HFSC Hearing on Capital Formation Proposals
House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises
“Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens, Part II”
Wednesday, May 13, 2015
Key Topics & Takeaways
- M&A Broker Bill: Panelists expressed mixed views on the bill with some noting that in the wake of the SEC No Action Letter, codifying the exemptions might be premature.
- Access to Research Bill: Panelists expressed general support for the bill agreeing that ETF research as well as research reports about issuers that are registered investment companies would provide investors with additional information and improve the efficiency of the overall capital markets.
- Venture Exchange Bill: Panelists were generally supportive of the need for liquidity in the small cap space. Burton highlighted the need to be able to trade venture securities over-the-counter.
- DOL Proposed Conflict of Interest Rule: When asked to comment on the DOL fiduciary proposal, Kruszewski stated that the proposed rule would impose additional costs and limits investor choice.
Participants
- Ronald J. Kruszewski, Chairman and Chief Executive Officer, Stifel Financial Corporation, on behalf of the Securities Industry and Financial Markets Association
- David Burton, Senior Fellow, Economic Policy, The Heritage Foundation
- Professor Mercer Bullard, MDLA Distinguished Lecturer and Professor of Law, University of Mississippi School of Law
- Thomas Quaadman, Vice President, Center for Capital Markets Competitiveness, US Chamber of Commerce
- David Weild IV, Chairman and Chief Executive Officer, Weild & Co.
JOBS Act 2.0 Bills
H.R.___ – the “Main Street Growth Act”
H.R.___ – the “Fair Access to Investment Research Act of 2015”
H.R.___ – To direct the SEC to review all its significant regulations to determine whether such regulations are necessary in the public interest or whether such regulations should be amended or rescinded
H.R.___ – the ”Accelerating Access to Capital Act of 2015″
Opening Remarks
Subcommittee Chairman Scott Garrett (R-N.J.) stated that the bills being discussed would further reduce barriers to capital formation and help make U.S. capital markets “even more attractive” to companies and investors. He continued that the Jumpstart Our Business Startups (JOBS) Act in 2012 did “little” for the secondary market, and that this is the first time the committee is considering legislation on venture exchanges.
Ranking Member Carolyn Maloney (D-N.Y.) explained that the system of securities laws in the U.S. is complex and that the “tension” underlying these laws is simple: investors want as much information as possible and as fast as possible in the companies they are investing in. She continued that companies issuing securities want to spend as little time putting together information for investors as possible. Maloney added that the bills being discussed would “alter the current balance” between investor protection and lower costs for companies.
Rep. Ann Wagner (R-Mo.) said that her legislation, the Accelerating Access to Capital Act of 2015, would help small companies move “off the sidelines” and secure funding to grow their businesses.
Testimony
Ronald J. Kruszewski
Ronald J. Kruszewski, Chairman and Chief Executive Officer, Stifel Financial Corporation, on behalf of the Securities Industry and Financial Markets Association (SIFMA), testified that SIFMA “strongly supports” Rep. French Hill’s (R-Ark.) Fair Access to Investment Research Act of 2015, as conflicts in current legislation result in “disparate” treatment for research on different types of securities. He continued that Rep. Bill Huizenga’s (R-Mich.) Mergers & Acquisitions (M&A) Broker Bill was influential in “spurring” the Securities and Exchange Commission (SEC) to issue their No Action Letter regarding registration requirements for M&A brokers, but that it is “premature” to legislate a permanent form of relief on an issue where the SEC has acted.
Regarding Garrett’s Main Street Growth Act, Kruszewski stated that while SIFMA supports the SEC moving forward with ideas to improve liquidity in small and mid-cap stocks, any prescriptive solutions risk “damaging the competition” in equity markets that has “fueled” innovation. He added that SIFMA and its member firms are committed to working with Garrett to ensure the legislation is “workable and efficient” for all market participants. Kruszewski continued that SIFMA is supportive of Vice Chairman Robert Hurt’s (R-Va.) retroactive review legislation that ensures reviews of the SEC rulebook are conducted on a regular basis, as regulators need to review the “interplay” between rules and their cumulative effect rather than only review each individual rule.
