HFS Subcommittee Hearing on Impediments to Capital Formation
AT OCTOBER 3RD’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, Members
discussed shortcomings in the JOBS
Act and examined seven legislative proposals that aim to enhance access to
capital and reduce barriers to capital formation for small and mid-sized
companies:
1)
H.R.
2274, the Small Business Mergers, Acquisitions, Sales, and Brokerage
Simplification Act of 2013;
2)
H.R.
1973, the Business Development Company Modernization Act;
3)
H.R.
1800, the Small Business Credit Availability Act;
4)
H.R. 31,
the Next Steps for Credit Availability Act;
5)
H.R.
___, To direct the Securities and Exchange Commission to revise its regulations
relating to requiring the use eXtensible Business Reporting Language (XBRL) for
periodic reporting to exempt smaller public companies from such requirements;
6)
H.R.
___, To amend the Securities Exchange Act of 1934 to provide for an optional
pilot program allowing certain emerging growth companies to increase the tick
sizes of their stocks; and
7)
H.R.
___, To amend certain provisions of the securities laws relating to the
treatment of emerging growth companies (ECGs).
In
his opening remarks, Chairman Scott Garrett (R-N.J.) said early results on the
impact of the JOBS Act are “very encouraging,” noting that the number of
initial public offerings (IPOs) this year have been roughly equivalent to
levels last seen in 2007. He also sarcastically praised the Securities and
Exchange Commission (SEC) for promulgating rules mandated by the JOBS Act,
including lifting the ban on general solicitation, but strongly criticized the
SEC’s proposal to change the disclosure and filing requirements for general
solicitation. In closing, Garrett advocated for a continued focus on capital
formation legislation and praised the legislation being discussed at the
hearing. Ranking Member Carolyn Maloney (D-N.Y.) also highlighted the steep
decline in IPOs, but said it is important to balance increased incentives for
capital formation and “healthy” public disclosure.
In
his opening
statement, Gary Wunderlich, testifying on behalf of the Securities Industry
and Financial Markets Association (SIFMA), focused his comments on five of the
legislative proposals before the Committee. He expressed his support for the
Tick-Size Pilot Discussion Draft, sponsored by Rep. Sean Duffy (R-Wis.), that
would require the market to set up a five-year pilot program allowing small and
mid-sized companies to widen the current one-penny spread increment (tick-size)
that is used to trade securities. However, Wunderlich strongly criticized
language in the draft legislation that would prohibit trading within the wider
quoting increments.
“A
prohibition on trading inside the quoting increment would be an unprecedented
alteration of market practice and would prevent broker-dealers from providing
price improvement to retail investors,” he said.
Wunderlich
also advocated for a “broader review” of U.S. market structure as part of the
pilot program, including an analysis of the regulatory structure around
exchange and off-exchange trading venues, the future of self-regulation, and a
consideration of whether the comparative regulatory benefits and obligations
facing exchanges and broker-dealers should be adjusted to reflect today’s
market realities. In closing, Wunderlich praised Rep. Stephen Fincher’s
(R-Tenn.) ECG Discussion Draft and H.R. 1973, 1800, 31, but offered the
following suggestions for the trio of Business Development Companies
(BDCs)-related bills: 1) remove the “unnecessary obstacles” that remain in
place today so that BDCs can efficiently access the markets, and 2) provide
increased flexibility in the asset coverage ratio for BDCs.
In
his testimony,
David Weild, Chairman and CEO of IssuWorks, said improving access to capital in
the U.S. is “one of the most important needs for our economy,” and while he
praised the passage of the JOBS Act, he noted that the legislation “did nothing
to improve the aftermarket for the companies and their investors.” Weild
praised several of the legislative fixes to the JOBS Act that have emanated
from Members on the Committee, including H.R. 2274, 1973, 1800 and 31, and
highlighted the importance the Duffy Tick-Size Discussion Draft. More
specifically, he urged Duffy to “go further” in his draft legislation and
include larger tick size options for nano-cap stocks, no order flow payments, and
a requirement that trading be done only at the outer bounds of the minimum
tick-size increments.
