House Financial Services on Oversight of the SEC Division of Corporate Finance
House Financial Services Committee
Subcomittee on Capital Markets and Government Sponsored Enterprises
“Oversight of the SEC’s Division of Corporation Finance”
Thursday, July 24, 2014
Key Topics & Takeaways
- Proxy Advisory Firms and Shareholder Proposals: Rep. Garrett (R-N.J.) welcomed recent guidance from the SEC on proxy advisory firms and called for the SEC to report back on the results of the guidance.
- Corporate Disclosure: Higgins explained that the goal of the SEC is to ensure that investors are supplied with all the accurate material information needed to make investment decisions while trying to minimize the burden on companies.
- JOBS Act: Reps. Mulvaney (R-S.C.) and Fincher (R-Tenn.) expressed their frustration at the lack of progress by the SEC in implementing the JOBS Act.
- CEO Pay Ratio: Rep. Huizenga (R-Mich.) questioned whether requiring disclosures of CEO pay ratios fits into the SEC’s mission. Higgins said the SEC would follow any Congressional mandate regardless of whether it fits its mission clearly.
- WKSI Waivers: Higgins defended the right of the SEC to grant WKSI to firms that have been convicted of felonies or misdemeanors as long as they can demonstrate the waiver is appropriate.
- Accredited Investor Definition: Rep. Hultgren (R-Ill.) called for an expanded definition of “accredited investor” that goes beyond income or net worth.
- Small Business Forum on Capital Formation: Higgins said recommendations from the SEC’s small business forum were considered in ongoing rulemakings and implemented within the JOBS Act.
- HFT: Rep. Sherman (D-Calif.) accused computerized trading of “taking money off the table” without contributing anything to society.
- QM vs. QRM: Higgins said joint rulemaking with other regulators is difficult, but that the SEC is considering comments of the classification of different mortgage types.
Speakers
- Keith F. Higgins, Director, Division of Corporation Finance, U.S. Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Scott Garrett (R-N.J.) said that under the Obama administration, many regulators have been carrying out a “heavy handed political act” rather than fulfilling their mandated duties. He thanked Securities and Exchange Commission (SEC) Chair Mary Jo White for preserving the “political independence” of the SEC. He stressed that the SEC was a disclosure-based agency and that providing appropriate information to investors is “at the heart of what the SEC does.” He praised the SEC for taking steps to address “disclosure overload,” to end disclosure requirements of information that is “almost useless to the retail investor,” and to address growing concerns about the proxy advisory industry.
Garret stressed, however, that significant work remained to address concerns about irrelevant and unnecessary disclosure requirements and to limit activist shareholder proposals. He suggested that the SEC amend proposal rules to increase the percent ownership threshold, lengthen holding time requirement, and strengthen resubmission thresholds. He expressed concern at the SEC’s implementation of the Jumpstart Our Business Startups (JOBS) Act, whose rules he claimed had not been implemented with the same “zeal and enthusiasm” as had rules associated with Dodd-Frank. He also said the SEC’s accredited investor definition could hurt small business capital formation by reducing the number of eligible investors.
Ranking Member Carolyn Maloney (D-N.Y.) stated that “markets run more on confidence than on capital.” She identified the accuracy and transparency of the statements that publicly traded companies must file with the SEC as an “underrated source” of confidence in the markets, and that is promotes capital formation.
Rep. David Scott (D-Ga.) said the SEC has a “good and necessary” three-part mission: 1) to protect investors; 2) to ensure liquid and efficient markets; and 3) to facilitate capital formation. He expressed interest in learning what changes have been made to the SEC as a result of Dodd-Frank and said he would support any reforms needed to improve SEC efficiency. He said it was critically important that the SEC and the Commodity Futures Trading Commission (CFTC ) finalize their joint rule regarding cross-border swaps and derivatives. Failure to do so, he warned, would cause confusion in the markets and put American businesses at a competitive disadvantage. He stressed the importance of ensuring that the top eight foreign swaps and derivatives jurisdictions have equally “robust” regulatory regimes.
