[House Report 113-342]
[From the U.S. Government Publishing Office]


113th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     113-342

======================================================================



 
                 SMALL CAP LIQUIDITY REFORM ACT OF 2013

                                _______
                                

February 5, 2014.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3448]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 3448) to amend the Securities Exchange Act of 
1934 to provide for an optional pilot program allowing certain 
emerging growth companies to increase the tick sizes of their 
stocks, having considered the same, report favorably thereon 
with an amendment and recommend that the bill as amended do 
pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Small Cap Liquidity Reform Act of 
2013''.

SEC. 2. LIQUIDITY PILOT PROGRAM FOR SECURITIES OF CERTAIN EMERGING 
                    GROWTH COMPANIES.

  (a) In General.--Section 11A(c)(6) of the Securities Exchange Act of 
1934 (15 U.S.C. 78k-1(c)(6)) is amended to read as follows:
  ``(6) Liquidity Pilot Program for Securities of Certain Emerging 
Growth Companies.--
          ``(A) Quoting increment.--Beginning on the date that is 90 
        days after the date of the enactment of the Small Cap Liquidity 
        Reform Act of 2013, the securities of a covered emerging growth 
        company shall be quoted using--
                  ``(i) a minimum increment of $0.05; or
                  ``(ii) if, not later than 60 days after such date of 
                enactment, the company so elects in the manner 
                described in subparagraph (D)--
                          ``(I) a minimum increment of $0.10; or
                          ``(II) the increment at which such securities 
                        would be quoted without regard to the minimum 
                        increments established under this paragraph.
          ``(B) Trading increment.--In the case of a covered emerging 
        growth company the securities of which are quoted at a minimum 
        increment of $0.05 or $0.10 under this paragraph, the 
        Commission shall determine the increment at which the 
        securities of such company are traded.
          ``(C) Future right to opt out or change minimum increment.--
                  ``(i) In general.--At any time beginning on the date 
                that is 90 days after the date of the enactment of the 
                Small Cap Liquidity Reform Act of 2013, a covered 
                emerging growth company the securities of which are 
                quoted at a minimum increment of $0.05 or $0.10 under 
                this paragraph may elect in the manner described in 
                subparagraph (D)--
                          ``(I) for the securities of such company to 
                        be quoted at the increment at which such 
                        securities would be quoted without regard to 
                        the minimum increments established under this 
                        paragraph; or
                          ``(II) to change the minimum increment at 
                        which the securities of such company are quoted 
                        from $0.05 to $0.10 or from $0.10 to $0.05.
                  ``(ii) When election effective.--An election under 
                this subparagraph shall take effect on the date that is 
                30 days after such election is made.
                  ``(iii) Single election to change minimum 
                increment.--A covered emerging growth company may not 
                make more than one election under clause (i)(II).
          ``(D) Manner of election.--
                  ``(i) In general.--An election is made in the manner 
                described in this subparagraph by informing the 
                Commission of such election.
                  ``(ii) Notification of exchanges and other trading 
                venues.--Upon being informed of an election under 
                clause (i), the Commission shall notify each exchange 
                or other trading venue where the securities of the 
                covered emerging growth company are quoted or traded.
          ``(E) Issuers ceasing to be covered emerging growth 
        companies.--
                  ``(i) In general.--If an issuer the securities of 
                which are quoted at a minimum increment of $0.05 or 
                $0.10 under this paragraph ceases to be a covered 
                emerging growth company, the securities of such issuer 
                shall be quoted at the increment at which such 
                securities would be quoted without regard to the 
                minimum increments established under this paragraph.
                  ``(ii) Exceptions.--The Commission may by regulation, 
                as the Commission considers appropriate, specify any 
                circumstances under which an issuer shall continue to 
                be considered a covered emerging growth company for 
                purposes of this paragraph after the issuer ceases to 
                meet the requirements of subparagraph (L)(i).
          ``(F) Securities trading below $1.--
                  ``(i) Initial price.--
                          ``(I) At effective date.--If the trading 
                        price of the securities of a covered emerging 
                        growth company is below $1 at the close of the 
                        last trading day before the date that is 90 
                        days after the date of the enactment of the 
                        Small Cap Liquidity Reform Act of 2013, the 
                        securities of such company shall be quoted 
                        using the increment at which such securities 
                        would be quoted without regard to the minimum 
                        increments established under this paragraph.
                          ``(II) At ipo.--If a covered emerging growth 
                        company makes an initial public offering after 
                        the day described in subclause (I) and the 