Weild
acknowledged that his ‘outer bounds’ proposal may be controversial, but said
the change will “increase liquidity and institutional investment, raise the
stock prices of smaller stocks, spur more IPOs and create jobs for the
economy.” In closing, Weild called for a “JOBS Act 2” that addresses
deficiencies in Titles I, III and IV of the JOBS Act, and advocated for the
creation of a “horizontally-integrated small capitalization division” within
the SEC to better address the needs of small and middle-market financial
services firms.
In his opening
statement, Heath Abshure, testifying on behalf of the North American
Securities Administrators Association (NASAA), said NASAA’s views on the
collection of bills before the Subcommittee is “mixed.” He said NASAA supports
H.R. 2274, sponsored by Rep. Bill Huizenga (R-Mich.), but noted concerns with
the BDC and ECG proposals. Abshure said the EGC proposal is “further expanding
new, untested regulatory carve-outs for EGCs” and the BDC proposals are
increasing leverage and conflicts of interests, and decreasing transparency in
the BDC space. He also disagreed with the proposed fix to the Duffy Tick-Size
discussion draft advocated by Weild. In closing, Abshure noted his concern with
several JOBS Act proposals includng lifting the ban on general solicitation in Regulation
D, Rule 506 offerings. Additionally, he praised legislation from Full Committee
Ranking Member Maxine Waters (D-Calif.) that would authorize the SEC to collect
“user fees” from federally registered investment advisers to fund more frequent
examinations and H.R.
2998, the Investor Choice Act of 2013, that preserves an investor’s right
to access the court system if the investor has a dispute against a broker or investment
adviser.
Michael
Ertel, testifying on behalf of the Alliance of Merger & Acquisition
Advisors (AM&AA), focused his testimony
on H.R. 2274. He said the current “one-size-fits-all regulatory scheme”
governing M&A brokers today is the same as those that govern Wall Street
investment bankers and retail securities brokers, which imposes “burdensome and
complex” requirements that are “largely irrelevant” in the context of private
M&A transactions. In closing, Ertel dismissed concerns that H.R. 2274
contains new federal preemptions of state laws and urged Members to quickly
pass the legislation.
Tom
Quaadman, Vice President of the Center for Capital Markets Competitiveness
(CCMC), noted
the “lack of efficiency” in U.S. capital markets over the past several years,
resulting in a decline in initial public offerings, and a “sharp drop” in
public companies overall. He attributed these declines to several sources, but
said two key roadblocks have been stale regulatory, and legislative and
regulatory initiatives that are changing fundamental market practices. In this
light, Quaadman praised the bipartisan legislative proposals promulgated by
members of the Committee, calling them “an important step in removing some of
the roadblocks that are inhibiting growth by America’s Main Street businesses.”
In
closing, Quaadman suggested a few enhancements to the proposals as the sponsors
work to finalize the legislative language. For the trio of BDC-related bills,
he suggested the SEC reexamine the required disclosures to insure that
investors are “properly” aware of the risks. On the XBRL Discussion Draft,
Quaadman strongly advocated for a provision that would require the SEC to
submit an annual report to Congress on the progress it has made on XBRL and the
costs of compliance. He also urged the Commission to extend the grace period in
current SEC Rule 406T to “at least 5 years” for smaller issuers. With regard to
the Tick-Size Discussion Draft, he urged Duffy to include a safe harbor
provision that “insulates management and directors from liability in exercising
the option to choose a tick size.” On the ECG Discussion Draft, he recommended
that the final legislation “modernize” SEC Rule 701 by raising the rule’s
threshold to reflect JOBS Act revisions.
Alexander
Frank, CFO and Partner of Fifth Street Management, and Michael
Arougheti, CEO of Ares Capital Corp., focused their remarks on H.R. 1973,
1800 and 31. They outlined the importance of BDCs to the middle market and
praised the three proposals for “modernizing the BDC regulatory framework,” and
enabling BDCs to more easily raise and deploy capital to small and medium-size
businesses. However, Frank said that provisions in H.R. 1800 and 31 that
increase the effective leverage threshold should be eliminated, a position that
Arougheti strongly objected to.
