Improving Investment Research for Small and Emerging Issuers Act

Mr. Speaker, initial public offerings, or IPOs, have historically been one of the most meaningful steps in the lifecycle of a company. ``Going public'' was the ultimate goal for entrepreneurs. You start a business from scratch, build it up into a successful enterprise, and then open up an opportunity for the public to share in your success.

By completing an IPO, a company is able to raise much-needed capital for job creation and expansion opportunities, while allowing main street investors the opportunity to have an economic piece of the action and ability to participate in the growth phase of a company.

However, over the past two decades, our nation has experienced a 37 percent decline in the number of U.S. listed companies. Equally troubling, we have seen the number of public companies fall to around 5,700. These statistics are concerning because they are similar to the data we saw in the 1980's when our economy was less than half its current size.

For myriad reasons, the public model is no longer viewed as an attractive means of raising capital. Instead, small and emerging growth companies are choosing to go public much later in their lifecycle or choosing not to go public at all.

We must work to change the trajectory. In speaking to the New York Economic Club, SEC Chairman Clayton stated that ``Regardless of the cause, the reduction in the number of U.S.-listed public companies is a serious issue for our markets and the country more generally. To the extent companies are eschewing our public markets, the vast majority of Main Street investors will be unable to participate in their growth. The potential lasting effects of such an outcome to the economy and society are, in two words, not good.''

I share Chairman Clayton's concerns. We need to ensure that our capital markets are open for innovators and job creators and we must work to right-size regulations for smaller companies as well.

One way that Congress worked to lift burdensome regulations and help small companies gain access to capital markets was the bipartisan Jumpstart Our Business Startups Act--popularly known as the JOBS Act.

Section 105 of the JOBS Act changed the ``gun-jumping rules'' to provide an exception from the definition of an offer to allow for the publication or distribution by a broker or dealer of a research report about an emerging growth company that is the subject of a proposed public offering. However, few investment banks have published any pre- IPO research since passage of the JOBS Act, and research coverage in general on small issuers continues to be an issue. This negatively affects investor interest and awareness in a company as well as trading liquidity.

This provision was intended to increase research but unfortunately it has had the opposite effect and instead, there has been a significant decline over recent years in analyst research covering small public companies. According to the U.S. Chamber, ``61% of all companies listed on a major exchange with less than a $100 million market capitalization have no research coverage at all.''

For equities with a market cap below $750 million, the average number of research analysts covering that stock is one, while equities above $750 million in market cap have an average of 12 research analysts covering the stock.

Additionally, the amount of research written on small companies has declined even as the percentage of individual ownership in small cap companies has increased. Little to no research coverage generally corresponds with lower stock liquidity, and reduced research coverage may be particularly disadvantageous to individual investors who have limited research capabilities on their own.

In fact, one study published June 2017 in the Journal of Finance found that an increase in the number of analysts covering an industry improved the quality of analyst forecasts and information flow to investors. For that reason, it is important to examine current SEC rules and regulations affecting the ability of investment research coverage regarding small issuers. The Treasury Report on Capital Markets recommended a holistic review of rules and regulations regarding research, including the Global Settlement, to determine, which provisions should be retained, amended, or removed.

Our bipartisan bill, the Improving Investment Research for Small and Emerging Issuers Act, would direct the SEC to study and evaluate issues affecting the ability of emerging growth companies and other small issuers in obtaining research coverage, including SEC rules, FINRA rules, state and federal liability concerns, the 2003 Global Research Analyst Settlements, and MiFID II. Not later than 180 days after enactment, the SEC will be required to submit to Congress a report that includes the results of the study and recommendations to assist EGCs and other small issuers in obtaining research coverage.

Among the issues the SEC must consider are factors related to the demand for such research by institutional and retail investors, cost considerations for such research, and the impact on the availability of research coverage for small issuers due to a variety of market and regulatory conditions. The SEC's report must include recommendations to increase the demand for, volume of, and quality of investment research into small issuers, including EGCs.

I'd like to thank the Financial Services Chairwoman, Mrs. Waters, and Rep. Ben McAdams, for recognizing the importance of research in our capital markets and working with me to address this issue.

Mr. Speaker, I am honored to present this legislation, but I am more honored to acknowledge something that is exceedingly important.

The chairwoman of the committee, the Honorable Maxine Waters, has, under her leadership in this Congress, produced many pieces of bipartisan legislation. This is but a continuation of her legislative record. I want to commend her for her efforts, and I would also like to salute Mr. McHenry and the persons who are across the aisle for their efforts, as well, in producing bipartisan legislation.

I thank Mr. Barr for his assistance and his help. He is the Oversight ranking member, and he and I will be working together on many pieces of legislation.