                        first share of the securities of such company 
                        is offered to the public at a price below $1, 
                        the securities of such company shall be quoted 
                        using the increment at which such securities 
                        would be quoted without regard to the minimum 
                        increments established under this paragraph.
                  ``(ii) Average trading price.--If the average trading 
                price of the securities of a covered emerging growth 
                company falls below $1 for any 90-day period beginning 
                on or after the day before the date of the enactment of 
                the Small Cap Liquidity Reform Act of 2013, the 
                securities of such company shall, after the end of such 
                period, be quoted using the increment at which such 
                securities would be quoted without regard to the 
                minimum increments established under this paragraph.
          ``(G) Fraud or manipulation.--If the Commission determines 
        that a covered emerging growth company has violated any 
        provision of the securities laws prohibiting fraudulent, 
        manipulative, or deceptive acts or practices, the securities of 
        such company shall, after the date of the determination, be 
        quoted using the increment at which such securities would be 
        quoted without regard to the minimum increments established 
        under this paragraph.
          ``(H) Ineligibility for increased minimum increment 
        permanent.--The securities of an issuer may not be quoted at a 
        minimum increment of $0.05 or $0.10 under this paragraph at any 
        time after--
                  ``(i) such issuer makes an election under 
                subparagraph (A)(ii)(II);
                  ``(ii) such issuer makes an election under 
                subparagraph (C)(i)(I), except during the period before 
                such election takes effect; or
                  ``(iii) the securities of such issuer are required by 
                this paragraph to be quoted using the increment at 
                which such securities would be quoted without regard to 
                the minimum increments established under this 
                paragraph.
          ``(I) Additional reports and disclosures.--The Commission 
        shall require a covered emerging growth company the securities 
        of which are quoted at a minimum increment of $0.05 or $0.10 
        under this paragraph to make such reports and disclosures as 
        the Commission considers necessary or appropriate in the public 
        interest or for the protection of investors.
          ``(J) Limitation of liability.--An issuer (or any officer, 
        director, manager, or other agent of such issuer) shall not be 
        liable to any person (other than such issuer) under any law or 
        regulation of the United States, any constitution, law, or 
        regulation of any State or political subdivision thereof, or 
        any contract or other legally enforceable agreement (including 
        any arbitration agreement) for any losses caused solely by the 
        quoting of the securities of such issuer at a minimum increment 
        of $0.05 or $0.10, by the trading of such securities at the 
        increment determined by the Commission under subparagraph (B), 
        or by both such quoting and trading, as provided in this 
        paragraph.
          ``(K) Report to congress.--Not later than 6 months after the 
        date of the enactment of the Small Cap Liquidity Reform Act of 
        2013, and every 6 months thereafter, the Commission, in 
        coordination with each exchange on which the securities of 
        covered emerging growth companies are quoted or traded, shall 
        submit to Congress a report on the quoting and trading of 
        securities in increments permitted by this paragraph and the 
        extent to which such quoting and trading are increasing 
        liquidity and active trading by incentivizing capital 
        commitment, research coverage, and brokerage support, together 
        with any legislative recommendations the Commission may have.
          ``(L) Definitions.--In this paragraph:
                  ``(i) Covered emerging growth company.--The term 
                `covered emerging growth company' means an emerging 
                growth company, as defined in the first paragraph (80) 
                of section 3(a), except that--
                          ``(I) such paragraph shall be applied by 
                        substituting `$750,000,000' for 
                        `$1,000,000,000' each place it appears; and
                          ``(II) subparagraphs (B), (C), and (D) of 
                        such paragraph do not apply.
                  ``(ii) Security.--The term `security' means an equity 
                security.
          ``(M) Savings provision.--Notwithstanding any other provision 
        of this paragraph, the Commission may--
                  ``(i) make such adjustments to the pilot program 
                specified in this paragraph as the Commission considers 
                necessary or appropriate to ensure that such program 
                can provide statistically meaningful or reliable 
                results, including adjustments to eliminate selection 
                bias among participants, expand the number of 
                participants eligible to participate in such program, 
                and change the duration of such program for one or more 
                participants; and
                  ``(ii) conduct any other study or pilot program, in 
                conjunction with or separate from the pilot program 
                specified in this paragraph (as such program may be 
                adjusted pursuant to clause (i)), to evaluate quoting 
                or trading in various minimum increments.''.
  (b) Sunset.--Effective on the date that is 5 years after the date of 
the enactment of this Act, section 11A(c)(6) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78k-1(c)(6)) is repealed.

