written notice of withdrawal with the Commission. If the Commission finds that any registered broker or 

dealer is no longer in existence or has ceased to do business as a 

broker or dealer, the Commission, by order, shall cancel the registration of such broker or dealer. 

(6)(A) With respect to any person who is associated, who is seeking to become associated, or, at the time of the alleged misconduct, 

who was associated or was seeking to become associated with a 

broker or dealer, or any person participating, or, at the time of the 

alleged misconduct, who was participating, in an offering of any 

penny stock, the Commission, by order, shall censure, place limitations on the activities or functions of such person, or suspend for 

a period not exceeding 12 months, or bar any such person from 

being associated with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, or from participating 

in an offering of penny stock, if the Commission finds, on the 

record after notice and opportunity for a hearing, that such censure, placing of limitations, suspension, or bar is in the public interest and that such person— 

(i) has committed or omitted any act, or is subject to an 

order or finding, enumerated in subparagraph (A), (D), (E), (H), 

or (G) of paragraph (4) of this subsection; 

(ii) has been convicted of any offense specified in subparagraph (B) of such paragraph (4) within 10 years of the commencement of the proceedings under this paragraph; or 

(iii) is enjoined from any action, conduct, or practice specified 

in subparagraph (C) of such paragraph (4). 

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(B) It shall be unlawful— 

(i) for any person as to whom an order under subparagraph 

(A) is in effect, without the consent of the Commission, willfully to become, or to be, associated with a broker or dealer in 

contravention of such order, or to participate in an offering of 

penny stock in contravention of such order; 

(ii) for any broker or dealer to permit such a person, without 

the consent of the Commission, to become or remain, a person 

associated with the broker or dealer in contravention of such 

order, if such broker or dealer knew, or in the exercise of reasonable care should have known, of such order; or 

(iii) for any broker or dealer to permit such a person, without 

the consent of the Commission, to participate in an offering of 

penny stock in contravention of such order, if such broker or 

dealer knew, or in the exercise of reasonable care should have 

known, of such order and of such participation. 

(C) For purposes of this paragraph, the term ‘‘person participating in an offering of penny stock’’ includes any person acting as 

any promoter, finder, consultant, agent, or other person who engages in activities with a broker, dealer, or issuer for purposes of 

the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock. The Commission may, by rule or regulation, define such term to include other 

activities, and may, by rule, regulation, or order, exempt any person or class of persons, in whole or in part, conditionally or unconditionally, from such term. 

(7) No registered broker or dealer or government securities 

broker or government securities dealer registered (or required to 

register) under section 15C(a)(1)(A) shall effect any transaction in, 

or induce the purchase or sale of, any security unless such broker 

or dealer meets such standards of operational capability and such 

broker or dealer and all natural persons associated with such 

broker or dealer meet such standards of training, experience, competence, and such other qualifications as the Commission finds necessary or appropriate in the public interest or for the protection of 

investors. The Commission shall establish such standards by rules 

and regulations, which may— 

(A) specify that all or any portion of such standards shall be 

applicable to any class of brokers and dealers and persons associated with brokers and dealers; 

(B) require persons in any such class to pass tests prescribed 

in accordance with such rules and regulations, which tests 

shall, with respect to any class of partners, officers, or supervisory employees (which latter term may be defined by the 

Commission’s rules and regulations and as so defined shall include branch managers of brokers or dealers) engaged in the 

management of the broker or dealer, include questions relating 

to bookkeeping, accounting, internal control over cash and securities, supervision of employees, maintenance of records, and 

other appropriate matters; and 

(C) provide that persons in any such class other than brokers 

and dealers and partners, officers, and supervisory employees 

of brokers or dealers, may be qualified solely on the basis of 

compliance with such standards of training and such other 

qualifications as the Commission finds appropriate. 

14 

The Commission, by rule, may prescribe reasonable fees and 

charges to defray its costs in carrying out this paragraph, including, but not limited to, fees for any test administered by it or under 

its direction. The Commission may cooperate with registered securities associations and national securities exchanges in devising 

and administering tests and may require registered brokers and 

dealers and persons associated with such brokers and dealers to 

pass tests administered by or on behalf of any such association or 

exchange and to pay such association or exchange reasonable fees 

or charges to defray the costs incurred by such association or exchange in administering such tests. 

(8) It shall be unlawful for any registered broker or dealer to effect any transaction in, or induce or attempt to induce the purchase 

or sale of, any security (other than or commercial paper, bankers’ 

acceptances, or commercial bills), unless such broker or dealer is a 

member of a securities association registered pursuant to section 

15A of this title or effects transactions in securities solely on a national securities exchange of which it is a member. 

(9) The Commission by rule or order, as it deems consistent with 

the public interest and the protection of investors, may conditionally or unconditionally exempt from paragraph (8) of this subsection any broker or dealer or class of brokers or dealers specified 

in such rule or order. 

(10) For the purposes of determining whether a person is subject 

to a statutory disqualification under section 6(c)(2), 15A(g)(2), or 

17A(b)(4)(A) of this title, the term ‘‘Commission’’ in paragraph 

(4)(B) of this subsection shall mean ‘‘exchange’’, ‘‘association’’, or 

‘‘clearing agency’’, respectively. 

(11) BROKER/DEALER REGISTRATION WITH RESPECT TO TRANSACTIONS IN SECURITY FUTURES PRODUCTS.— 

(A) NOTICE REGISTRATION.— (i) CONTENTS OF NOTICE.—Notwithstanding paragraphs (1) and (2), a broker or dealer required to register only because it effects transactions in security futures products on an exchange registered pursuant to 

section 6(g) may register for purposes of this section 

by filing with the Commission a written notice in such 

form and containing such information concerning such 

broker or dealer and any persons associated with such 

broker or dealer as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. A broker or dealer may not register under this paragraph unless that 

broker or dealer is a member of a national securities 

association registered under section 15A(k). 

