The Senate Committee on Banking, Housing, and Urban Affairs meets today to conduct hearings on a set of bills ostensibly designed to increase access to capital. Several of these bills are part of a dangerous agenda to rollback securities markets regulations. The deregulation of private capital markets contemplated in these bills would disproportionally affect small, retail investors vis-à-vis large investors and would undermine the effective regulations and investor protections that are fundamental principles of stable and enlarging U.S. public capital markets.
There is no evidence supporting the premise that undercutting compliance with enacted regulations would magically increase the number of initial public offerings (IPOs). In fact, this approach—represented by the passage of the JOBS Act in 2012—has proven ineffective and even counterproductive. Instead of encouraging public markets, Congress’ deregulatory spree of private capital markets further undermines public offerings by incentivizing companies to stay private and reap the advantages of expanded exemptions and reduced compliance relative to IPOs. A number of bills in these hearings would double-down on this failed approach by reducing disclosure requirements that are integral to maintain investor confidence and stable capital markets.
Another bill, S 1117, the “Consumer Choice and Capital Markets Protection Act”, would roll back post-crisis systemic risk protections related to money market funds.
A more extensive, detailed discussion of the securities markets implications of today’s hearing can be found in the testimony of Mercer E. Bullard, Professor of Law at the University of Mississippi School of Law, at: https://bit.ly/2I9JNlP.
In addition, Americans for Financial Reform has previously written opposition letters to three of the bills under consideration today when they were advanced in the House. These letters are quoted below.
- S. 588, the “Helping Angels Lead Our Startups (HALOS) Act”
Related House bill: H.R. 79
Previous AFR Statement: The “HALOS Act,” would permit issuers of unregistered securities to be exempted from safeguards regarding general solicitations so long as such solicitations were made at an ‘event’ sponsored by any of a wide range of non-profit or educational organizations, investor associations, or trade associations.
SEC registration requirements are designed to protect investors by providing investors with verified, reliable financial information concerning the securities in which they invest. The JOBS Act made it possible to do broad-based general solicitation of the public for the sale of riskier unregistered securities. But it also required that companies do a good-faith verification that investors were in fact accredited investors who met a range of qualifications indicating they could afford the increased risk of loss associated with investing in unregistered securities. This requirement is an important investor protection.
The HALOS Act would eliminate this investor protection for a very wide range of types of issuer events, events that could easily be used to solicit investment from the broader public, including many who are not accredited investors. This exemption is overly broad and would likely lead to losses for investors who are not prepared to take the significant risks associated with purchases of unregistered securities.
- S. 1117, the “Consumer Financial Choice and Capital Markets Protection Act of 2017”
Related House bill: H.R. 2319
Previous AFR Statement: H.R. 2319 would reverse key 2014 reforms to rules governing Money Market Funds (MMFs). During the 2008 crisis, declines in the value of MMFs that were over-invested in risky bank debt eventually led to a multi-hundred billion-dollar run on the entire sector of prime MMFs. Due to the threat to financial stability and the broader economy, the Federal government intervened and bailed out the entire MMF sector by publicly guaranteeing its assets. This stopped the run, but exposed taxpayers to the potential loss of hundreds of billions of dollars.
In response to these events, regulators took several steps to require that a key subsector of MMFs—institutional prime funds—report accurate information to their investors about the current market value of their holdings. In a technical sense, this is a requirement that funds report a so-called “floating Net Asset Value” (NAV) which represents the true market value of their holdings, rather than a fixed NAV which gives the impression that each share in a money market fund is worth one dollar. This reform became effective October, 2016.
This regulatory change enhances financial stability by helping to ensure that fund investors are prepared for fluctuations in the value of their funds and are less likely to engage in a disorderly exit from the sector when prices start to shift. It also makes clear that shares in MMFs are market investments that carry risk. The floating NAV is designed to lessen the impression that shares in MMFs are similar to insured bank deposits, thus lessening the perception that they are implicitly backed by the government.
H.R. 2319 would reverse the regulatory response to the crisis by once again permitting institutional prime funds to report an inaccurate fixed value for their holdings, thus encouraging investors to view these instruments as the equivalent of bank deposits—which they are not. Funds affected by this regulatory change are funds invested in by large institutional investors, not retail investors, and only “prime” funds that hold securities not guaranteed by the Federal government are affected.
H.R. 2319 purports to address any increased threat of a taxpayer bailout by prohibiting any Federal government bailout of MMFs. However, the definition exempts a “facility with broad-based eligibility established in unusual or exigent circumstances” from the definition of “covered Federal assistance.” This language would exempt Federal government assistance provided under Section 13(3) of the Federal Reserve Act from any prohibition on bailouts under this bill—leaving the door wide open to future Federal Reserve assistance to MMFs.
Congress should not reverse important regulatory changes made in response to the government bailout of MMFs during the crisis, and should maintain the requirement to report more accurate fund valuations to investors. In recent testimony to the Committee (October 4, 2017), SEC chair Jay Clayton expressed his view that any such change would be premature at best.
- S. 2126, the “Fostering Innovation Act of 2017”
Related House bill: H.R. 1645
Previous AFR Statement: H.R. 1645 would double the time for which certain new public companies are exempt from key financial reporting controls, most notably attestation by an auditor that their earnings and accounting are accurate. It grants this exemption to a class of companies, newly public companies with low revenue growth, which have a particular strong incentive to manipulate their financial statements and deceive investors. This bill would both harm investors and undermine the integrity of capital markets.