                          Purpose and Summary

    In 2000, the Securities and Exchange Commission (SEC) 
ordered U.S. securities exchanges to change their quotations in 
equity securities and options from fractions to decimals.\1\ 
This process, known as ``decimalization,'' was completed in 
April 2001.\2\ In 2005, the SEC adopted Rule 612 of Regulation 
National Market System (Reg. NMS)--also known as the Sub-Penny 
Rule--to establish a minimum price variation, or ``tick size,'' 
of one penny ($.01) for all stocks listed on U.S. securities 
exchanges.\3\
---------------------------------------------------------------------------
    \1\See Securities and Exchange Commission, Regulation NMS, Rel. No. 
34-51808 (June 9, 2005).
    \2\See id.
    \3\See Securities and Exchange Commission, Report to Congress on 
Decimalization (July 2012).
---------------------------------------------------------------------------
    Recently, some equity market participants have argued that 
the move to decimal pricing and penny tick sizes has 
significantly reduced liquidity in publicly-traded small-cap 
stocks, thereby hindering the ability of these companies to 
grow and create jobs. H.R. 3448, the Small Cap Liquidity Reform 
Act of 2013, would amend Section 11A(c)(6) of the Securities 
Exchange Act of 1934 (Exchange Act) to provide for a pilot 
program administered by the SEC allowing certain Emerging 
Growth Companies (EGCs), a category of issuers recently 
established in Title I of the Jumpstart Our Business Startups 
(JOBS) Act (P.L. 112-106), with a stock price above $1.00 to 
increase the tick size at which their stocks would be quoted 
from $.01 to $.05, or, if the EGC's board of directors so 
elects, $.10. Under H.R. 3448, the SEC would determine in its 
discretion the minimum tick size at which a participating EGC's 
stock would be traded.

                  Background and Need for Legislation

    As noted above, some equity market participants have argued 
that decimalization and penny tick sizes have significantly 
harmed liquidity in publicly-traded small-cap stocks. For 
example, according to Jeff Solomon, Chief Executive Officer of 
Cowen and Company:

          One of the principal reasons for the lack of 
        liquidity in small cap stocks can be directly 
        attributed to the advent of decimalization, meaning 
        trading in penny increments. As a direct result of 
        reduced trading spreads, professional market makers and 
        specialists, whose job was to provide liquidity for 
        their clientele, were forced to overhaul, sell or 
        dissolve their businesses to contend with much lower 
        revenues. This, in turn, gave rise to two market forces 
        affecting market structure--electronic trading and 
        reduced research coverage of small cap stocks.

    In written testimony before the Subcommittee on Capital 
Markets and Government Sponsored Enterprises, Tom Quaadman, 
Vice President of the Center for Capital Markets 
Competitiveness at the U.S. Chamber of Commerce, expressed a 
similar view, stating that ``trading in pennies has impacted 
the available liquidity in some thinly traded stocks, including 
many small-cap stocks.''
    Market participants have claimed that the reduction in 
liquidity caused by the move to penny tick sizes for small-cap 
stocks has made trading these stocks more difficult and 
disincentivized other small companies from accessing the 
capital markets through initial public offerings (IPOs). This, 
in turn, has hindered small business capital formation and job 
creation. In written testimony before the Subcommittee on 
Capital Markets and Government Sponsored Enterprises, David 
Wield, Chairman and CEO of IssuWorks Holdings LLC, stated:

          Inadequate tick sizes (the smallest increment by 
        which a stock can be bought or sold) have eroded the 
        economic infrastructure required to support small cap 
        stocks. Inadequate tick sizes leave insufficient 
        revenue to pay for needed visibility (research and 
        sales) and liquidity (capital commitment) that support 
        investment in small capitalization stocks once they are 
        public. Fewer IPOs means fewer U.S. jobs.

    As a result, market participants have argued that an SEC-
administered pilot program to widen tick sizes for certain EGCs 
will enhance liquidity in small cap stocks, leading to 
improvements in small business capital formation and job 
creation. In his written testimony before the Subcommittee, Mr. 
Wield stated that H.R. 3448 ``will lead to more liquidity . . . 
which will bring more institutional investment . . . which will 
raise stock prices in smaller stocks . . . leading to more IPOs 
and more job creation that will grow the economy.'' The 
Securities and Financial Markets Association (SIFMA) also 
offered its support for H.R. 3448 before the Subcommittee, 
stating:

          [SIFMA] generally believe[s] that a pilot program 
        which widens quote increments for small and mid-cap 
        securities could increase trading liquidity in those 
        securities. Increased liquidity in the small and mid-
        cap market will create a more fertile environment for 
        small and emerging growth companies to tap the public 
        markets, with broader market participation in the 
        sector and the potential for increased research 
        coverage to better inform and educate investors on both 
        the opportunities and risks. We know that these 
        companies can be an engine for economic growth, and the 
        sponsors of these proposals are right to consider 
        additional ways to ensure entrepreneurs have access to 
        the capital they need.

