House Financial Services Subcommittee on Legislative Proposals to Enhance Capital Markets
House
Financial Services Subcommittee on
Capital
Markets and Government Sponsored Enterprises
Legislative Proposals to Improve the U.S. Capital
Markets
Wednesday, December 2, 2015
Key
Topics & Takeaways
-
Defendants’
Rights in Administrative Law Proceedings: Stanford Law Professor Grundfest called for reasonable
protections of defendants’ rights in enforcement actions, and claimed that
legislative proposals such as H.R. 3798 – the Due Process Restoration Act – can
help restore a more effective equilibrium to ensure the SEC addresses the
“litany of concerns” raised by market participants over the “truncated rights”
of defendants. However, the University of Tennessee’s Carcello claimed that
this bill would make it “more difficult” for the SEC to enforce the federal
securities laws, while the Chamber’s Quaadman countered that this bill simply
gives defendants the rights to defend themselves in line with the
constitutional safeguards included in the Bill of Rights.
-
Small Investor Advocate or Quasi-Lobbyist: The Small Business
Investor Alliance’s Mathieu supported the
Small Business Advocate Act, which he claimed would give small businesses an
“equal footing” with the SEC’s existing investor advocate.However, Carcello and Rep. Ellison (D-Minn.) argued
that this bill would create a “quasi-lobbying” group to advocate for a better
regulatory environment for small business.
- Importance of Angel Investors: Several panelists voiced
their support for the HALOS Act, and Quaadman explained that angel investors
are “extremely important” for capital formation since they are often the first
line of accredited investors investing in startups. He also noted that the historically
low levels of small business startups underscores the importance of opening up
these financing channels to promote capital formation. Further, he argued that
the implementation of Basel III deters banks from lending to startups, which
makes them more dependent on capital markets.
Speakers:
-
Joseph Grundfest, William A.
Franke Professor of Law and Business, Stanford Law School
-
Brian
Hahn, Chief Financial Officer, GlycoMimetics, on behalf
of the Biotechnology Industry Organization
- Joseph
V. Carcello, EY and Business
Alumni Professor, Department of Accounting and Information Management, Haslam
College of Business, University of Tennessee
-
Chris
Mathieu, Senior Vice President and Chief
Financial Officer, Horizon Technology Finance, on behalf of the Small Business
Investor Alliance
-
Tom
Quaadman, Vice President, Center for
Capital Markets Competitiveness, U.S. Chamber of Commerce
Opening Remarks
Subcommittee Chairman Garrett (R-N.J.)
Subcommittee Chairman Scott Garrett (R-N.J.) opened
by explaining that the hearing would consider ways to modernize the U.S.
securities laws to improve capital markets, as well as opportunities to build
upon the success of the Jumpstart Our Business Startups (JOBS) Act by lowering
barriers to capital formation for small and medium sized enterprises
(SMEs).
Garrett claimed that his bill, H.R. 3798,
the Due Process Restoration Act, would enable defendants to move their cases to
a Federal district court to ensure they have due process protections that “do
not exist” in Securities and Exchange Commission’s (SEC’s) administrative law
process. Garrett noted that the SEC relies
on its own administrative proceedings to litigate enforcement actions and in
doing so enjoys an advantage, as evidenced by the “extraordinarily high” rate
of cases it won in FY2014. Garrett
warned that the administrative law process comes at a “significant cost” of due
process for the accused, since the SEC’s in-house tribunal lacks many protections
afforded under federal courts (including full discovery rights). Garrett
explained that his bill intends to protect the rights of defendants in these
cases.
Ranking Member Maloney (D-N.Y.)
Subcommittee Ranking Member Carolyn Maloney
explained that the hearing would consider a series of legislative proposals that
aim to address capital formation constraints to make it easier for companies to
raise capital. She noted that she co-sponsors
a bill, H.R. 3784,
the SEC Small Business Advocate Act, which would create a small business
advocate to advise the SEC on issues affecting capital formation in the small
business community. Maloney referred to the bill as a “common sense proposal”
that is modeled after a provision in the Dodd-Frank Act that established the
SEC’s Investor Advisory Committee. Maloney also expressed concern that the Due Process
Restoration Act would overhaul the SEC’s use of administrative law judges (ALJs)
and in doing so would erode its enforcement authority. Maloney recalled that the notion of ‘insider
trading’ was established by an administrative opinion, which she said is a
“useful tool” to protect investors.