(ii) IMMEDIATE EFFECTIVENESS.—Such registration 

shall be effective contemporaneously with the submission of notice, in written or electronic form, to the 

Commission, except that such registration shall not be 

effective if the registration would be subject to suspension or revocation under paragraph (4). 

(iii) SUSPENSION.—Such registration shall be suspended immediately if a national securities association 

registered pursuant to section 15A(k) of this title suspends the membership of that broker or dealer. 

15 

(iv) TERMINATION.—Such registration shall be terminated immediately if any of the above stated conditions for registration set forth in this paragraph are no 

longer satisfied. 

(B) EXEMPTIONS FOR REGISTERED BROKERS AND DEALERS.—A broker or dealer registered pursuant to the requirements of subparagraph (A) shall be exempt from the 

following provisions of this title and the rules thereunder 

with respect to transactions in security futures products: 

(i) Section 8. 

(ii) Section 11. 

(iii) Subsections (c)(3) and (c)(5) of this section. 

(iv) Section 15B. 

(v) Section 15C. 

(vi) Subsections (d), (e), (f), (g), (h), and (i) of section 

17. 

(12) EXEMPTION FOR SECURITY FUTURES PRODUCT EXCHANGE

MEMBERS.— 

(A) REGISTRATION EXEMPTION.—A natural person shall 

be exempt from the registration requirements of this section if such person— 

(i) is a member of a designated contract market registered with the Commission as an exchange pursuant 

to section 6(g); 

(ii) effects transactions only in securities on the exchange of which such person is a member; and 

(iii) does not directly accept or solicit orders from 

public customers or provide advice to public customers 

in connection with the trading of security futures 

products. 

(B) OTHER EXEMPTIONS.—A natural person exempt from 

registration pursuant to subparagraph (A) shall also be exempt from the following provisions of this title and the 

rules thereunder: 

(i) Section 8. 

(ii) Section 11. 

(iii) Subsections (c)(3), (c)(5), and (e) of this section. 

(iv) Section 15B. 

(v) Section 15C. 

(vi) Subsections (d), (e), (f), (g), (h), and (i) of section 

17. 

(13) REGISTRATION EXEMPTION FOR MERGER AND ACQUISITION

BROKERS.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), an M&A broker shall be exempt from registration 

under this section. 

(B) EXCLUDED ACTIVITIES.—An M&A broker is not exempt from registration under this paragraph if such broker 

does any of the following: 

(i) 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 

transaction. 

16 

(ii) Engages on behalf of an issuer in a public offering of any class of securities that is registered, or is required to be registered, with the Commission under section 12 or with respect to which the issuer files, or is 

required to file, periodic information, documents, and 

reports under subsection (d). 

(iii) Engages on behalf of any party in a transaction 

involving a public shell company. 

(C) DISQUALIFICATIONS.—An M&A broker is not exempt 

from registration under this paragraph if such broker is 

subject to— 

(i) suspension or revocation of registration under 

paragraph (4); 

(ii) a statutory disqualification described in section 

3(a)(39); 

(iii) a disqualification under the rules adopted by the 

Commission under section 926 of the Investor Protection and Securities Reform Act of 2010 (15 U.S.C. 77d 

note); or 

(iv) a final order described in paragraph (4)(H). 

(D) RULE OF CONSTRUCTION.—Nothing in this paragraph 

shall be construed to limit any other authority of the Commission to exempt any person, or any class of persons, from 

any provision of this title, or from any provision of any rule 

or regulation thereunder. 

(E) DEFINITIONS.—In this paragraph: 

(i) CONTROL.—The term ‘‘control’’ means the power, 

directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. There is a presumption 

of control for any person who— 

(I) is a director, general partner, member or 

manager of a limited liability company, or officer 

exercising executive responsibility (or has similar 

status or functions); 

(II) has the right to vote 20 percent or more of 

a class of voting securities or the power to sell or 

direct the sale of 20 percent or more of a class of 

voting securities; or 

(III) in the case of a partnership or limited liability company, has the right to receive upon dissolution, or has contributed, 20 percent or more of 

the capital. 

(ii) ELIGIBLE PRIVATELY HELD COMPANY.—The term 

‘‘eligible privately held company’’ means a privately 

held company that meets both of the following conditions: 

(I) The company does not have any class of securities registered, or required to be registered, with 

the Commission under section 12 or with respect to 

which the company files, or is required to file, periodic information, documents, and reports under 

subsection (d). 

(II) In the fiscal year ending immediately before 

the fiscal year in which the services of the M&A 

17 

broker are initially engaged with respect to the securities transaction, the company meets either or 

both of the following conditions (determined in accordance with the historical financial accounting 

records of the company): 

(aa) The earnings of the company before interest, taxes, depreciation, and amortization 

are less than $25,000,000. 

(bb) The gross revenues of the company are less than $250,000,000. 

