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[House Report 115-884]
[From the U.S. Government Publishing Office]

115th Congress    }                                   {       Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                   {       115-884

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       INVESTMENT ADVISER REGULATORY FLEXIBILITY IMPROVEMENT ACT

                                _______
                                

 August 3, 2018.--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. 6321]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 6321) to require the Securities and Exchange 
Commission to revise the definitions of a ``small business'' 
and ``small organization'' for purposes of assessing the impact 
of the Commission's rulemakings under the Investment Advisers 
Act of 1940, having considered the same, report favorably 
thereon without amendment and recommend that the bill do pass.

                          PURPOSE AND SUMMARY

    On July 10, 2018, Representative Gwen Moore introduced H.R. 
6321, the ``Investment Adviser Regulatory Flexibility 
Improvement Act'', requires the U.S. Securities and Exchange 
Commission (SEC or Commission) to better examine the regulatory 
burdens faced by small entities that are subject to the SEC's 
jurisdiction. H.R. 6321 requires the SEC to revise the 
definitions of a ``small business'' and ``small organization'' 
for purposes of assessing the impact of the SEC's rulemakings 
under section 275.0-7 of title 17, Code of Federal Regulations, 
and to provide alternative methods under which a business or 
organization may qualify as a small business or small 
organization.

                  BACKGROUND AND NEED FOR LEGISLATION

    The Regulatory Flexibility Act requires all federal 
agencies to analyze the economic impact of regulations when 
there is likely to be a significant economic impact on a 
substantial number of small entities and to consider regulatory 
alternatives that will achieve the agency's goal while 
minimizing the burden on small entities. For the purposes of 
the Investment Advisers Act of 1940 and the Regulatory 
Flexibility Act, the SEC's rules lay out the criteria for when 
investment advisers are considered small entities.
    The goal of H.R. 6321 is to ensure that the Commission more 
broadly considers the regulatory burden of its regulations on 
small investment advisers by directing the Commission to revise 
its definitions of a ``small business'' and ``small 
organization to account for alternative methods for accounting 
for which entities constitute such businesses and 
organizations.''
    SEC regulations currently define ``small business'' and 
``small organization'' as investment advisers with less than 
$25 million in assets under management (AUM); with less than $5 
million in total assets at the end of the most recent fiscal 
year; and who do not control, are not controlled by, and are 
not under common control with another investment adviser with 
more than $25 million in AUM or an entity with over $5 million 
in total assets at the end of the most recent fiscal year.
    Prior to enactment of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), mandatory SEC 
registration for investment advisers was set at AUM of at least 
$25 million. Title IV of the Dodd-Frank Act increased this 
mandatory SEC registration threshold from $25 million in AUM to 
at least $100 million in AUM.
    The Committee is aware of concerns that the SEC's attention 
to the economic impact of its regulations on small investment 
advisory firms is both inadequate and while not intentional, 
the SEC's staff may not consider the effect of its rule on 
small investment advisers. With the increased threshold for SEC 
registration at $100 million in AUM, virtually no SEC-
registered investment advisers could be deemed to be ``small'' 
for cost-benefit analysis purposes--even though more than 6,000 
registered advisory firms employ 10 or fewer non-clerical 
employees. While H.R. 6321's subject matter is the treatment of 
small business and small organization for purposes of the 
Investment Advisers Act of 1940, the SEC has an obligation to 
broadly considers the impact of its regulations on all small 
entities that are subject to SEC oversight and regulation. The 
SEC should also direct self-regulatory organizations, FINRA, 
the PCAOB and FASB to consider the impact of rules and 
standards on small broker-dealers, investment companies, 
auditing firms of broker-dealers as well those entities that 
also comply with U.S. generally accepted accounting principles. 
The revisions to these definitions for smaller investment 
advisers should serve as the SEC's template to better tailor 
both regulations and guidance for these entities.
    In revising the definitions of ``small business'' and 
``small organization'' with regards to advisory firms, the bill 
directs the SEC to consider whether such alternative methods 
for qualifying as a ``small business'' or ``small 
organization'' should include a threshold based on the number 
of non-clerical employees of the business or organization. With 
respect to this and any other alternative methods, it would be 
the Commission's decision to determine what alternative methods 
are appropriate. The Committee would expect that the SEC would 
welcome public comments to inform its decisions. Nonetheless, 
revising these definitions and considering whether such 
definitions should include more meaningful metrics will result 
in a better understanding of regulatory costs on small advisers 
and should lead to more tailored regulations, reduced burdens 
and improve the relationship and the delivery of advice to 
investors.

                                HEARINGS

    The Committee on Financial Services has not held a hearing 
examining matters relating to H.R. 6321.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
July 11, 2018, and ordered H.R. 6321 to be reported favorably 
to the House, without amendment, by voice vote.

                            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 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 voice vote, a quorum being present.

                      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. 6321 
will require the SEC--within one year of enactment--to revise 
the definitions of ``small business'' and ``small 
organization'' with regards to investment advisory firms for 
purposes of assessing the impact of the SEC's rulemakings under 
the Investment Advisers Act of 1940. In making such revision, 
the bill directs the SEC to consider whether such alternative 
methods for businesses or organizations to qualify as a ``small 
business'' or ``small organization'' should include a threshold 
based on the number of non-clerical employees of the business 
or organization. This will allow for a better understanding of 
the regulatory costs on small advisers and a more tailored 
regulation to reduce burdens.

