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114th Congress   }                                        {     Report
                        HOUSE OF REPRESENTATIVES
 2d Session      }                                        {    114-684

======================================================================



 
       NATIONAL SECURITIES EXCHANGE REGULATORY PARITY ACT OF 2016

                                _______
                                

 July 12, 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

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 5421]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 5421) to amend the Securities Act of 1933 to 
apply the exemption from State regulation of securities 
offerings to securities listed on a national security exchange 
that has listing standards that have been approved by the 
Commission, having considered the same, report favorably 
thereon without amendment and recommend that the bill do pass.

                          Purpose and Summary

    Introduced by Representative Ed Royce on June 9, 2016, H.R. 
5421, the National Securities Exchange Regulatory Parity Act, 
is a simple and technical amendment to the Securities Act of 
1933 (``Act''). Specifically, H.R. 5421 amends Section 18 of 
the Act, which provides what is known as a ``blue sky'' 
exemption for securities listed and traded on specified 
national securities exchanges: New York Stock Exchange (NYSE), 
American Stock Exchange and NASDAQ. The legislation would 
eliminate the specific references to those venues, and instead 
provide blue sky exemption for any security listed on a 
``national securities exchange'' registered with the Securities 
and Exchange Commission (SEC). This statutory change better 
reflects today's markets in that the NYSE and NASDAQ are not 
the only trading venues that list securities.

                  Background and Need for Legislation

    The Securities Act of 1933 (``Act'') exempts certain 
securities from individual state-by-state registration, which 
is commonly known as the ``blue sky'' exemption. The blue sky 
exemption is found in Section 18(b)(1) of the Act and applies 
based on where a particular security is listed for trading. In 
that regard, the Act specifically enumerates certain exchanges 
with national listings programs that were in existence when the 
provision was added to the Act by the National Securities 
Markets Improvement Act (NSMIA) in 1996.
    The blue sky exemption in the Act applies to securities 
listed on the NYSE, the American Stock Exchange (which no 
longer exists as a stand-alone exchange), or the National 
Market System of the Nasdaq Stock Market (``NASDAQ'') as well 
as any national securities exchange the SEC determines by rule 
has ``substantially similar'' listing standards. Since the 
exemption's enactment, additional securities exchanges have 
registered with the SEC, including, for example the Bats BZX 
Exchange (``Bats'').
    In 2012, the SEC amended its Rule 146 issued under the Act 
to designate Bats as an exchange that has substantially similar 
listing standards as the NYSE and NASDAQ. Consequently, 
securities listed on Bats are granted blue sky exemption under 
the Act. However, because Bats is not specifically listed in 
Section 18(b)(1) of the Act, the SEC must first make a formal 
finding that with any proposed changes to Bats' listing 
standards, those standards remain ``substantially similar'' to 
those of either NYSE or NASDAQ.
    The statutory construction provides preferential treatment 
to the exchanges listed in Section 18(b)(1) of the Act, and 
limits innovation with respect to listings standards. The 
competition for listing securities is a global business and the 
presence of multiple U.S. listing venues gives issuers options 
regarding the brand with which they choose to associate and 
protects them against unreasonably high listings fees. 
Unfortunately, the Act requires the SEC to consider an 
innovative listing standard proposal against standards that may 
have been in effect at the time of NSMIA. This treatment is an 
inherently unfair two-step process for the unlisted exchanges 
and creates a competitive disadvantage amongst exchanges. 
Issuers, broker-dealers, investment bankers and analysts should 
decide which listing venue would best serve the needs of the 
company's shareholders. Listing venues should develop listing 
standards that are consistent with the Securities Exchange Act 
of 1934 and the SEC should not approve standards which do not 
meet this standard, however, the law should not place the SEC 
in a favorable position to limit innovation and competition to 
certain exchanges. H.R. 5421 corrects this disparity and amends 
the Act to represent today's capital markets, given that there 
are more listing venues than NYSE and NASDAQ currently in 
existence.