(iii) M&A BROKER.—The term ‘‘M&A broker’’ means 

a broker, and any person associated with a broker, engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, regardless 

of whether the broker acts on behalf of a seller or 

buyer, through the purchase, sale, exchange, issuance, 

repurchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company, if the broker reasonably believes 

that— 

(I) upon consummation of the transaction, any 

person acquiring securities or assets of the eligible 

privately held company, acting alone or in concert, 

will control and, directly or indirectly, will be active in the management of the eligible privately 

held company or the business conducted with the 

assets of the eligible privately held company; and 

(II) if any person is offered securities in exchange 

for securities or assets of the eligible privately held 

company, such person will, prior to becoming legally bound to consummate the transaction, receive 

or have reasonable access to the most recent fiscal 

year-end financial statements of the issuer of the 

securities as customarily prepared by the management of the issuer in the normal course of operations and, if the financial statements of the issuer 

are audited, reviewed, or compiled, any related 

statement by the independent accountant, a balance sheet dated not more than 120 days before the 

date of the offer, and information pertaining to the 

management, business, results of operations for the 

period covered by the foregoing financial statements, and material loss contingencies of the 

issuer. 

(iv) PUBLIC SHELL COMPANY.—The term ‘‘public shell 

company’’ is a company that at the time of a transaction with an eligible privately held company— 

(I) has any class of securities registered, or required to be registered, with the Commission under 

section 12 or that is required to file reports pursuant to subsection (d); 

(II) has no or nominal operations; and 

(III) has— 

(aa) no or nominal assets; 

18 

(bb) assets consisting solely of cash and cash 

equivalents; or 

(cc) assets consisting of any amount of cash 

and cash equivalents and nominal other assets. 

(F) INFLATION ADJUSTMENT.— (i) IN GENERAL.—On the date that is 5 years after the 

date of the enactment of the Small Business Mergers, 

Acquisitions, Sales, and Brokerage Simplification Act 

of 2017, and every 5 years thereafter, each dollar 

amount in subparagraph (E)(ii)(II) shall be adjusted 

by— 

(I) dividing the annual value of the Employment 

Cost Index For Wages and Salaries, Private Industry Workers (or any successor index), as published 

by the Bureau of Labor Statistics, for the calendar 

year preceding the calendar year in which the adjustment is being made by the annual value of 

such index (or successor) for the calendar year ending December 31, 2012; and 

(II) multiplying such dollar amount by the 

quotient obtained under subclause (I). 

(ii) ROUNDING.—Each dollar amount determined 

under clause (i) shall be rounded to the nearest multiple of $100,000. 

(c)(1)(A) No broker or dealer shall make use of the mails or any 

means or instrumentality of interstate commerce to effect any 

transaction in, or to induce or attempt to induce the purchase or 

sale of, any security (other than commercial paper, bankers’ acceptances, or commercial bills), or any security-based swap agreement 

by means of any manipulative, deceptive, or other fraudulent device or contrivance. 

(B) No broker, dealer, or municipal securities dealer shall make 

use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce 

the purchase or sale of, any municipal security or any securitybased swap agreement involving a municipal security by means of 

any manipulative, deceptive, or other fraudulent device or contrivance. 

(C) No government securities broker or government securities 

dealer shall make use of the mails or any means or instrumentality 

of interstate commerce to effect any transaction in, or to induce or 

to attempt to induce the purchase or sale of, any government security or any security-based swap agreement involving a government 

security by means of any manipulative, deceptive, or other fraudulent device or contrivance. 

(2)(A) No broker or dealer shall make use of the mails or any 

means or instrumentality of interstate commerce to effect any 

transaction in, or to induce or attempt to induce the purchase or 

sale of, any security (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) otherwise 

than on a national securities exchange of which it is a member, in 

connection with which such broker or dealer engages in any fraudulent, deceptive, or manipulative act or practice, or makes any fictitious quotation. 

19 

(B) No broker, dealer, or municipal securities dealer shall make 

use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce 

the purchase or sale of, any municipal security in connection with 

which such broker, dealer, or municipal securities dealer engages 

in any fraudulent, deceptive, or manipulative act or practice, or 

makes any fictitious quotation. 

(C) No government securities broker or government securities 

dealer shall make use of the mails or any means or instrumentality 

of interstate commerce to effect any transaction in, or induce or attempt to induce the purchase or sale of, any government security 

in connection with which such government securities broker or government securities dealer engages in any fraudulent, deceptive, or 

manipulative act or practice, or makes any fictitious quotation. 

(D) The Commission shall, for the purposes of this paragraph, by 

rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative and such quotations as are fictitious. 

(E) The Commission shall, prior to adopting any rule or regulation under subparagraph (C), consult with and consider the views 

of the Secretary of the Treasury and each appropriate regulatory 

agency. If the Secretary of the Treasury or any appropriate regulatory agency comments in writing on a proposed rule or regulation 

of the Commission under such subparagraph (C) that has been 

published for comment, the Commission shall respond in writing to 

such written comment before adopting the proposed rule. If the 

Secretary of the Treasury determines, and notifies the Commission, 

that such rule or regulation, if implemented, would, or as applied 

does (i) adversely affect the liquidity or efficiency of the market for 

government securities; or (ii) impose any burden on competition not 

necessary or appropriate in furtherance of the purposes of this section, the Commission shall, prior to adopting the proposed rule or 

regulation, find that such rule or regulation is necessary and appropriate in furtherance of the purposes of this section notwithstanding the Secretary’s determination. 

(3)(A) No broker or dealer (other than a government securities 

broker or government securities dealer, except a registered broker 

or dealer) shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security 

(other than an exempted security (except a government security) or 

commercial paper, bankers’ acceptances, or commercial bills) in 

contravention of such rules and regulations as the Commission 

shall prescribe as necessary or appropriate in the public interest or 

for the protection of investors to provide safeguards with respect to 

the financial responsibility and related practices of brokers and 

dealers including, but not limited to, the acceptance of custody and 

use of customers’ securities and the carrying and use of customers’ 

deposits or credit balances. Such rules and regulations shall (A) require the maintenance of reserves with respect to customers’ deposits or credit balances, and (B) no later than September 1, 1975, establish minimum financial responsibility requirements for all brokers and dealers. 