Mr. Quaadman of the U.S. Chamber of Commerce added that H.R. 
3448 will ``ensure that we have a market structure that 
supports capital formation for all public companies. This 
legislation would permit scientific evidence-based rulemaking, 
which, in our opinion, is the best kind.''

                                Hearings

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing on legislative text that later became H.R. 3448 on 
October 24, 2013.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
November 14, 2013, and ordered H.R. 3448 to be reported 
favorably to the House without amendment by a recorded vote of 
57 yeas to 0 nays (recorded vote no. FC-39), a quorum being 
present.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto.
    1. A motion by Chairman Hensarling to report the bill (H.R. 
3448) with an amendment to the House with a favorable 
recommendation was agreed to by a record vote of 57 yeas to 0 
nays (recorded vote no. FC-39).

                                              RECORD VOTE NO. FC-39
----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Hensarling.................        X   ........  .........  Ms. Waters.......        X   ........  .........
Mr. Gary G. Miller (CA)........        X   ........  .........  Mrs. Maloney (NY)        X   ........  .........
Mr. Bachus.....................        X   ........  .........  Ms. Velazquez....        X   ........  .........
Mr. King (NY)..................        X   ........  .........  Mr. Watt.........        X   ........  .........
Mr. Royce......................        X   ........  .........  Mr. Sherman......        X   ........  .........
Mr. Lucas......................        X   ........  .........  Mr. Meeks........        X   ........  .........
Mrs. Capito....................        X   ........  .........  Mr. Capuano......        X   ........  .........
Mr. Garrett....................        X   ........  .........  Mr. Hinojosa.....        X   ........  .........
Mr. Neugebauer.................        X   ........  .........  Mr. Clay.........        X   ........  .........
Mr. McHenry....................        X   ........  .........  Mrs. McCarthy      ........  ........  .........
                                                                 (NY).
Mr. Campbell...................  ........  ........  .........  Mr. Lynch........  ........  ........  .........
Mrs. Bachmann..................  ........  ........  .........  Mr. David Scott          X   ........  .........
                                                                 (GA).
Mr. McCarthy (CA)..............        X   ........  .........  Mr. Al Green (TX)        X   ........  .........
Mr. Pearce.....................        X   ........  .........  Mr. Cleaver......        X   ........  .........
Mr. Posey......................        X   ........  .........  Ms. Moore........        X   ........  .........
Mr. Fitzpatrick................        X   ........  .........  Mr. Ellison......        X   ........  .........
Mr. Westmoreland...............        X   ........  .........  Mr. Perlmutter...        X   ........  .........
Mr. Luetkemeyer................        X   ........  .........  Mr. Himes........        X   ........  .........
Mr. Huizenga (MI)..............        X   ........  .........  Mr. Peters (MI)..        X   ........  .........
Mr. Duffy......................        X   ........  .........  Mr. Carney.......        X   ........  .........
Mr. Hurt.......................        X   ........  .........  Ms. Sewell (AL)..        X   ........  .........
Mr. Grimm......................        X   ........  .........  Mr. Foster.......        X   ........  .........
Mr. Stivers....................        X   ........  .........  Mr. Kildee.......        X   ........  .........
Mr. Fincher....................        X   ........  .........  Mr. Murphy (FL)..        X   ........  .........
Mr. Stutzman...................        X   ........  .........  Mr. Delaney......        X   ........  .........
Mr. Mulvaney...................        X   ........  .........  Ms. Sinema.......        X   ........  .........
Mr. Hultgren...................        X   ........  .........  Mrs. Beatty......        X   ........  .........
Mr. Ross.......................        X   ........  .........  Mr. Heck (WA)....        X   ........  .........
Mr. Pittenger..................        X   ........  .........
Mrs. Wagner....................        X   ........  .........
Mr. Barr.......................        X   ........  .........
Mr. Cotton.....................        X   ........  .........
Mr. Rothfus....................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 3448 
amends Section 11A(c)(6) of the Exchange Act to provide for a 
pilot program administered by the SEC allowing certain EGCs 
with a stock price above $1.00 to increase the tick size at 
which their stocks would be quoted from $.01 to $.05, or, if 
the EGC's board of directors so elects, $.10.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, January 14, 2014.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3448, the Small 
Cap Liquidity Reform Act of 2013.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 3448--Small Cap Liquidity Reform Act of 2013

    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 that 
would change the minimum increment that the price of a stock 
could change (the tick size) for certain securities. Pay-as-
you-go 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. exchanges. 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 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 
(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.
    The CBO staff contacts for this estimate are Susan Willie 
(for federal costs), Melissa Merrell (for the state and local 
impact), and Paige Piper/Bach (for the impact on the private 
sector). The estimate was approved by Theresa Gullo, Deputy 
Assistant Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 3448 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    Duplication of Federal Programs

    Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013), 
the Committee states that no provision of H.R. 3448 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013), 
the Committee states that H.R. 3448 contains no directed 
rulemaking.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This Section cites H.R. 3448 as the ``Small Cap Liquidity 
Reform Act of 2013.''

