During floor consideration of H.R. 2357, Congresswoman Maxine Waters (D-CA), Ranking Member of Committee on Financial Services, urged rejection of the bill, which would harm American investors and small businesses and thwart regulators’ abilities to police the markets against fraud.
In her remarks, Ranking Member Waters criticized House Republicans for “prioritizing a bill that would make it easier for companies to scam investors by escaping regulatory scrutiny,” instead of addressing “a host of critical issues facing the American public, including helping the people of Baton Rouge who just suffered devastating losses following the historic flooding last month.”
According to a Statement of Administration Policy, the White House “strongly opposes” H.R. 2357, and if the bill were to reach the President’s desk, his senior advisors would recommend a veto.
The full text of Rep. Waters’ statement, as prepared for delivery, is below:
Mr. Chairman, I rise today in strong opposition to H.R. 2357, a toxic package of bills that would outright encourage fraud in our financial markets and put retail investors and small businesses at risk. Instead of addressing a host of critical issues facing the American public, including helping the people of Baton Rouge who just suffered devastating losses following the historic flooding last month, Republicans are prioritizing a bill that would make it easier for companies to scam investors by escaping regulatory scrutiny.
In particular, H.R. 2357 would allow small companies that are not listed on a national stock exchange to publicly offer their stock as an “accelerated filer” without first alerting the Securities and Exchange Commission or gaining its approval. Currently, this accelerated filer status is reserved for larger companies that meet the standards of and are traded on a national stock exchange. They also are closely followed by analysts, giving investors more insight into their activities. Small companies traded off-exchange simply don’t have the same safeguards in place. Providing this type of quick access to our securities markets without sufficient oversight and transparency would lead to accounting fraud, market manipulation, insider trading, and sales of artificially inflated stock. Anyone who has seen the movie The Wolf of Wall Street can tell you just how bad this would be for our investors and their savings.
Next, the bill would recreate a private securities offering that would be exempt from federal and state securities laws. The bill would carve out a scenario where a private company could sell stock to certain investors without providing them, or the SEC, with any information. This stock could then be distributed to the public at large without restriction, and again without any information. What’s more troubling is that the SEC previously eliminated this exact type of offering exemption after concluding that it, in fact, facilitated fraud. Specifically, the exemption had been used frequently in fraudulent “pump-and-dump” schemes where these early investors aggressively promoted the stock to artificially inflate its price, and then dumped their shares on unsuspecting investors. The provision also ignores the fact that the JOBS Act created similar, yet responsible exemptions to facilitate small company offerings under the crowdfunding rules and Regulation A. As a result, this bill would simply create a loophole for companies to secretly conduct public offerings and swindle investors.
Lastly, the bill would stop the SEC dead in its tracks in advancing important investor protections in the trillion-dollar private securities market. In particular, it would block the Commission from requiring companies to file a short, simple notice of a sale to alert the SEC and state regulators to possible fraud. It also would prevent the SEC from stopping private equity funds and hedge funds from using misleading advertising materials. This would essentially allow bad actors to run wild and sell stock to unknowing investors about their true intentions.
Mr. Chairman, it is clear that this bill represents reckless shortsightedness and woeful disregard for the history of fraud in the securities markets by undoing much-needed disclosure requirements and investor protections. The Administration has threatened to veto this bill, saying it would “undermine not only the health and integrity of our markets, but the very capital formation process they claim to promote.” I therefore strongly urge my colleagues to join me, investor advocates and the state securities regulators in opposing H.R. 2357.