                                Hearing

    The Committee on Financial Services held no hearings 
examining matters relating to H.R. 5421.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
June 15, 2016 and June 16, 2016, and ordered H.R. 5421 to be 
reported favorably to the House without amendment by a recorded 
vote of 47 yeas to 12 nays (recorded vote no. FC-113), 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 record 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 47 
yeas to 12 nays (Record vote no. FC-113), 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. 5421 
will level the playing field for identically regulated 
securities exchanges and eliminate additional burdens and costs 
for companies, by amending Section 18 of the Securities Act of 
1933 to provide an exemption from state registration for any 
security listed on a ``national securities exchange'' 
registered with 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

    The Committee adopts as its own 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 8, 2016.
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. 5421, the National 
Securities Exchange Regulatory Parity Act of 2016.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

H.R. 5421--National Securities Exchange Regulatory Parity Act of 2016

    Under current law, the Securities and Exchange Commission 
(SEC) exempts certain securities from state regulation. H.R. 
5421 would expand the exemption to allow any security listed on 
a national exchange that is registered with the SEC to be 
exempt from state regulation.
    On the basis of information from the SEC, CBO estimates 
that implementing H.R. 5421 would have an insignificant effect 
on the agency's costs. Under the bill the SEC would have to 
review any future changes to the rules of national exchanges 
and rescind a current SEC rule, but the cost of that work would 
not be significant. Moreover, the SEC is authorized to collect 
fees sufficient to offset its appropriation; therefore, CBO 
estimates that implementing H.R. 5421 would have a negligible 
effect on net discretionary costs, assuming appropriation 
actions consistent with that authority.
    Enacting H.R. 5421 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply. CBO 
estimates that enacting H.R. 5421 would not increase net direct 
spending or on-budget deficits in any of the four consecutive 
10-year periods beginning in 2027.
    H.R. 5421 would preempt state laws that govern the state-
level registration of securities. Preemptions are mandates as 
defined in the Unfunded Mandates Reform Act (UMRA) because they 
limit the authority of states to apply their own laws. However, 
CBO estimates that the preemption would not affect the budgets 
of state, local, or tribal governments because it would impose 
no duty on states that would result in additional spending or a 
revenue loss.
    H.R. 5421 contains no private-sector mandates as defined in 
UMRA.
    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

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
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.

                         Earmark Identification

    H.R. 5421 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. 5421 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. 5421 contains no directed 
rulemaking.

             Section-by-Section Analysis of the Legislation


Section 1: Short title

    This section cites H.R. 5421 as the ``National Securities 
Exchange Regulatory Parity Act of 2016.''

Section 2: Application of exemption

    This section amends Section 18 of the Securities Act of 
1933 by eliminating the specific references to the New York 
Stock Exchange, the American Stock Exchange and NASDAQ, and 
instead, extending the ``blue sky'' exemption for any security 
listed on a ``national securities exchange'' registered with 
the SEC and whose listing standards were approved by the SEC.

         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):

                         SECURITIES ACT OF 1933


TITLE I--SHORT TITLE

           *       *       *       *       *       *       *



SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.

