SIFMA provides comments to the House Committee on Financial Services in regards to H.R. 4918 the Helping Startups Continue to…
July 9, 2018
Via Electronic Mail ([email protected])
Mr. Brent J. Fields, Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: Covered Investment Fund Research Reports ║ File Number S7-11-18
Dear Mr. Fields:
The Securities Industry and Financial Markets Association (“SIFMA”)1 jointly with the Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG,”2 referred to herein together with SIFMA as “SIFMA”) appreciate the opportunity to provide comments to the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) on its proposal (the “Proposal”)3 to adopt Rule 139b under the Securities Act of 1933 (the “Securities Act”), which would establish a safe harbor for covered investment fund research. If adopted, among other things, the Proposal would allow a brokerdealer to publish or distribute a “covered investment fund research report” without such report being considered an offer for sale or offer to sell the covered investment fund’s securities for purposes of sections 2(a)(10) and 5(c) of the Securities Act, subject to conditions.
The Commission was directed to adopt a safe harbor for covered investment fund research pursuant to the Fair Access to Investment Research Act of 2017 (the “FAIR Act”).4 Specifically, the FAIR Act requires the Commission to establish a safe harbor for covered investment fund research by revising Rule 139 under the Securities Act, which is an existing safe harbor that applies to research on corporate and certain other issuers. In recent years, through the FAIR Act and other laws and initiatives, Congress has clearly indicated its view that the publication and distribution of research should be encouraged and not overly restricted. With respect to covered investment funds, the House of Representatives Committee on Financial Services (the “HFS Committee”) Report accompanying the FAIR Act explained that, because research that covers open-end funds and exchange-traded funds (“ETFs”) does not benefit from Rule 139 and other existing safe harbors, “broker-dealers do not publish research regarding ETFs, depriving investors of useful information when deciding whether to invest in this product.” Congress was concerned that this situation “inhibits the free flow of investment research” and enacted the FAIR Act to fix this problem.
Congress has also taken other recent actions intended to encourage the free flow of investment research. For example, in the Jumpstart Our Business Startups Act (“JOBS Act”), Congress explicitly prohibited the Commission and FINRA from adopting or maintaining any rule or regulation that would prohibit a broker-dealer from publishing or distributing any research report with respect to the securities of an emerging growth company within any prescribed period of time following the initial public offering date of the emerging growth company or within any prescribed period of time prior to the expiration date of a lock-up agreement. In addition, an interest in Congress to stimulate research coverage for smaller issuers was one of the driving forces behind proposed legislation that likely led to the Commission’s own tick size pilot.5 As recently as June 21, 2018, the HFS Committee considered and unanimously passed a bill that would require the Commission to “conduct a study to evaluate the issues affecting the provision of and reliance upon investment research into small issuers, including emerging growth companies and companies considering initial public offerings” and to make “recommendations to increase the demand for, volume of, and quality of investment research” on such issuers.6
1 SIFMA brings together the shared interest of hundreds of securities firms, banks and asset managers. SIFMA’s mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association. For more information, visit www.sifma.org.
2 SIFMA AMG brings the asset management community together to provide views on policy matters and to create industry best practices. SIFMA AMG’s members represent U.S. and multinational asset management firms whose combined global assets under management exceed $39 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private equity funds.
3 Covered Investment Fund Research Reports, Securities Act Release No. 10498 (May 23, 2018), 83 Fed. Reg. 26788 (June 8, 2018) (the “Proposing Release”).
4 Fair Access to Investment Research Act of 2017, Public Law No. 115-66, 131 Stat. 1196 (2017).
5 See Small Cap Liquidity Reform Act of 2013, H.R. 3448, 113th Cong. (2014) (bill that passed the House of Representatives that would have required the Commission to enact a tick size pilot program and report to Congress on, among other things, the extent to which wider tick sizes “are increasing liquidity and active trading by incentivizing … research coverage….”); H.R. Rep. No. 113-342 (2014) (HFS Committee report accompanying H.R. 3448 quoting committee testimony that a tick size pilot could lead to “increased research coverage to better inform and educate investors on both the opportunities and risks.”).
6 See, e.g., Improving Investment Research for Small and Emerging Issuers Act, H.R. 6139, 115th Cong. (2018).