Rep. Hurt (R-Va.)
Rep. Robert Hurt (R-Va.) explained that the bills
before the Subcommittee are necessary to lower barriers to capital for small
businesses to enable them to create jobs and grow the economy. In particular,
he noted that the bill he co-sponsors, the Helping Angels Lead Our Startups (HALOS) Act, would improve startups’ abilities to market their
securities through “demo days” without the risk of violating federal securities
laws. In doing so, Hurt claimed, this
bill would alleviate the burden on startups and small business which face “disproportionately
expensive” compliance burdens.
Rep. Sinema (D-Ariz.)
Rep. Kyrsten Sinema (D-Ariz.) expressed her support
for the bipartisan bill, the Fostering Innovation Act, which she said provides targeted regulatory relief
to companies on the verge of scientific or medical discoveries. Sinema
explained that this “common sense exemption” would ensure regulations do not
stand in the way of companies with a research driven business model. She also
expressed her support for the HALOS Act, which she explained would connect
angel investors and entrepreneurs to ensure small businesses have “every
opportunity” to succeed.
Rep. Poliquin (R-Maine)
Rep. Bruce Poliquin (R-Maine) noted that
approximately 80 percent of new jobs are created by small businesses that often
do not have access to traditional loans to grow and expand their businesses. He
also explained that the SEC holds a forum that brings together government
officials and the private sector to come up with ideas on how small businesses
can access capital, however the SEC is not required to act upon the group’s
recommendations, which are often ignored. Poliquin explained that the Small Business Capital Formation Enhancement Act requires that the SEC consider the recommendations
put forth by the public-private sector forum and issue a public statement
justifying why they will (or will not) implement those recommendations to improve
capital access in America.
Panel Remarks
Joseph
Grundfest, William A. Franke Professor of Law and Business, Stanford Law School
In his opening statement,
Grundfest highlighted the need to “balance” the number of cases that the SEC
chooses to pursue in federal court versus those considered internally by ALJs. He also called for a reasonable balance between
defendants’ rights in enforcement actions. Grundfest agreed that legislative
proposals such as H.R. 3798 can help restore a more effective equilibrium
between those competing interests. Grundfest
explained that fairness is the chief concern about the SEC’s use of
administrative law procedures.
While he noted the Commission’s recent effort to
amend its rules on the use of ALJs, Grundfest argued that such concessions are
minor given the “litany of concerns” raised by concerned parties over the
“truncated rights” of defendants. Grundfest recommended a legislative solution
to help restore a more effective balance in the Commission’s use of
administrative law procedures, such as legislation requiring the SEC to reform
its internal procedures and set specific criteria for the cases that should be
tried in federal court or by ALJs, and a third criteria whereby more nuanced
cases would be tried under administrative law procedures unless the federal
court grants a petition for its removal.
Such a tripartite approach, Grundfest argued, can more appropriately
balance the rights of defendants without interfering with the SEC’s “legitimate
interests” in enforcing the U.S. securities laws.
Brian
Hahn, Chief Financial Officer, GlycoMimetics, on behalf of the Biotechnology
Industry Organization
Hahn explained
that his company launched its initial public offering (IPO) with support from
the JOBS Act and said that providing targeted exemptions allows small biotech
companies like his to “focus on science, rather than compliance.” Hahn
expressed support for Rep. Sinema’s bill which he explained would provide
targeted exemptions from requirements under Sarbanes-Oxley for small businesses,
and would build on the success of the JOBS Act by reducing compliance costs of small
companies. Hahn also encouraged the
Subcommittee to continue encouraging the SEC to focus on capital formation, and
argued that H.R. 3784 would improve SEC’s ability to make informed policy
decisions by including a small business advocate in that process.
Joseph
V. Carcello, EY and Business Alumni Professor, Department of Accounting and Information Management, Haslam College of
Business, University of Tennessee
Carcello claimed
that “capital markets do not exist without investors.” He expressed opposition
to H.R. 3784 that would establish a small business advocate within the SEC
which he claimed is “flawed,” because it would establish a “quasi-lobbying”
entity within the SEC that would seek a more favorable regulatory climate. Such
changes, he warned, could result in greater information risk to investors, which
could be counterproductive to small businesses, since capital would only be
available at a higher cost.
