House Oversight & Government Reform Subcommittee Discusses the JOBS Act with SEC Chairman Mary Schapiro
AT THIS MORNING’S HOUSE OVERSIGHT AND GOVERNMENT REFORM SUBCOMMITTEE HEARING, members discussed the implementation of the Jumpstart Our Business Startups (JOBS) Act with Securities and Exchange Commission (SEC) Chairman Mary Schapiro, whose agency is responsible for promulgating the legislation’s rulemakings.
In her opening statement, Schapiro gave a broad overview of the JOBS Act and detailed the legislation’s “significant” alterations to federal securities laws. She also described the Commission’s ongoing implementation efforts, highlighting their prioritization of provisions that became effective upon enactment of the legislation, and assuring members that SEC staff is working diligently to promulgate the rest of the rules. However, Schapiro said that some of the legislation’s rulemaking deadlines are “not achievable.” Specifically, Schapiro said the Commission would be unable to promulgate the rulemakings to revise Rules 506 and 144A under Title II of the legislation by the statutorily mandated 90 day deadline, but she added that the Commission’s staff has made “significant” progress on recommendations and economic analysis of the Title II rulemakings and expects to promulgate a proposal “in the very near future.”
Schapiro also updated the Committee on the SEC’s efforts to enhance their cost/benefit analysis capabilities. She said the Commission’s new staff guidance regarding economic analysis, fully integrates the Division of Risk, Strategy and Financial Innovation (RSFI) and the Office of the General Counsel (OGC) into the economic analysis process. She said implementation of this guidance is already underway. In closing, Schapiro said the SEC is also in the process of bolstering its rule writing teams by hiring 16 new economists and requesting an additional 20 economist positions as part of its fiscal year 2013 budget request.
Question and Answer
JOBS Act
Chairman Patrick McHenry (R-N.C.) asked Schapiro when the SEC will issue its rule proposal to lift the general solicitation ban. Schapiro said the SEC will publish a timeline for the Commission’s consideration of the rulemaking in the next two days and expects to promulgate a rule proposal “by this summer.” She noted that the SEC’s mandates under Title II of the legislation are “not as simple as lifting the ban on general solicitation.” She said the statute also requires issuers to take “reasonable steps to verify that purchasers of these securities are accredited investors, using whatever means the Commission deems appropriate.” Schapiro said the Commission must perform a cost/benefit analysis of each investor verification method, which is why the SEC will be unable to propose the rule by the July 4 deadline.
Following up, McHenry asked if the Commission will propose rules regarding crowdfunding by the December 31 deadline. Schapiro said she expects the Commission to meet that deadline and said SEC staff has already started working on the issuer disclosure requirements and the funding portal requirements.
McHenry asked Schapiro if she believes the structure of crowdfunding inherently protects investors against fraud. Schapiro said the structure of crowdfunding does have some inherent investor protections, but the SEC’s rules matter because they will ensure that all portals police issuers and the right disclosures have been filed.
When asked if the SEC will exempt Regulation A from the shareholder cap under Rule 12G of the Securities Exchange Act, Schapiro said the SEC will consider it, but there was not an explicit exemption in the statute.
McHenry asked Schapiro if the SEC would correct an “oversight” in the legislation that fails to extend the shareholder registration threshold increase to savings and loan institutions. Schapiro said the SEC is very engaged on this subject and has been speaking with Congressmen and the Community Bankers Association to better understand the issue. She said the SEC is currently trying to “understand the differences between thrift and bank holding companies” so that the SEC can analyze the reports that thrifts file and determine whether shareholders have appropriate access to those reports. She added that the SEC will mostly likely issue a rulemaking on this issue instead of a “one-off exemptive process.”
McHenry also asked if the innocent and material exemption for accredited investors, under Rule 508 of Regulation D, could be applied to crowdfunding issuances. Schapiro said she has discussed this topic with SEC staff and said “it makes a lot of sense” for the Rule 508 exemption to apply to crowdfunding.
