House Financial Services Hearing on Capital Formation
House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises
“Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens”
Wednesday, April 29, 2014
Key Topics & Takeaways
- H.R.1675: US Chamber’s Quaadman expressed concern that the legislation would allow proprietary information from non-reporting companies to get out to the public, which could “destroy a company.”
- H.R.1839 (RAISE Act): Quaadman said the RAISE Act would allow the SEC to put in place a set of rules exempting from prohibitions relating to interstate commerce to allow for markets to function, businesses to have liquidity, and create investor protection.
- H.R.686 (M&A Broker Bill):
-
- Quaadman said that the SEC’s No Action Letter regarding registration requirements for M&A brokers could be revoked by a change in leadership at the SEC and the M&A bill would enable these parameters to be “set in stone.”
- Professor Theresa Gabaldon said the M&A Broker bill is “flawed” and needs bad actor provisions limiting public offering activities.
Participants
- Thomas C. Deas, Vice President and Treasurer, FMC Corporation, on behalf of the Coalition for Derivatives End-Users
- Professor Theresa A. Gabaldon, Lyle T. Alverson Professor of Law, George Washington University
- Gayle Hughes, Partner, Merion Investment Partners, on behalf of the Small Business Investor Alliance
- Shane Kovacs, Executive Vice President, Chief Financial Officer and Head of Corporate Development, PTC Therapeutics, Inc., on behalf of the Biotechnology Industry Organization
- Thomas Quaadman, Vice President, Center for Capital Markets Competitiveness, US Chamber of Commerce
JOBS Act 2.0 Bills Discussed
H.R. 432, the “Small Business Investment Company Advisers Relief Act of 2015”
H.R. 686, the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015”
H.R. 1317, a bill to amend the Commodity Exchange Act and the Securities Exchange Act of 1934 to specify how clearing requirements apply to certain affiliate transactions, and for other purposes
H.R. 1334, the “Holding Company Registration Threshold Equalization Act of 2015”
H.R. 1525, the “Disclosure Modernization and Simplification Act of 2015”
H.R. 1675, the “Encouraging Employee Ownership Act of 2015”
H.R. 1723, the “Small Business Freedom and Growth Act of 2015”
H.R. 1839, the “Reforming Access for Investments in Startup Enterprises Act of 2015”
H.R. 1847, the “Swap Data Repository and Clearinghouse Indemnification Correction Act”
H.R. 1965, the “Small Company Disclosure Simplification Act”
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
H.R. ____, the “Improving Access to Capital for Emerging Growth Companies Act”
Opening Remarks
Subcommittee Chairman Scott Garrett (R-N.J.) stated that his committee should “lead the charge” to update the Jumpstart Our Business Startups (JOBS) Act but “more needs to be done.” He continued that securities laws need to be improved because American startups continue to have difficulty accessing capital. Garrett concluded that the “JOBS Act 2.0” bills are “modest” and “not insignificant to people back home,” adding that capital formation and investor protection “isn’t an either/or.”
Vice Chairman Robert Hurt (R-Va.) stated that “we need to do everything we can to reduce regulatory burdens” and that the combined effects of the current regulatory regime can be “insurmountable.”
Testimony
Thomas C. Deas, Coalition for Derivatives End-Users
Thomas C. Deas, Vice President and Treasurer of FMC Corporation, on behalf of the Coalition for Derivatives End-Users, stated that financial regulatory reform measures should not impose burdens on derivatives end-users, as end-users make up less than 10 percent of the over-the-counter (OTC) derivatives market and therefore do not contribute to systemic risk. He stated three areas of concern relating to cross-border transactions and international competitiveness: 1) Centralized Treasury Units (CTUs) engaging in inter-affiliate derivatives transactions; 2) capital requirements for derivatives transactions; and 3) cross-border concerns. Deas stressed that the Coalition “strongly supports” H.R.1317.