In addition, Carcello argued that the Dodd-Frank Act
and Sarbanes-Oxley made it easier for the SEC to bring enforcement actions before
ALJs. Moving away from that approach, he cautioned, is “unlikely” to be in the
best interest of society.
Carcello also explained that the Fostering
Innovation Act would extend a waiver for issuer’s controls over financial reporting
(ICFR) from five to ten years, which he cautioned would be “ill advised” since such
reporting is valued by investors. Carcello cited a study in which he claimed that
72 percent of surveyed institutional investors indicated they relied on ICFR
extensively. Rather than giving a
“blanket exemption” to certain companies, Carcello suggested companies allow
shareholders to vote and “let the market decide” whether an extension to ICFR
reporting is necessary.
Chris
Mathieu, Senior Vice President and Chief Financial Officer, Horizon Technology
Finance, on
behalf of the Small Business Investor Alliance (SBIA)
Mathieu noted the
importance of establishing a small business advocate within the SEC and expressed
his support for the Small Business Advocate Act, which he claimed would give
small businesses an “equal footing” with the existing investor advocate. He
cited a speech in
which former SEC Commissioner Gallagher argued that the SEC does not have an
adequate structure in place to consider how various rules impact small businesses
and unintentionally undermine capital formation. Mathieu argued that legislation and
regulation has a “bias” in favor of large corporations, and that this bill
would lead to better regulation and legislation since small business
stakeholders would have a voice in the decision making process.
Mathieu also expressed his support for the Small Business
Capital Formation Enhancement Act.
Tom Quaadman, Vice
President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
Quaadman recalled
that the Chamber of Commerce released 28 recommendations earlier this year on how the SEC can improve its enforcement and
oversight functions while ensuring due process. He noted that the Commission’s
use of administrative proceedings has changed drastically over the last 25
years. Quaadman also claimed that administrative proceedings present an uneven
playing field, since defendants have only 90 days to prepare their defense, no
right to deposition, and no right to discovery. He summarized several of the
Chamber’s recommendations, including that the SEC: 1) develop an alternative
dispute resolution mechanism so that the SEC can quickly resolve minor
violations; 2) allow the right of removal to a federal district court; and 3)
allow defendants the right to a trial by jury.
Quaadman lent his support to H.R. 3798, the Due
Process Restoration Act, but suggested that it be amended to include the 1933
Securities Act and the 1940 Acts. He
also suggested that there be one standard of proof so that there is balance
between the use of federal courts or the administrative law process. These
changes, he argued, would allow the SEC to be a strong enforcer of the law and
give defendants the ability to properly defend themselves.
Quaadman also expressed support for the Small
Business Advocate Act, which he argued should mirror the rights afforded to the
investor advocate (such as the right to appoint a non-voting member to the
investor advisory committee.) Quaadman
also suggested that the bill include transparency requirements for the SEC’s
advisory committees, such as a requirement to subject it to the Sunshine Act
and Federal Advisory Committee Act.
Quaadman indicated that he supports the HALOS Act
but urged the Subcommittee to include strong investor protections to ensure
information is being offered to accredited investors.
Quaadman also commended the Subcommittee for
including various capital formation bills in the Developing Roadway
Infrastructure for a Vibrant Economy (DRIVE) Act.
Question and Answer
Free Market Approach
Garrett asked whether Carcello’s suggestion to
“allow the market to decide” whether certain reports were necessary under the
Fostering Innovation Act could apply to a whole myriad of Dodd-Frank rules to allow
investors to “opt out” of certain requirements. Quaadman agreed that such an
approach could be applied to a wide variety of laws, but noted there could be
concerns about “uneven playing field[s]” developing. Carcello affirmed that such a principle could
be broadly applied, such as to the need for external audits of financial
statements.
Defendants Rights to Due Process
Maloney asked whether the Due Process Restoration Act
would allow defendants to choose the venue that is in their best interest at
the expense of what is in the public interest. Carcello agreed that a defendant
would use that tool to advance its own interests but that the SEC chooses a
venue based on the best interest of investors and society at large. Carcello also recalled that the use of ALJ
was facilitated by actions that Congress took with Sarbanes-Oxley and under the
Dodd-Frank Act to provide the SEC with greater enforcement tools. Carcello also claimed that this bill would make
it “more difficult” for the SEC to enforce the federal securities laws. Quaadman
countered that this bill simply gives defendants the rights to defend
themselves in line with the constitutional safeguards included in the Bill of
Rights. He equated it to repealing the
Bill of Rights, which he said clearly would not be in the best interest of the
country.