Section 2. Liquidity Pilot Program for securities of certain emerging 
        growth companies

    This section: creates a pilot program under which the 
securities of covered EGCs may be quoted using small 
increments; permits covered EGCs to opt out of the pilot 
program; gives the SEC attendant authorities to carry out the 
program and detect fraud or manipulation; requires semiannual 
reports to Congress on the effect of the pilot program on 
liquidity; sets out definitions for the Act; sets forth certain 
savings provisions; and sunsets the pilot program after five 
years.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                    SECURITIES EXCHANGE ACT OF 1934


TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *



     national market system for securities; securities information 
                               processors

  Sec. 11A. (a) * * *

           *       *       *       *       *       *       *

  (c)(1) * * *

           *       *       *       *       *       *       *

  [(6) Tick size.--
          [(A) Study and report.--The Commission shall conduct 
        a study examining the transition to trading and quoting 
        securities in one penny increments, also known as 
        decimalization. The study shall examine the impact that 
        decimalization has had on the number of initial public 
        offerings since its implementation relative to the 
        period before its implementation. The study shall also 
        examine the impact that this change has had on 
        liquidity for small and middle capitalization company 
        securities and whether there is sufficient economic 
        incentive to support trading operations in these 
        securities in penny increments. Not later than 90 days 
        after the date of enactment of this paragraph, the 
        Commission shall submit to Congress a report on the 
        findings of the study.
          [(B) Designation.--If the Commission determines that 
        the securities of emerging growth companies should be 
        quoted and traded using a minimum increment of greater 
        than $0.01, the Commission may, by rule not later than 
        180 days after the date of enactment of this paragraph, 
        designate a minimum increment for the securities of 
        emerging growth companies that is greater than $0.01 
        but less than $0.10 for use in all quoting and trading 
        of securities in any exchange or other execution 
        venue.]
  (6) Liquidity Pilot Program for Securities of Certain 
Emerging Growth Companies.--
          (A) Quoting increment.--Beginning on the date that is 
        90 days after the date of the enactment of the Small 
        Cap Liquidity Reform Act of 2013, the securities of a 
        covered emerging growth company shall be quoted using--
                  (i) a minimum increment of $0.05; or
                  (ii) if, not later than 60 days after such 
                date of enactment, the company so elects in the 
                manner described in subparagraph (D)--
                          (I) a minimum increment of $0.10; or
                          (II) the increment at which such 
                        securities would be quoted without 
                        regard to the minimum increments 
                        established under this paragraph.
          (B) Trading increment.--In the case of a covered 
        emerging growth company the securities of which are 
        quoted at a minimum increment of $0.05 or $0.10 under 
        this paragraph, the Commission shall determine the 
        increment at which the securities of such company are 
        traded.
          (C) Future right to opt out or change minimum 
        increment.--
                  (i) In general.--At any time beginning on the 
                date that is 90 days after the date of the 
                enactment of the Small Cap Liquidity Reform Act 
                of 2013, a covered emerging growth company the 
                securities of which are quoted at a minimum 
                increment of $0.05 or $0.10 under this 
                paragraph may elect in the manner described in 
                subparagraph (D)--
                          (I) for the securities of such 
                        company to be quoted at the increment 
                        at which such securities would be 
                        quoted without regard to the minimum 
                        increments established under this 
                        paragraph; or
                          (II) to change the minimum increment 
                        at which the securities of such company 
                        are quoted from $0.05 to $0.10 or from 
                        $0.10 to $0.05.
                  (ii) When election effective.--An election 
                under this subparagraph shall take effect on 
                the date that is 30 days after such election is 
                made.
                  (iii) Single election to change minimum 
                increment.--A covered emerging growth company 
                may not make more than one election under 
                clause (i)(II).
          (D) Manner of election.--
                  (i) In general.--An election is made in the 
                manner described in this subparagraph by 
                informing the Commission of such election.
                  (ii) Notification of exchanges and other 
                trading venues.--Upon being informed of an 
                election under clause (i), the Commission shall 
                notify each exchange or other trading venue 
                where the securities of the covered emerging 
                growth company are quoted or traded.
          (E) Issuers ceasing to be covered emerging growth 
        companies.--
                  (i) In general.--If an issuer the securities 
                of which are quoted at a minimum increment of 
                $0.05 or $0.10 under this paragraph ceases to 
                be a covered emerging growth company, the 
                securities of such issuer shall be quoted at 
                the increment at which such securities would be 
                quoted without regard to the minimum increments 
                established under this paragraph.
                  (ii) Exceptions.--The Commission may by 
                regulation, as the Commission considers 