David Burton
David Burton, Senior Fellow for Economic Policy from The Heritage Foundation, focused his testimony on the secondary market for securities with an emphasis on the Main Street Growth Act. He suggested three key steps that would improve secondary markets: (1) Improving the regulatory environment for existing non-exchange over-the-counter (OTC) securities traded on alternative trading systems; (2) Amending the Securities Exchange Act to establish venture exchanges; and (3) Improving the regulatory environment for secondary sales of private securities, primarily by codifying the so-called Section 4(a)(1 ½) exemption and ensuring that platform traded securities are eligible for the exemption.
Professor Mercer Bullard
Professor Mercer Bullard, MDLA Distinguished Lecturer and Professor of Law, University of Mississippi School of Law, testified that he had two general concerns that apply to the bills being discussed. First, he expressed concern that the recent “piecemeal” reforms have rendered the public-private distinction almost meaningless. Second, he cautioned Congress in assuming the role of the regulator. Bullard asserted that the SEC has “far greater competence” than Congress in promulgating detailed securities rules. He further argued that Congress should use statutes to establish broad parameters within which the SEC may conduct detailed rulemaking.
Tom Quaadman
Tom Quaadman, Vice President of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, highlighted the need for long-term economic growth and job creation. He stated his support for Hurt’s retroactive review legislation, explaining that legislation is needed in order to prompt SEC action. He made the following recommendations for improving the effectiveness of the proposed legislation: (1) Regulations should be prioritized by those rules that are economically significant under the Small Business Regulatory Enforcement Fairness Act; (2) Regulations should be prioritized by those rules that have numerical thresholds that have not been adjusted in over 20 years; (3) Mandate that the review undergo a public notice and comment process as required under the Administrative Procedures Act; and (4) Expand the review to include those organizations delegated by the SEC to adopt rules that have a significant impact on the market place.
David Weild IV
David Weild IV, Chairman and Chief Executive Officer, Weild & Co., testified that the Main Street Growth Act “has the potential to go down as one of the most important acts to come out of this or any Congress” by creating “essential” infrastructure that supports U.S. economic growth. He offered improvements for inclusion to the current legislation: (1) Venture Exchanges be opened to all U.S. companies under $2 billion in equity market value or have less than $1 billion in revenue and are public for five years or less; (2) Create an orderly transition to graduate from a venture exchange, which would allow companies to stay until they have a higher threshold for 12 consecutive months; (3) Explicitly permit broker-dealer member-owned venture exchanges; and (4) Adjust listing thresholds annually for inflation.
H.R.___ – the “Main Street Growth Act”
Garrett asked Burton whether venture exchanges are needed. Burton stated that the venture exchange is “very positive” as it creates an alternative framework. He continued that there is an established OTC market and making that work better is “positive.” Burton explained that one advantage the OTC market has over the venture exchange approach is that changes could happen “immediately,” rather than the time it will take the SEC to write rules regarding venture exchanges. Kruszewski added that market structure has evolved towards speed while destroying the ecosystem for small companies, so the idea of recreating the ecosystem is “extremely important” and “needs to be done.”
Rep. David Scott (D-Ga.) asked why there should be two sets of exchanges, one for venture operations and one for national firms. Bullard stated that the SEC has been “effective and responsive” when it comes to venture companies, so there is “no need” for Garrett’s bill. He continued that the OTC market’s website has a thorough set of standards for companies.
Rep. Keith Ellison (D-Minn.) asked Bullard if the Garrett Bill is appropriate given the SEC’s recent adoption of the Tick Size Pilot Program. Bullard asserted that the Venture Exchange bill would only undermine the Tick Size Pilot program by inhibiting competition amongst trading venues.
