HFSC November Markup

House Financial Services Committee

Markup

Tuesday, November 16, 2021

Bills Considered

  • H.R. 2311, the Credit Union Governance Modernization Act of 2021
  • H.R. 2620, the Investor Choice Act of 2021
  • H.R. 5910, the Holding SPACs Accountable Act of 2021
  • H.R. 5911, the Fair Hiring in Banking Act
  • H.R. 5913, the Protecting Investors from Excessive SPACs Fees Act of 2021
  • H.R. 5914, the Empowering States to Protect Seniors from Bad Actors

Opening Statements
Chairman Maxine Waters (D-Calif.)
In her opening statement, Waters explained the impacts of the pandemic, the proliferation of special purpose acquisition companies (SPAC), and their effect on retail investors and described the various bills to be considered. She said that the Committee will continue to look out for retail investors and advance legislation to expand opportunities for fair and competitive markets and retirement savings.

Ranking Member Patrick McHenry (R-N.C.)
In his opening remarks, McHenry said there are a few “bright spot” bills including one from Rep. Josh Gottheimer (D-N.J.) to protect seniors from bad actors and one from Rep. Joyce Beatty (D-Ohio) to codify previous Administration work to expand employment opportunities for Americans with past minor offenses. McHenry expressed his disappointment that none of the bills do anything to help Americans struggling to make ends meet due to consistently high inflation. He said the rest of these bills aim to narrow down access to capital markets and are extremely partisan.

H.R. 2311, the Credit Union Governance Modernization Act of 2021
Reps. Tom Emmer (R-Minn.) and Ed Perlmutter (D-Colo.) introduced their bill and Amendment in the Nature of a Substitute (ANS), which would modernize certain processes regarding expulsion of credit union members. Perlmutter said this bill would give credit union members the ability to expel a member in limited circumstances under new policy adopted by the National Credit Union Association (NCUA). Reps. David Scott (D-Ga.) and William Timmons (R-S.C.) spoke in favor of the bill and said it would streamline the process for expelling a member who has engaged in egregious, dangerous, or illegal conduct, without removing due process rights.

The Amendment in the Nature of a Substitute was agreed to and reported favorably to the House by a voice vote.

H.R. 2620, the Investor Choice Act of 2021
Rep. Bill Foster (D-Ill.) introduced his bill and his Amendment in the Nature of a Substitute, which would prohibit pre-dispute arbitration clauses in financial contracts for broker dealers and retail investment advisers. Foster characterized arbitration agreements with stockbrokers and investment advisors as “take it or leave it,” not allowing consumers to go to court, offering no consumer leverage to negotiate, being unfair to consumers, disproportionately favoring firms, utilizing inexperienced panels, and causing a statistical imbalance in arbitration proceedings. He added that the bill would not have an effect on proceedings that are already in effect and would preserve the ability for investors and firms to settle before proceedings begin.

Foster also stated that as the bill moves forward, he is sympathetic to carving out certain non-profits, specifically those owned and governed by their investors and who are willing to document the fairness of their arbitration proceedings with the Securities and Exchange Commission (SEC).

Rep. Bill Huizenga (R-Mich.) said that the Committee should hold a Subcommittee hearing on the issue for a robust debate and that the bill eliminates an important legal resource available to investors. He also pointed out that Foster acknowledged that the SEC did not utilize its authority under Dodd Frank to address the issue, that the SEC seems to rarely pass up a rulemaking opportunity, but that in the last eleven years, the SEC has not used its authority at all to restrict mandatory arbitration. He added that both Republican and Democrat led Commissions have not raised the issue, asked why Congress should use its authority to restrict arbitration if the SEC has never used its own authority and pointed out that the Committee majority memo states that 30% of FINRA arbitration awards go unpaid, calling it a cherry-picked statistic by trial lawyers. He also asked Foster if he would still use the number. Foster said he would get the origin of the number and get back to Huizenga, who then highlighted FINRA’s different statistics on the matter and concluded that he did not oppose the idea of the study but opposed the bill overall.