Quaadman argued that angel investors are “extremely
important” for capital formation since they are often the first line of
accredited investors investing in startups. He also noted that the historically
low levels of small business startups underscores the importance of opening up
these financing channels to promote capital formation. Further, he argued that
the implementation of Basel III deters banks from lending to startups, which
makes them more dependent on capital markets.
General Solicitation Rules
Hurt asked whether the current general solicitation
rules impede startups’ access capital and whether the HALOS Act would resolve
that issue. Hahn explained that the “test the waters” provision included in the
JOBS Act was “instrumental” in his company’s successful IPO launch; and he
affirmed that the HALOS Act would provide companies with more access to pitch
to potential investors, which would also promote capital formation.
Defendants’ Right to Impartial Judges
Rep. Sean Duffy (R-Wis.) challenged the assertion
that defendants should be limited in taking cases to federal courts because
they are “overburdened” as “absolutely insane.”
Quaadman agreed that defendants should have the right to have their case
heard by an impartial judge, particularly since the administrative procedures
process is a “completely tilted playing field” since defendants have no right
to discovery.
IPO Onramp
Rep. John Carney (D-Del.) noted that the IPO on-ramp
has produced some “pretty good results” and asked whether there were any
concerns that the definition of ‘emerging growth companies’ ought to be more
limited. Carcello recommended that the
definition be “significantly more limited” than what was in a bill voted down
last year.
Small Business Advocate
Quaadman asserted that both the SEC Small Business
Advocate Act as well as Rep. Poliquin’s Small Business Capital Formation
Enhancement Act will have “far ranging consequences” because the SEC would have
to debate about small business access to capital formation. Rather than
recommendations being ignored, he claimed, these bills provide a mechanism by
which the SEC would have to respond to recommendations. Hahn added that the
lack of response from the SEC on small business capital formation proposals “makes
[one] wonder what [the Commission] also missed that can help companies like
mine.” Mathieu agreed, adding that it is “crazy” that a lot of people spend a
lot of time preparing for the SEC’s private-public forum on small business and
propose “great ideas” to help small businesses that “go nowhere.”
SME Access to Equity Capital
Rep. Brad Sherman (D-Calif.) asked what proposals
beyond the JOBS Act would help SMEs get access to equity capital. Carcello explained that the HALOS Act is “quite
good” and “quite helpful” since it focuses on angel investors. However, he expressed concern about the
expansion of the Act into venues such as non-profits and universities, since
most people that work in those venues are not accredited or sophisticated
investors.
Bias toward Large Corporations
Rep. Keith Ellison (D-Minn.) claimed that many
people think rules are “rigged” in favor of large businesses, and he argued
that H.R. 3798 further exacerbates the problem by allowing defendants to pick a
“favorable” venue for their alleged misconduct cases. Ellison cautioned that this bill would allow
a well-funded defendant to choose an “overwhelmed” district court to evade
enforcement. Carcello agreed, claiming that
such an effort would not be in the public interest.
Ellison maintained that HR 3784 would create a
“quasi-lobbying” group to advocate for a better regulatory environment for small
business. Carcello agreed, and claimed
that the small business advisory committee would “not at all [be] comparable to
the [SEC’s investor advisory committee].”
Rep. Bill Huizenga (R-Mich.) explained that many of
these issues come down to fundamental questions about fairness in how the SEC
balances investors’ rights in its enforcement proceedings and that they are not
partisan issues. He called for
participants to not “polarize these issues more than they already are.” Grundfest agreed, and added that the SEC should
not act as both the “judge and jury” and deprive defendants of their
fundamental rights in the process.
Carney said it is “troubling” to hear a small
business advocate referred to as a quasi-lobbyist, and encouraged participants
to be careful in how they use such “pejorative” terms. Carney reiterated that the essence of the
bill is to bring small business concerns to the SEC to facilitate policies and regulations
that do not hurt small businesses and capital formation.
Independence of Administrative Law Judges
Rep. Al Green (D-Texas) expressed concern about the
conflation of criminal and civil law. He
asserted that these enforcement proceedings go before an “independent arbiter”
(administrative judge), but Quaadman explained that administrative law judges
are employees of the SEC, so they are “not independent.”