Rep. John Carney (D-Del.) asked what the panelist’s concerns are in regards to the Venture Exchange Bill. Quaadman noted that the SEC and the Exchanges should have the ability to work through the investor protection concerns with a perspective and retrospective review of the development of the Venture Exchanges.
H.R.___ – the “Fair Access to Investment Research Act of 2015″
Maloney stated that she supports the concept of the Research Bill and asked Bullard if it would be better for the SEC to amend the rule to include registered investment companies subject to appropriate conditions. Bullard explained that “a lot needs to be done” with respect to registered companies but the SEC has become “dysfunctional” with rulemaking.
Rep. David Schweikert (R-Ariz.) asked the panelists to describe the ability of researchers to publish managed exchange-traded fund (ETF) reports and any challenges that exist in the current market. Kruszewski voiced support for the ETF bill asserting that the current SEC rules are outdated given the current marketplace and that creating safe harbor would provide additional information to the marketplace. Bullard added that with the way the ETF bill is drafted, research reports on managed ETFs would fall within scope.
Carney asked the panel how prescriptive the ETF legislation should be. Bullard stated that the current departures from SEC Rule 139 were concerning and would like to see Congress take a less prescriptive approach to ETF Research.
H.R.___ – To direct the SEC to review all its significant regulations to determine whether such regulations are necessary in the public interest or whether such regulations should be amended or rescinded
Hurt asked if it is necessary to have a 10 year review of regulation and rules at the SEC. Kruszewski stated that Hurt’s bill is “very common sense,” but “it just hasn’t been done.” Quaadman added that the JOBS Act is “full of regulations that the SEC could have done themselves but did not.”
H.R.___ – the ”Accelerating Access to Capital Act of 2015″
Maloney asked Bullard about exchange traded requirements. Bullard stated that exchanges impose different governance, rights for shareholders, and listing requirements. He continued that OTC stocks are “highly illiquid, extremely volatile, and have lottery-like returns.” Bullard stated that if exchange traded requirements were taken away, the risk to investors would outweigh the benefits to companies.
Wagner asked Weild how her legislation will help small issuers. Weild explained that Form S-3 “drops the cost” for small issuers in comparison to Form S-1. Quaadman added that securities law needs to do a “better” job of balancing investor protection and disclosure requirements, and that the Wagner Bill allows for this balance. He continued that the legislation speeds up the process for companies to go into markets.
H.R.686, the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015”
Maloney asked Kruszewski to detail SIFMA’s concerns with the M&A Broker Bill. Kruszewski expressed strong concerns with the $25 million earnings before interest, tax, depreciation and amortization (EBITDA) threshold, stating that potentially companies with over $1 billion in market cap could fall within this proposed exemption. He further noted that passage of the M&A Broker Bill was not necessary in the wake of the SEC’s No Action Letter regarding M&A brokers following the initial passage of the bill in the House in January 2014.
When asked by Maloney to clarify if passage of the bill would preclude some of the protections included in the SEC No Action Letter which are not address in the M&A Broker Bill, Kruszewski agreed stating that codifying the exemptions detailed in the M&A Broker Bill would supersede the conditions outlined in the SEC No Action Letter.
H.R.1975, a bill to amend the Securities Exchange Act of 1934 to require the Securities Exchange Commission to refund or credit excess payments made to the Commission
Ellison asked Bullard about his concerns over H.R.1975. Bullard expressed concern and anecdotally said that he has trouble accessing data on firms through the SEC’s EDGAR system. He stated that there should be 21st century technology in a 21st century market and the eXtensible Business Reporting Language (XBRL) exemption in the proposed bill would run contrary to that view.
DOL Proposed Conflict of Interest Rule
Rep. Bruce Poliquin (R-Maine) asked Kruszewski what the Department of Labor’s (DOL) proposed conflict of interest rule would do to the rate of return for people preparing for retirement. Kruszewski stated that the proposed rule imposes additional costs and limits choice for investors.