Professor Gabaldon, GWU Law
Professor Theresa A. Gabaldon, Lyle T. Alverson Professor of Law at George Washington University, stated that the JOBS Act 2.0 bills were prepared without appropriate regard for abuse and how the proposals would work with other de-regulatory efforts. She said that some of the proposals do not work together, as lawmakers are “pushing for modernization on one hand and fighting it on another.” Gabaldon stated that she had issues with eight of the proposed bills: H.R.686, H.R.1839, H.R.1675, H.R.1659, H.R.1525, H.R.1965, H.R.1723 and H.R.1975.
Gabaldon commented that H.R.686 (“The M&A Brokers bill”) was “flawed,” because it would permit someone banned from the securities industry to publicly offer and resell an unlimited number of securities. Gabaldon noted that the M&A Brokers bill needs bad-actor provisions limiting public offering activities and that the Securities Exchange Commission’s (SEC) No Action Letter regarding registration requirements for mergers and acquisition (M&A) brokers has conditions that improve the bill. Speaking about H.R.1659, she continued that there is no reason to reduce the time between a public filing and an issuer’s road show from 21 to 15 days, because on average it takes 40 days. Gabaldon concluded that it would be “impossible” to say whether the group of bills would positively affect capital formation.
Gayle Hughes, Small Business Investor Alliance
Gayle Hughes, Partner at Merion Investment Partners, on behalf of the Small Business Investor Alliance (SBIA), stated her support for H.R.432 (“The SBIC Advisers Relief Act”) because it fixes duplicative regulation by state and federal governments and ensures that smaller funds are able to focus on small business investing rather than filling out regulatory paperwork. She supported H.R.686, H.R.1525 and H.R.1659 because they help businesses raise capital and reduce regulatory burdens.
Shane Kovacs, Biotechnology Industry Organization
Shane Kovacs, Executive Vice President, Chief Financial Officer and Head of Corporate Development at PTC Therapeutics, Inc., on behalf of the Biotechnology Industry Organization (BIO), stated that capital formation is “key” to life-saving research and development that his company conducts, adding that “every dollar spent on regulatory burdens is a dollar not spent in the lab or clinic.” He continued that “smart” policy making can support job growth and innovative research and development. Kovacs supported H.R.1965, H.R.1525, H.R.1723, H.R.1839, H.R.1675 and H.R.1659.
Thomas Quaadman, US Chamber of Commerce
Thomas Quaadman, Vice President of the Center for Capital Markets Competitiveness at the US Chamber of Commerce, stated that business formation is at its lowest point since 1977, noting a steady decline in the number of businesses being formed in the U.S. since 2008. He said that the package of legislation is important to build on the foundation of the JOBS Act since the SEC is reluctant to modernize its rules. He explained that if the JOBS Act is not fully implemented, job creation and economic growth will continue to underperform and decline. Quaadman specifically supported H.R.1847, H.R.1334, H.R.686, H.R.1659, H.R.432, H.R.1525, H.R.1965, H.R.1675, H.R.1723 and H.R.1839.
H.R.1525, the “Disclosure Modernization and Simplification Act of 2015”
Garrett asked Gabaldon about the SEC’s review of rules for simplification and scaling. She said it “isn’t obvious” to her what in Reg S-K the SEC could be expected to act on quickly, expressing skepticism over any reforms. Quaadman added that Congress needs to push the SEC to take action.
H.R.1723, the “Small Business Freedom and Growth Act of 2015”
Garrett asked Kovacs the significance of H.R.1723 to him. Kovacs replied that any legislation that will reduce burdens would benefit small companies.
H.R.1317, a bill to amend the Commodity Exchange Act and the Securities Exchange Act of 1934 to specify how clearing requirements apply to certain affiliate transactions, and for other purposes
Rep. Randy Neugebauer (R-Texas) asked Deas what type of problems Title VII presents to inter-affiliate derivatives trading. Deas asserted that the fact that netting was not included in the original regulation has increased the number of derivatives contracts and added risk.