More information about
this event can be accessed here.
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House
Financial Services Subcommittee on
Capital
Markets and Government Sponsored Enterprises
Legislative Proposals to Improve the U.S. Capital
Markets
Wednesday, December 2, 2015
Key
Topics & Takeaways
-
Defendants’
Rights in Administrative Law Proceedings: Stanford Law Professor Grundfest called for reasonable
protections of defendants’ rights in enforcement actions, and claimed that
legislative proposals such as H.R. 3798 – the Due Process Restoration Act – can
help restore a more effective equilibrium to ensure the SEC addresses the
“litany of concerns” raised by market participants over the “truncated rights”
of defendants. However, the University of Tennessee’s Carcello claimed that
this bill would make it “more difficult” for the SEC to enforce the federal
securities laws, while the Chamber’s Quaadman countered that this bill simply
gives defendants the rights to defend themselves in line with the
constitutional safeguards included in the Bill of Rights. -
Small Investor Advocate or Quasi-Lobbyist: The Small Business
Investor Alliance’s Mathieu supported the
Small Business Advocate Act, which he claimed would give small businesses an
“equal footing” with the SEC’s existing investor advocate.However, Carcello and Rep. Ellison (D-Minn.) argued
that this bill would create a “quasi-lobbying” group to advocate for a better
regulatory environment for small business.
- Importance of Angel Investors: Several panelists voiced
their support for the HALOS Act, and Quaadman explained that angel investors
are “extremely important” for capital formation since they are often the first
line of accredited investors investing in startups. He also noted that the historically
low levels of small business startups underscores the importance of opening up
these financing channels to promote capital formation. Further, he argued that
the implementation of Basel III deters banks from lending to startups, which
makes them more dependent on capital markets.
Speakers:
-
Joseph Grundfest, William A.
Franke Professor of Law and Business, Stanford Law School -
Brian
Hahn, Chief Financial Officer, GlycoMimetics, on behalf
of the Biotechnology Industry Organization
- Joseph
V. Carcello, EY and Business
Alumni Professor, Department of Accounting and Information Management, Haslam
College of Business, University of Tennessee
-
Chris
Mathieu, Senior Vice President and Chief
Financial Officer, Horizon Technology Finance, on behalf of the Small Business
Investor Alliance -
Tom
Quaadman, Vice President, Center for
Capital Markets Competitiveness, U.S. Chamber of Commerce
Opening Remarks
Subcommittee Chairman Garrett (R-N.J.)
Subcommittee Chairman Scott Garrett (R-N.J.) opened
by explaining that the hearing would consider ways to modernize the U.S.
securities laws to improve capital markets, as well as opportunities to build
upon the success of the Jumpstart Our Business Startups (JOBS) Act by lowering
barriers to capital formation for small and medium sized enterprises
(SMEs).
Garrett claimed that his bill, H.R. 3798,
the Due Process Restoration Act, would enable defendants to move their cases to
a Federal district court to ensure they have due process protections that “do
not exist” in Securities and Exchange Commission’s (SEC’s) administrative law
process. Garrett noted that the SEC relies
on its own administrative proceedings to litigate enforcement actions and in
doing so enjoys an advantage, as evidenced by the “extraordinarily high” rate
of cases it won in FY2014. Garrett
warned that the administrative law process comes at a “significant cost” of due
process for the accused, since the SEC’s in-house tribunal lacks many protections
afforded under federal courts (including full discovery rights). Garrett
explained that his bill intends to protect the rights of defendants in these
cases.
Ranking Member Maloney (D-N.Y.)
Subcommittee Ranking Member Carolyn Maloney
explained that the hearing would consider a series of legislative proposals that
aim to address capital formation constraints to make it easier for companies to
raise capital. She noted that she co-sponsors
a bill, H.R. 3784,
the SEC Small Business Advocate Act, which would create a small business
advocate to advise the SEC on issues affecting capital formation in the small
business community. Maloney referred to the bill as a “common sense proposal”
that is modeled after a provision in the Dodd-Frank Act that established the
SEC’s Investor Advisory Committee. Maloney also expressed concern that the Due Process
Restoration Act would overhaul the SEC’s use of administrative law judges (ALJs)
and in doing so would erode its enforcement authority. Maloney recalled that the notion of ‘insider
trading’ was established by an administrative opinion, which she said is a
“useful tool” to protect investors.