Rep. Robert Hurt (R-Va.) advocated for a review of the corporate disclosure system to reduce “disclosure overload.” “Too much information for the sake of information,” he explained, creates inefficiency and confusion. He noted the SEC’s broad discretion in carrying out its mission of facilitating capital formation, and said the JOBS Act includes “common sense updates” to the SEC’s approach. He expressed concern about the “disproportionate cost” of XBRL compliance.
Rep. Brad Sherman (D-Calif.) criticized the SEC for being two years behind in writing credit rating agency regulations and claimed that many of the “same pressures” that caused the rating agencies to improperly rate mortgage-backed securities during the financial crisis still remain. He expressed concern about high speed trading practices, claiming that such practices injure investor confidence and provide little societal benefit. He advocated for a reasonable financial transaction tax, which he said could raise revenue for the SEC.
Rep. Ed Royce (R-Calif.) praised the SEC for its “active pursuit” of insider trading violations. He expressed interest in learning the SEC’s approach to ensuring “new and creative deals” involving contracts are not simply insider trading in disguise.
Witness Testimony
In his testimony, Keith Higgins, director of the SEC’s Division of Corporation Finance, stated that the mission of the SEC is to protect investors; to maintain fair, orderly, and efficient markets; and to promote capital formation. The Division of Corporation Finance, he explained, is tasked with ensuring that investors have access to “material, complete, and accurate information.” To accomplish this task, he said, his division selectively reviews company filings, provides interpretive guidance, and issues rulemaking recommendations to the Commission. His staff also reviews the disclosure filings of every publicly traded company as required under the Sarbanes-Oxley Act, he said. He also highlighted the recent issuance of guidance to investment advisors about their responsibilities regarding proxy advisory firms.
The current focus of his division, he said, is implementing Dodd-Frank and the JOBS Act. He noted that several Dodd-Frank rules have been completed, including say-on-pay, asset level review of asset-backed securities, bad actors disqualification, and removing primary residence as a component of accredited investor evaluation. He also highlighted that he is working to complete the CEO pay ratio rule. Regarding the JOBS Act, he noted that his division is making progress on several rules, including rules on general solicitation for crowdfunding. He said the Division of Corporation Finance was “leading the effort” to review the disclosure system to ensure timely, material, and more effective disclosure. His goal, he mentioned, is to modernize and update disclosure requirements so that they are more meaningful to investors and less burdensome to companies.
Question and Answer
Proxy Advisory Firms and Shareholder Proposals
Garrett noted that Higgins discussed recently-issued guidance that addresses many concerns raised by investors and businesses about proxy advisory firms, and called it an important step regarding share voting. He asked how the SEC is going to oversee the implementation of the guidance. Higgins replied that the SEC keeps an eye on the markets, but proxy season is typically the first four months of the year, so there is currently a “lull.” He explained that the SEC collects feedback from market participants, but that there is no current work plan on how to assess the guidance.
Garrett then asked about proxy advisers having to report possible conflicts of interest. Higgins said the guidance requires that proxy firms provide information on conflicts “on or about” the time it delivers a report.
Asked by Garrett if the SEC would be reporting back to Congress with a report on the performance of the guidance, Higgins said there are no plans at present to deliver a report, but that it would be considered.
On the topic of shareholder proposals, Higgins said no one is happy with the current process, but all issues are the subject of widespread debate and any proposal will have to find some sort of consensus. He said the SEC devotes a substantial amount of staff resources each year to monitoring the proxy voting process to ensure that it is not abused by activist shareholders and special interest groups.
Maloney said she is a big advocate of the XBRL system, calling it the way of the future and saying companies are thrilled they can have a standard format for disclosure that cuts paperwork and makes it easier to file information. She asked if the data in the system would be available online, to which Higgins replied that the data is available.
