Small Cap Liquidity Reform Act of 2013 (H.R. 3448; 113th Congress)
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The Small Cap Liquidity Reform Act of 2013 () was a bill that was intended to increase the
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liq ...
on the stock market of stocks belonging to emerging growth companies. It would allow small companies to choose a tick size of $0.05 or $0.10 instead of the standard $0.01. To participate, companies would need to have stock prices of over $1.00 and revenues of less than $750 million. It was introduced into the
United States House of Representatives The United States House of Representatives, often referred to as the House of Representatives, the U.S. House, or simply the House, is the lower chamber of the United States Congress, with the Senate being the upper chamber. Together they ...
during the
113th United States Congress The 113th United States Congress was a meeting of the legislative branch of the United States federal government, from January 3, 2013, to January 3, 2015, during the fifth and sixth years of Barack Obama's presidency. It was composed of the ...
.


Background

In financial markets, a tick size is the smallest increment (tick) by which the price of stocks,
futures contract In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
s or other exchange-traded instrument can move. Current rules from the Securities and Exchange Commission, which regulates the stock market, set the tick at $0.01 increments. This change was made in 2000 with the goal of increasing trading in large company stocks, but it had the side effect of reducing the trading on small company stocks. This pilot program would enable smaller companies to choose larger tick sizes that would "increase the liquidity and capital availability necessary for emerging... companies to be successful on the public market."


Provisions of the bill

''This summary is based largely on the summary provided by the
Congressional Research Service The Congressional Research Service (CRS) is a public policy research institute of the United States Congress. Operating within the Library of Congress, it works primarily and directly for members of Congress and their committees and staff on a ...
, a
public domain The public domain (PD) consists of all the creative work to which no exclusive intellectual property rights apply. Those rights may have expired, been forfeited, expressly waived, or may be inapplicable. Because those rights have expired, ...
source.'' The Small Cap Liquidity Reform Act of 2013 would amend the Securities Exchange Act of 1934 to establish a
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liq ...
pilot program A pilot study, pilot project, pilot test, or pilot experiment is a small-scale preliminary study conducted to evaluate feasibility, duration, cost, adverse events, and improve upon the study design prior to performance of a full-scale research pr ...
for securities of emerging growth companies (EGC) with total annual gross revenues of less than $750 million, under which those securities shall be quoted using either: (1) a minimum increment of $0.05, (2) a minimum increment of $0.10, or (3) the increment at which the securities would be quoted without regard to such minimum increments. The bill would repeal the requirement for a Securities and Exchange Commission (SEC) study examining the transition to trading and quoting securities in one penny increments, known as decimalization. The bill would require EGC securities quoted at a minimum increment of $0.05 or $0.10 to be traded at either such minimum increment or at one permitted by SEC regulations. The bill would prescribe procedures for an EGC board of directors to elect either to opt out or to change the minimum increment. The bill would prescribe pricing and trading procedures governing securities trading below $1.00. The bill would direct the SEC to require an EGC under this Act to submit additional reports and disclosures. The bill would shield an issuer from liability for losses caused solely by the quoting or trading of its securities at a minimum increment of $0.05, $0.10, or another SEC-authorized increment. The bill would direct the SEC to report biannually to Congress on: (1) the quoting and trading of securities in increments permitted by this Act, and (2) the extent to which such quoting and trading increases liquidity and active trading by incentivizing capital commitment, research coverage, and brokerage support.