(B) Consistent with this title, the Commission, in consultation 

with the Commodity Futures Trading Commission, shall issue such 

20 

rules, regulations, or orders as are necessary to avoid duplicative 

or conflicting regulations applicable to any broker or dealer registered with the Commission pursuant to section 15(b) (except 

paragraph (11) thereof), that is also registered with the Commodity 

Futures Trading Commission pursuant to section 4f(a) of the Commodity Exchange Act (except paragraph (2) thereof), with respect 

to the application of: (i) the provisions of section 8, section 15(c)(3), 

and section 17 of this title and the rules and regulations thereunder related to the treatment of customer funds, securities, or 

property, maintenance of books and records, financial reporting, or 

other financial responsibility rules, involving security futures products; and (ii) similar provisions of the Commodity Exchange Act 

and rules and regulations thereunder involving security futures 

products. 

(C) Notwithstanding any provision of sections 2(a)(1)(C)(i) or 

4d(a)(2) of the Commodity Exchange Act and the rules and regulations thereunder, and pursuant to an exemption granted by 

the Commission under section 36 of this title or pursuant to a 

rule or regulation, cash and securities may be held by a broker 

or dealer registered pursuant to subsection (b)(1) and also registered as a futures commission merchant pursuant to section 

4f(a)(1) of the Commodity Exchange Act, in a portfolio margining account carried as a futures account subject to section 

4d of the Commodity Exchange Act and the rules and regulations thereunder, pursuant to a portfolio margining program 

approved by the Commodity Futures Trading Commission, and 

subject to subchapter IV of chapter 7 of title 11 of the United 

States Code and the rules and regulations thereunder. The 

Commission shall consult with the Commodity Futures Trading Commission to adopt rules to ensure that such transactions 

and accounts are subject to comparable requirements to the extent practicable for similar products. 

(4) If the Commission finds, after notice and opportunity for a 

hearing, that any person subject to the provisions of section 12, 13, 

14, or subsection (d) of section 15 of this title or any rule or regulation thereunder has failed to comply with any such provision, rule, 

or regulation in any material respect, the Commission may publish 

its findings and issue an order requiring such person, and any person who was a cause of the failure to comply due to an act or omission the person knew or should have known would contribute to 

the failure to comply, to comply, or to take steps to effect compliance, with such provision or such rule or regulation thereunder 

upon such terms and conditions and within such time as the Commission may specify in such order. 

(5) No dealer (other than a specialist registered on a national securities exchange) acting in the capacity of market maker or otherwise shall make use of the mails or any means or instrumentality 

of interstate commerce to effect any transaction in, or to induce or 

attempt to induce the purchase or sale of, any security (other than 

an exempted security or a municipal security) in contravention of 

such specified and appropriate standards with respect to dealing as 

the Commission, by rule, shall prescribe as necessary or appropriate in the public interest and for the protection of investors, to 

maintain fair and orderly markets, or to remove impediments to 

and perfect the mechanism of a national market system. Under the 

21 

rules of the Commission a dealer in a security may be prohibited 

from acting as broker in that security. 

(6) No broker or dealer shall make use of the mails or any means 

or instrumentality of interstate commerce to effect any transaction 

in, or to induce or attempt to induce the purchase or sale of, any 

security (other than an exempted security, municipal security, commercial paper, bankers’ acceptances, or commercial bills) in contravention of such rules and regulations as the Commission shall 

prescribe as necessary or appropriate in the public interest and for 

the protection of investors or to perfect or remove impediments to 

a national system for the prompt and accurate clearance and settlement of securities transactions, with respect to the time and method of, and the form and format of documents used in connection 

with, making settlements of and payments for transactions in securities, making transfers and deliveries of securities, and closing accounts. Nothing in this paragraph shall be construed (A) to affect 

the authority of the Board of Governors of the Federal Reserve System, pursuant to section 7 of this title, to prescribe rules and regulations for the purpose of preventing the excessive use of credit for 

the purchase or carrying of securities, or (B) to authorize the Commission to prescribe rules or regulations for such purpose. 

(7) In connection with any bid for or purchase of a government 

security related to an offering of government securities by or on behalf of an issuer, no government securities broker, government securities dealer, or bidder for or purchaser of securities in such offering shall knowingly or willfully make any false or misleading 

written statement or omit any fact necessary to make any written 

statement made not misleading. 

(8) PROHIBITION OF REFERRAL FEES.—No broker or dealer, or person associated with a broker or dealer, may solicit or accept, directly or indirectly, remuneration for assisting an attorney in obtaining the representation of any person in any private action arising under this title or under the Securities Act of 1933. 