For more information on this event and an archived webcast, please click here.
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House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises
“Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens, Part II”
Wednesday, May 13, 2015
Key Topics & Takeaways
- M&A Broker Bill: Panelists expressed mixed views on the bill with some noting that in the wake of the SEC No Action Letter, codifying the exemptions might be premature.
- Access to Research Bill: Panelists expressed general support for the bill agreeing that ETF research as well as research reports about issuers that are registered investment companies would provide investors with additional information and improve the efficiency of the overall capital markets.
- Venture Exchange Bill: Panelists were generally supportive of the need for liquidity in the small cap space. Burton highlighted the need to be able to trade venture securities over-the-counter.
- DOL Proposed Conflict of Interest Rule: When asked to comment on the DOL fiduciary proposal, Kruszewski stated that the proposed rule would impose additional costs and limits investor choice.
Participants
- Ronald J. Kruszewski, Chairman and Chief Executive Officer, Stifel Financial Corporation, on behalf of the Securities Industry and Financial Markets Association
- David Burton, Senior Fellow, Economic Policy, The Heritage Foundation
- Professor Mercer Bullard, MDLA Distinguished Lecturer and Professor of Law, University of Mississippi School of Law
- Thomas Quaadman, Vice President, Center for Capital Markets Competitiveness, US Chamber of Commerce
- David Weild IV, Chairman and Chief Executive Officer, Weild & Co.
JOBS Act 2.0 Bills
H.R.___ – the “Main Street Growth Act”
H.R.___ – the “Fair Access to Investment Research Act of 2015”
H.R.___ – To direct the SEC to review all its significant regulations to determine whether such regulations are necessary in the public interest or whether such regulations should be amended or rescinded
H.R.___ – the ”Accelerating Access to Capital Act of 2015″
Opening Remarks
Subcommittee Chairman Scott Garrett (R-N.J.) stated that the bills being discussed would further reduce barriers to capital formation and help make U.S. capital markets “even more attractive” to companies and investors. He continued that the Jumpstart Our Business Startups (JOBS) Act in 2012 did “little” for the secondary market, and that this is the first time the committee is considering legislation on venture exchanges.
Ranking Member Carolyn Maloney (D-N.Y.) explained that the system of securities laws in the U.S. is complex and that the “tension” underlying these laws is simple: investors want as much information as possible and as fast as possible in the companies they are investing in. She continued that companies issuing securities want to spend as little time putting together information for investors as possible. Maloney added that the bills being discussed would “alter the current balance” between investor protection and lower costs for companies.
Rep. Ann Wagner (R-Mo.) said that her legislation, the Accelerating Access to Capital Act of 2015, would help small companies move “off the sidelines” and secure funding to grow their businesses.
Testimony
Ronald J. Kruszewski
Ronald J. Kruszewski, Chairman and Chief Executive Officer, Stifel Financial Corporation, on behalf of the Securities Industry and Financial Markets Association (SIFMA), testified that SIFMA “strongly supports” Rep. French Hill’s (R-Ark.) Fair Access to Investment Research Act of 2015, as conflicts in current legislation result in “disparate” treatment for research on different types of securities. He continued that Rep. Bill Huizenga’s (R-Mich.) Mergers & Acquisitions (M&A) Broker Bill was influential in “spurring” the Securities and Exchange Commission (SEC) to issue their No Action Letter regarding registration requirements for M&A brokers, but that it is “premature” to legislate a permanent form of relief on an issue where the SEC has acted.
Regarding Garrett’s Main Street Growth Act, Kruszewski stated that while SIFMA supports the SEC moving forward with ideas to improve liquidity in small and mid-cap stocks, any prescriptive solutions risk “damaging the competition” in equity markets that has “fueled” innovation. He added that SIFMA and its member firms are committed to working with Garrett to ensure the legislation is “workable and efficient” for all market participants. Kruszewski continued that SIFMA is supportive of Vice Chairman Robert Hurt’s (R-Va.) retroactive review legislation that ensures reviews of the SEC rulebook are conducted on a regular basis, as regulators need to review the “interplay” between rules and their cumulative effect rather than only review each individual rule.