Rep. Hurt (R-Va.)
Rep. Robert Hurt (R-Va.) explained that the bills
before the Subcommittee are necessary to lower barriers to capital for small
businesses to enable them to create jobs and grow the economy. In particular,
he noted that the bill he co-sponsors, the Helping Angels Lead Our Startups (HALOS) Act, would improve startups’ abilities to market their
securities through “demo days” without the risk of violating federal securities
laws. In doing so, Hurt claimed, this
bill would alleviate the burden on startups and small business which face “disproportionately
expensive” compliance burdens.
Rep. Sinema (D-Ariz.)
Rep. Kyrsten Sinema (D-Ariz.) expressed her support
for the bipartisan bill, the Fostering Innovation Act, which she said provides targeted regulatory relief
to companies on the verge of scientific or medical discoveries. Sinema
explained that this “common sense exemption” would ensure regulations do not
stand in the way of companies with a research driven business model. She also
expressed her support for the HALOS Act, which she explained would connect
angel investors and entrepreneurs to ensure small businesses have “every
opportunity” to succeed.
Rep. Poliquin (R-Maine)
Rep. Bruce Poliquin (R-Maine) noted that
approximately 80 percent of new jobs are created by small businesses that often
do not have access to traditional loans to grow and expand their businesses. He
also explained that the SEC holds a forum that brings together government
officials and the private sector to come up with ideas on how small businesses
can access capital, however the SEC is not required to act upon the group’s
recommendations, which are often ignored. Poliquin explained that the Small Business Capital Formation Enhancement Act requires that the SEC consider the recommendations
put forth by the public-private sector forum and issue a public statement
justifying why they will (or will not) implement those recommendations to improve
capital access in America.
Panel Remarks
Joseph
Grundfest, William A. Franke Professor of Law and Business, Stanford Law School
In his opening statement,
Grundfest highlighted the need to “balance” the number of cases that the SEC
chooses to pursue in federal court versus those considered internally by ALJs. He also called for a reasonable balance between
defendants’ rights in enforcement actions. Grundfest agreed that legislative
proposals such as H.R. 3798 can help restore a more effective equilibrium
between those competing interests. Grundfest
explained that fairness is the chief concern about the SEC’s use of
administrative law procedures.
While he noted the Commission’s recent effort to
amend its rules on the use of ALJs, Grundfest argued that such concessions are
minor given the “litany of concerns” raised by concerned parties over the
“truncated rights” of defendants. Grundfest recommended a legislative solution
to help restore a more effective balance in the Commission’s use of
administrative law procedures, such as legislation requiring the SEC to reform
its internal procedures and set specific criteria for the cases that should be
tried in federal court or by ALJs, and a third criteria whereby more nuanced
cases would be tried under administrative law procedures unless the federal
court grants a petition for its removal.
Such a tripartite approach, Grundfest argued, can more appropriately
balance the rights of defendants without interfering with the SEC’s “legitimate
interests” in enforcing the U.S. securities laws.
Brian
Hahn, Chief Financial Officer, GlycoMimetics, on behalf of the Biotechnology
Industry Organization
Hahn explained
that his company launched its initial public offering (IPO) with support from
the JOBS Act and said that providing targeted exemptions allows small biotech
companies like his to “focus on science, rather than compliance.” Hahn
expressed support for Rep. Sinema’s bill which he explained would provide
targeted exemptions from requirements under Sarbanes-Oxley for small businesses,
and would build on the success of the JOBS Act by reducing compliance costs of small
companies. Hahn also encouraged the
Subcommittee to continue encouraging the SEC to focus on capital formation, and
argued that H.R. 3784 would improve SEC’s ability to make informed policy
decisions by including a small business advocate in that process.
Joseph
V. Carcello, EY and Business Alumni Professor, Department of Accounting and Information Management, Haslam College of
Business, University of Tennessee
Carcello claimed
that “capital markets do not exist without investors.” He expressed opposition
to H.R. 3784 that would establish a small business advocate within the SEC
which he claimed is “flawed,” because it would establish a “quasi-lobbying”
entity within the SEC that would seek a more favorable regulatory climate. Such
changes, he warned, could result in greater information risk to investors, which
could be counterproductive to small businesses, since capital would only be
available at a higher cost.