Rep. French Hill (R-Ark.) expressed opposition to the bill and recounted his history as a managing securities principal licensed by FINRA and the SEC and his experience with the arbitration process in practice, having sat on the disciplinary committee of the agency that preceded FINRA. He added that arbitration has provided a fair and efficient venue to resolve disputes and is cheaper, faster, investor friendly, and better for small investors. He also highlighted the accessibility of arbitration, the availability of fee waivers, the opt-out option, and how FINRA arbitration is well-regulated and supervised. He also emphasized that the SEC has not acted on the issue and that the bill has failed for multiple Congresses. Hill concluded that arbitration works and that the bill would take away the best resolution process for the investors that the bill claims to help.

Foster agreed with the positives of arbitration but said that investors should still have a choice to take their disputes to court. He added that by leaving Rule 12200 intact, there will be an asymmetry against brokers and advisers. Foster voiced his sympathy for concerns over the threat of advisors forcing disputes into courts when investors might be subject to the financial threat of having to pay for a lawyer.

Rep. John Rose (R-Tenn.) explained the benefits of FINRA arbitration to small investors and its decades of effectiveness. He added that eliminating arbitration would not be a win for investors but would be for trial lawyers. Foster countered that the bill would not eliminate arbitration but, instead, give investors a choice.

Amendment Offered by Rep. Bill Foster (D-Ill.)
Foster offered an amendment to the underlying bill that adds an SEC study to Section 7. He stated that the Amendment is the result of discussion for the potential need to examine and possibly modify FINRA rule 12200. He then explained that the merits of altering or abolishing the rule can be argued from multiple directions, further explaining that it could restore symmetry for choice of dispute resolution venue but might prevent investors, who do not have the same level of funds as firms, from choosing the lower expense of arbitration, which may be all they can afford. He concluded that this amendment asks the SEC to study this and report back to Congress.

The Amendment in the Nature of a Substitute was agreed to and reported favorably to the House by a vote of 27 – 23.

H.R. 5910, the Holding SPACs Accountable Act of 2021
Rep. Michael San Nicolas (D-Guam) introduced his bill and his Amendment in the Nature of a Substitute, which would exclude certain SPACs from safe harbor for forward-looking statements. San Nicolas also said the bill essentially replaces blank check companies with development or growth-stage companies to ensure these companies in existence for acquiring or merging are not making fraudulent forward-looking statements. Huizenga said this would have real consequences on the strength of our capital markets and opportunities to grow savings. He said it would prohibit SPACs from taking advantage of providing forward-looking guidance and projections, which has been an important tool for SPACs to go public. He said this bill risks further tightening of the IPO pipeline in American capital markets and is unjustified because there is no evidence of problems or harms on everyday investors. Gonzalez also urged colleagues to oppose the bill, saying he would rather see more forward guidance and opportunities for retail investors to participate in capital markets than a preventative measure to limit forward looking statements. Waters said these revenue projections are too often “complete conjecture” and supported the bill to impose accountability on SPACs making wild and inaccurate forward-looking statements.

Amendment Offered by Rep. Bill Huizenga (R-Mich.)
Huizenga said instead of prematurely rushing through a restrictive bill that excludes SPACs from the Private Securities Litigation Reforms Act (PSLRA), his amendment would have the SEC thoroughly examine the issue to determine if forward looking statements are causing harm to investors. San Nicolas said the bill requires the SEC to carry out a study of how SPACs use forward-looking statements but noted that the answer to that question is already obvious. Huizenga said the study would look at how SPACs use forward looking statements within the safe harbor and if it has been helpful or positive and require a report to be submitted within 180 days of enactment. Reps. Bryan Steil (R-Wisc.), Rose, and Hill supported the Amendment. Hill said qualified institutional investors are the ones reading forward-looking statements and argued the real objective of this bill is to kill SPACs as a way of going public. Waters said this amendment would only require the SEC to study whether fraud is bad.

Amendment Offered by Rep. Bryan Steil (R-Wisc.)
Steil said the underlying bill jeopardizes American IPOs and public markets. His amendment would give emerging growth companies (EGCs) a five-year extension to grow and expand their products through the creation of streamlined disclosures and filing procedures. Steil explained that many companies are not generating enough revenue after going public to support the compliance costs that come with the loss of an EGC status. He argued that this amendment would help young, small companies to remain public and give them more access to public markets. Hill and Huizenga spoke in favor of the Amendment. San Nicolas said the Amendment makes sense for smaller companies in a grey area between EGC status, but he will not support striking section one and two of the underlying bill which address fraud in forward-looking statements. Both Amendments were considered on block and not agreed to by a vote of 22 – 27.

