House Financial Services Committee

On September 6, 2018, House Committee on Financial Services Chairman Jeb Hensarling and Representative John Delaney released a discussion draft of the Bipartisan Housing Finance Reform Act (the “Act”).  The Act would require eligible private credit enhancers (as approved by the Federal Housing Finance Agency, “PCEs”) to engage in approved credit risk transfer transactions.  PCEs would be new entities in the secondary mortgage market that would be required to provide eligible private insurance for conventional mortgage loans financed through Ginnie Mae.  In order to encourage investment in the credit risk transfer securities issued by the PCEs, the Act would expand the current Section 3(c)(5)(C) exemption to include all risk-sharing transactions and the investment in any other products created pursuant to the Act with an aim of diversifying risk away from the current government housing finance system.

The current Section 3(c)(5)(C) exemption generally excludes from the definition of “investment company” any entity primarily engaged in, among other things, purchasing or otherwise acquiring mortgages and other interests in real estate.  In order to qualify for this exemption, a mortgage REIT must comply with strict asset tests, including having at least 55 percent of its assets consist of mortgages and other liens on, or interests in, real estate that are the functional equivalent of mortgage loans, referred to as “qualifying assets,” and at least 80 percent of its assets consist of qualifying assets and real estate-related assets.  The Act would expand the exemption’s qualifying asset definition to expressly include any financial instrument that transfers credit risk on mortgage loans.

Neither Chairman Hensarling nor Representative Delaney is planning to run for re-election to Congress in 2018.  We will continue to track the progress of the draft Act as it is considered by the House Committee on Financial Services.

A summary of the draft Act is available here.

 

Late on Tuesday night, the House passed the recently unveiled JOBS & Investor Confidence Act on a vote of 406-4. The almost unanimous decision advances the bill, commonly referred to as JOBS Act 3.0, which is comprised of 32 individual capital formation-related pieces of legislation.

Among other reforms, the bill proposes changes to existing rules that would affect regulations on angel investors; the definition of an “accredited investor”; the expansion of IPO on-ramp expeditions for EGCs; and the easing certain securities regulations for IPOs.

House Majority Leader Kevin McCarthy, co-author of the original JOBS Act, noted that the Act is “…evidence of this House’s commitment to expanding opportunity for American workers and investors.”

We will be following this post with a more comprehensive legal update discussing the bill.

Today, a bipartisan, capital formation-focused, package of legislation was unveiled by House Financial Services Committee Chairman Jeb Hensarling and Ranking Member Maxine Waters.  The “JOBS and Investor Confidence Act of 2018” is comprised of 32 individual bills, including those we have previously blogged about, that have already passed in the Committee or in the House this term.

Chairman Hensarling noted that the efforts of the Committee and the package “…will play an important role in sustaining long-term economic growth and global competitiveness.”

A chart of the bills that comprise the legislative package can be found here.

The House Financial Services Committee met last week and approved eight capital formation-related bills. The bills require the Securities and Exchange Commission to take action to change certain of its definitions in its rules and provide guidance on a number of securities-related issues.  These include amending the definition of a qualifying investment; requiring a study on IPO underwriting fees with the Financial Industry Regulatory Authority; and requiring a study on expanding investments in small-cap companies. Committee Chairman Jeb Hensarling noted that these bills “…will help our small businesses gain capital, help entrepreneurial ventures, and help companies in America go public and stay public.”

Below we provide a summary of the principal bills:

H.R. 6177, the “Developing and Empowering our Aspiring Leaders Act,” requires the SEC to revise the definition of a qualifying investment to include equity securities acquired in a secondary transaction.

H.R. 6319, the “Expanding Investment in Small Businesses Act,” requires the SEC to study whether the current diversified fund limit threshold for mutual funds of 10% constrains their ability to take meaningful positions in small-cap companies.

H.R. 6322, the “Enhancing Multi-Class Share Disclosures Act,” requires issuers with a multi-class stock structure to make certain disclosures in any proxy or consent solicitation materials.

H.R. 6324, the “Middle Market IPO Underwriting Cost Act,” requires the SEC, in consultation with FINRA, to study the direct and indirect costs associated with small and medium-sized companies to undertake initial public offerings.

H.R. 6320, the “Promoting Transparent Standards for Corporate Insiders Act,” requires the SEC to consider certain amendments to Rule 10b5-1 and directs the SEC to consider how any amendments to Rule 10b5-1 would clarify and enhance existing prohibitions against insider trading while also considering the impact of any such amendments on attracting candidates for insider positions, capital formation, and a company’s willingness to operate as a public company.

H.R. 6323, the “National Senior Investor Initiative Act of 2018,” creates an interdivisional task force at the SEC, to examine and identify challenges facing senior investors and requires the Government Accountability Office to study the economic costs of the exploitation of senior citizens.

Congress has passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which principally addresses financial regulatory measures.  The legislation also includes a number of securities law related provisions.  For example, Section 503 requires that the SEC review the findings and recommendations of the annual SEC Government-Business Forum on capital formation and address the findings and recommendations publicly.  Section 504 expands the Section 3(c)(1) exception under the Investment Company Act to include venture capital funds that have up to 250 investors and $10 million in aggregate committed capital contributions and uncalled capital.  Section 507 raises the Section 701 threshold to $10 million and indexes the threshold to inflation going forward.  Section 508 allows reporting companies to rely on Regulation A.  Rule 509  provides closed-end funds listed on a national securities exchange and certain interval funds to benefit from the same securities offering and other provisions available to operating companies.  After the Small Business Credit Availability Act was passed modernizing the securities offering and communications related provisions for BDCs, there had been concern that closed-end funds had been forgotten.

See the firm’s Legal Update here.