Question
and Answer
Several
members asked questions related to the Duffy Tick-Size Discussion Draft, and
more specifically, on the ability to trade within the tick-size and how to
structure the tick-size pilot program. Weild said allowing trading within the
tick-size would “cause the small-cap market to devolve,” however, if trading is
restricted to the outer bounds, as envisioned in the draft legislation, it will
incentivize firms to create order flow and bring more capital into the
micro-cap markets. Wunderlich pushed back on Weild’s assertion, warning that
prohibiting trading within the tick-size would distort market valuation and
efficiency, and prevent broker-dealers from providing price improvement to
retail investors. It is important to note, however, that all of the panelists
agreed that there should be a tick-size pilot program, its duration should be
at least five years, and the universe of firms to include in the pilot is
correctly defined in the discussion draft.
In
response to a question from Garrett, Weild said the pilot program could include
two baskets of stocks, one that allows for trading within the tick-size and one
that does not. This opinion was later echoed by Wunderlich, in his capacity as
CEO of Wunderlich Securities, when responding to a question from Rep. John
Carney (D-Del.).
Additionally,
Duffy expressed interest in adding a safe harbor provision to his Tick-Size
Discussion Draft, as proposed by Quaadman.
Several
Members also asked the panelists to share their concerns with the trio of
BDC-related legislation being considered by the Committee. Garrett asked
Abshure to detail why he opposed the expansion of asset classes that BDCs could
invest in. Abshure said he does not see any value in allowing BDCs to invest in
financial services companies because financial services companies are “conduits
for capital to go elsewhere, increasing the cost of capital [for small and
mid-sized companies].”
In
related Member questions on criticisms of the three BDC proposals, Arougheti
noted that Fifth Street is the only BDC firm that opposes the increase in
leverage or a change in the asset coverage ratio. He said 40 percent of
investors in BDC stocks are sophisticated institutional investors and they are
responsible for driving growth in the sector, not retail investors. Arougheti
also highlighted the different business models of BDCs, and said 50 percent of
leverage in the BDC industry is provided by large banks. In closing, he said
the loan agreements between BDCs and banks already include risk assignments for
different asset classes that BDCs invest in, so an increase in the leverage
ratio for BDCs would not inherently introduce more risk to BDCs. Quaadman
echoed Arougheti’s remarks, noting that a change in the leverage ratio from 1:1
to 2:1, as contemplated in the legislative proposals, “is not a big change.”
Rep.
David Scott (D-Ga.) asked the panelists if allowing BDCs to invest in hedge
funds and private equity funds enables them to circumvent the general
prohibition on selling interest in private funds to retail investors. Abshure
said the changes in BDC law currently being proposed would “effectively allow
hedge funds for unaccredited investors.” Pushing back on Abshure’s assertions,
Rep. Mick Mulvaney (R-S.C.) noted that pension funds invest in hedge funds and
private equity funds, and BDCs are required to disclose their investments to
investors.
When
asked by Rep. Brad Sherman (D-Calif.) if a “high leverage” BDC designation
would address his concerns, Frank and Abshure said it would not.
Rep.
Robert Hurt (R-Va.) asked Quaadman to detail why the Chamber is asking for a
delay on XBRL disclosure requirements. Quaadman said XBRL is still a work in
process, and the SEC has had a “number of problems” getting the initiative off
the ground. In that light, the Chamber is asking for a delay to give the SEC
time to sort out the problems with XBRL, and to examine how investors are
currently using new reporting language.
For
testimony and a webcast of the hearing, please click here.
AT OCTOBER 3RD’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, Members
discussed shortcomings in the JOBS
Act and examined seven legislative proposals that aim to enhance access to
capital and reduce barriers to capital formation for small and mid-sized
companies:
1)
H.R.
2274, the Small Business Mergers, Acquisitions, Sales, and Brokerage
Simplification Act of 2013;
2)
H.R.
1973, the Business Development Company Modernization Act;
3)
H.R.
1800, the Small Business Credit Availability Act;
4)
H.R. 31,
the Next Steps for Credit Availability Act;
5)
H.R.
___, To direct the Securities and Exchange Commission to revise its regulations
relating to requiring the use eXtensible Business Reporting Language (XBRL) for
periodic reporting to exempt smaller public companies from such requirements;
6)
H.R.