In addition, Carcello argued that the Dodd-Frank Act
and Sarbanes-Oxley made it easier for the SEC to bring enforcement actions before
ALJs. Moving away from that approach, he cautioned, is “unlikely” to be in the
best interest of society.
Carcello also explained that the Fostering
Innovation Act would extend a waiver for issuer’s controls over financial reporting
(ICFR) from five to ten years, which he cautioned would be “ill advised” since such
reporting is valued by investors. Carcello cited a study in which he claimed that
72 percent of surveyed institutional investors indicated they relied on ICFR
extensively. Rather than giving a
“blanket exemption” to certain companies, Carcello suggested companies allow
shareholders to vote and “let the market decide” whether an extension to ICFR
reporting is necessary.
Chris
Mathieu, Senior Vice President and Chief Financial Officer, Horizon Technology
Finance, on
behalf of the Small Business Investor Alliance (SBIA)
Mathieu noted the
importance of establishing a small business advocate within the SEC and expressed
his support for the Small Business Advocate Act, which he claimed would give
small businesses an “equal footing” with the existing investor advocate. He
cited a speech in
which former SEC Commissioner Gallagher argued that the SEC does not have an
adequate structure in place to consider how various rules impact small businesses
and unintentionally undermine capital formation. Mathieu argued that legislation and
regulation has a “bias” in favor of large corporations, and that this bill
would lead to better regulation and legislation since small business
stakeholders would have a voice in the decision making process.
Mathieu also expressed his support for the Small Business
Capital Formation Enhancement Act.
Tom Quaadman, Vice
President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
Quaadman recalled
that the Chamber of Commerce released 28 recommendations earlier this year on how the SEC can improve its enforcement and
oversight functions while ensuring due process. He noted that the Commission’s
use of administrative proceedings has changed drastically over the last 25
years. Quaadman also claimed that administrative proceedings present an uneven
playing field, since defendants have only 90 days to prepare their defense, no
right to deposition, and no right to discovery. He summarized several of the
Chamber’s recommendations, including that the SEC: 1) develop an alternative
dispute resolution mechanism so that the SEC can quickly resolve minor
violations; 2) allow the right of removal to a federal district court; and 3)
allow defendants the right to a trial by jury.
Quaadman lent his support to H.R. 3798, the Due
Process Restoration Act, but suggested that it be amended to include the 1933
Securities Act and the 1940 Acts. He
also suggested that there be one standard of proof so that there is balance
between the use of federal courts or the administrative law process. These
changes, he argued, would allow the SEC to be a strong enforcer of the law and
give defendants the ability to properly defend themselves.
Quaadman also expressed support for the Small
Business Advocate Act, which he argued should mirror the rights afforded to the
investor advocate (such as the right to appoint a non-voting member to the
investor advisory committee.) Quaadman
also suggested that the bill include transparency requirements for the SEC’s
advisory committees, such as a requirement to subject it to the Sunshine Act
and Federal Advisory Committee Act.
Quaadman indicated that he supports the HALOS Act
but urged the Subcommittee to include strong investor protections to ensure
information is being offered to accredited investors.
Quaadman also commended the Subcommittee for
including various capital formation bills in the Developing Roadway
Infrastructure for a Vibrant Economy (DRIVE) Act.
Question and Answer
Free Market Approach
Garrett asked whether Carcello’s suggestion to
“allow the market to decide” whether certain reports were necessary under the
Fostering Innovation Act could apply to a whole myriad of Dodd-Frank rules to allow
investors to “opt out” of certain requirements. Quaadman agreed that such an
approach could be applied to a wide variety of laws, but noted there could be
concerns about “uneven playing field[s]” developing. Carcello affirmed that such a principle could
be broadly applied, such as to the need for external audits of financial
statements.
Defendants Rights to Due Process
Maloney asked whether the Due Process Restoration Act
would allow defendants to choose the venue that is in their best interest at
the expense of what is in the public interest. Carcello agreed that a defendant
would use that tool to advance its own interests but that the SEC chooses a
venue based on the best interest of investors and society at large. Carcello also recalled that the use of ALJ
was facilitated by actions that Congress took with Sarbanes-Oxley and under the
Dodd-Frank Act to provide the SEC with greater enforcement tools. Carcello also claimed that this bill would make
it “more difficult” for the SEC to enforce the federal securities laws. Quaadman
countered that this bill simply gives defendants the rights to defend
themselves in line with the constitutional safeguards included in the Bill of
Rights. He equated it to repealing the
Bill of Rights, which he said clearly would not be in the best interest of the
country.