(d) SUPPLEMENTARY AND PERIODIC INFORMATION.— 

(1) IN GENERAL.—Each issuer which has filed a registration 

statement containing an undertaking which is or becomes operative under this subsection as in effect prior to the date of 

enactment of the Securities Acts Amendments of 1964, and 

each issuer which shall after such date file a registration statement which has become effective pursuant to the Securities Act 

of 1933, as amended, shall file with the Commission, in accordance with such rules and regulations as the Commission may 

prescribe as necessary or appropriate in the public interest or 

for the protection of investors, such supplementary and periodic information, documents, and reports as may be required 

pursuant to section 13 of this title in respect of a security registered pursuant to section 12 of this title. The duty to file 

under this subsection shall be automatically suspended if and 

so long as any issue of securities of such issuer is registered 

pursuant to section 12 of this title. The duty to file under this 

subsection shall also be automatically suspended as to any fiscal year, other than the fiscal year within which such registration statement became effective, if, at the beginning of such fiscal year, the securities of each class, other than any class of 

asset-backed securities, to which the registration statement reVerDate Sep 11 2014 02:41 Dec 01, 2017 Jkt 079006 PO 00000 Frm 00021 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431
22 

lates are held of record by less than 300 persons, or, in the 

case of a bank, a savings and loan holding company (as defined 

in section 10 of the Home Owners’ Loan Act), or a bank holding company, as such term is defined in section 2 of the Bank 

Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons 

persons. For the purposes of this subsection, the term ‘‘class’’ 

shall be construed to include all securities of an issuer which 

are of substantially similar character and the holders of which 

enjoy substantially similar rights and privileges. The Commission may, for the purpose of this subsection, define by rules 

and regulations the term ‘‘held of record’’ as it deems necessary 

or appropriate in the public interest or for the protection of investors in order to prevent circumvention of the provisions of 

this subsection. Nothing in this subsection shall apply to securities issued by a foreign government or political subdivision 

thereof. 

(2) ASSET-BACKED SECURITIES.— 

(A) SUSPENSION OF DUTY TO FILE.—The Commission 

may, by rule or regulation, provide for the suspension or 

termination of the duty to file under this subsection for 

any class of asset-backed security, on such terms and conditions and for such period or periods as the Commission 

deems necessary or appropriate in the public interest or 

for the protection of investors. 

(B) CLASSIFICATION OF ISSUERS.—The Commission may, 

for purposes of this subsection, classify issuers and prescribe requirements appropriate for each class of issuers of 

asset-backed securities. 

(e) NOTICES TO CUSTOMERS REGARDING SECURITIES LENDING.— 

Every registered broker or dealer shall provide notice to its customers that they may elect not to allow their fully paid securities 

to be used in connection with short sales. If a broker or dealer uses 

a customer’s securities in connection with short sales, the broker 

or dealer shall provide notice to its customer that the broker or 

dealer may receive compensation in connection with lending the 

customer’s securities. The Commission, by rule, as it deems necessary or appropriate in the public interest and for the protection 

of investors, may prescribe the form, content, time, and manner of 

delivery of any notice required under this paragraph. 

(f) The Commission, by rule, as it deems necessary or appropriate 

in the public interest and for the protection of investors or to assure equal regulation, may require any member of a national securities exchange not required to register under section 15 of this 

title and any person associated with any such member to comply 

with any provision of this title (other than section 15(a)) or the 

rules or regulations thereunder which by its terms regulates or 

prohibits any act, practice, or course of business by a ‘‘broker or 

dealer’’ or ‘‘registered broker or dealer’’ or a ‘‘person associated with 

a broker or dealer,’’ respectively. 

(g) Every registered broker or dealer shall establish, maintain, 

and enforce written policies and procedures reasonably designed, 

taking into consideration the nature of such broker’s or dealer’s 

business, to prevent the misuse in violation of this title, or the 

rules or regulations thereunder, of material, nonpublic information 

by such broker or dealer or any person associated with such broker 

23 

or dealer. The Commission, as it deems necessary or appropriate 

in the public interest or for the protection of investors, shall adopt 

rules or regulations to require specific policies or procedures reasonably designed to prevent misuse in violation of this title (or the 

rules or regulations thereunder) of material, nonpublic information. 

(h) REQUIREMENTS FOR TRANSACTIONS IN PENNY STOCKS.— (1) IN GENERAL.—No broker or dealer shall make use of the 

mails or any means or instrumentality of interstate commerce 

to effect any transaction in, or to induce or attempt to induce 

the purchase or sale of, any penny stock by any customer except in accordance with the requirements of this subsection 

and the rules and regulations prescribed under this subsection. 

(2) RISK DISCLOSURE WITH RESPECT TO PENNY STOCKS.—Prior 

to effecting any transaction in any penny stock, a broker or 

dealer shall give the customer a risk disclosure document 

that— 

(A) contains a description of the nature and level of risk 

in the market for penny stocks in both public offerings and 

secondary trading; 

(B) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violations of such duties or other requirements of Federal securities laws; 

(C) contains a brief, clear, narrative description of a 

dealer market, including ‘‘bid’’ and ‘‘ask’’ prices for penny 

stocks and the significance of the spread between the bid 

and ask prices; 

(D) contains the toll free telephone number for inquiries 

on disciplinary actions established pursuant to section 

15A(i) of this title; 

(E) defines significant terms used in the disclosure document or in the conduct of trading in penny stocks; and 

(F) contains such other information, and is in such form 

(including language, type size, and format), as the Commission shall require by rule or regulation. 

(3) COMMISSION RULES RELATING TO DISCLOSURE.—The Commission shall adopt rules setting forth additional standards for 

the disclosure by brokers and dealers to customers of information concerning transactions in penny stocks. Such rules— 

(A) shall require brokers and dealers to disclose to each 

customer, prior to effecting any transaction in, and at the 

time of confirming any transaction with respect to any 

penny stock, in accordance with such procedures and 

methods as the Commission may require consistent with 

the public interest and the protection of investors— 

(i) the bid and ask prices for penny stock, or such 

other information as the Commission may, by rule, require to provide customers with more useful and reliable information relating to the price of such stock; 

(ii) the number of shares to which such bid and ask 

prices apply, or other comparable information relating 

to the depth and liquidity of the market for such stock; 

and 

(iii) the amount and a description of any compensation that the broker or dealer and the associated perVerDate Sep 11 2014 02:41 Dec 01, 2017 Jkt 079006 PO 00000 Frm 00023 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431
24 

son thereof will receive or has received in connection 

with such transaction; 

(B) shall require brokers and dealers to provide, to each 

customer whose account with the broker or dealer contains 

penny stocks, a monthly statement indicating the market 

value of the penny stocks in that account or indicating 

that the market value of such stock cannot be determined 

because of the unavailability of firm quotes; and 

(C) may, as the Commission finds necessary or appropriate in the public interest or for the protection of investors, require brokers and dealers to disclose to customers 

additional information concerning transactions in penny 

stocks. 