H.R.1675, the “Encouraging Employee Ownership Act of 2015”
Rep. Ruben Hinojosa (D-Texas) asked if employees will receive the information they need to make sound investment decisions if the SEC’s Rule 701 is revised. Kovacs said his company has to attract talent by using stock options as incentives, as well as incentivizing employees to take additional equity in the company they work for. Quaadman expressed concern that the legislation would allow proprietary information from non-reporting companies to get out to the public, which could “destroy a company.”
Rep. Randy Hultgren (R-Ill.) asked Quaadman to elaborate on the dangers that disclosures pose to private companies. Quaadman said startups use proprietary information that if leaked could either hamper the company’s ability to be successful or “destroy them.” Quaadman added that those types of disclosures are more suited to public companies than private companies.
H.R.1839, the “Reforming Access for Investments in Startup Enterprises (RAISE) Act of 2015”
Rep. Patrick McHenry (R-N.C.) asked Quaadman about existing case law on the sale of restricted securities in secondary markets. Quaadman said that there is not a uniform set of standards, but explained the RAISE Act would allow the SEC to create rules to would allow markets to function, businesses to have liquidity, and protect investors. Quaadman added that the RAISE Act will help provide trust and confidence in markets.
H.R.686, the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015”
Rep. Bill Huizenga (R-Mich.) asked Quaadman to elaborate why the SEC should have a more tailored registration system for smaller, family-owned, privately-held M&A brokers. Quaadman said that the SEC’s No Action Letter regarding registration requirements for M&A brokers could be revoked by a change in leadership at the SEC and the M&A bill would require these parameters to be “set in stone.” Gabaldon noted that the SEC’s No Action Letter has a number of protections that are important and said she hoped the committee will consider them in the bill.
Garrett concluded the hearing by saying that many of the bills discussed are re-regulation, rather than new regulations, that make technical corrections to existing statute.
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”
Wednesday, April 29, 2014
Key Topics & Takeaways
- H.R.1675: US Chamber’s Quaadman expressed concern that the legislation would allow proprietary information from non-reporting companies to get out to the public, which could “destroy a company.”
- H.R.1839 (RAISE Act): Quaadman said the RAISE Act would allow the SEC to put in place a set of rules exempting from prohibitions relating to interstate commerce to allow for markets to function, businesses to have liquidity, and create investor protection.
- H.R.686 (M&A Broker Bill):
-
- Quaadman said that the SEC’s No Action Letter regarding registration requirements for M&A brokers could be revoked by a change in leadership at the SEC and the M&A bill would enable these parameters to be “set in stone.”
- Professor Theresa Gabaldon said the M&A Broker bill is “flawed” and needs bad actor provisions limiting public offering activities.
Participants
- Thomas C. Deas, Vice President and Treasurer, FMC Corporation, on behalf of the Coalition for Derivatives End-Users
- Professor Theresa A. Gabaldon, Lyle T. Alverson Professor of Law, George Washington University
- Gayle Hughes, Partner, Merion Investment Partners, on behalf of the Small Business Investor Alliance
- Shane Kovacs, Executive Vice President, Chief Financial Officer and Head of Corporate Development, PTC Therapeutics, Inc., on behalf of the Biotechnology Industry Organization
- Thomas Quaadman, Vice President, Center for Capital Markets Competitiveness, US Chamber of Commerce
JOBS Act 2.0 Bills Discussed
H.R. 432, the “Small Business Investment Company Advisers Relief Act of 2015”
H.R. 686, the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015”
H.R. 1317, a bill to amend the Commodity Exchange Act and the Securities Exchange Act of 1934 to specify how clearing requirements apply to certain affiliate transactions, and for other purposes
H.R. 1334, the “Holding Company Registration Threshold Equalization Act of 2015”
H.R. 1525, the “Disclosure Modernization and Simplification Act of 2015”
H.R. 1675, the “Encouraging Employee Ownership Act of 2015”
H.R. 1723, the “Small Business Freedom and Growth Act of 2015”
H.R. 1839, the “Reforming Access for Investments in Startup Enterprises Act of 2015”
H.R. 1847, the “Swap Data Repository and Clearinghouse Indemnification Correction Act”
H.R. 1965, the “Small Company Disclosure Simplification Act”
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
H.R. ____, the “Improving Access to Capital for Emerging Growth Companies Act”
Opening Remarks
Subcommittee Chairman Scott Garrett (R-N.J.) stated that his committee should “lead the charge” to update the Jumpstart Our Business Startups (JOBS) Act but “more needs to be done.” He continued that securities laws need to be improved because American startups continue to have difficulty accessing capital. Garrett concluded that the “JOBS Act 2.0” bills are “modest” and “not insignificant to people back home,” adding that capital formation and investor protection “isn’t an either/or.”
