U.S. Territories Investor Protection Act of 2016

Floor Speech

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

The Investment Company Act of 1940 governs investment companies such as mutual funds, closed-end funds, unit investment trusts, and exchange-traded funds. Its purpose is to protect investors in such funds and to provide for impartial oversight of these companies.

Among other things, the 1940 act regulates the type of activities that such companies can undertake and establishes standards for their conduct. In doing so, it describes investment companies' functions and their structure; regulates various transactions among affiliated persons; limits the amount of leverage they can undertake; outlines accounting, recordkeeping, and auditing requirements of funds; and describes how securities may be redeemed and repurchased. These matters sound technical, but they provide fundamental protections for investors in U.S. investment companies.

Due to a historical artifact, however, all funds that are located and organized in and sold only to residents of U.S. territories are exempted from the 1940 act. The reason for such an exemption was that, at the time the act was being considered in 1940, the U.S. territories were deemed to be too distant from Washington, D.C., thus making travel to them cost prohibitive. Obviously, the cost of air travel is no longer cost prohibitive and not a reason to exempt territories from the 1940 act.

As a result of this exemption, investment companies located in U.S. territories can sell products to the residents and not be subject to the oversight, disclosure, and conflict-of-interest requirements that such companies located in the mainland U.S. are subject to.

The outcome is that those located in the U.S. territories have been subject to investment losses, some resulting from behavior that likely would have been prohibited if the act applied to the island's investment companies.

To address this matter, H.R. 5322, the U.S. Territories Investor Protection Act, applies the 1940 act to currently exempt investment companies that are located, organized in, and sold to residents of these territories.

In order to permit investment companies to comply with the legislation, it provides for a 3-year compliance period with an option at the approval of the SEC for an additional 3 years. This time period balances the need to bring the investor protections of the 1940 act to the territories with enough time for affected entities to fully understand and comply with the 1940 act.

It is important to note that if investment companies need further relief from any specific requirement of the 1940 act, they are able to request such relief through the SEC under existing law.

I want to thank Chairman Hensarling for working with me throughout the last 9 months in a productive manner. Such cooperation was critical to developing an approach that would apply the act in a manner sensitive to investors and investment companies.

As a result, I believe the framework of this bill, when combined with current statutory mechanisms, will provide a sufficient time period for adjustment and compliance.

I urge Members to support this legislation. This legislation will dramatically benefit investors in Puerto Rico. Those that call Puerto Rico home will now be subject to the same investor protection laws that those on the mainland are subject to. This is not only fair, but it is right, as many Puerto Ricans have lost their life savings in investment products offered only on the island.

When it comes to Puerto Rico, it is important to realize that what we are doing is not creating a new law or imposing a Federal mandate on the island. We are simply closing the loophole that has prevented Puerto Ricans from enjoying the same protections as the rest of Americans.

With the enactment of this bill, the 1940 act will be applied to Puerto Rico and other U.S. territories in the same exact manner it is applied to all 50 States. Investors and consumers in Puerto Rico deserve this, and this bill is long overdue.

Not only will the 1940 act provide Puerto Rico's investors with much-needed safeguards, but the current fiscal crisis on the island is creating budgetary challenges for the local government. Having additional Federal oversight of investment activity is now especially critical for the island's residents.

In closing, I want to thank Chairman Hensarling again for his cooperation and bringing this important bill forward to the floor. I ask Members to support this bill.

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

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