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From Securities Regulation Daily, June 08, 2017

House passes CHOICE Act with closed-end fund amendment

By Mark S. Nelson, J.D.

The House passed the GOP-led Financial CHOICE Act following a day-long session that included votes on several amendments to the version of the bill that had been reported out of the Financial Services Committee. For securities practitioners, an amendment offered by Rep. Trey Hollingsworth (R-Ind) would extend well-known seasoned issuer status to eligible closed-end funds. The bill passed by a vote of 233-186 and now moves to the Senate where it likely will face strong opposition by Democrats.

The CHOICE Act, if enacted as drafted, would repeal many Dodd-Frank Act provisions, including those requiring conflict minerals disclosures. The bill also would impose significant new curbs on financial regulators’ ability to adopt new regulations, significantly revise bank capital requirements, limit the Financial Stability Oversight Council’s designation powers, and change the structure of the Consumer Financial Protection Bureau.

Closed-end companies amendment. The Hollingsworth amendment, which the House approved by a vote of 231-180, directs the Commission to revise numerous rules to either remove current textual exclusions of registered closed-end companies, or to add text including these entities, in order to allow them to become WKSIs. The rule revisions would affect Form N-2 and the following:

  • Securities Act Rules 134, 138, 139, 163, 163A, 164, 168, 169, 172, 173, 405, 415, 418, 424(b), 433, 497;
  • Exchange Act Rule 14a-101; and
  • Regulation FD: Rule 103.

Securities Act Rule 405 establishes the requirements for a company to claim the coveted WKSI status; Investment Company Act Section 5(a)(2) defines "closed-end company" simply as a management company other than an open-end company. The Hollingsworth amendment would give the Commission one year to make the required revisions. The provision also would require that it be interpreted in a manner that does not limit closed-end companies’ distribution of sales material under Securities Act Rule 482.

CHOICE Act passage. The CHOICE Act, sponsored by Financial Services Committee Chairman Jeb Hensarling (R-Tex), would be the most significant revision to U.S. financial services laws since enactment of the Dodd-Frank Act. The bill’s Republican backers in the House argued that Dodd-Frank failed to eliminate the possibility of government bailouts of failed financial firms and that Dodd-Frank regulations constrain the U.S. economy. Democrats in the House argued that the CHOICE Act would gut key provisions of Dodd-Frank and harm consumers.

Chairman Hensarling reiterated what he has said are the benefits of the bill in a press release shortly after its passage. "Fortunately there is a better, smarter way. It’s called the Financial CHOICE Act. It stands for economic growth for all, but bank bailouts for none. We will end bank bailouts once and for all. We will replace bailouts with bankruptcy. We will replace economic stagnation with a growing, healthy economy."

Ranking Member Maxine Waters (D-Cal) summarized opposition to the bill: "This bill is a vehicle for Donald Trump's agenda to deregulate and help out Wall Street. It destroys nearly all of the important policies we put in place in the Dodd-Frank Wall Street Reform and Consumer Protection Act to prevent another financial crisis and protect consumers. This bill would create vast harm, and lead us right back to the bad old days."

The CHOICE Act contains extensive provisions for securities firms and banks. A Wolters Kluwer Legal & Regulatory U.S. whitepaper examined the CHOICE Act and other events that may shape U.S. financial regulations.

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