  (a) Scope of Exemption.--Except as otherwise provided in this 
section, no law, rule, regulation, or order, or other 
administrative action of any State or any political subdivision 
thereof--
          (1) requiring, or with respect to, registration or 
        qualification of securities, or registration or 
        qualification of securities transactions, shall 
        directly or indirectly apply to a security that--
                  (A) is a covered security; or
                  (B) will be a covered security upon 
                completion of the transaction;
          (2) shall directly or indirectly prohibit, limit, or 
        impose any conditions upon the use of--
                  (A) with respect to a covered security 
                described in subsection (b), any offering 
                document that is prepared by or on behalf of 
                the issuer; or
                  (B) any proxy statement, report to 
                shareholders, or other disclosure document 
                relating to a covered security or the issuer 
                thereof that is required to be and is filed 
                with the Commission or any national securities 
                organization registered under section 15A of 
                the Securities Exchange Act of 1934, except 
                that this subparagraph does not apply to the 
                laws, rules, regulations, or orders, or other 
                administrative actions of the State of 
                incorporation of the issuer; or
          (3) shall directly or indirectly prohibit, limit, or 
        impose conditions, based on the merits of such offering 
        or issuer, upon the offer or sale of any security 
        described in paragraph (1).
  (b) Covered Securities.--For purposes of this section, the 
following are covered securities:
          (1) Exclusive federal registration of nationally 
        traded securities.--A security is a covered security if 
        such security is--
                  (A) listed, or authorized for listing, on the 
                New York Stock Exchange or the American Stock 
                Exchange, or listed, or authorized for listing, 
                on the National Market System of the Nasdaq 
                Stock Market (or any successor to such 
                entities);
                  (B) listed, or authorized for listing, on a 
                national securities exchange (or tier or 
                segment thereof) that has listing standards 
                [that the Commission determines by rule (on its 
                own initiative or on the basis of a petition) 
                are substantially similar to the listing 
                standards applicable to securities described in 
                subparagraph (A)] that has been approved by the 
                Commission; or
                  (C) a security of the same issuer that is 
                equal in seniority or that is a senior security 
                to a security described in subparagraph (A) [or 
                (B)].
          (2) Exclusive federal registration of investment 
        companies.--A security is a covered security if such 
        security is a security issued by an investment company 
        that is registered, or that has filed a registration 
        statement, under the Investment Company Act of 1940.
          (3) Sales to qualified purchasers.--A security is a 
        covered security with respect to the offer or sale of 
        the security to qualified purchasers, as defined by the 
        Commission by rule. In prescribing such rule, the 
        Commission may define the term ``qualified purchaser'' 
        differently with respect to different categories of 
        securities, consistent with the public interest and the 
        protection of investors.
           (4) Exemption in connection with certain exempt 
        offerings.--A security is a covered security with 
        respect to a transaction that is exempt from 
        registration under this title pursuant to--
                  (A) paragraph (1) or (3) of section 4, and 
                the issuer of such security files reports with 
                the Commission pursuant to section 13 or 15(d) 
                of the Securities Exchange Act of 1934;
                  (B) section 4(4);
                  (C) section 4(6);
                  (D) a rule or regulation adopted pursuant to 
                section 3(b)(2) and such security is--
                          (i) offered or sold on a national 
                        securities exchange; or
                          (ii) offered or sold to a qualified 
                        purchaser, as defined by the Commission 
                        pursuant to paragraph (3) with respect 
                        to that purchase or sale;
                  (E) section 3(a), other than the offer or 
                sale of a security that is exempt from such 
                registration pursuant to paragraph (4), (10), 
                or (11) of such section, except that a 
                municipal security that is exempt from such 
                registration pursuant to paragraph (2) of such 
                section is not a covered security with respect 
                to the offer or sale of such security in the 
                State in which the issuer of such security is 
                located;
                  (F) Commission rules or regulations issued 
                under section 4(2), except that this 
                subparagraph does not prohibit a State from 
                imposing notice filing requirements that are 
                substantially similar to those required by rule 
                or regulation under section 4(2) that are in 
                effect on September 1, 1996; or
                  (G) section 4(a)(7).
  (c) Preservation of Authority.--
          (1) Fraud authority.--Consistent with this section, 
        the securities commission (or any agency or office 
        performing like functions) of any State shall retain 
        jurisdiction under the laws of such State to 
        investigate and bring enforcement actions, in 
        connection with securities or securities transactions
                  (A) with respect to--
                          (i) fraud or deceit; or
                          (ii) unlawful conduct by a broker or 
                        dealer; and
                  (B) in connection to a transaction described 
                under section 4(6), with respect to--
                          (i) fraud or deceit; or
                          (ii) unlawful conduct by a broker, 
                        dealer, funding portal, or issuer.
          (2) Preservation of filing requirements.--
                  (A) Notice filings permitted.--Nothing in 
                this 
                section prohibits the securities commission (or 
                any agency or office performing like functions) 
                of any State from requiring the filing of any 
                document filed with the Commission pursuant to 
                this title, together with annual or periodic 
                reports of the value of securities sold or 
                offered to be sold to persons located in the 
                State (if such sales data is not included in 
                documents filed with the Commission), solely 
                for notice purposes and the assessment of any 
                fee, together with a consent to service of 
                process and any required fee.
                  (B) Preservation of fees.--
                          (i) In general.--Until otherwise 
                        provided by law, rule, regulation, or 
                        order, or other administrative action 
                        of any State or any political 
                        subdivision thereof, adopted after the 
                        date of enactment of the National 
                        Securities Markets Improvement Act of 
                        1996, filing or registration fees with 
                        respect to securities or securities 
                        transactions shall continue to be 
                        collected in amounts determined 
                        pursuant to State law as in effect on 
                        the day before such date.
                          (ii) Schedule.--The fees required by 
                        this subparagraph shall be paid, and 
                        all necessary supporting data on sales 
                        or offers for sales required under 
                        subparagraph (A), shall be reported on 
                        the same 
                        schedule as would have been applicable 
                        had the issuer not relied on the 
                        exemption provided in subsection (a).
                  (C) Availability of preemption contingent on 
                payment of fees.--
                          (i) In general.--During the period 
                        beginning on the date of enactment of 
                        the National Securities 
                        Markets Improvement Act of 1996 and 
                        ending 3 years after that date of 
                        enactment, the securities commission 
                        (or any agency or office performing 
                        like functions) of any State may 
                        require the registration of securities 
                        issued by any issuer who refuses to pay 
                        the fees required by subparagraph (B).
                          (ii) Delays.--For purposes of this 
                        subparagraph, delays in payment of fees 
                        or underpayments of fees that are 
                        promptly remedied shall not constitute 
                        a refusal to pay fees.
                  (D) Fees not permitted on listed 
                securities.--Notwithstanding subparagraphs (A), 
                (B), and (C), no filing or fee may be required 
                with respect to any security that is a covered 
                security pursuant to subsection (b)(1), or will 
                be such a covered security upon completion of 
                the transaction, or is a security of the same 
                issuer that is equal in seniority or that is a 
                senior security to a security that is a covered 
                security pursuant to subsection (b)(1).
                  (F) Fees not permitted on crowdfunded 
                securities.--Notwithstanding subparagraphs (A), 
                (B), and (C), no filing or fee may be required 
                with respect to any security that is a covered 
                security pursuant to subsection (b)(4)(B), or 
                will be such a covered security upon completion 
                of the transaction, except for the securities 
                commission (or any agency or office performing 
                like functions) of the State of the principal 
                place of business of the issuer, or any State 
                in which purchasers of 50 percent or greater of 
                the aggregate amount of the issue are 
                residents, provided that for purposes of this 
                subparagraph, the term ``State'' includes the 
                District of Columbia and the territories of the 
                United States.
          (3) Enforcement of requirements.--Nothing in this 
        section shall prohibit the securities commission (or 
        any agency or office performing like functions) of any 
        State from suspending the offer or sale of securities 
        within such State as a result of the failure to submit 
        any filing or fee required under law and permitted 
        under this section.
  (d) Definitions.--For purposes of this section, the following 
definitions shall apply:
          (1) Offering document.--The term ``offering 
        document''--
                  (A) has the meaning given the term 
                ``prospectus'' in section 2(a)(10), but without 
                regard to the provisions of subparagraphs (a) 
                and (b) of that section; and
                  (B) includes a communication that is not 
                deemed to offer a security pursuant to a rule 
                of the Commission.
          (2) Prepared by or on behalf of the issuer.--Not 
        later than 6 months after the date of enactment of the 
        National Securities Markets Improvement Act of 1996, 
        the Commission shall, by rule, define the term 
        ``prepared by or on behalf of the issuer'' for purposes 
        of this section.
          (3) State.--The term ``State'' has the same meaning 
        as in section 3 of the Securities Exchange Act of 1934.
          (4) Senior security.--The term ``senior security'' 
        means any bond, debenture, note, or similar obligation 
        or instrument constituting a security and evidencing 
        indebtedness, and any stock of a class having priority 
        over any other class as to distribution of assets or 
        payment of dividends.