Ranking Member Mike Quigley (D-Ill.) asked if the SEC’s crowdfunding rulemakings will adequately protect investors. Schapiro said the version of the legislation that passed built in a number of investor protections, including disclosure requirements for intermediaries and issuers, the establishment of an intermediary self-regulating organization (SRO), and a requirement that intermediaries take measures to identify fraud. She said the SEC’s rules will strengthen those protections in a number of ways, including requiring background checks.
Cost/Benefit Analysis
Quigley asked Schapiro how the SEC is addressing lost investor confidence in its cost/benefit analysis models. Schapiro said it is “notoriously hard” to quantify lost investor confidence, but said when it cannot be quantified, the SEC will talk about it qualitatively and detail why it matters.
Following up, McHenry asked if a rule’s affect on job creation would be taken into account when performing a cost/benefit analysis. Schapiro said the SEC’s economic analysis aims to determine a rule’s affect on competition, efficiency and capital formation. “If you equate capital formation to job creation, then employment will be factored into [the SEC’s] cost benefit/analysis,” Schapiro said.
McHenry asked if SROs should be required to perform cost/benefit analysis before promulgating a rule. Schapiro said SROs file about 2,000 rules with the SEC every year, 77 percent of which become effective immediately or concern new products coming to market. She said due to the immense quantity of SRO-promulgated rules, performing a cost/benefit analysis on each one would slow down a business’ ability to bring products to the market in a timely manner. “Some rules may require more analysis, but it would be a mistake to make it a blanket requirement,” she said. Schapiro added that SROs must also provide a justification of each rule when it is sent to the SEC for formal approval.
Money Market Funds
McHenry asked Schapiro to comment on the SEC’s money market fund reform efforts. Schapiro said it is her goal to ensure that the American taxpayer is never on the hook again if a money market fund “breaks the buck.” She said the SEC hopes to accomplish this by focusing its reforms on the structural weaknesses of money market funds “in a way that allows their value to float to reflect the value of the underlying security.” She said this will prevent investors from fleeing the fund if it “breaks the buck,” which addresses money market funds’ susceptibility to runs. Schapiro also suggested an alternative reform which would implement a “small” capital buffer to offset minute variations in price.
For testimony and a webcast of the hearing, please click here.
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AT THIS MORNING’S HOUSE OVERSIGHT AND GOVERNMENT REFORM SUBCOMMITTEE HEARING, members discussed the implementation of the Jumpstart Our Business Startups (JOBS) Act with Securities and Exchange Commission (SEC) Chairman Mary Schapiro, whose agency is responsible for promulgating the legislation’s rulemakings.
In her opening statement, Schapiro gave a broad overview of the JOBS Act and detailed the legislation’s “significant” alterations to federal securities laws. She also described the Commission’s ongoing implementation efforts, highlighting their prioritization of provisions that became effective upon enactment of the legislation, and assuring members that SEC staff is working diligently to promulgate the rest of the rules. However, Schapiro said that some of the legislation’s rulemaking deadlines are “not achievable.” Specifically, Schapiro said the Commission would be unable to promulgate the rulemakings to revise Rules 506 and 144A under Title II of the legislation by the statutorily mandated 90 day deadline, but she added that the Commission’s staff has made “significant” progress on recommendations and economic analysis of the Title II rulemakings and expects to promulgate a proposal “in the very near future.”
Schapiro also updated the Committee on the SEC’s efforts to enhance their cost/benefit analysis capabilities. She said the Commission’s new staff guidance regarding economic analysis, fully integrates the Division of Risk, Strategy and Financial Innovation (RSFI) and the Office of the General Counsel (OGC) into the economic analysis process. She said implementation of this guidance is already underway. In closing, Schapiro said the SEC is also in the process of bolstering its rule writing teams by hiring 16 new economists and requesting an additional 20 economist positions as part of its fiscal year 2013 budget request.
Question and Answer
JOBS Act
Chairman Patrick McHenry (R-N.C.) asked Schapiro when the SEC will issue its rule proposal to lift the general solicitation ban. Schapiro said the SEC will publish a timeline for the Commission’s consideration of the rulemaking in the next two days and expects to promulgate a rule proposal “by this summer.” She noted that the SEC’s mandates under Title II of the legislation are “not as simple as lifting the ban on general solicitation.” She said the statute also requires issuers to take “reasonable steps to verify that purchasers of these securities are accredited investors, using whatever means the Commission deems appropriate.” Schapiro said the Commission must perform a cost/benefit analysis of each investor verification method, which is why the SEC will be unable to propose the rule by the July 4 deadline.