Vice Chairman Robert Hurt (R-Va.) stated that “we need to do everything we can to reduce regulatory burdens” and that the combined effects of the current regulatory regime can be “insurmountable.”
Testimony
Thomas C. Deas, Coalition for Derivatives End-Users
Thomas C. Deas, Vice President and Treasurer of FMC Corporation, on behalf of the Coalition for Derivatives End-Users, stated that financial regulatory reform measures should not impose burdens on derivatives end-users, as end-users make up less than 10 percent of the over-the-counter (OTC) derivatives market and therefore do not contribute to systemic risk. He stated three areas of concern relating to cross-border transactions and international competitiveness: 1) Centralized Treasury Units (CTUs) engaging in inter-affiliate derivatives transactions; 2) capital requirements for derivatives transactions; and 3) cross-border concerns. Deas stressed that the Coalition “strongly supports” H.R.1317.
Professor Gabaldon, GWU Law
Professor Theresa A. Gabaldon, Lyle T. Alverson Professor of Law at George Washington University, stated that the JOBS Act 2.0 bills were prepared without appropriate regard for abuse and how the proposals would work with other de-regulatory efforts. She said that some of the proposals do not work together, as lawmakers are “pushing for modernization on one hand and fighting it on another.” Gabaldon stated that she had issues with eight of the proposed bills: H.R.686, H.R.1839, H.R.1675, H.R.1659, H.R.1525, H.R.1965, H.R.1723 and H.R.1975.
Gabaldon commented that H.R.686 (“The M&A Brokers bill”) was “flawed,” because it would permit someone banned from the securities industry to publicly offer and resell an unlimited number of securities. Gabaldon noted that the M&A Brokers bill needs bad-actor provisions limiting public offering activities and that the Securities Exchange Commission’s (SEC) No Action Letter regarding registration requirements for mergers and acquisition (M&A) brokers has conditions that improve the bill. Speaking about H.R.1659, she continued that there is no reason to reduce the time between a public filing and an issuer’s road show from 21 to 15 days, because on average it takes 40 days. Gabaldon concluded that it would be “impossible” to say whether the group of bills would positively affect capital formation.
Gayle Hughes, Small Business Investor Alliance
Gayle Hughes, Partner at Merion Investment Partners, on behalf of the Small Business Investor Alliance (SBIA), stated her support for H.R.432 (“The SBIC Advisers Relief Act”) because it fixes duplicative regulation by state and federal governments and ensures that smaller funds are able to focus on small business investing rather than filling out regulatory paperwork. She supported H.R.686, H.R.1525 and H.R.1659 because they help businesses raise capital and reduce regulatory burdens.