David Burton
David Burton, Senior Fellow for Economic Policy from The Heritage Foundation, focused his testimony on the secondary market for securities with an emphasis on the Main Street Growth Act. He suggested three key steps that would improve secondary markets: (1) Improving the regulatory environment for existing non-exchange over-the-counter (OTC) securities traded on alternative trading systems; (2) Amending the Securities Exchange Act to establish venture exchanges; and (3) Improving the regulatory environment for secondary sales of private securities, primarily by codifying the so-called Section 4(a)(1 ½) exemption and ensuring that platform traded securities are eligible for the exemption.
Professor Mercer Bullard
Professor Mercer Bullard, MDLA Distinguished Lecturer and Professor of Law, University of Mississippi School of Law, testified that he had two general concerns that apply to the bills being discussed. First, he expressed concern that the recent “piecemeal” reforms have rendered the public-private distinction almost meaningless. Second, he cautioned Congress in assuming the role of the regulator. Bullard asserted that the SEC has “far greater competence” than Congress in promulgating detailed securities rules. He further argued that Congress should use statutes to establish broad parameters within which the SEC may conduct detailed rulemaking.
Tom Quaadman
Tom Quaadman, Vice President of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, highlighted the need for long-term economic growth and job creation. He stated his support for Hurt’s retroactive review legislation, explaining that legislation is needed in order to prompt SEC action. He made the following recommendations for improving the effectiveness of the proposed legislation: (1) Regulations should be prioritized by those rules that are economically significant under the Small Business Regulatory Enforcement Fairness Act; (2) Regulations should be prioritized by those rules that have numerical thresholds that have not been adjusted in over 20 years; (3) Mandate that the review undergo a public notice and comment process as required under the Administrative Procedures Act; and (4) Expand the review to include those organizations delegated by the SEC to adopt rules that have a significant impact on the market place.
David Weild IV
David Weild IV, Chairman and Chief Executive Officer, Weild & Co., testified that the Main Street Growth Act “has the potential to go down as one of the most important acts to come out of this or any Congress” by creating “essential” infrastructure that supports U.S. economic growth. He offered improvements for inclusion to the current legislation: (1) Venture Exchanges be opened to all U.S. companies under $2 billion in equity market value or have less than $1 billion in revenue and are public for five years or less; (2) Create an orderly transition to graduate from a venture exchange, which would allow companies to stay until they have a higher threshold for 12 consecutive months; (3) Explicitly permit broker-dealer member-owned venture exchanges; and (4) Adjust listing thresholds annually for inflation.
H.R.___ – the “Main Street Growth Act”
Garrett asked Burton whether venture exchanges are needed. Burton stated that the venture exchange is “very positive” as it creates an alternative framework. He continued that there is an established OTC market and making that work better is “positive.” Burton explained that one advantage the OTC market has over the venture exchange approach is that changes could happen “immediately,” rather than the time it will take the SEC to write rules regarding venture exchanges. Kruszewski added that market structure has evolved towards speed while destroying the ecosystem for small companies, so the idea of recreating the ecosystem is “extremely important” and “needs to be done.”
Rep. David Scott (D-Ga.) asked why there should be two sets of exchanges, one for venture operations and one for national firms. Bullard stated that the SEC has been “effective and responsive” when it comes to venture companies, so there is “no need” for Garrett’s bill. He continued that the OTC market’s website has a thorough set of standards for companies.
Rep. Keith Ellison (D-Minn.) asked Bullard if the Garrett Bill is appropriate given the SEC’s recent adoption of the Tick Size Pilot Program. Bullard asserted that the Venture Exchange bill would only undermine the Tick Size Pilot program by inhibiting competition amongst trading venues.
