Legislative Proposals to Improve Small Businesses’ and Communities’ Access to Capital

Statement of Paul Schott Stevens
President and CEO
Investment Company Institute

US House of Representatives Committee on Financial Services
Subcommittee on Capital Markets, Securities and Investment

November 3, 2017
Washington, DC

As prepared for delivery.

Thank you, Chairman Huizenga, Ranking Member Maloney, and members of the Subcommittee, for the opportunity to testify on proposals to improve access to capital for small businesses and communities.

ICI is the leading association representing regulated funds globally. ICI’s member funds are the vehicles through which more than 100 million Americans pursue important financial goals, including saving for retirement, college, or a first home.

Registered funds also play a vital role in the US economy. They channel capital from fund investors to the markets and to users of capital—businesses and communities that need funding to build infrastructure, create new technologies, and hire employees. Funds help fuel innovation, growth, and job creation.

One measure that can enhance this process is Mr. Hollingsworth’s bill, the “Expanding Investment Opportunities Act.” ICI fully supports the discussion draft, because we feel that its provisions to modernize offering rules for closed-end funds will provide significant benefits to these funds, their shareholders, and the enterprises they can help finance.

Like other registered funds, closed-end funds are comprehensively regulated under the federal securities laws and Securities and Exchange Commission [SEC] regulations. They differ from mutual funds—also known as “open-end funds”—because closed-end funds have flexibility to invest in a broader array of assets, such as stocks and bonds issued by small private companies.

For investors, closed-end funds provide enhanced income and cash flow; increased after-tax efficiency; and broader diversification. We estimate that more than 3 million investors held $271 billion in assets in 533 closed-end funds in June 2017.

Despite their numerous benefits, the number of closed-end funds has declined sharply—by more than 19 percent—over the past decade. In 2016, only eight new closed-end funds issued shares—a decline of 81 percent from 2007. Clearly this valuable and well-regulated investment vehicle has untapped potential to help fund our economy.

Mr. Hollingsworth’s bill would help reverse these trends. It would reduce the burdens of certain SEC registration and communications requirements that impose heavy costs on funds and their investors without commensurate investor protection benefits. The resulting cost savings would be passed on to fund shareholders, making these funds more attractive.

While the discussion draft’s provisions are quite technical, they follow well-established rules governing securities issued by operating companies. If closed-end funds could avail themselves of these rules, they would be subject to all the same conditions as operating companies—plus the extensive investor protections of the Investment Company Act.

When former SEC Chair Mary Jo White evaluated nearly identical legislative provisions in 2013, she concluded that, “[i]n my view, these provisions do not raise significant investor protection concerns.” We agree—and we believe that now is the time for Congress to act.

Some will argue that these changes should be left to the SEC. In fact, the Commission suggested the need to modernize registration and communications requirements for closed-end funds in 2005. Unfortunately, the SEC has not followed through—and the Commission has no fewer competing priorities now than it has had throughout the past dozen years. We believe that the discussion draft’s approach, giving the SEC one year to enact new regulations before the bill’s provisions take effect, is necessary and appropriate.

We also have heard concerns that automatic shelf registrations would allow closed-end funds, including some funds that are not traded on exchanges, to register new offerings without a full SEC staff review. This is true—but similar treatment for operating companies appears to have worked well for more than a decade. Moreover, closed-end funds that utilize these provisions already will have filed a registration statement, reviewed and declared effective by the SEC staff. 

For all these reasons, we wholeheartedly support Mr. Hollingsworth’s discussion draft as a valuable set of reforms that will enhance financing for the economy while maintaining stringent protections for investors.

Mr. Chairman, if I may briefly comment on one other measure…ICI also supports the proposed offering and communications reforms for business development companies, or BDCs, in the proposed “Small Business Credit Availability Act.” We do not object the bill’s provisions to grant BDCs more flexibility to use leverage.

Mr. Chairman, Ms. Maloney, I thank you again for the opportunity to testify. I’ll be happy to address the subcommittee’s questions.