Hurt said the XBRL system is something that his constituents have expressed concerns about. He questioned whether it really benefits investors at all, and said the system is not ready for “primetime.”
Hurt then asked what the SEC’s goals are for corporate disclosure. Higgins answered that the SEC wants to provide investors with material information to help them make investment decisions while also making the disclosure less burdensome on companies. He said that, in some respects, there is too much disclosure, but there are also areas where investors would benefit from additional information.
Hurt said it is very expensive for companies to disclose a lot of information, and that these funds could otherwise be spent on job creation or other purposes.
Rep. Bill Foster (D-Ill.) asked what the SEC is doing to ensure reports are filed properly. Higgins said the SEC offers guidance of general applicability, and issues comments when a company has an incoming filing.
Rep. Steve Stivers (R-Ohio) read comments made by Commissioner Piwowar on the harm caused by “disclosure overload” and asked Higgins to comment. Higgins said he believes there could be disclosures that investors do not find useful and companies find burdensome, but there might also be information that is not being reported that would be valuable to investors. He said the SEC’s job is to find a balance and ensure that investors have all the accurate material information needed to make informed investment decisions. He continued that the SEC is seeking public comment.
Hurt said access to capital is important, especially as a driver of job creation in a time of high unemployment. He said there is concern about the pace at which the JOBS Act reforms are being implemented. He asked when results would be seen. Higgins said the SEC is still preparing recommendations, which would likely take the form of a release that the public could then comment on.
Rep. Ann Wager (R-Mo.) said savings and loans were left out of the JOBS Act as an oversight. She asked what the SEC is doing to fix this, and Higgins replied that it is working on rulemakings and hopes to have a proposal by the end of the year.
Rep. Mick Mulvaney (R-S.C.) expressed his frustration that the SEC is in charge of regulating conflict minerals, calling this “patently absurd” and questioned why rulemaking in this area has been completed before JOBS Act related action. He called it a “case of misplaced priorities.”
Mulvaney raised crowdfunding provisions that require a company seeking to raise more than $500,000 to go through an audit. He asked whether requiring an audit would positively or negatively impact access to capital through crowdfunding. Higgins said Congress suggested the $500,000 threshold but that the SEC has the power to raise it, and it is considering comments.
Rep. John Carney (D-Del.) asked about the initial public offering (IPO) “onramp” that was a part of the JOBS Act and the “quiet period” before going public during which emerging growth companies can “test the waters” by issuing reports to potential investors. Higgins said investors were skittish at first, but that he has since heard that the process is being used frequently and without any problems.
Rep. Stephen Fincher (R-Tenn.) said the JOBS Act is important to getting the economy going, but reported hearing that many SEC staffers do not like the Act because it is a Congressional initiative rather than a result of SEC action. He asked Higgins if some staffers have “turned a cold shoulder” to the JOBS Act, to which Higgins responded that no one had expressed such a sentiment to him.
Fincher asked Higgins if he thinks the SEC should exhibit the same zeal in implementing the JOBS Act as it does with the Dodd-Frank Act. “I believe so,” Higgins answered.
Scott raised section 953(b) of the Dodd-Frank Act, which directed the SEC to develop a rulemaking on corporate disclosure including the pay ratio between a company’s chief executive officer salary and that of the median employee. He asked how the SEC is progressing. Higgins replied that the SEC issued a proposal last September that received thousands of comment letters, and that while there is no strict deadline, Chair White made it clear she would like to get a rule done this year.
Scott asked if the SEC is concerned about the pay gap and whether it is contributing to the “disappearing” of the middle class. Higgins said the SEC has no view on that, and only seeks to get a rule done as mandated by Congress.
Foster asked if a simplification of the pay ratio calculation, such as only requiring an answer to be accurate within 10 percent, would make the proposal more doable. Higgins said he would get back to Foster with an answer.