___, To amend the Securities Exchange Act of 1934 to provide for an optional
pilot program allowing certain emerging growth companies to increase the tick
sizes of their stocks; and
7)
H.R.
___, To amend certain provisions of the securities laws relating to the
treatment of emerging growth companies (ECGs).
In
his opening remarks, Chairman Scott Garrett (R-N.J.) said early results on the
impact of the JOBS Act are “very encouraging,” noting that the number of
initial public offerings (IPOs) this year have been roughly equivalent to
levels last seen in 2007. He also sarcastically praised the Securities and
Exchange Commission (SEC) for promulgating rules mandated by the JOBS Act,
including lifting the ban on general solicitation, but strongly criticized the
SEC’s proposal to change the disclosure and filing requirements for general
solicitation. In closing, Garrett advocated for a continued focus on capital
formation legislation and praised the legislation being discussed at the
hearing. Ranking Member Carolyn Maloney (D-N.Y.) also highlighted the steep
decline in IPOs, but said it is important to balance increased incentives for
capital formation and “healthy” public disclosure.
In
his opening
statement, Gary Wunderlich, testifying on behalf of the Securities Industry
and Financial Markets Association (SIFMA), focused his comments on five of the
legislative proposals before the Committee. He expressed his support for the
Tick-Size Pilot Discussion Draft, sponsored by Rep. Sean Duffy (R-Wis.), that
would require the market to set up a five-year pilot program allowing small and
mid-sized companies to widen the current one-penny spread increment (tick-size)
that is used to trade securities. However, Wunderlich strongly criticized
language in the draft legislation that would prohibit trading within the wider
quoting increments.
“A
prohibition on trading inside the quoting increment would be an unprecedented
alteration of market practice and would prevent broker-dealers from providing
price improvement to retail investors,” he said.
Wunderlich
also advocated for a “broader review” of U.S. market structure as part of the
pilot program, including an analysis of the regulatory structure around
exchange and off-exchange trading venues, the future of self-regulation, and a
consideration of whether the comparative regulatory benefits and obligations
facing exchanges and broker-dealers should be adjusted to reflect today’s
market realities. In closing, Wunderlich praised Rep. Stephen Fincher’s
(R-Tenn.) ECG Discussion Draft and H.R. 1973, 1800, 31, but offered the
following suggestions for the trio of Business Development Companies
(BDCs)-related bills: 1) remove the “unnecessary obstacles” that remain in
place today so that BDCs can efficiently access the markets, and 2) provide
increased flexibility in the asset coverage ratio for BDCs.
In
his testimony,
David Weild, Chairman and CEO of IssuWorks, said improving access to capital in
the U.S. is “one of the most important needs for our economy,” and while he
praised the passage of the JOBS Act, he noted that the legislation “did nothing
to improve the aftermarket for the companies and their investors.” Weild
praised several of the legislative fixes to the JOBS Act that have emanated
from Members on the Committee, including H.R. 2274, 1973, 1800 and 31, and
highlighted the importance the Duffy Tick-Size Discussion Draft. More
specifically, he urged Duffy to “go further” in his draft legislation and
include larger tick size options for nano-cap stocks, no order flow payments, and
a requirement that trading be done only at the outer bounds of the minimum
tick-size increments.
Weild
acknowledged that his ‘outer bounds’ proposal may be controversial, but said
the change will “increase liquidity and institutional investment, raise the
stock prices of smaller stocks, spur more IPOs and create jobs for the
economy.” In closing, Weild called for a “JOBS Act 2” that addresses
deficiencies in Titles I, III and IV of the JOBS Act, and advocated for the
creation of a “horizontally-integrated small capitalization division” within
the SEC to better address the needs of small and middle-market financial
services firms.