           *       *       *       *       *       *       *


                             MINORITY VIEWS

    H.R. 5421 is intended to be a technical fix that would 
amend a 1996 law to take into account the existence of 
additional national securities exchanges today. It does so by 
removing the requirement that the Securities and Exchange 
Commission (SEC), in determining whether to preempt state 
regulation, finds that an exchange's proposed listing standards 
for securities are equal to or greater than the robust 
standards that existed at the New York Stock Exchange (NYSE), 
the American Stock Exchange (now NYSE AMEX), or Nasdaq in 1996.
    However, the bill does nothing to guide the SEC in how it 
should otherwise determine whether to preempt our state 
securities regulators. Rather, H.R. 5421 would remove the 
baseline standard and with it, how the SEC interprets that 
standard to require certain core quantitative thresholds 
relating to, for example, revenue, market capitalization, 
number of shareholders, and share price.
    Removing the current framework and replacing it with 
nothing will at best create confusion and at worst encourage a 
race-to-the-bottom as exchanges try to compete for business by 
lowering their listing standards. Moreover, if the SEC were to 
approve Venture Exchanges, whose very business model is based 
on lower listing standards for smaller companies, it would have 
to preempt the states, notwithstanding the fact that their 
oversight over these companies may be more appropriate.
    For these reasons, we do not believe that H.R. 5421 is a 
so-called technical fix and oppose it.
                                   Maxine Waters.
                                   Emanuel Cleaver.
                                   Keith Ellison.
                                   Gwen Moore.
                                   Stephen F. Lynch.
                                   Joyce Beatty.
                                   Al Green.
                                   Wm. Lacy Clay.

                                  [all]