(4) EXEMPTIONS.—The Commission, as it determines consistent with the public interest and the protection of investors, 

may by rule, regulation, or order exempt in whole or in part, 

conditionally or unconditionally, any person or class of persons, 

or any transaction or class of transactions, from the requirements of this subsection. Such exemptions shall include an exemption for brokers and dealers based on the minimal percentage of the broker’s or dealer’s commissions, commission-equivalents, and markups received from transactions in penny stocks. 

(5) REGULATIONS.—It shall be unlawful for any person to violate such rules and regulations as the Commission shall prescribe in the public interest or for the protection of investors 

or to maintain fair and orderly markets— 

(A) as necessary or appropriate to carry out this subsection; or 

(B) as reasonably designed to prevent fraudulent, deceptive, or manipulative acts and practices with respect to 

penny stocks. 

(i) LIMITATIONS ON STATE LAW.— 

(1) CAPITAL, MARGIN, BOOKS AND RECORDS, BONDING, AND RE- PORTS.—No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational 

reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. The 

Commission shall consult periodically the securities commissions (or any agency or office performing like functions) of the 

States concerning the adequacy of such requirements as established under this title. 

(2) FUNDING PORTALS.— 

(A) LIMITATION ON STATE LAWS.—Except as provided in 

subparagraph (B), no State or political subdivision thereof 

may enforce any law, rule, regulation, or other administrative action against a registered funding portal with respect 

to its business as such. 

(B) EXAMINATION AND ENFORCEMENT AUTHORITY.—Subparagraph (A) does not apply with respect to the examination and enforcement of any law, rule, regulation, or administrative action of a State or political subdivision thereVerDate Sep 11 2014 02:41 Dec 01, 2017 Jkt 079006 PO 00000 Frm 00024 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431
25 

of in which the principal place of business of a registered 

funding portal is located, provided that such law, rule, regulation, or administrative action is not in addition to or 

different from the requirements for registered funding portals established by the Commission. 

(C) DEFINITION.—For purposes of this paragraph, the 

term ‘‘State’’ includes the District of Columbia and the territories of the United States. 

(3) DE MINIMIS TRANSACTIONS BY ASSOCIATED PERSONS.—No 

law, rule, regulation, or order, or other administrative action 

of any State or political subdivision thereof may prohibit an associated person of a broker or dealer from effecting a transaction described in paragraph (3) for a customer in such State 

if— 

(A) such associated person is not ineligible to register 

with such State for any reason other than such a transaction; 

(B) such associated person is registered with a registered 

securities association and at least one State; and 

(C) the broker or dealer with which such person is associated is registered with such State. 

(4) DESCRIBED TRANSACTIONS.— 

(A) IN GENERAL.—A transaction is described in this paragraph if— 

(i) such transaction is effected— 

(I) on behalf of a customer that, for 30 days 

prior to the day of the transaction, maintained an 

account with the broker or dealer; and 

(II) by an associated person of the broker or 

dealer— 

(aa) to which the customer was assigned for 

14 days prior to the day of the transaction; 

and 

(bb) who is registered with a State in which 

the customer was a resident or was present 

for at least 30 consecutive days during the 1- 

year period prior to the day of the transaction; 

or 

(ii) the transaction is effected— 

(I) on behalf of a customer that, for 30 days 

prior to the day of the transaction, maintained an 

account with the broker or dealer; and 

(II) during the period beginning on the date on 

which such associated person files an application 

for registration with the State in which the transaction is effected and ending on the earlier of— 

(aa) 60 days after the date on which the application is filed; or 

(bb) the date on which such State notifies 

the associated person that it has denied the 

application for registration or has stayed the 

pendency of the application for cause. 

(B) RULES OF CONSTRUCTION.—For purposes of subparagraph (A)(i)(II)— 

26 

(i) each of up to 3 associated persons of a broker or 

dealer who are designated to effect transactions during the absence or unavailability of the principal associated person for a customer may be treated as an associated person to which such customer is assigned; 

and 

(ii) if the customer is present in another State for 30 

or more consecutive days or has permanently changed 

his or her residence to another State, a transaction is 

not described in this paragraph, unless the associated 

person of the broker or dealer files an application for 

registration with such State not later than 10 business 

days after the later of the date of the transaction, or 

the date of the discovery of the presence of the customer in the other State for 30 or more consecutive 

days or the change in the customer’s residence. 

(j) RULEMAKING TO EXTEND REQUIREMENTS TO NEW HYBRID

PRODUCTS.— (1) CONSULTATION.—Prior to commencing a rulemaking 

under this subsection, the Commission shall consult with and 

seek the concurrence of the Board concerning the imposition of 

broker or dealer registration requirements with respect to any 

new hybrid product. In developing and promulgating rules 

under this subsection, the Commission shall consider the views 

of the Board, including views with respect to the nature of the 

new hybrid product; the history, purpose, extent, and appropriateness of the regulation of the new product under the Federal banking laws; and the impact of the proposed rule on the 

banking industry. 

