59–006 

114TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 114–673 

U.S. TERRITORIES INVESTOR PROTECTION ACT OF 2016 

JULY 11, 2016.—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 

[To accompany H.R. 5322] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 5322) to amend the Investment Company Act of 1940 to 

terminate an exemption for companies located in Puerto Rico, the 

Virgin Islands, and any other possession of the United States, having considered the same, report favorably thereon without amendment and recommend that the bill do pass. 

PURPOSE AND SUMMARY

Introduced by Representative Nydia Vela ́squez on May 25, 2016, 

H.R. 5322, the U.S. Territories Investor Protection Act of 2016, 

amends Section 6(a)(1) of the Investment Company Act of 1940 

(Act) to terminate an exemption for investment companies located 

in Puerto Rico, the Virgin Islands, and any other possession of the 

United States. Under current law, such companies are exempt from 

registration under the Act provided that their shares are sold solely 

to the residents of the territory or possession in which they are located. 

The bill provides a three-year safe harbor for investment companies that currently enjoy this exemption. Additionally, the bill authorizes the Securities and Exchange Commission (SEC) to further 

delay the effective date (or end of the exemption) for a maximum 

of three years following the initial three year safe harbor. 

BACKGROUND AND NEED FOR LEGISLATION

When Congress enacted the Investment Company Act of 1940, it 

was prohibitively expensive and logistically difficult for SEC personnel to travel and inspect investment companies located in cerVerDate Sep 11 2014 00:12 Jul 13, 2016 Jkt 059006 PO 00000 Frm 00001 Fmt 6659 Sfmt 6602 E:\HR\OC\HR673.XXX HR673

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tain U.S. territories, including Alaska, Hawaii, the Philippines, the 

Panama Canal Zone, Puerto Rico and the U.S. Virgin Islands. 

Consequently, those investment companies were exempt from 

registration with, and oversight by, the SEC, but the investment 

company had to follow the laws of the jurisdiction in which the investment company operated. As U.S. territories and possessions became states or independent nations no longer under U.S. control, 

amendments were made to Section 6(a)(1) of the Act. The burdens 

and costs of travel are not the same today as they were in 1940, 

and therefore it is appropriate to modernize the Act. Consequently, 

H.R. 5322 terminates the anachronistic exemption from registration under the Act. Thus, the bill ensures that investment companies in Puerto Rico, Guam, and elsewhere will operate subject to 

the same rules as their mainland counterparts, consistent with the 

SEC’s ability to gather information quickly using modern technology regardless of distance. 

HEARINGS

The Committee on Financial Services’ held no hearings examining matters relating to H.R. 5322. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

June 15, 2016 and June 16, 2016, and ordered H.R. 5322 to be reported favorably to the House without amendment by a recorded 

vote of 59 yeas to 0 nays (recorded vote no. FC–118), 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 in committee was a motion by Chairman Hensarling to report 

the bill favorably to the House without amendment. That motion 

was agreed to by a recorded vote of 59 yeas to 0 nays (Record vote 

no. FC–118), a quorum being present. 


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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. 5322 will protect U.S. territories investments by terminating the exemptions for 

investment companies located in U.S. territories, and ensuring that 

they are subject to the same requirements and oversight by the 

SEC. 

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. 

COMMITTEE COST ESTIMATE

Pursuant to section 402 of the Congressional Budget Act of 1974, 

the Committee estimates that enacting this legislation would not 

have any significant impact on direct or discretionary spending or 

revenues. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

With respect to clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, an estimate and comparison prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974 was not submitted to 

the Committee before the filing of this report. 

FEDERAL MANDATES STATEMENT

Pursuant to section 423 of the Unfunded Mandates reform Act, 

the Committee estimates that H.R. 5322 contains no intergovernmental or private mandates and/or that the cost of any such mandates falls below the annual thresholds established in the Act. 

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. 


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EARMARK IDENTIFICATION

H.R. 5322 does not contain any congressional earmarks, limited 

tax benefits, or limited tariff benefits as defined in clause 9 of rule 

XXI. 

DUPLICATION OF FEDERAL PROGRAMS

Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), the 

Committee states that no provision of H.R. 5322 establishes or reauthorizes a program of the Federal Government known to be duplicative of another Federal program, a program that was included 

in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111–139, or a program 

related to a program identified in the most recent Catalog of Federal Domestic Assistance. 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), the 

Committee states that H.R. 5322 contains no directed rulemaking. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1: Short title 

This section cites H.R. 5322 as the ‘‘U.S. Territories Investor Protection Act of 2016.’’ 