   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, July 17, 2018.
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. 3555, H.R. 6177, 
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R. 
6324.
    If you wish further details on these estimates, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                             Mark P. Hadley
                                        (For Keith Hall, Director).
    Enclosure.

Securities and Exchange Commission Legislation

    On July 11, the House Committee on Financial Services 
ordered eight bills to be reported related to the rules, 
regulations, and operations of the Securities and Exchange 
Commission (SEC). The bills are:
           H.R. 3555, the Exchange Regulatory 
        Improvement Act, would require the Securities and 
        Exchange Commission (SEC) to issue regulations 
        regarding its definition of what constitutes a facility 
        used by a national securities exchange;
           H.R. 6177, the Developing and Empowering our 
        Aspiring Leaders Act of 2018, would direct the SEC to 
        conduct a rulemaking to expand what types of asset 
        acquisitions are considered qualifying investments for 
        a venture capital fund;
           H.R. 6319, the Expanding Investment in Small 
        Business Act, would require the SEC to conduct a study 
        on the limitation on the amount of outstanding 
        securities a closed-end fund may hold from a single 
        issuer and still be classified as diversified;
           H.R. 6320, the Promoting Transparent 
        Standards for Corporate Insiders Act, would require the 
        SEC to conduct a study of various proposals to change 
        agency rules regarding the use of written trading plans 
        by certain securities traders;
           H.R. 6321, the Investment Adviser Regulatory 
        Flexibility Improvement Act, would require the SEC to 
        revise the definitions of a small business and small 
        organization applicable for assessing the effect of the 
        agency's rulemakings under the Investment Advisers Act 
        of 1940 on those entities;
           H.R. 6322, the Enhancing Multi-Class Share 
        Disclosures Act, would direct the SEC to issue a rule 
        requiring securities issuers with multi-class stock 
        structures to make disclosures regarding the voting 
        power of certain individuals;
           H.R. 6323, the National Senior Investor 
        Initiative Act of 2018, would direct the SEC to 
        establish a taskforce to identify challenges that 
        senior investors face and to report on its findings 
        every two years; and
           H.R. 6324, the Middle Market IPO 
        Underwriting Cost Act, would direct the SEC to study 
        the costs associated with small and medium-sized 
        companies undertaking an initial public offering and to 
        report on its findings.
    Using information from the SEC regarding the costs of 
similar activities, CBO estimates that implementing seven of 
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R. 
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of 
about $1 million for the agency to conduct the required studies 
and rulemakings and to issue reports. CBO estimates that 
implementing the eighth bill--H.R. 6323--would have a gross 
cost of $7 million over the 2019-2023 period for the SEC to 
establish and carry out the functions of the taskforce 
established under the bill.
    However, the SEC is authorized to collect fees sufficient 
to offset its annual appropriation; therefore, CBO estimates 
that the net effect on discretionary spending of implementing 
each of those bills would be negligible, assuming appropriation 
actions consistent with that authority. H.R. 6323 also would 
require the Government Accountability Office (GAO) to conduct a 
study on the economic costs of the financial exploitation of 
senior citizens and CBO estimates that implementing that 
section would cost GAO less than $500,000; such spending would 
be subject to the availability of appropriated funds.
    None of the bills would affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply for any of the 
eight bills.
    None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods 
beginning in 2029, CBO estimates.
    None of the bills contain intergovernmental mandates as 
defined in the Unfunded Mandate Reform Act (UMRA) and would not 
affect the budgets of state, local, or tribal governments. All 
of them would require the SEC to take actions that could raise 
the agency's administrative costs and the fees it collects to 
offset those costs. If the SEC increased fees, it would 
increase the cost of an existing mandate on private entities 
required to pay those fees. CBO estimates that none of the 
bills would increase fees in an amount that would exceed the 
annual threshold for private-sector mandates established in 
UMRA ($160 million in 2018, adjusted annually for inflation).
    The CBO staff contacts for this estimate are Stephen Rabent 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed 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 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 rule 
makings: The Committee estimates that the bill requires one 
directed rulemaking to require the SEC--within one year of 
enactment--to revise the definitions of ``small business'' and 
``small organization'' to provide alternative methods under 
which a business or organization may qualify as a ``small 
business'' or ``small organization.''

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This Section cites H.R. 6321 as the ``Investment Adviser 
Regulatory Flexibility Improvement Act''.

Section 2. Definition of small business of small organization

    This section requires the SEC--within one year of 
enactment--to revise the definitions for ``small business'' and 
``small organization'' under section 275.0-7 of title 17, Code 
of Federal Regulations, to provide alternative methods under 
which a business or organization may qualify as a ``small 
business'' or ``small organization.'' In making such revision, 
the SEC shall consider whether such alternative methods should 
include a threshold based on the number of non-clerical 
employees of the business or organization.

         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: H.R. 6321 does not 
repeal or amend any section of a statute. Therefore, the Office 
of Legislative Counsel did not prepare the report contemplated 
by Clause 3(e)(1)(B) of rule XIII of the House of 
Representatives.

                                  [all]
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