Rep. Huizenga asked whether Higgins believes that requiring disclosure of the pay ratio truly fits within the SEC’s three-part mission. Higgins replied that the measure was mandated by Congress, and the mission of the SEC is to follow the law. Huizenga countered that the SEC has a role, and that he doubts it is executing its role by pursuing this proposal.
Sherman said the job of the SEC is to carry out the mandates Congress gives it, and asked when the SEC would get the rule done. Higgins said the Commission controls the agenda, and that he cannot give an estimate.
Scott said swaps and derivatives are a growing part of the world economy and asked whether the SEC has been working towards developing a joint rule with the CFTC. Higgins said this is not the responsibility of his division, but that he would be happy to ask someone else to respond to the concern.
Rep. Gary Peters (D-Mich.) noted that companies are required to disclose information such the nature of their business, products, subsidiaries, number of employees, and any anticipated changes in the number of employees. However, he said, they are not required to disclose where employees are based. He argued that responsible investors have a right to know whether firms are hiring in the U.S. or moving money overseas. He asked if the SEC has the authority to implement such a requirement without legislation. Higgins said he believes the SEC would have that power even absent a Congressional mandate.
Peters asked if the SEC would be able to implement the proposal without difficulty. Higgins said if Congress passes a law, the SEC would have its economists look at the costs and benefits and collect public input. He said he did not see any structural impediments to adopting such a rule, only that time would be needed to review.
Rep. Stephen Lynch (D-Mass.) asked about well-known seasoned issuer (WKSI) waivers that are given to issuers who are supposed to be disqualified from WKSI status if convicted of felonies or misdemeanors such as fraud. He said the SEC often gives multiple waivers to large institutions. Higgins said waivers can be given to a firm if the SEC deems it appropriate. He said WKSI discrimination was never intended as a punishment, and that these firms would have already been punished through fines.
Rep. Randy Hultgren (R-Ill.) said the SEC took up securities offering reform, including the WKSI designation that allows greater flexibility, in 2005. He asked whether the SEC “rubber stamps” requests for WKSI waivers, of if there is a process to the consideration. Higgins explained there is fist a phone call to determine whether there is, in fact, a plausible case for a waiver, which is then followed by a letter from the issuer putting its full case forward. He states that the SEC then goes back and forth with the issuer before deciding whether or not to grant a waiver.
Accredited Investor Definition
Hultgren noted that accredited investor status lets people access a wider variety of investment options, but lamented that the definition has not been updated for some time. He said linking the definition purely to income or net worth is antiquated and counterproductive, and asked whether the SEC is considering letting people take a test to demonstrate their competency, as is done in the United Kingdom. Higgins said the SEC is considering the option, though he could not say whether the change would be adopted.
Small Business Forum on Capital Formation
Rep. Ann Wagner (R-Mo.) asked what the Division of Corporation Finance plans to do with recommendations it collected from its small business forum on capital formation. Higgins said none of the recommendations had a high priority attached to them, but that several dealt with existing rulemaking proposals are being taken into account.
Stivers asked how many of the forum’s recommendations for capital formation have been acted on. Higgins could not give a precise number, but offered that a number of them became a part of the JOBS Act.
Stivers said the measures were incorporated into the JOBS Act because the SEC failed to act on its own, and urged Higgins to listen to small businesses.
Sherman said computerized trading is “taking money off the table” without doing any service to society. He asked what the benefits are to not taking steps to minimize high-frequency trading. Higgins said this is not his area, and that the question should be directed to Director Stephen Luparello of the Division of Trading and Markets.
Rep. John Carney (D-Del.) raised the risk retention rules to be promulgated by the SEC. He said a re-proposal that came out in 2013 put qualified mortgages (QM) and qualified residential mortgages (QRM) in the same class, and noted that former Rep. Barney Frank (D-Mass.) complained that they were to be two separate classes. He asked how he would respond to Frank’s objections that there was a clear statutory mandate for them to be separate classes. Higgins said the view has been expressed by many commenters, but that joint-agency rulemaking is difficult.
