The House Appropriations Committee released the long-awaited omnibus bill with its spending limits for federal agencies, including the SEC and the CFTC. The omnibus also includes two securities bills that would amend the Investment Company Act, the Investment Advisers Act and the Exchange Act to address the ability of business development companies (BDCs) to raise capital and to direct an SEC office to mull the impact of natural disasters on small businesses. The omnibus also includes the Clarifying Lawful Overseas Use of Data (CLOUD) Act, which will be of interest to companies that store customer data on overseas servers. The House quickly passed the appropriations bill by a vote of 256-167, but procedural moves in the Senate could require final votes to be taken closer to when the current continuing resolution expires tomorrow, possibly with the aid of a brief further CR. If enacted, the omnibus (H.R. 1625) would fund the government through September 30, 2018.
Business development companies. Title VIII of Division S contains the Small Business Credit Availability Act. Section 802 of the Act would lower the 200 percent asset coverage requirement to 150 percent for a BDC that meets certain criteria. Specifically, a BDC must disclose the approval and effective date regarding the lower asset coverage requirement within five business days of approval in its Exchange Act filings and on its website. Similarly, a BDC must disclose in its Exchange Act filings the aggregate outstanding principal amount or liquidation preference and the asset coverage percent as stated in its latest financials.
A BDC that is an issuer of common equity securities must likewise make disclosures in its Exchange Act filings that are reasonably designed to inform shareholders of the amount of senior securities along with the asset coverage ratios and the principal risk factors related to these securities. A final requirement pertains to the approval process itself and requires either a majority vote or a shareholder vote at a special or annual meeting; if the BDC is not an issuer of common equity securities, it must give shareholders an opportunity to sell their shares.
The omnibus provision is based on legislation (H.R.4267) introduced by Rep. Steve Stivers (R-Ohio) that was reported by the House Financial Services Committee 58-2 in November 2017. Similar language also appeared in Section 437 of the Financial CHOICE Act (H.R. 10), which has passed the House, and in a bill introduced by Sen. Dean Heller (R-NV) (S. 2324). While the omnibus provision applies only to BDCs, Section 509 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) contains a similar provision for closed-end companies. S. 2155 passed the Senate and is awaiting further action by the House.
Under Section 803 of the Act, a company electing under Investment Company Act Section 54 to be a BDC could use the securities offering and proxy rules like other companies that file reports under Exchange Act Sections 13(a) and 15(d). The provision directs the SEC to make conforming amendments to numerous regulations and to Schedule 14A and Form N-2. The Form N-2 revisions would require incorporation by reference of certain reports and would permit a BDC that is a well-known seasoned issuer to file automatic shelf offerings on Form N-2.
Section 803 also provides that a BDC can deem the required regulatory changes to have been made if the Commission fails to act within one year of enactment. The revisions would be deemed to have been made as of one day following the one-year anniversary of the date of enactment of the Act. Moreover, the Act would not bar a BDC from invoking Securities Act Rule 482 for the distribution of sales material. Section 438 of the Financial CHOICE Act and Sen. Heller’s bill also contain language similar to the omnibus provision.
Natural disasters. Title IX of Division S contains the Small Business Access to Capital After a Natural Disaster Act. The provision is based on legislation (H.R. 4792) sponsored by Rep. Nydia Velazquez (D-NY), which was approved by the House FSC 57-0 and passed the House by voice vote. The omnibus provision would amend Exchange Act Section 4(j) to require the SEC’s Advocate for Small Business Capital Formation to identify the unique problems facing small businesses affected by hurricanes or other natural disasters and report its findings regarding the most serious of these issues to Congress.
The SEC Small Business Advocate Act of 2016 (Public Law No. 114–284) created the SEC’s Advocate for Small Business Capital Formation. The office is charged with numerous tasks, including assisting in the resolution of significant problems small businesses and their investors have with the Commission or with self-regulatory organizations, identifying regulations that could be changed to benefit small businesses, and to mull the economic impact regulations on small businesses. The list of existing duties includes the consideration of the unique challenges of minority- and women-owned small businesses with respect to raising capital.
CLOUD Act. Although not a securities law, the CLOUD Act deserves a brief mention because it falls broadly into the category of cybersecurity and information and data privacy. The purpose of the legislation, contained in Division V of the omnibus, is to require a provider of electronic communication services or of remote computing services to preserve the contents of wire or electronic communications regarding customers or subscribers even if those communications are stored outside the U.S. Law enforcement agencies have encountered difficulties in obtaining such records when they are stored on servers located outside the U.S. The inclusion of the CLOUD Act is reminiscent of a few years ago when the Cybersecurity Information Sharing Act was attached to similar must-pass legislation.
The CLOUD Act was sponsored by Sen. Orrin Hatch (R-Utah) (S. 2383) and by Rep. Doug Collins (R-Ga) (H.R. 4943) and was prompted by the case U.S. v. Microsoft, which was argued before the Supreme Court in February. The government, as petitioner, framed the question thus: "Whether a United States provider of email services must comply with a probable-cause-based warrant issued under 18 U.S.C. 2703 [the Stored Communications Act] by making disclosure in the United States of electronic communications within that provider’s control, even if the provider has decided to store that material abroad." Microsoft argued against extending provisions of the SCA and noted that relevant legislation was pending in Congress.
Following oral argument, Sen. Hatch emphasized why Congress decided to act: "It’s no surprise that throughout this morning’s oral argument, Justices continually referred to the importance of action from Congress, and the CLOUD Act in particular, in settling the question of when and where law enforcement can compel disclosure of data stored abroad."
SEC funding and policy rider. Title V of Division E addresses independent agency funding. The SEC was appropriated $1.652 billion for FY 2018. Included in this funding is a $45 million increase over FY 2017 for the SEC’s information technology initiatives. Also, $68.95 million was allocated to the SEC’s Division of Economic and Risk Analysis, while $14.75 million was allocated to the SEC inspector general.
The omnibus also contains the political spending policy rider that has appeared in other recent appropriations bills. Specifically, the SEC is barred from finalizing, issuing, or implementing rules regarding the disclosure of companies’ political spending habits. Several years ago, the Commission received multiple rulemaking petitions asking the agency to adopt rules to require public companies to disclose their political contributions. Commissioner Robert Jackson was a signatory to one of the petitions. The several petitions generated millions of public comments, although in the intervening years, the Commission has not taken any significant action on them.
Elsewhere in the omnibus, the Public Company Accounting Oversight Board is permitted to sponsor a Sarbanes-Oxley Act scholarship program for up to $1 million. The Office of Management and Budget must report to Congress on the costs of implementing the Dodd-Frank Act. The SEC and CFTC, however, are excepted from a prohibition on using funds for interagency boards such that both agencies can fund and sponsor a joint advisory committee on emerging regulatory issues.
CFTC appropriation. Title VI of Division A provides that the CFTC is funded at $249 million, slightly below the $250 million appropriation it had received in recent years. An ongoing focus of the CFTC has been the modernization of its IT systems and the omnibus provides $48 million for this purpose, which will be available to the agency until September of 2019. Also of note, the omnibus allocates $2.7 million for the CFTC’s inspector general. The CFTC must submit a spending plan to the congressional appropriations committees within 30 days after the omnibus is enacted.
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