The Amendment in the Nature of a Substitute was agreed to and reported favorably to the House by a vote of 27 – 23.

H.R. 5911, the Fair Hiring in Banking Act
Rep. Joyce Beatty (D-Ohio) introduced her bill and her Amendment in the Nature of a Substitute, which would expand employment opportunities at banks for those with criminal records by reducing barriers to their employment. She explained the large U.S. incarceration rate and how the bill would reduce the lifetime ban for individuals who committed minor crimes. She added that a felon is no more likely to be convicted for a new offense than anyone else after seven years and explained other portions of the bill.

Amendment Offered by Rep. Joyce Beatty (D-Ohio)
Beatty offered an amendment to the underlying bill to make a technical correction and strike language in the definition of “crimes of dishonesty”. Rep. Ann Wagner (R-Mo.) outlined the Financial Depository Institution Corporation (FDIC) policy around hiring past criminals and asked Beatty if the bill would allow the FDIC to continue using its nine-question framework as it is relevant to considering Section 19 waivers. Beatty responded that her change to the bill would give the FDIC the flexibility to incorporate the factors it currently uses to evaluate consent applications. She added that the FDIC has updated its policy several times since the 1990s and concluded that the bill’s language is intended to give the FDIC flexibility to consider its nine question framework factors. Reps. Madeleine Dean (D-Pa.), Gonzalez, Waters, and McHenry voiced their support for the bill. Dean also expressed her commitment to reducing incarceration and improving opportunities for the formerly incarcerated to reintegrate into society and explained her Promoting Reentry Through Education in Prisons (PREP) Act to ensure that incarcerated people have the education they need to reintegrate into society. Waters discussed the disproportionate impact of incarceration on minority communities.

The Amendment in the Nature of a Substitute was agreed to and reported favorably to the House by a voice vote.

H.R. 5913, the Protecting Investors from Excessive SPACs Fees Act of 2021
Rep. Brad Sherman (D-Calif.) introduced his bill and his Amendment in the Nature of a Substitute, which would require the SEC to update disclosures requirements at three points when (1) investors put money into the SPAC, (2) during the de-SPAC, and (3) voting on the final deal. Sherman clarified that this version no longer prohibits advisors from recommending SPACs with high promotional fees but that it is now focused on more disclosure information. Huizenga said this bill to require more information and reporting on revenue expectations is a forward-looking type of statement and conflicts with the first SPAC bill presented by San Nicolas. Gonzalez said this bill is premature because the SEC has indicated they are currently studying disclosure requirements for SPACs. Rep. Warren Davidson (R-Ohio) said the underlying bill promotes the concept that wealthier individuals retain greater autonomy in their financial investments and that we should be promoting access to capital markets.

Amendment Offered by Rep. Bill Huizenga (R-Mich.)
Huizenga said the underlying bill skips over the research and analysis stages that are needed before developing policy and deciding which SPACs securities brokers and advisors can or cannot recommend and trade. He said his amendment will require the SEC to study and report on what issues need to be addressed with legislation and to also provide clarity on market realities absent regulation. Sherman said disclosures should be put in place now and then later give the SEC time to fine tune the disclosure regime as needed. Gonzalez said the underlying bill is premature and that Huizenga’s amendment is the perfect balance. Waters spoke in opposition of the Amendment. The Amendment was not agreed to by a vote of 23 – 27.

The Amendment in the Nature of a Substitute was agreed to and reported favorably to the House by a vote of 29 – 23.

H.R. 5914, the Empowering States to Protect Seniors from Bad Actors
Rep. Josh Gottheimer (D-N.J.) introduced his bill and his Amendment in the Nature of a Substitute, which would provide grants to states for enhanced protection of senior investors and policy holders. Gottheimer explained the underreporting of elder abuse and the different scams that target older Americans, including Internal Revenue Service (IRS) impersonations and tech support scams. Reps. Sylvia Garcia (D-Texas), Huizenga, and Waters expressed support for the bill. Huizenga highlighted the portions requiring a report to Congress to assess the effectiveness of the program, and Garcia emphasized its bipartisanship.

The Amendment in the Nature of a Substitute was agreed to and reported favorably to the House by a voice vote.

For more information on this hearing, please click here.