Week ending April 5, 2017
H.R.1343 – Encouraging Employee Ownership Act of 2017
The bill directs the Securities and Exchange Commission to revise its rules so as to increase the threshold amount for requiring issuers to provide certain disclosures relating to compensatory benefit plans.
“Under current law, if an issuer sells, in the aggregate, more than $5 million of securities in any consecutive 12-month period, the issuer is required to provide additional disclosures to investors, such as risk factors, the plans under which offerings are made, and certain financial statements. H.R. 1343 requires the SEC to increase that threshold from $5 million to $10 million, and index the amount for inflation every five years.”
To that end the bill is about employee ownership of the company (stocks) they work for if the aggregate offering price of securities subject to outstanding offers and the amount sold in the preceding 12 months to no more than $5 million dollars.
The bill raises that threshold to $10 million with the explanatory statement in the bill report that the bill gives private companies more flexibility to reward and, importantly, retain employees with a company’s securities. Current law requires private companies must disclose certain information to some employees and investors who purchase securities issued by the company prior to their sale based on the $5 million amount explained above. The disclosure, seen as burdensome at that amount raises it to $10 million.
The bill does not address if the employee can sell the stock to anyone other than back to the issuing company.
(Full text of H.R. 1343 at congress.gov)
Sponsor: Rep. Hultgren, Randy [R-IL-14] (Introduced 03/02/2017)
Status: Passed House /
VOTES and FLOOR ACTION
On Passage: On passage Passed by the Yeas and Nays: 331 – 87 (Roll no. 216)
Motion to recommit: On motion to recommit with instructions Failed by the Yeas and Nays: 185 – 228 (Roll no. 215)
Text of the motion:
The House proceeded with 10 minutes of debate on the motion to recommit with instructions. The instructions contained in the motion seek to require the bill to be reported back to the House with an amendment to add a section to prohibit any exemption to an issuer if the issuer or affiliate of the issuer has withheld information from Congress relevant to its investigation of any collusion between persons associated with the Russian Government and persons associated with a presidential campaign.
COST AND IMPACT
Cost to the taxpayers: Based on an analysis of information from the SEC, CBO estimates that implementing H.R. 1343 would cost less than $500,000 to issue new rules to adjust the disclosure threshold. Under current law, the SEC is authorized to collect fees sufficient to offset its annual appropriation; therefore, CBO estimates that the net effect on discretionary spending would be negligible, assuming appropriation actions consistent with that authority.
Pay-as-you-go requirements: Enacting H.R. 1343 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.
Regulatory and Other Impact: H.R. 1343 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act and would not affect the budgets of state, local, or tribal governments.
Dynamic Scoring: CBO estimates that enacting H.R. 1343 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.
Tax Complexity: Not applicable to this bill.
Earmark Certification: H.R. 1343 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9 of rule XXI.
Duplication of programs: Pursuant to section 3(c)(5) of rule XIII, the Committee states that no provision of H.R. 1343 establishes or reauthorizes a program of the Federal Government known to be duplicative of another Federal program.
Direct Rule-Making: Pursuant to section 3(i) of H. Res. 5, 115th Cong. (2017), the Committee states that H.R. 1343 contains one directed rulemaking. The rulemaking directs the Securities and Exchange Commission to revise section 230.701(e) of title 17, Code of Federal Regulations to increase its threshold from $5 million to $10 million, and index the amount for inflation every five years.
Advisory Committee Statement: No advisory committees within the meaning of section 5(b) of the Federal Advisory Committee Act were created by this legislation.
Budget Authority: Data not available
Constitutional Authority: Assumed.
H.R. 1343 would amend the Securities and Exchange Commission’s Rule 701 by raising and then indexing for inflation the permissible aggregate sales threshold of securities sold without certain disclosures to employees and other parties as part of their compensation from $5 million to $10 million. We continue to be concerned that this bill fails to protect employee shareholders, encourage sensible employee stock ownership, or promote capital formation.
Currently, private companies that compensate their employees with more than $5 million in company stock in a twelve month period must provide those employees with relatively simple disclosures, including two years of financial statements which do not need to be audited and information about the risks associated with investment in the securities. Such information is essential for employees, just like other investors, to understand the value of their stake in a company.
This information may be even more important for employee-investors since they may be more susceptible to suggestion and coercion, may not have the resources to otherwise know the value of their shares, and may not understand the nature of the risks associated with these private, illiquid securities that are not freely tradable. Indeed, rather than encouraging more employee’s to own their employer’s stock, the bill only encourages individual employees to own more of their employer’s stock, exposing them to concentration risk in their retirement accounts. This is more troubling in the context of the Jumpstart Our Business Startups Act of 2012, which made it easier for privately-held companies to remain private by, for example, exempting employees who receive stock compensation from counting toward the threshold for public company reporting. Therefore, the bill would enable large private companies to encourage overinvestment by employees in stock that they cannot value and may not ever be permitted to sell, except back to the company.
Some proponents of the bill cite the costs of disclosure and fear of confidential information being leaked to competitors. However, to take advantage of the increased threshold under the bill, a company would need to have over $34 million in total assets. Requiring such large companies to provide the minimal disclosures cannot be seen as too burdensome. In addition, non-disclosure agreements and similar confidentiality agreements are already effective mechanisms to prevent unauthorized disclosure.
For all of these reasons, we oppose H.R. 1343.
Michael E. Capuano.
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