                appropriate, specify any circumstances under 
                which an issuer shall continue to be considered 
                a covered emerging growth company for purposes 
                of this paragraph after the issuer ceases to 
                meet the requirements of subparagraph (L)(i).
          (F) Securities trading below $1.--
                  (i) Initial price.--
                          (I) At effective date.--If the 
                        trading price of the securities of a 
                        covered emerging growth company is 
                        below $1 at the close of the last 
                        trading day before the date that is 90 
                        days after the date of the enactment of 
                        the Small Cap Liquidity Reform Act of 
                        2013, the securities of such company 
                        shall be quoted using the increment at 
                        which such securities would be quoted 
                        without regard to the minimum 
                        increments established under this 
                        paragraph.
                          (II) At ipo.--If a covered emerging 
                        growth company makes an initial public 
                        offering after the day described in 
                        subclause (I) and the first share of 
                        the securities of such company is 
                        offered to the public at a price below 
                        $1, the securities of such company 
                        shall be quoted using the increment at 
                        which such securities would be quoted 
                        without regard to the minimum 
                        increments established under this 
                        paragraph.
                  (ii) Average trading price.--If the average 
                trading price of the securities of a covered 
                emerging growth company falls below $1 for any 
                90-day period beginning on or after the day 
                before the date of the enactment of the Small 
                Cap Liquidity Reform Act of 2013, the 
                securities of such company shall, after the end 
                of such period, be quoted using the increment 
                at which such securities would be quoted 
                without regard to the minimum increments 
                established under this paragraph.
          (G) Fraud or manipulation.--If the Commission 
        determines that a covered emerging growth company has 
        violated any provision of the securities laws 
        prohibiting fraudulent, manipulative, or deceptive acts 
        or practices, the securities of such company shall, 
        after the date of the determination, be quoted using 
        the increment at which such securities would be quoted 
        without regard to the minimum increments established 
        under this paragraph.
          (H) Ineligibility for increased minimum increment 
        permanent.--The securities of an issuer may not be 
        quoted at a minimum increment of $0.05 or $0.10 under 
        this paragraph at any time after--
                  (i) such issuer makes an election under 
                subparagraph (A)(ii)(II);
                  (ii) such issuer makes an election under 
                subparagraph (C)(i)(I), except during the 
                period before such election takes effect; or
                  (iii) the securities of such issuer are 
                required by this paragraph to be quoted using 
                the increment at which such securities would be 
                quoted without regard to the minimum increments 
                established under this paragraph.
          (I) Additional reports and disclosures.--The 
        Commission shall require a covered emerging growth 
        company the securities of which are quoted at a minimum 
        increment of $0.05 or $0.10 under this paragraph to 
        make such reports and disclosures as the Commission 
        considers necessary or appropriate in the public 
        interest or for the protection of investors.
          (J) Limitation of liability.--An issuer (or any 
        officer, director, manager, or other agent of such 
        issuer) shall not be liable to any person (other than 
        such issuer) under any law or regulation of the United 
        States, any constitution, law, or regulation of any 
        State or political subdivision thereof, or any contract 
        or other legally enforceable agreement (including any 
        arbitration agreement) for any losses caused solely by 
        the quoting of the securities of such issuer at a 
        minimum increment of $0.05 or $0.10, by the trading of 
        such securities at the increment determined by the 
        Commission under subparagraph (B), or by both such 
        quoting and trading, as provided in this paragraph.
          (K) Report to congress.--Not later than 6 months 
        after the date of the enactment of the Small Cap 
        Liquidity Reform Act of 2013, and every 6 months 
        thereafter, the Commission, in coordination with each 
        exchange on which the securities of covered emerging 
        growth companies are quoted or traded, shall submit to 
        Congress a report on the quoting and trading of 
        securities in increments permitted by this paragraph 
        and the extent to which such quoting and trading are 
        increasing liquidity and active trading by 
        incentivizing capital commitment, research coverage, 
        and brokerage support, together with any legislative 
        recommendations the Commission may have.
          (L) Definitions.--In this paragraph:
                  (i) Covered emerging growth company.--The 
                term ``covered emerging growth company'' means 
                an emerging growth company, as defined in the 
                first paragraph (80) of section 3(a), except 
                that--
                          (I) such paragraph shall be applied 
                        by substituting ``$750,000,000'' for 
                        ``$1,000,000,000'' each place it 
                        appears; and
                          (II) subparagraphs (B), (C), and (D) 
                        of such paragraph do not apply.
                  (ii) Security.--The term ``security'' means 