Quaadman argued that angel investors are “extremely
important” for capital formation since they are often the first line of
accredited investors investing in startups. He also noted that the historically
low levels of small business startups underscores the importance of opening up
these financing channels to promote capital formation. Further, he argued that
the implementation of Basel III deters banks from lending to startups, which
makes them more dependent on capital markets.
General Solicitation Rules
Hurt asked whether the current general solicitation
rules impede startups’ access capital and whether the HALOS Act would resolve
that issue. Hahn explained that the “test the waters” provision included in the
JOBS Act was “instrumental” in his company’s successful IPO launch; and he
affirmed that the HALOS Act would provide companies with more access to pitch
to potential investors, which would also promote capital formation.
Defendants’ Right to Impartial Judges
Rep. Sean Duffy (R-Wis.) challenged the assertion
that defendants should be limited in taking cases to federal courts because
they are “overburdened” as “absolutely insane.”
Quaadman agreed that defendants should have the right to have their case
heard by an impartial judge, particularly since the administrative procedures
process is a “completely tilted playing field” since defendants have no right
to discovery.
IPO Onramp
Rep. John Carney (D-Del.) noted that the IPO on-ramp
has produced some “pretty good results” and asked whether there were any
concerns that the definition of ‘emerging growth companies’ ought to be more
limited. Carcello recommended that the
definition be “significantly more limited” than what was in a bill voted down
last year.
Small Business Advocate
Quaadman asserted that both the SEC Small Business
Advocate Act as well as Rep. Poliquin’s Small Business Capital Formation
Enhancement Act will have “far ranging consequences” because the SEC would have
to debate about small business access to capital formation. Rather than
recommendations being ignored, he claimed, these bills provide a mechanism by
which the SEC would have to respond to recommendations. Hahn added that the
lack of response from the SEC on small business capital formation proposals “makes
[one] wonder what [the Commission] also missed that can help companies like
mine.” Mathieu agreed, adding that it is “crazy” that a lot of people spend a
lot of time preparing for the SEC’s private-public forum on small business and
propose “great ideas” to help small businesses that “go nowhere.”
SME Access to Equity Capital
Rep. Brad Sherman (D-Calif.) asked what proposals
beyond the JOBS Act would help SMEs get access to equity capital. Carcello explained that the HALOS Act is “quite
good” and “quite helpful” since it focuses on angel investors. However, he expressed concern about the
expansion of the Act into venues such as non-profits and universities, since
most people that work in those venues are not accredited or sophisticated
investors.
Bias toward Large Corporations
Rep. Keith Ellison (D-Minn.) claimed that many
people think rules are “rigged” in favor of large businesses, and he argued
that H.R. 3798 further exacerbates the problem by allowing defendants to pick a
“favorable” venue for their alleged misconduct cases. Ellison cautioned that this bill would allow
a well-funded defendant to choose an “overwhelmed” district court to evade
enforcement. Carcello agreed, claiming that
such an effort would not be in the public interest.
Ellison maintained that HR 3784 would create a
“quasi-lobbying” group to advocate for a better regulatory environment for small
business. Carcello agreed, and claimed
that the small business advisory committee would “not at all [be] comparable to
the [SEC’s investor advisory committee].”
Rep. Bill Huizenga (R-Mich.) explained that many of
these issues come down to fundamental questions about fairness in how the SEC
balances investors’ rights in its enforcement proceedings and that they are not
partisan issues. He called for
participants to not “polarize these issues more than they already are.” Grundfest agreed, and added that the SEC should
not act as both the “judge and jury” and deprive defendants of their
fundamental rights in the process.
Carney said it is “troubling” to hear a small
business advocate referred to as a quasi-lobbyist, and encouraged participants
to be careful in how they use such “pejorative” terms. Carney reiterated that the essence of the
bill is to bring small business concerns to the SEC to facilitate policies and regulations
that do not hurt small businesses and capital formation.
Independence of Administrative Law Judges
Rep. Al Green (D-Texas) expressed concern about the
conflation of criminal and civil law. He
asserted that these enforcement proceedings go before an “independent arbiter”
(administrative judge), but Quaadman explained that administrative law judges
are employees of the SEC, so they are “not independent.”
More information about
this event can be accessed here.