For more information on this hearing, please click here.
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House Financial Services Committee
Subcomittee on Capital Markets and Government Sponsored Enterprises
“Oversight of the SEC’s Division of Corporation Finance”
Thursday, July 24, 2014
Key Topics & Takeaways
- Proxy Advisory Firms and Shareholder Proposals: Rep. Garrett (R-N.J.) welcomed recent guidance from the SEC on proxy advisory firms and called for the SEC to report back on the results of the guidance.
- Corporate Disclosure: Higgins explained that the goal of the SEC is to ensure that investors are supplied with all the accurate material information needed to make investment decisions while trying to minimize the burden on companies.
- JOBS Act: Reps. Mulvaney (R-S.C.) and Fincher (R-Tenn.) expressed their frustration at the lack of progress by the SEC in implementing the JOBS Act.
- CEO Pay Ratio: Rep. Huizenga (R-Mich.) questioned whether requiring disclosures of CEO pay ratios fits into the SEC’s mission. Higgins said the SEC would follow any Congressional mandate regardless of whether it fits its mission clearly.
- WKSI Waivers: Higgins defended the right of the SEC to grant WKSI to firms that have been convicted of felonies or misdemeanors as long as they can demonstrate the waiver is appropriate.
- Accredited Investor Definition: Rep. Hultgren (R-Ill.) called for an expanded definition of “accredited investor” that goes beyond income or net worth.
- Small Business Forum on Capital Formation: Higgins said recommendations from the SEC’s small business forum were considered in ongoing rulemakings and implemented within the JOBS Act.
- HFT: Rep. Sherman (D-Calif.) accused computerized trading of “taking money off the table” without contributing anything to society.
- QM vs. QRM: Higgins said joint rulemaking with other regulators is difficult, but that the SEC is considering comments of the classification of different mortgage types.
Speakers
- Keith F. Higgins, Director, Division of Corporation Finance, U.S. Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Scott Garrett (R-N.J.) said that under the Obama administration, many regulators have been carrying out a “heavy handed political act” rather than fulfilling their mandated duties. He thanked Securities and Exchange Commission (SEC) Chair Mary Jo White for preserving the “political independence” of the SEC. He stressed that the SEC was a disclosure-based agency and that providing appropriate information to investors is “at the heart of what the SEC does.” He praised the SEC for taking steps to address “disclosure overload,” to end disclosure requirements of information that is “almost useless to the retail investor,” and to address growing concerns about the proxy advisory industry.
Garret stressed, however, that significant work remained to address concerns about irrelevant and unnecessary disclosure requirements and to limit activist shareholder proposals. He suggested that the SEC amend proposal rules to increase the percent ownership threshold, lengthen holding time requirement, and strengthen resubmission thresholds. He expressed concern at the SEC’s implementation of the Jumpstart Our Business Startups (JOBS) Act, whose rules he claimed had not been implemented with the same “zeal and enthusiasm” as had rules associated with Dodd-Frank. He also said the SEC’s accredited investor definition could hurt small business capital formation by reducing the number of eligible investors.
Ranking Member Carolyn Maloney (D-N.Y.) stated that “markets run more on confidence than on capital.” She identified the accuracy and transparency of the statements that publicly traded companies must file with the SEC as an “underrated source” of confidence in the markets, and that is promotes capital formation.
Rep. David Scott (D-Ga.) said the SEC has a “good and necessary” three-part mission: 1) to protect investors; 2) to ensure liquid and efficient markets; and 3) to facilitate capital formation. He expressed interest in learning what changes have been made to the SEC as a result of Dodd-Frank and said he would support any reforms needed to improve SEC efficiency. He said it was critically important that the SEC and the Commodity Futures Trading Commission (CFTC ) finalize their joint rule regarding cross-border swaps and derivatives. Failure to do so, he warned, would cause confusion in the markets and put American businesses at a competitive disadvantage. He stressed the importance of ensuring that the top eight foreign swaps and derivatives jurisdictions have equally “robust” regulatory regimes.