Following up, McHenry asked if the Commission will propose rules regarding crowdfunding by the December 31 deadline. Schapiro said she expects the Commission to meet that deadline and said SEC staff has already started working on the issuer disclosure requirements and the funding portal requirements.
McHenry asked Schapiro if she believes the structure of crowdfunding inherently protects investors against fraud. Schapiro said the structure of crowdfunding does have some inherent investor protections, but the SEC’s rules matter because they will ensure that all portals police issuers and the right disclosures have been filed.
When asked if the SEC will exempt Regulation A from the shareholder cap under Rule 12G of the Securities Exchange Act, Schapiro said the SEC will consider it, but there was not an explicit exemption in the statute.
McHenry asked Schapiro if the SEC would correct an “oversight” in the legislation that fails to extend the shareholder registration threshold increase to savings and loan institutions. Schapiro said the SEC is very engaged on this subject and has been speaking with Congressmen and the Community Bankers Association to better understand the issue. She said the SEC is currently trying to “understand the differences between thrift and bank holding companies” so that the SEC can analyze the reports that thrifts file and determine whether shareholders have appropriate access to those reports. She added that the SEC will mostly likely issue a rulemaking on this issue instead of a “one-off exemptive process.”
McHenry also asked if the innocent and material exemption for accredited investors, under Rule 508 of Regulation D, could be applied to crowdfunding issuances. Schapiro said she has discussed this topic with SEC staff and said “it makes a lot of sense” for the Rule 508 exemption to apply to crowdfunding.
Ranking Member Mike Quigley (D-Ill.) asked if the SEC’s crowdfunding rulemakings will adequately protect investors. Schapiro said the version of the legislation that passed built in a number of investor protections, including disclosure requirements for intermediaries and issuers, the establishment of an intermediary self-regulating organization (SRO), and a requirement that intermediaries take measures to identify fraud. She said the SEC’s rules will strengthen those protections in a number of ways, including requiring background checks.
Cost/Benefit Analysis
Quigley asked Schapiro how the SEC is addressing lost investor confidence in its cost/benefit analysis models. Schapiro said it is “notoriously hard” to quantify lost investor confidence, but said when it cannot be quantified, the SEC will talk about it qualitatively and detail why it matters.
Following up, McHenry asked if a rule’s affect on job creation would be taken into account when performing a cost/benefit analysis. Schapiro said the SEC’s economic analysis aims to determine a rule’s affect on competition, efficiency and capital formation. “If you equate capital formation to job creation, then employment will be factored into [the SEC’s] cost benefit/analysis,” Schapiro said.
McHenry asked if SROs should be required to perform cost/benefit analysis before promulgating a rule. Schapiro said SROs file about 2,000 rules with the SEC every year, 77 percent of which become effective immediately or concern new products coming to market. She said due to the immense quantity of SRO-promulgated rules, performing a cost/benefit analysis on each one would slow down a business’ ability to bring products to the market in a timely manner. “Some rules may require more analysis, but it would be a mistake to make it a blanket requirement,” she said. Schapiro added that SROs must also provide a justification of each rule when it is sent to the SEC for formal approval.
Money Market Funds
McHenry asked Schapiro to comment on the SEC’s money market fund reform efforts. Schapiro said it is her goal to ensure that the American taxpayer is never on the hook again if a money market fund “breaks the buck.” She said the SEC hopes to accomplish this by focusing its reforms on the structural weaknesses of money market funds “in a way that allows their value to float to reflect the value of the underlying security.” She said this will prevent investors from fleeing the fund if it “breaks the buck,” which addresses money market funds’ susceptibility to runs. Schapiro also suggested an alternative reform which would implement a “small” capital buffer to offset minute variations in price.
For testimony and a webcast of the hearing, please click here.