(2) LIMITATION.—The Commission shall not— 

(A) require a bank to register as a broker or dealer 

under this section because the bank engages in any transaction in, or buys or sells, a new hybrid product; or 

(B) bring an action against a bank for a failure to comply with a requirement described in subparagraph (A), 

unless the Commission has imposed such requirement by rule 

or regulation issued in accordance with this section. 

(3) CRITERIA FOR RULEMAKING.—The Commission shall not 

impose a requirement under paragraph (2) of this subsection 

with respect to any new hybrid product unless the Commission 

determines that— 

(A) the new hybrid product is a security; and 

(B) imposing such requirement is necessary and appropriate in the public interest and for the protection of investors. 

(4) CONSIDERATIONS.—In making a determination under 

paragraph (3), the Commission shall consider— 

(A) the nature of the new hybrid product; and 

(B) the history, purpose, extent, and appropriateness of 

the regulation of the new hybrid product under the Federal securities laws and under the Federal banking laws. 

(5) OBJECTION TO COMMISSION REGULATION.— (A) FILING OF PETITION FOR REVIEW.—The Board may obtain review of any final regulation described in paragraph 

(2) in the United States Court of Appeals for the District 

27 

of Columbia Circuit by filing in such court, not later than 

60 days after the date of publication of the final regulation, a written petition requesting that the regulation be 

set aside. Any proceeding to challenge any such rule shall 

be expedited by the Court of Appeals. 

(B) TRANSMITTAL OF PETITION AND RECORD.—A copy of a 

petition described in subparagraph (A) shall be transmitted as soon as possible by the Clerk of the Court to an 

officer or employee of the Commission designated for that 

purpose. Upon receipt of the petition, the Commission 

shall file with the court the regulation under review and 

any documents referred to therein, and any other relevant 

materials prescribed by the court. 

(C) EXCLUSIVE JURISDICTION.—On the date of the filing 

of the petition under subparagraph (A), the court has jurisdiction, which becomes exclusive on the filing of the materials set forth in subparagraph (B), to affirm and enforce 

or to set aside the regulation at issue. 

(D) STANDARD OF REVIEW.—The court shall determine to 

affirm and enforce or set aside a regulation of the Commission under this subsection, based on the determination of 

the court as to whether— 

(i) the subject product is a new hybrid product, as 

defined in this subsection; 

(ii) the subject product is a security; and 

(iii) imposing a requirement to register as a broker 

or dealer for banks engaging in transactions in such 

product is appropriate in light of the history, purpose, 

and extent of regulation under the Federal securities 

laws and under the Federal banking laws, giving deference neither to the views of the Commission nor the 

Board. 

(E) JUDICIAL STAY.—The filing of a petition by the Board 

pursuant to subparagraph (A) shall operate as a judicial 

stay, until the date on which the determination of the 

court is final (including any appeal of such determination). 

(F) OTHER AUTHORITY TO CHALLENGE.—Any aggrieved 

party may seek judicial review of the Commission’s rulemaking under this subsection pursuant to section 25 of 

this title. 

(6) DEFINITIONS.—For purposes of this subsection: 

(A) NEW HYBRID PRODUCT.—The term ‘‘new hybrid product’’ means a product that— 

(i) was not subjected to regulation by the Commission as a security prior to the date of the enactment 

of the Gramm-Leach-Bliley Act; 

(ii) is not an identified banking product as such 

term is defined in section 206 of such Act; and 

(iii) is not an equity swap within the meaning of section 206(a)(6) of such Act. 

(B) BOARD.—The term ‘‘Board’’ means the Board of Governors of the Federal Reserve System. 

(j) The authority of the Commission under this section with respect to security-based swap agreements shall be subject to the restrictions and limitations of section 3A(b) of this title. 

28 

(k) REGISTRATION OR SUCCESSION TO A UNITED STATES BROKER

OR DEALER.—In determining whether to permit a foreign person or 

an affiliate of a foreign person to register as a United States broker 

or dealer, or succeed to the registration of a United States broker 

or dealer, the Commission may consider whether, for a foreign person, or an affiliate of a foreign person that presents a risk to the 

stability of the United States financial system, the home country 

of the foreign person has adopted, or made demonstrable progress 

toward adopting, an appropriate system of financial regulation to 

mitigate such risk. 

(l) TERMINATION OF A UNITED STATES BROKER OR DEALER.—For 

a foreign person or an affiliate of a foreign person that presents 

such a risk to the stability of the United States financial system, 

the Commission may determine to terminate the registration of 

such foreign person or an affiliate of such foreign person as a 

broker or dealer in the United States, if the Commission determines that the home country of the foreign person has not adopted, 

or made demonstrable progress toward adopting, an appropriate 

system of financial regulation to mitigate such risk. 

(k) STANDARD OF CONDUCT.— 

(1) IN GENERAL.—Notwithstanding any other provision of 

this Act or the Investment Advisers Act of 1940, the Commission may promulgate rules to provide that, with respect to a 

broker or dealer, when providing personalized investment advice about securities to a retail customer (and such other customers as the Commission may by rule provide), the standard 

of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable 

to an investment adviser under section 211 of the Investment 

Advisers Act of 1940. The receipt of compensation based on 

commission or other standard compensation for the sale of securities shall not, in and of itself, be considered a violation of 

such standard applied to a broker or dealer. Nothing in this 

section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities. 