Rep. Robert Hurt (R-Va.) advocated for a review of the corporate disclosure system to reduce “disclosure overload.” “Too much information for the sake of information,” he explained, creates inefficiency and confusion. He noted the SEC’s broad discretion in carrying out its mission of facilitating capital formation, and said the JOBS Act includes “common sense updates” to the SEC’s approach. He expressed concern about the “disproportionate cost” of XBRL compliance.
Rep. Brad Sherman (D-Calif.) criticized the SEC for being two years behind in writing credit rating agency regulations and claimed that many of the “same pressures” that caused the rating agencies to improperly rate mortgage-backed securities during the financial crisis still remain. He expressed concern about high speed trading practices, claiming that such practices injure investor confidence and provide little societal benefit. He advocated for a reasonable financial transaction tax, which he said could raise revenue for the SEC.
Rep. Ed Royce (R-Calif.) praised the SEC for its “active pursuit” of insider trading violations. He expressed interest in learning the SEC’s approach to ensuring “new and creative deals” involving contracts are not simply insider trading in disguise.
Witness Testimony
In his testimony, Keith Higgins, director of the SEC’s Division of Corporation Finance, stated that the mission of the SEC is to protect investors; to maintain fair, orderly, and efficient markets; and to promote capital formation. The Division of Corporation Finance, he explained, is tasked with ensuring that investors have access to “material, complete, and accurate information.” To accomplish this task, he said, his division selectively reviews company filings, provides interpretive guidance, and issues rulemaking recommendations to the Commission. His staff also reviews the disclosure filings of every publicly traded company as required under the Sarbanes-Oxley Act, he said. He also highlighted the recent issuance of guidance to investment advisors about their responsibilities regarding proxy advisory firms.
The current focus of his division, he said, is implementing Dodd-Frank and the JOBS Act. He noted that several Dodd-Frank rules have been completed, including say-on-pay, asset level review of asset-backed securities, bad actors disqualification, and removing primary residence as a component of accredited investor evaluation. He also highlighted that he is working to complete the CEO pay ratio rule. Regarding the JOBS Act, he noted that his division is making progress on several rules, including rules on general solicitation for crowdfunding. He said the Division of Corporation Finance was “leading the effort” to review the disclosure system to ensure timely, material, and more effective disclosure. His goal, he mentioned, is to modernize and update disclosure requirements so that they are more meaningful to investors and less burdensome to companies.
Question and Answer
Proxy Advisory Firms and Shareholder Proposals
Garrett noted that Higgins discussed recently-issued guidance that addresses many concerns raised by investors and businesses about proxy advisory firms, and called it an important step regarding share voting. He asked how the SEC is going to oversee the implementation of the guidance. Higgins replied that the SEC keeps an eye on the markets, but proxy season is typically the first four months of the year, so there is currently a “lull.” He explained that the SEC collects feedback from market participants, but that there is no current work plan on how to assess the guidance.
Garrett then asked about proxy advisers having to report possible conflicts of interest. Higgins said the guidance requires that proxy firms provide information on conflicts “on or about” the time it delivers a report.
Asked by Garrett if the SEC would be reporting back to Congress with a report on the performance of the guidance, Higgins said there are no plans at present to deliver a report, but that it would be considered.
On the topic of shareholder proposals, Higgins said no one is happy with the current process, but all issues are the subject of widespread debate and any proposal will have to find some sort of consensus. He said the SEC devotes a substantial amount of staff resources each year to monitoring the proxy voting process to ensure that it is not abused by activist shareholders and special interest groups.
Maloney said she is a big advocate of the XBRL system, calling it the way of the future and saying companies are thrilled they can have a standard format for disclosure that cuts paperwork and makes it easier to file information. She asked if the data in the system would be available online, to which Higgins replied that the data is available.