I am honored today to say that this piece of legislation was born as a result of honorable intentions metamorphosing into unintended consequences, honorable intentions.

When we passed Dodd-Frank in 2010, we sought to add additional protections for whistleblowers above and beyond what was accorded in Sarbanes-Oxley. In so doing, with the best of intentions, we found that this legislation was taken before the Supreme Court of the United States of America, and the Supreme Court concluded--and I don't quarrel with their conclusion, but the Supreme Court concluded that the legislation would apply only if the person who was a whistleblower took the concern to the SEC first.

I don't quarrel with what the Supreme Court ruled. This is why we have this piece of legislation to correct the best of intentions that metamorphosed into unintended consequences.

Let's talk for just a moment about whistleblowers.

It is exceedingly important to do this because I want people to know that whistleblowers are extraordinary people in the sense only of they do extraordinary things. They are really ordinary people, but they do extraordinary things.

These are the people who are willing to put their livelihoods on the line. These are the people who are willing to take that step that many of us would not take because, when you take that step as a whistleblower, you will sometimes stand alone. But they understand that it is better to stand alone than never to stand at all, and in so doing, they are protecting us: consumers, members of the public.

So I commend the whistleblowers of the world who take these extraordinary steps.

But we also want to do more than commend them. We want to protect them. This legislation will protect those who are willing to step forward, those who will see something and say something, something that we encourage people to do.

You can't encourage people to see something and say something and then allow them to do this without the protections that we should properly accord them and that we intended to accord them under Dodd- Frank. So I am honored today to have this piece of legislation that will give whistleblowers the protection that we intended and will also send a message that the companies that they work for can have the

opportunity to take corrective action before the SEC is informed.

Many of these companies want to do the right thing, and if given the opportunity, they will--not all, many. I think we ought to give them an opportunity to do the right thing; and to do so, we would want whistleblowers to report internally before they take this to an external source such as the SEC.

Mr. Speaker, this legislation is bipartisan. I am honored to tell you that, among the persons who are the cosponsors, we have the Honorable Carolyn Maloney; the Honorable Representative Gerald Connolly; the Honorable Gregory Meeks; the Honorable Joyce Beatty, who is here in this room with us currently; and the Honorable Vicente Gonzalez, all of whom support it, along with the Honorable Emanuel Cleaver.

I would also add, it is endorsed by the National Whistleblower Center, endorsed by the North American Securities Administrators Association, endorsed by Public Citizen, endorsed by the Government Accountability Project, endorsed by the Project On Government Oversight, and endorsed by the Securities Industry and Financial Markets Association.

It is another example of how, under the leadership of the Honorable Maxine Waters, we continue to produce bipartisan legislation. I am honored, Mr. Speaker, to have this honorable chairwoman presiding today.

Mr. Speaker, I move to suspend the rules and pass the bill (H.R. 2515) to amend the Securities and Exchange Act of 1934 to amend the definition of whistleblower, as amended.

Mr. Speaker, I yield myself such time as I may consume.

I thank Representative Green, the chairman of the Subcommittee on Oversight and Investigations, for working with the gentleman from Michigan (Mr. Huizenga) to craft this timely piece of legislation to ensure that all whistleblowers reporting suspected securities law violations are protected from retaliation by their employers.

In the Dodd-Frank Act, Congress provided the Securities and Exchange Commission the authority to reward whistleblowers who voluntarily provide the SEC with original information that leads to a successful enforcement action with monetary sanctions exceeding $1 million.

Realizing that these whistleblowers may be deterred by their employers, Congress also required the SEC to issue regulations to protect them from retaliatory efforts, such as firing or demotion; but in 2018, the Supreme Court held that whistleblowers who report alleged misconduct internally but not to the SEC are not protected by the antiretaliation provisions of Dodd-Frank. This is not what Congress intended. Indeed, requiring whistleblowers to race to the SEC in order to be protected discourages them from reporting their suspicions to their superiors.

The U.S. Chamber of Commerce highlighted the importance of internal reporting in its 2010 letter to the SEC, stating: ``The experience of the many companies with robust internal reporting programs, as well as the empirical evidence, demonstrate that all stakeholders benefit when those with knowledge of potential securities law violations report internally, thus enabling management to promptly investigate and take remedial action.''

By clarifying that whistleblowers who only report alleged misconduct to the employers are also protected by the antiretaliation provisions in the Dodd-Frank Act, this bill would encourage employees to communicate potential securities law violations to their employers without fear of being fired before they are able to report to the SEC.

Again, I thank Chairman Green and Mr. Huizenga for pushing this important bill, and I urge my colleagues to join me in supporting it.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield such time as he may consume to the gentleman from Texas (Mr. Green), the chairman of the Subcommittee on Oversight and Investigations and the sponsor of H.R. 2515.