Shane Kovacs, Biotechnology Industry Organization
Shane Kovacs, Executive Vice President, Chief Financial Officer and Head of Corporate Development at PTC Therapeutics, Inc., on behalf of the Biotechnology Industry Organization (BIO), stated that capital formation is “key” to life-saving research and development that his company conducts, adding that “every dollar spent on regulatory burdens is a dollar not spent in the lab or clinic.” He continued that “smart” policy making can support job growth and innovative research and development. Kovacs supported H.R.1965, H.R.1525, H.R.1723, H.R.1839, H.R.1675 and H.R.1659.
Thomas Quaadman, US Chamber of Commerce
Thomas Quaadman, Vice President of the Center for Capital Markets Competitiveness at the US Chamber of Commerce, stated that business formation is at its lowest point since 1977, noting a steady decline in the number of businesses being formed in the U.S. since 2008. He said that the package of legislation is important to build on the foundation of the JOBS Act since the SEC is reluctant to modernize its rules. He explained that if the JOBS Act is not fully implemented, job creation and economic growth will continue to underperform and decline. Quaadman specifically supported H.R.1847, H.R.1334, H.R.686, H.R.1659, H.R.432, H.R.1525, H.R.1965, H.R.1675, H.R.1723 and H.R.1839.
H.R.1525, the “Disclosure Modernization and Simplification Act of 2015”
Garrett asked Gabaldon about the SEC’s review of rules for simplification and scaling. She said it “isn’t obvious” to her what in Reg S-K the SEC could be expected to act on quickly, expressing skepticism over any reforms. Quaadman added that Congress needs to push the SEC to take action.
H.R.1723, the “Small Business Freedom and Growth Act of 2015”
Garrett asked Kovacs the significance of H.R.1723 to him. Kovacs replied that any legislation that will reduce burdens would benefit small companies.
H.R.1317, a bill to amend the Commodity Exchange Act and the Securities Exchange Act of 1934 to specify how clearing requirements apply to certain affiliate transactions, and for other purposes
Rep. Randy Neugebauer (R-Texas) asked Deas what type of problems Title VII presents to inter-affiliate derivatives trading. Deas asserted that the fact that netting was not included in the original regulation has increased the number of derivatives contracts and added risk.
H.R.1675, the “Encouraging Employee Ownership Act of 2015”
Rep. Ruben Hinojosa (D-Texas) asked if employees will receive the information they need to make sound investment decisions if the SEC’s Rule 701 is revised. Kovacs said his company has to attract talent by using stock options as incentives, as well as incentivizing employees to take additional equity in the company they work for. Quaadman expressed concern that the legislation would allow proprietary information from non-reporting companies to get out to the public, which could “destroy a company.”
Rep. Randy Hultgren (R-Ill.) asked Quaadman to elaborate on the dangers that disclosures pose to private companies. Quaadman said startups use proprietary information that if leaked could either hamper the company’s ability to be successful or “destroy them.” Quaadman added that those types of disclosures are more suited to public companies than private companies.
H.R.1839, the “Reforming Access for Investments in Startup Enterprises (RAISE) Act of 2015”
Rep. Patrick McHenry (R-N.C.) asked Quaadman about existing case law on the sale of restricted securities in secondary markets. Quaadman said that there is not a uniform set of standards, but explained the RAISE Act would allow the SEC to create rules to would allow markets to function, businesses to have liquidity, and protect investors. Quaadman added that the RAISE Act will help provide trust and confidence in markets.
H.R.686, the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015”
Rep. Bill Huizenga (R-Mich.) asked Quaadman to elaborate why the SEC should have a more tailored registration system for smaller, family-owned, privately-held M&A brokers. Quaadman said that the SEC’s No Action Letter regarding registration requirements for M&A brokers could be revoked by a change in leadership at the SEC and the M&A bill would require these parameters to be “set in stone.” Gabaldon noted that the SEC’s No Action Letter has a number of protections that are important and said she hoped the committee will consider them in the bill.
Garrett concluded the hearing by saying that many of the bills discussed are re-regulation, rather than new regulations, that make technical corrections to existing statute.
For more information on this event and an archived webcast, please click here.