Rep. John Carney (D-Del.) asked what the panelist’s concerns are in regards to the Venture Exchange Bill. Quaadman noted that the SEC and the Exchanges should have the ability to work through the investor protection concerns with a perspective and retrospective review of the development of the Venture Exchanges.
H.R.___ – the “Fair Access to Investment Research Act of 2015″
Maloney stated that she supports the concept of the Research Bill and asked Bullard if it would be better for the SEC to amend the rule to include registered investment companies subject to appropriate conditions. Bullard explained that “a lot needs to be done” with respect to registered companies but the SEC has become “dysfunctional” with rulemaking.
Rep. David Schweikert (R-Ariz.) asked the panelists to describe the ability of researchers to publish managed exchange-traded fund (ETF) reports and any challenges that exist in the current market. Kruszewski voiced support for the ETF bill asserting that the current SEC rules are outdated given the current marketplace and that creating safe harbor would provide additional information to the marketplace. Bullard added that with the way the ETF bill is drafted, research reports on managed ETFs would fall within scope.
Carney asked the panel how prescriptive the ETF legislation should be. Bullard stated that the current departures from SEC Rule 139 were concerning and would like to see Congress take a less prescriptive approach to ETF Research.
H.R.___ – To direct the SEC to review all its significant regulations to determine whether such regulations are necessary in the public interest or whether such regulations should be amended or rescinded
Hurt asked if it is necessary to have a 10 year review of regulation and rules at the SEC. Kruszewski stated that Hurt’s bill is “very common sense,” but “it just hasn’t been done.” Quaadman added that the JOBS Act is “full of regulations that the SEC could have done themselves but did not.”
H.R.___ – the ”Accelerating Access to Capital Act of 2015″
Maloney asked Bullard about exchange traded requirements. Bullard stated that exchanges impose different governance, rights for shareholders, and listing requirements. He continued that OTC stocks are “highly illiquid, extremely volatile, and have lottery-like returns.” Bullard stated that if exchange traded requirements were taken away, the risk to investors would outweigh the benefits to companies.
Wagner asked Weild how her legislation will help small issuers. Weild explained that Form S-3 “drops the cost” for small issuers in comparison to Form S-1. Quaadman added that securities law needs to do a “better” job of balancing investor protection and disclosure requirements, and that the Wagner Bill allows for this balance. He continued that the legislation speeds up the process for companies to go into markets.
H.R.686, the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015”
Maloney asked Kruszewski to detail SIFMA’s concerns with the M&A Broker Bill. Kruszewski expressed strong concerns with the $25 million earnings before interest, tax, depreciation and amortization (EBITDA) threshold, stating that potentially companies with over $1 billion in market cap could fall within this proposed exemption. He further noted that passage of the M&A Broker Bill was not necessary in the wake of the SEC’s No Action Letter regarding M&A brokers following the initial passage of the bill in the House in January 2014.
When asked by Maloney to clarify if passage of the bill would preclude some of the protections included in the SEC No Action Letter which are not address in the M&A Broker Bill, Kruszewski agreed stating that codifying the exemptions detailed in the M&A Broker Bill would supersede the conditions outlined in the SEC No Action Letter.
H.R.1975, a bill to amend the Securities Exchange Act of 1934 to require the Securities Exchange Commission to refund or credit excess payments made to the Commission
Ellison asked Bullard about his concerns over H.R.1975. Bullard expressed concern and anecdotally said that he has trouble accessing data on firms through the SEC’s EDGAR system. He stated that there should be 21st century technology in a 21st century market and the eXtensible Business Reporting Language (XBRL) exemption in the proposed bill would run contrary to that view.
DOL Proposed Conflict of Interest Rule
Rep. Bruce Poliquin (R-Maine) asked Kruszewski what the Department of Labor’s (DOL) proposed conflict of interest rule would do to the rate of return for people preparing for retirement. Kruszewski stated that the proposed rule imposes additional costs and limits choice for investors.
For more information on this event and an archived webcast, please click here.