Hurt said the XBRL system is something that his constituents have expressed concerns about. He questioned whether it really benefits investors at all, and said the system is not ready for “primetime.”
Hurt then asked what the SEC’s goals are for corporate disclosure. Higgins answered that the SEC wants to provide investors with material information to help them make investment decisions while also making the disclosure less burdensome on companies. He said that, in some respects, there is too much disclosure, but there are also areas where investors would benefit from additional information.
Hurt said it is very expensive for companies to disclose a lot of information, and that these funds could otherwise be spent on job creation or other purposes.
Rep. Bill Foster (D-Ill.) asked what the SEC is doing to ensure reports are filed properly. Higgins said the SEC offers guidance of general applicability, and issues comments when a company has an incoming filing.
Rep. Steve Stivers (R-Ohio) read comments made by Commissioner Piwowar on the harm caused by “disclosure overload” and asked Higgins to comment. Higgins said he believes there could be disclosures that investors do not find useful and companies find burdensome, but there might also be information that is not being reported that would be valuable to investors. He said the SEC’s job is to find a balance and ensure that investors have all the accurate material information needed to make informed investment decisions. He continued that the SEC is seeking public comment.
Hurt said access to capital is important, especially as a driver of job creation in a time of high unemployment. He said there is concern about the pace at which the JOBS Act reforms are being implemented. He asked when results would be seen. Higgins said the SEC is still preparing recommendations, which would likely take the form of a release that the public could then comment on.
Rep. Ann Wager (R-Mo.) said savings and loans were left out of the JOBS Act as an oversight. She asked what the SEC is doing to fix this, and Higgins replied that it is working on rulemakings and hopes to have a proposal by the end of the year.
Rep. Mick Mulvaney (R-S.C.) expressed his frustration that the SEC is in charge of regulating conflict minerals, calling this “patently absurd” and questioned why rulemaking in this area has been completed before JOBS Act related action. He called it a “case of misplaced priorities.”
Mulvaney raised crowdfunding provisions that require a company seeking to raise more than $500,000 to go through an audit. He asked whether requiring an audit would positively or negatively impact access to capital through crowdfunding. Higgins said Congress suggested the $500,000 threshold but that the SEC has the power to raise it, and it is considering comments.
Rep. John Carney (D-Del.) asked about the initial public offering (IPO) “onramp” that was a part of the JOBS Act and the “quiet period” before going public during which emerging growth companies can “test the waters” by issuing reports to potential investors. Higgins said investors were skittish at first, but that he has since heard that the process is being used frequently and without any problems.
Rep. Stephen Fincher (R-Tenn.) said the JOBS Act is important to getting the economy going, but reported hearing that many SEC staffers do not like the Act because it is a Congressional initiative rather than a result of SEC action. He asked Higgins if some staffers have “turned a cold shoulder” to the JOBS Act, to which Higgins responded that no one had expressed such a sentiment to him.
Fincher asked Higgins if he thinks the SEC should exhibit the same zeal in implementing the JOBS Act as it does with the Dodd-Frank Act. “I believe so,” Higgins answered.
Scott raised section 953(b) of the Dodd-Frank Act, which directed the SEC to develop a rulemaking on corporate disclosure including the pay ratio between a company’s chief executive officer salary and that of the median employee. He asked how the SEC is progressing. Higgins replied that the SEC issued a proposal last September that received thousands of comment letters, and that while there is no strict deadline, Chair White made it clear she would like to get a rule done this year.
Scott asked if the SEC is concerned about the pay gap and whether it is contributing to the “disappearing” of the middle class. Higgins said the SEC has no view on that, and only seeks to get a rule done as mandated by Congress.
Foster asked if a simplification of the pay ratio calculation, such as only requiring an answer to be accurate within 10 percent, would make the proposal more doable. Higgins said he would get back to Foster with an answer.