Mr. Speaker, I ask unanimous consent that all Members may have 5 legislative days within which to revise and extend their remarks.

Mr. Speaker, I yield myself the balance of my time.

Mr. Speaker, this is a very important measure that will increase corporate accountability and help those companies committed to ferreting out wrongdoing to take action without government involvement and protects those workers who help them to do so.

I commend the gentleman from Texas and the gentleman from Michigan for working in a bipartisan manner to bring this bill before the House.

Mr. Speaker, I urge my colleagues to join me in supporting this important piece of legislation, and I yield back the balance of my time.

Mr. Speaker, on that I demand the yeas and nays.

Mr. Speaker, I yield myself such time as I may consume.

I rise in support of H.R. 2515, the Whistleblower Protection Reform Act of 2019.

I would like to thank my colleagues, Congressman Green and Congressman Huizenga, for their work on this commonsense, bipartisan legislation.

Mr. Speaker, whistleblowers play a very important role in rooting out bad behavior that harms the market as well as mom-and-pop investors. Additionally, businesses have a self-interest in detecting and eliminating illegal activity as swiftly as possible within their organizations. To that end, clarifying the concept of encouraging employees to report alleged securities fraud activities to their employers without fear of retaliation just makes simple common sense.

Businesses typically strive to comply with the law, and they have incentives to do so from market pressures, but it is also because unlawful activity hurts the company itself and it hurts its investors, driving down the company's value, tarnishing the company's reputation, repelling business partners and customers, and damaging the overall marketplace. That is why, frankly, the vast majority of actors in the private sector do the right thing.

For these reasons, many companies have implemented strong internal reporting measures to detect and mitigate potential wrongdoing before harm spreads. But if internal whistleblowers who report potential securities law violations internally are not protected from retaliation, what good are these internal reporting systems that these companies have voluntarily established?

That notion might seem counterintuitive, but last year, in the Digital Realty Trust case, the Supreme Court held that the whistleblower antiretaliation protections of the Dodd-Frank Act do not extend to internal whistleblowers; only those who report to the SEC are protected from retaliation.

Now, this is not an error in the Supreme Court's judgment; it is simply a faithful interpretation of the flawed drafting of the Dodd- Frank law. This bill solves this problem by amending section 922 of Dodd-Frank to clarify that whistleblowers who report alleged misconduct internally with their employers but not to the SEC are protected by Dodd-Frank's antiretaliation provisions.

By clarifying that Dodd-Frank's antiretaliation protections also apply to internal whistleblowers, this bill addresses the Supreme Court's interpretation and aligns Dodd-Frank's whistleblower protections with other major whistleblower laws.

Again, I want to thank Congressman Green and Congressman Huizenga for this important bipartisan legislation, which I proudly support. I urge all of my colleagues to join me in supporting H.R. 2515.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield myself the balance of my time, and I am prepared to close.

Mr. Speaker, again, I would thank Congressman Green and Congressman Huizenga for their leadership on this extending of whistleblower protections, and I yield back the balance of my time.

General Leave

Mr. Speaker, I move to suspend the rules and pass the bill (H.R. 2919) to require the Securities and Exchange Commission to carry out a study to evaluate the issues affecting the provision of and reliance upon investment research into small issuers.

Mr. Speaker, I ask unanimous consent that all Members may have 5 legislative days in which to revise and extend their remarks on this legislation and to insert extraneous material thereon.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, I thank the ranking member of our Investor Protection, Entrepreneurship, and Capital Markets Subcommittee, Representative Huizenga, and Representative McAdams, for working across the aisle on this bipartisan bill to improve investment research coverage for small issuers.

Investment research helps to raise investor awareness, understanding, and interest about a company, which in turn can promote informed investment and overall trading in a company's securities.

However, reports indicate significant declines in analyst research on small public companies. In fact, it appears that most exchange-listed companies with less than $100 million in market capitalization have no research coverage at all.

To address this concerning trend, H.R. 2919 would direct the SEC to conduct a study on the issues that are affecting the availability of research coverage for small issuers, including emerging growth companies, companies considering an initial public offering, and minority-, women-, and veteran-owned businesses. It also directs the SEC to report back recommendations to improve the quality and availability of investment research for small issuers.

I urge my colleagues to support this bipartisan bill to enable us to identify some of the barriers small businesses face when attempting to get their story out to investors in our public capital markets.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield myself the balance of my time.

Mr. Speaker, I am pleased that Mr. Huizenga and Mr. McAdams worked in a bipartisan manner to bring forth H.R. 2919. Markets work best when there is adequate public information, and the study on additional research provided for in this bill will help ensure that this is the case.

I urge my colleagues to join me in supporting this important legislation, and I yield back the balance of my time.