(2) DISCLOSURE OF RANGE OF PRODUCTS OFFERED.—Where a 

broker or dealer sells only proprietary or other limited range 

of products, as determined by the Commission, the Commission 

may by rule require that such broker or dealer provide notice 

to each retail customer and obtain the consent or acknowledgment of the customer. The sale of only proprietary or other limited range of products by a broker or dealer shall not, in and 

of itself, be considered a violation of the standard set forth in 

paragraph (1). 

(l) OTHER MATTERS.—The Commission shall— 

(1) facilitate the provision of simple and clear disclosures to 

investors regarding the terms of their relationships with brokers, dealers, and investment advisers, including any material 

conflicts of interest; and 

(2) examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and inVerDate Sep 11 2014 02:41 Dec 01, 2017 Jkt 079006 PO 00000 Frm 00028 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431
29 

vestment advisers that the Commission deems contrary to the 

public interest and the protection of investors. 

(m) HARMONIZATION OF ENFORCEMENT.—The enforcement authority of the Commission with respect to violations of the standard 

of conduct applicable to a broker or dealer providing personalized 

investment advice about securities to a retail customer shall include— 

(1) the enforcement authority of the Commission with respect to such violations provided under this Act; and 

(2) the enforcement authority of the Commission with respect to violations of the standard of conduct applicable to an 

investment adviser under the Investment Advisers Act of 1940, 

including the authority to impose sanctions for such violations, 

and 

the Commission shall seek to prosecute and sanction violators of 

the standard of conduct applicable to a broker or dealer providing 

personalized investment advice about securities to a retail customer under this Act to same extent as the Commission prosecutes 

and sanctions violators of the standard of conduct applicable to an 

investment advisor under the Investment Advisers Act of 1940. 

(n) DISCLOSURES TO RETAIL INVESTORS.— 

(1) IN GENERAL.—Notwithstanding any other provision of the 

securities laws, the Commission may issue rules designating 

documents or information that shall be provided by a broker or 

dealer to a retail investor before the purchase of an investment 

product or service by the retail investor. 

(2) CONSIDERATIONS.—In developing any rules under paragraph (1), the Commission shall consider whether the rules 

will promote investor protection, efficiency, competition, and 

capital formation. 

(3) FORM AND CONTENTS OF DOCUMENTS AND INFORMATION.— 

Any documents or information designated under a rule promulgated under paragraph (1) shall— 

(A) be in a summary format; and 

(B) contain clear and concise information about— 

(i) investment objectives, strategies, costs, and risks; 

and 

(ii) any compensation or other financial incentive received by a broker, dealer, or other intermediary in 

connection with the purchase of retail investment 

products. 

(o) AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.—The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the 

Federal securities laws, the rules and regulations thereunder, or 

the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public 

interest and for the protection of investors. 

* * * * * * * 

(30) 

MINORITY VIEWS 

H.R. 477 would exempt certain merger and acquisition (M&A) 

brokers from registration as broker-dealers with the Securities and 

Exchange Commission. Under the bill, M&A brokers are defined as 

brokers that facilitate the transfer of ownership of privately held 

companies with earnings of less than $25 million or revenues of 

less than $250 million annually. M&A brokers cannot be subject to 

certain bad actor disqualifications, and public shell companies cannot be a party to the transaction. 

When the Committee considered this bill in the 113th Congress, 

there was broad consensus that its purpose was to encourage the 

SEC to finalize its no-action relief to exempt certain merger and acquisition brokers from registration. Two weeks after that bill 

passed in the House, the SEC issued the no-action relief, but added 

several protections for investors and small businesses. 

Some have argued that because of the nature of the relief provided by the SEC, the agency could retract its no-action letter at 

any time. Therefore, they say that the bill is necessary to provide 

legal certainty. However, if that is the goal of this bill, it should 

more closely track the SEC’s relief, including the additional protections that are omitted from the bill. 

For example, under the relief, if an M&A broker represents the 

buyer and seller in the transaction, it must obtain the consent of 

both parties to that conflict-of-interest. Similarly, the SEC reasonably prohibited M&A brokers from engaging in private placements 

and arranging buyer financing, recognizing that the narrow exemption is intended for persons who fairly facilitate the merger of 

small businesses, not for promoters who are compensated for their 

ability to hype up the value of the companies and attract new investment. The relief also prohibits M&A brokers from being able to 

bind parties to the transaction similar to a power of attorney to ensure that transaction is ultimately decided by the parties themselves, who know and understand its terms. It has now been over 

three and a half years since the SEC issued its relief and there has 

been no evidence that these conditions are inappropriate or onerous. 

Moreover, Democratic witnesses, Professor Theresa Gabaldon of 

GW Law and Professor Mercer Bullard of the University of Mississippi School of Law, testified in past Congresses that smaller 

companies may be better served by licensed professionals. According to a 2015 New York Times opinion piece, there is also a concern 

that it could create a loophole in the law, which private equity 

firms could use to avoid more frequent broker-dealer exams and 

rules and to be able to charge more for merger advice to a company 

its investors own in a fund portfolio. The bill is opposed by small 

brokerage firms like the Independent Investment Bankers, M&A 

31 

Securities, BA Securities, and Burch, and regional firms like D.A. 

Davidson, Stephens, BB&T, WilliamBlair, and RW Baird. 

For all of these reasons, we oppose H.R. 477. 

MAXINE WATERS. 

NYDIA M. VELA ́ ZQUEZ. 

GREGORY W. MEEKS. 

CAROLYN B. MALONEY. 

EMANUEL CLEAVER. 

DENNY HECK. 

KEITH ELLISON. 

WM. LACY CLAY. 

AL GREEN. 

GWEN MOORE. 

BRAD SHERMAN. 

JOYCE BEATTY. 

Æ