Rep. Huizenga asked whether Higgins believes that requiring disclosure of the pay ratio truly fits within the SEC’s three-part mission. Higgins replied that the measure was mandated by Congress, and the mission of the SEC is to follow the law. Huizenga countered that the SEC has a role, and that he doubts it is executing its role by pursuing this proposal.
Sherman said the job of the SEC is to carry out the mandates Congress gives it, and asked when the SEC would get the rule done. Higgins said the Commission controls the agenda, and that he cannot give an estimate.
Scott said swaps and derivatives are a growing part of the world economy and asked whether the SEC has been working towards developing a joint rule with the CFTC. Higgins said this is not the responsibility of his division, but that he would be happy to ask someone else to respond to the concern.
Rep. Gary Peters (D-Mich.) noted that companies are required to disclose information such the nature of their business, products, subsidiaries, number of employees, and any anticipated changes in the number of employees. However, he said, they are not required to disclose where employees are based. He argued that responsible investors have a right to know whether firms are hiring in the U.S. or moving money overseas. He asked if the SEC has the authority to implement such a requirement without legislation. Higgins said he believes the SEC would have that power even absent a Congressional mandate.
Peters asked if the SEC would be able to implement the proposal without difficulty. Higgins said if Congress passes a law, the SEC would have its economists look at the costs and benefits and collect public input. He said he did not see any structural impediments to adopting such a rule, only that time would be needed to review.
Rep. Stephen Lynch (D-Mass.) asked about well-known seasoned issuer (WKSI) waivers that are given to issuers who are supposed to be disqualified from WKSI status if convicted of felonies or misdemeanors such as fraud. He said the SEC often gives multiple waivers to large institutions. Higgins said waivers can be given to a firm if the SEC deems it appropriate. He said WKSI discrimination was never intended as a punishment, and that these firms would have already been punished through fines.
Rep. Randy Hultgren (R-Ill.) said the SEC took up securities offering reform, including the WKSI designation that allows greater flexibility, in 2005. He asked whether the SEC “rubber stamps” requests for WKSI waivers, of if there is a process to the consideration. Higgins explained there is fist a phone call to determine whether there is, in fact, a plausible case for a waiver, which is then followed by a letter from the issuer putting its full case forward. He states that the SEC then goes back and forth with the issuer before deciding whether or not to grant a waiver.
Accredited Investor Definition
Hultgren noted that accredited investor status lets people access a wider variety of investment options, but lamented that the definition has not been updated for some time. He said linking the definition purely to income or net worth is antiquated and counterproductive, and asked whether the SEC is considering letting people take a test to demonstrate their competency, as is done in the United Kingdom. Higgins said the SEC is considering the option, though he could not say whether the change would be adopted.
Small Business Forum on Capital Formation
Rep. Ann Wagner (R-Mo.) asked what the Division of Corporation Finance plans to do with recommendations it collected from its small business forum on capital formation. Higgins said none of the recommendations had a high priority attached to them, but that several dealt with existing rulemaking proposals are being taken into account.
Stivers asked how many of the forum’s recommendations for capital formation have been acted on. Higgins could not give a precise number, but offered that a number of them became a part of the JOBS Act.
Stivers said the measures were incorporated into the JOBS Act because the SEC failed to act on its own, and urged Higgins to listen to small businesses.
Sherman said computerized trading is “taking money off the table” without doing any service to society. He asked what the benefits are to not taking steps to minimize high-frequency trading. Higgins said this is not his area, and that the question should be directed to Director Stephen Luparello of the Division of Trading and Markets.
Rep. John Carney (D-Del.) raised the risk retention rules to be promulgated by the SEC. He said a re-proposal that came out in 2013 put qualified mortgages (QM) and qualified residential mortgages (QRM) in the same class, and noted that former Rep. Barney Frank (D-Mass.) complained that they were to be two separate classes. He asked how he would respond to Frank’s objections that there was a clear statutory mandate for them to be separate classes. Higgins said the view has been expressed by many commenters, but that joint-agency rulemaking is difficult.
For more information on this hearing, please click here.