                an equity security.
          (M) Savings provision.--Notwithstanding any other 
        provision of this paragraph, the Commission may--
                  (i) make such adjustments to the pilot 
                program specified in this paragraph as the 
                Commission considers necessary or appropriate 
                to ensure that such program can provide 
                statistically meaningful or reliable results, 
                including adjustments to eliminate selection 
                bias among participants, expand the number of 
                participants eligible to participate in such 
                program, and change the duration of such 
                program for one or more participants; and
                  (ii) conduct any other study or pilot 
                program, in conjunction with or separate from 
                the pilot program specified in this paragraph 
                (as such program may be adjusted pursuant to 
                clause (i)), to evaluate quoting or trading in 
                various minimum increments.
  [Effective on the date that is five years after the date of 
enactment of H.R. 3448, paragragh (6), as amended by section 2 
of such bill, is repealed.]
  [(6) Liquidity Pilot Program for Securities of Certain 
Emerging Growth Companies.--
          [(A) Quoting increment.--Beginning on the date that 
        is 90 days after the date of the enactment of the Small 
        Cap Liquidity Reform Act of 2013, the securities of a 
        covered emerging growth company shall be quoted using--
                  [(i) a minimum increment of $0.05; or
                  [(ii) if, not later than 60 days after such 
                date of enactment, the company so elects in the 
                manner described in subparagraph (D)--
                          [(I) a minimum increment of $0.10; or
                          [(II) the increment at which such 
                        securities would be quoted without 
                        regard to the minimum increments 
                        established under this paragraph.
          [(B) Trading increment.--In the case of a covered 
        emerging growth company the securities of which are 
        quoted at a minimum increment of $0.05 or $0.10 under 
        this paragraph, the Commission shall determine the 
        increment at which the securities of such company are 
        traded.
          [(C) Future right to opt out or change minimum 
        increment.--
                  [(i) In general.--At any time beginning on 
                the date that is 90 days after the date of the 
                enactment of the Small Cap Liquidity Reform Act 
                of 2013, a covered emerging growth company the 
                securities of which are quoted at a minimum 
                increment of $0.05 or $0.10 under this 
                paragraph may elect in the manner described in 
                subparagraph (D)--
                          [(I) for the securities of such 
                        company to be quoted at the increment 
                        at which such securities would be 
                        quoted without regard to the minimum 
                        increments established under this 
                        paragraph; or
                          [(II) to change the minimum increment 
                        at which the securities of such company 
                        are quoted from $0.05 to $0.10 or from 
                        $0.10 to $0.05.
                  [(ii) When election effective.--An election 
                under this subparagraph shall take effect on 
                the date that is 30 days after such election is 
                made.
                  [(iii) Single election to change minimum 
                increment.--A covered emerging growth company 
                may not make more than one election under 
                clause (i)(II).
          [(D) Manner of election.--
                  [(i) In general.--An election is made in the 
                manner described in this subparagraph by 
                informing the Commission of such election.
                  [(ii) Notification of exchanges and other 
                trading venues.--Upon being informed of an 
                election under clause (i), the Commission shall 
                notify each exchange or other trading venue 
                where the securities of the covered emerging 
                growth company are quoted or traded.
          [(E) Issuers ceasing to be covered emerging growth 
        companies.--
                  [(i) In general.--If an issuer the securities 
                of which are quoted at a minimum increment of 
                $0.05 or $0.10 under this paragraph ceases to 
                be a covered emerging growth company, the 
                securities of such issuer shall be quoted at 
                the increment at which such securities would be 
                quoted without regard to the minimum increments 
                established under this paragraph.
                  [(ii) Exceptions.--The Commission may by 
                regulation, as the Commission considers 
                appropriate, specify any circumstances under 
                which an issuer shall continue to be considered 
                a covered emerging growth company for purposes 
                of this paragraph after the issuer ceases to 
                meet the requirements of subparagraph (L)(i).
          [(F) Securities trading below $1.--
                  [(i) Initial price.--
                          [(I) At effective date.--If the 
                        trading price of the securities of a 
                        covered emerging growth company is 
                        below $1 at the close of the last 
                        trading day before the date that is 90 
                        days after the date of the enactment of 
                        the Small Cap Liquidity Reform Act of 
                        2013, the securities of such company 
                        shall be quoted using the increment at 
                        which such securities would be quoted 
                        without regard to the minimum 
                        increments established under this 
                        paragraph.
                          [(II) At ipo.--If a covered emerging 
