A little-known loophole means not all investment companies are required to abide by federal registration and investor protection requirements, affecting some 3.7 million American citizens. Many lawmakers believe this loophole has outlived its usefulness. The U.S. Territories Investor Protection Act, S. 484 and H.R. 1366, would permanently close it.
What the bill does
In 1940, the Investment Company Act created an exemption for investment companies incorporated in U.S. territories such as Puerto Rico, Guam, and the Virgin Islands. The Securities and Exchange Commission (SEC) has long allowed the exemptions if a territorial company’s shares are sold only to residents of the territory where it’s located. That’s no small matter, as U.S. territories today total more than 3.7 million American citizens, exposing them to investment risks from which mainland citizens are protected.
This is no theoretical problem. Some companies in Puerto Rico were revealed to have underwritten bonds, but then turned around and sold those same bonds as mutual funds. While this is illegal in the contiguous states, the loophole rendered the arrangement legal in Puerto Rico.
What supporters say
Supporters argue the legislation clears up an anachronistic loophole that nonetheless persisted for decades, allowing Puerto Ricans and others to be taken advantage of financially.
“In the 1940s, a nonregistration exemption for investment companies in the noncontiguous territories made a lot of sense as it was extremely expensive and difficult for the SEC to send staff to travel to these territories and inspect the local companies,” Rep. French Hill (R-AR2) said on the House floor. “But with all the significant advances in technology and travel, these logistical barriers no longer exist. As such, this bill repeals this archaic exemption and provides a reasonable and safe harbor to allow those companies currently subject to the exemption to transition.”
Alaska and Hawaii, which are both located further away from the mainland than Puerto Rico, nonetheless received these investor protections upon being granted statehood. The territorial exemption used to make some level of sense upon its initial adoption 77 years ago, but no longer.
There are few if any vocal opponents to the legislation.
Odds of passage
The House bill attracted an even mix of eight bipartisan cosponsors, four Democrats and four Republicans. It passed the House Financial Services Committee on March 9 by a unanimous 58–0 vote. It then passed the full House on May 1 by a voice vote, in which no record of individual votes are recorded.
The Senate version attracted three cosponsors, two Republicans and one Democrat. In March it also passed the Senate Banking, Housing, and Urban Affairs Committee. It awaits a vote by the full Senate.
Yet that seeming level of support does not guarantee full passage. A previous version in July 2016 passed the House by voice vote, meaning no record of individual votes were cast, yet it never received a vote in the Senate.