Section 2: Termination of exemption 

This section amends the Investment Company Act of 1940 by 

eliminating the exemption provided to U.S. possessions under section 6(a)(1) of the Act. The exemption will take effect three years 

after enactment. This section also provides the SEC with the authority to extend the safe harbor to a maximum of three years, in 

addition to the initial three year period. 

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 and existing law in which no 

change is proposed is shown in roman): 

INVESTMENT COMPANY ACT OF 1940 

TITLE I—INVESTMENT COMPANIES 

* * * * * * * 

EXEMPTIONS

SEC. 6. (a) The following investment companies are exempt from 

the provisions of this title: 

ø(1) Any company organized or otherwise created under the 

laws of and having its principal office and place of business in 

Puerto Rico, the Virgin Islands, or any other possession of the 

United States; but such exemption shall terminate if any security of which such company is the issuer is offered for sale or 


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sold after the effective date of this title, by such company or 

an underwriter therefor, to a resident of any State other than 

the State in which such company is organized.¿ 

(2) Any company which since the effective date of this title 

or within five years prior to such date has been reorganized 

under the supervision of a court of competent jurisdiction, if 

(A) such company was not an investment company at the commencement of such reorganization proceedings, (B) at the conclusion of such proceedings all outstanding securities of such 

company were owned by creditors of such company or by persons to whom such securities were issued on account of creditors’ claims, and (C) more than 50 per centum of the voting securities of such company, and securities representing more 

than 50 per centum of the net asset value of such company, are 

currently owned beneficially by not more than twenty-five persons; but such exemption shall terminate if any security of 

which such company is the issuer is offered for sale or sold to 

the public after the conclusion of such proceedings by the 

issuer or by or through any underwriter. For the purposes of 

this paragraph, any new company organized as part of the reorganization shall be deemed the same company as its predecessor; and beneficial ownership shall be determined in the 

manner provided in section 3(c)(1). 

(3) Any issuer as to which there is outstanding a writing 

filed with the Commission by the Federal Savings and Loan 

Insurance Corporation stating that exemption of such issuer 

from the provisions of this title is consistent with the public interest and the protection of investors and is necessary or appropriate by reason of the fact that such issuer holds or proposes to acquire any assets or any product of any assets which 

have been segregated (A) from assets of any company which at 

the filing of such writing is an insured institution within the 

meaning of section 401(a) of the National Housing Act, as heretofore or hereafter amended, or (B) as a part of or in connection with any plan for or condition to the insurance of accounts 

of any company by said corporation or the conversion of any 

company into a Federal savings and loan association. Any such 

writing shall expire when canceled by a writing similarly filed 

or at the expiration of two years after the date of its filing, 

whichever first occurs; but said corporation may, nevertheless, 

before, at, or after the expiration of any such writing file another writing or writings with respect to such issuer. 

(4) Any company which prior to March 15, 1940, was and 

now is a wholly-owned subsidiary of a registered face-amount 

certificate company and was prior to said date and now is organized and operating under the insurance laws of any State and 

subject to supervision and examination by the insurance commissioner thereof, and which prior to March 15, 1940, was and 

now is engaged, subject to such laws, in business substantially 

all of which consists of issuing and selling only to residents of 

such State and investing the proceeds from, securities providing for or representing participations or interests in intangible assets consisting of mortgages or other liens on real estate or notes or bonds secured thereby or in a fund or deposit 

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cured thereby or having outstanding such securities so issued 

and sold. 

(5)(A) Any company that is not engaged in the business of 

issuing redeemable securities, the operations of which are subject to regulation by the State in which the company is organized under a statute governing entities that provide financial 

or managerial assistance to enterprises doing business, or proposing to do business, in that State if— 

(i) the organizational documents of the company state 

that the activities of the company are limited to the promotion of economic, business, or industrial development in 

the State through the provision of financial or managerial 

assistance to enterprises doing business, or proposing to do 

business, in that State, and such other activities that are 

incidental or necessary to carry out that purpose; 

(ii) immediately following each sale of the securities of 

the company by the company or any underwriter for the 

company, not less than 80 percent of the securities of the 

company being offered in such sale, on a class-by-class 

basis, are held by persons who reside or who have a substantial business presence in that State; 