                        growth company makes an initial public 
                        offering after the day described in 
                        subclause (I) and the first share of 
                        the securities of such company is 
                        offered to the public at a price below 
                        $1, the securities of such company 
                        shall be quoted using the increment at 
                        which such securities would be quoted 
                        without regard to the minimum 
                        increments established under this 
                        paragraph.
                  [(ii) Average trading price.--If the average 
                trading price of the securities of a covered 
                emerging growth company falls below $1 for any 
                90-day period beginning on or after the day 
                before the date of the enactment of the Small 
                Cap Liquidity Reform Act of 2013, the 
                securities of such company shall, after the end 
                of such period, be quoted using the increment 
                at which such securities would be quoted 
                without regard to the minimum increments 
                established under this paragraph.
          [(G) Fraud or manipulation.--If the Commission 
        determines that a covered emerging growth company has 
        violated any provision of the securities laws 
        prohibiting fraudulent, manipulative, or deceptive acts 
        or practices, the securities of such company shall, 
        after the date of the determination, be quoted using 
        the increment at which such securities would be quoted 
        without regard to the minimum increments established 
        under this paragraph.
          [(H) Ineligibility for increased minimum increment 
        permanent.--The securities of an issuer may not be 
        quoted at a minimum increment of $0.05 or $0.10 under 
        this paragraph at any time after--
                  [(i) such issuer makes an election under 
                subparagraph (A)(ii)(II);
                  [(ii) such issuer makes an election under 
                subparagraph (C)(i)(I), except during the 
                period before such election takes effect; or
                  [(iii) the securities of such issuer are 
                required by this paragraph to be quoted using 
                the increment at which such securities would be 
                quoted without regard to the minimum increments 
                established under this paragraph.
          [(I) Additional reports and disclosures.--The 
        Commission shall require a covered emerging growth 
        company the securities of which are quoted at a minimum 
        increment of $0.05 or $0.10 under this paragraph to 
        make such reports and disclosures as the Commission 
        considers necessary or appropriate in the public 
        interest or for the protection of investors.
          [(J) Limitation of liability.--An issuer (or any 
        officer, director, manager, or other agent of such 
        issuer) shall not be liable to any person (other than 
        such issuer) under any law or regulation of the United 
        States, any constitution, law, or regulation of any 
        State or political subdivision thereof, or any contract 
        or other legally enforceable agreement (including any 
        arbitration agreement) for any losses caused solely by 
        the quoting of the securities of such issuer at a 
        minimum increment of $0.05 or $0.10, by the trading of 
        such securities at the increment determined by the 
        Commission under subparagraph (B), or by both such 
        quoting and trading, as provided in this paragraph.
          [(K) Report to congress.--Not later than 6 months 
        after the date of the enactment of the Small Cap 
        Liquidity Reform Act of 2013, and every 6 months 
        thereafter, the Commission, in coordination with each 
        exchange on which the securities of covered emerging 
        growth companies are quoted or traded, shall submit to 
        Congress a report on the quoting and trading of 
        securities in increments permitted by this paragraph 
        and the extent to which such quoting and trading are 
        increasing liquidity and active trading by 
        incentivizing capital commitment, research coverage, 
        and brokerage support, together with any legislative 
        recommendations the Commission may have.
          [(L) Definitions.--In this paragraph:
                  [(i) Covered emerging growth company.--The 
                term ``covered emerging growth company'' means 
                an emerging growth company, as defined in the 
                first paragraph (80) of section 3(a), except 
                that--
                          [(I) such paragraph shall be applied 
                        by substituting ``$750,000,000'' for 
                        ``$1,000,000,000'' each place it 
                        appears; and
                          [(II) subparagraphs (B), (C), and (D) 
                        of such paragraph do not apply.
                  [(ii) Security.--The term ``security'' means 
                an equity security.
          [(M) Savings provision.--Notwithstanding any other 
        provision of this paragraph, the Commission may--
                  [(i) make such adjustments to the pilot 
                program specified in this paragraph as the 
                Commission considers necessary or appropriate 
                to ensure that such program can provide 
                statistically meaningful or reliable results, 
                including adjustments to eliminate selection 
                bias among participants, expand the number of 
                participants eligible to participate in such 
                program, and change the duration of such 
                program for one or more participants; and
                  [(ii) conduct any other study or pilot 
                program, in conjunction with or separate from 
                the pilot program specified in this paragraph 
                (as such program may be adjusted pursuant to 
                clause (i)), to evaluate quoting or trading in 
                various minimum increments.]

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