Congressional Budget Office report

''This summary is based largely on the summary provided by the
Congressional Budget Office The Congressional Budget Office (CBO) is a List of United States federal agencies, federal agency within the United States Congress, legislative branch of the United States government that provides budget and economic information to Congress. Ins ...
, as ordered reported by the House Committee on Financial Services on November 13, 2013. This is a
public domain The public domain (PD) consists of all the creative work to which no exclusive intellectual property rights apply. Those rights may have expired, been forfeited, expressly waived, or may be inapplicable. Because those rights have expired, ...
source.'' The Congressional Budget Office (CBO) estimates that implementing H.R. 3448 would have an insignificant effect on gross spending by the Securities and Exchange Commission (SEC) to establish a
pilot program A pilot study, pilot project, pilot test, or pilot experiment is a small-scale preliminary study conducted to evaluate feasibility, duration, cost, adverse events, and improve upon the study design prior to performance of a full-scale research pr ...
that would change the minimum increment that the price of a stock could change (the tick size) for certain
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
.
Pay-as-you-go Pay as you go or PAYG may refer to: Finance * Pay-as-you-go tax, or pay-as-you-earn tax * Pay-as-you-go pension plan * PAYGO, the practice in the US of financing expenditures with current funds rather than borrowing * PAUG, a structured financia ...
procedures do not apply to this legislation because it would not affect direct spending or revenues. H.R. 3448 would establish a five-year program that would allow the price of securities issued by smaller companies to change in increments of 5 or 10 cents, rather than the penny increments that are currently the standard for most stocks traded on U.S.
stock exchanges A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for the ...
. Under the pilot program the SEC would set the tick size for certain small companies at 5 cents; however, those companies would have the option to select a 10-cent increment. Further, the program would allow a one-time option to change the tick size from 5 cents to 10 cents or vice versa. H.R. 3448 also would require the SEC to submit biannual reports to the Congress showing the extent to which different tick sizes are affecting
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liq ...
and trading activity. CBO expects that changes in the workload of the SEC to implement the pilot program would not be significant because the agency has already begun efforts to develop such a program. H.R. 3448 would impose intergovernmental and private-sector mandates, as defined in the
Unfunded Mandates Reform Act The Unfunded Mandates Reform Act of 1995 (UMRA''(pdf)https://www.govinfo.gov/content/pkg/USCODE-1995-title2/html/USCODE-1995-title2-chap25.htm (text)] restricts the federal government of the United States, federal imposition of unfunded mandates on ...
(UMRA), by providing liability protection to issuers of securities of companies participating in the pilot program. Such issuers would not be liable for any losses caused by the quoting or trading of their securities at increments established under the program. Providing such protection would impose a mandate on both public and private investors that would otherwise be able to sue the issuers to recover losses related to tick size. The protection also would impose an intergovernmental mandate by preempting state and local liability laws. The cost of the mandate would be the forgone value of awards and settlements in such claims. Because the securities of companies covered by the liability protection are more risky than other securities, few public entities invest in them, and those that do limit the size of such investments. Consequently, CBO estimates that any potential losses tied to the mandate would be small. In addition, the costs, if any, of the preemption would be small because it would impose no duty that would result in additional spending or a loss of revenues. Therefore, CBO estimates the cost to public entities of complying with the mandates in the bill would fall below the annual threshold for intergovernmental mandates established in UMRA ($76 million in 2014, adjusted annually for inflation). Because of uncertainty about both the value of awards in such cases and the number of claims that would be filed in the absence of this provision, CBO cannot estimate the level of potential awards or settlements that would otherwise accrue to private investors. Therefore, CBO cannot determine whether the cost of the mandate would exceed the annual threshold established in UMRA for private-sector mandates ($152 million in 2014, adjusted annually for inflation). In addition to those mandates, the bill would impose a private-sector mandate on companies in the pilot program established in the bill by requiring them to notify the SEC if they elect to not participate. Based on information from the SEC, CBO estimates that the cost to comply with that mandate would be minimal.


Procedural history

The Small Cap Liquidity Reform Act of 2013 was introduced into the
United States House of Representatives The United States House of Representatives, often referred to as the House of Representatives, the U.S. House, or simply the House, is the lower chamber of the United States Congress, with the Senate being the upper chamber. Together they ...
on November 12, 2013 by Sean Duffy, Rep. Sean P. Duffy (R, WI-7). It was referred to the
United States House Committee on Financial Services The United States House Committee on Financial Services, also referred to as the House Banking Committee and previously known as the Committee on Banking and Currency, is the United States congressional committee, committee of the United States H ...
, which held a consideration and markup session on November 14, 2013. The committee ordered the bill reported (amended) with a vote of 57-0 on November 14, 2013. The bill was reported alongsid
House Report 113-342
on February 5, 2014. On February 7, 2014, House Majority Leader
Eric Cantor Eric Ivan Cantor (born June 6, 1963) is an American lawyer and former politician who represented Virginia's 7th congressional district in the United States House of Representatives from 2001 to 2014. A Republican, Cantor served as House Minori ...
announced that H.R. 3448 would be on the House schedule for February 11 or 12, 2014, to be considered under a suspension of the rules.


Debate and discussion

The
Biotechnology Industry Organization The Biotechnology Innovation Organization (BIO) is the largest advocacy association in the world representing the biotechnology industry. It was founded in 1993 as the Biotechnology Industry Organization, and changed its name to the Biotechnology ...
spoke out in favor of the bill, with President Jim Greenwood saying that "the current one-size-fits-all tick size does not reflect the realities of the market and subjects smaller issuers to the same trading framework as large, multinational companies with exponentially higher trading volumes and market caps." Greenwood went on to say that "BIO supports the Small Cap Liquidity Reform Act because it takes into account the unique nature of the trading environment that small companies face as well as the high capital burden of biotech R&D."


See also

*
List of bills in the 113th United States Congress The bills of the 113th United States Congress list includes proposed federal laws that were introduced in the 113th United States Congress. This Congress lasted from January 3, 2013, to January 3, 2015. The United States Congress is the bicamer ...


Notes/References


External links


Library of Congress - Thomas H.R. 3448beta.congress.gov H.R. 3448GovTrack.us H.R. 3448OpenCongress.org H.R. 3448House Report 113-342 on h.R. 3448
{{DEFAULTSORT:Small Cap Liquidity Reform Act of 2013 (H.R. 3448 113th Congress) Proposed legislation of the 113th United States Congress