(iii) the securities of the company are sold, or proposed 

to be sold, by the company or by any underwriter for the 

company, solely to accredited investors, as that term is defined in section 2(a)(15) of the Securities Act of 1933, or to 

such other persons that the Commission, as necessary or 

appropriate in the public interest and consistent with the 

protection of investors, may permit by rule, regulation, or 

order; and 

(iv) the company does not purchase any security issued 

by an investment company or by any company that would 

be an investment company except for the exclusions from 

the definition of the term ‘‘investment company’’ under 

paragraph (1) or (7) of section 3(c), other than— 

(I) any debt security that meets such standards of 

credit-worthiness as the Commission shall adopt; or 

(II) any security issued by a registered open-end investment company that is required by its investment 

policies to invest not less than 65 percent of its total 

assets in securities described in subclause (I) or securities that are determined by such registered open-end 

investment company to be comparable in quality to securities described in subclause (I). 

(B) Notwithstanding the exemption provided by this paragraph, section 9 (and, to the extent necessary to enforce section 

9, sections 38 through 51) shall apply to a company described 

in this paragraph as if the company were an investment company registered under this title. 

(C) Any company proposing to rely on the exemption provided by this paragraph shall file with the Commission a notification stating that the company intends to do so, in such form 

and manner as the Commission may prescribe by rule. 

(D) Any company meeting the requirements of this paragraph may rely on the exemption provided by this paragraph 

upon filing with the Commission the notification required by 


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subparagraph (C), until such time as the Commission determines by order that such reliance is not in the public interest 

or is not consistent with the protection of investors. 

(E) The exemption provided by this paragraph may be subject to such additional terms and conditions as the Commission 

may by rule, regulation, or order determine are necessary or 

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

(b) Upon application by any employees’ security company, the 

Commission shall by order exempt such company from the provisions of this title and of the rules and regulations hereunder, if and 

to the extent that such exemption is consistent with the protection 

of investors. In determining the provisions to which such an order 

of exemption shall apply, the Commission shall give due weight, 

among other things, to the form of organization and the capital 

structure of such company, the persons by whom its voting securities, evidences of indebtedness, and other securities are owned and 

controlled, the prices at which securities issued by such company 

are sold and the sales load thereon, the disposition of the proceeds 

of such sales, the character of the securities in which such proceeds 

are invested, and any relationship between such company and the 

issuer of any such security. 

(c) The Commission, by rules and regulations upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person, security, or transaction, or any class 

or classes of persons, securities, or transactions, from any provision 

or provisions of this title or of any rule or regulation thereunder, 

if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of 

investors and the purposes fairly intended by the policy and provisions of this title. 

(d) The Commission, by rules and regulations or order, shall exempt a closed-end investment company from any or all provisions 

of this title, but subject to such terms and conditions as may be 

necessary or appropriate in the public interest or for the protection 

of investors, if— 

(1) the aggregate sums received by such company from the 

sale of all its outstanding securities, plus the aggregate offering price of all securities of which such company is the issuer 

and which it proposes to offer for sale, do not exceed 

$10,000,000, or such other amount as the Commission may set 

by rule, regulation, or order; 

(2) no security of which such company is the issuer has been 

or is proposed to be sold by such company or any underwriter 

therefor, in connection with a public offering, to any person 

who is not a resident of the State under the laws of which such 

company is organized or otherwise created; and 

(3) such exemption is not contrary to the public interest or 

inconsistent with the protection of investors. 

(e) If, in connection with any rule, regulation, or order under this 

section exempting any investment company from any provision of 

section 7, the Commission deems it necessary or appropriate in the 

public interest or for the protection of investors that certain specified provisions of this title pertaining to registered investment companies shall be applicable in respect of such company, the proviVerDate Sep 11 2014 00:12 Jul 13, 2016 Jkt 059006 PO 00000 Frm 00008 Fmt 6659 Sfmt 6602 E:\HR\OC\HR673.XXX HR673

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sions so specified shall apply to such company, and to other persons in their transactions and relations with such company, as 

though such company were a registered investment company. 

(f) Any closed-end company which— 

(1) elects to be treated as a business development company 

pursuant to section 54; or 

(2) would be excluded from the definition of an investment 

company by section 3(c)(1), except that it presently proposes to 

make a public offering of its securities as a business development company, and has notified the Commission, in a form 

and manner which the Commission may, by rule, prescribe, 

that it intends in good faith to file, within 90 days, a notification of election to become subject to the provisions of sections 

55 through 65, 

shall be exempt from sections 1 through 53, except to the extent 

provided in sections 59 through 65. 

* * * * * * * 

Æ 


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