In his opening
statement, Heath Abshure, testifying on behalf of the North American
Securities Administrators Association (NASAA), said NASAA’s views on the
collection of bills before the Subcommittee is “mixed.” He said NASAA supports
H.R. 2274, sponsored by Rep. Bill Huizenga (R-Mich.), but noted concerns with
the BDC and ECG proposals. Abshure said the EGC proposal is “further expanding
new, untested regulatory carve-outs for EGCs” and the BDC proposals are
increasing leverage and conflicts of interests, and decreasing transparency in
the BDC space. He also disagreed with the proposed fix to the Duffy Tick-Size
discussion draft advocated by Weild. In closing, Abshure noted his concern with
several JOBS Act proposals includng lifting the ban on general solicitation in Regulation
D, Rule 506 offerings. Additionally, he praised legislation from Full Committee
Ranking Member Maxine Waters (D-Calif.) that would authorize the SEC to collect
“user fees” from federally registered investment advisers to fund more frequent
examinations and H.R.
2998, the Investor Choice Act of 2013, that preserves an investor’s right
to access the court system if the investor has a dispute against a broker or investment
adviser.
Michael
Ertel, testifying on behalf of the Alliance of Merger & Acquisition
Advisors (AM&AA), focused his testimony
on H.R. 2274. He said the current “one-size-fits-all regulatory scheme”
governing M&A brokers today is the same as those that govern Wall Street
investment bankers and retail securities brokers, which imposes “burdensome and
complex” requirements that are “largely irrelevant” in the context of private
M&A transactions. In closing, Ertel dismissed concerns that H.R. 2274
contains new federal preemptions of state laws and urged Members to quickly
pass the legislation.
Tom
Quaadman, Vice President of the Center for Capital Markets Competitiveness
(CCMC), noted
the “lack of efficiency” in U.S. capital markets over the past several years,
resulting in a decline in initial public offerings, and a “sharp drop” in
public companies overall. He attributed these declines to several sources, but
said two key roadblocks have been stale regulatory, and legislative and
regulatory initiatives that are changing fundamental market practices. In this
light, Quaadman praised the bipartisan legislative proposals promulgated by
members of the Committee, calling them “an important step in removing some of
the roadblocks that are inhibiting growth by America’s Main Street businesses.”
In
closing, Quaadman suggested a few enhancements to the proposals as the sponsors
work to finalize the legislative language. For the trio of BDC-related bills,
he suggested the SEC reexamine the required disclosures to insure that
investors are “properly” aware of the risks. On the XBRL Discussion Draft,
Quaadman strongly advocated for a provision that would require the SEC to
submit an annual report to Congress on the progress it has made on XBRL and the
costs of compliance. He also urged the Commission to extend the grace period in
current SEC Rule 406T to “at least 5 years” for smaller issuers. With regard to
the Tick-Size Discussion Draft, he urged Duffy to include a safe harbor
provision that “insulates management and directors from liability in exercising
the option to choose a tick size.” On the ECG Discussion Draft, he recommended
that the final legislation “modernize” SEC Rule 701 by raising the rule’s
threshold to reflect JOBS Act revisions.
Alexander
Frank, CFO and Partner of Fifth Street Management, and Michael
Arougheti, CEO of Ares Capital Corp., focused their remarks on H.R. 1973,
1800 and 31. They outlined the importance of BDCs to the middle market and
praised the three proposals for “modernizing the BDC regulatory framework,” and
enabling BDCs to more easily raise and deploy capital to small and medium-size
businesses. However, Frank said that provisions in H.R. 1800 and 31 that
increase the effective leverage threshold should be eliminated, a position that
Arougheti strongly objected to.
Question
and Answer
Several
members asked questions related to the Duffy Tick-Size Discussion Draft, and
more specifically, on the ability to trade within the tick-size and how to
structure the tick-size pilot program. Weild said allowing trading within the
tick-size would “cause the small-cap market to devolve,” however, if trading is
restricted to the outer bounds, as envisioned in the draft legislation, it will
incentivize firms to create order flow and bring more capital into the
micro-cap markets. Wunderlich pushed back on Weild’s assertion, warning that
prohibiting trading within the tick-size would distort market valuation and
efficiency, and prevent broker-dealers from providing price improvement to
retail investors. It is important to note, however, that all of the panelists
agreed that there should be a tick-size pilot program, its duration should be
at least five years, and the universe of firms to include in the pilot is
correctly defined in the discussion draft.
In
response to a question from Garrett, Weild said the pilot program could include
two baskets of stocks, one that allows for trading within the tick-size and one
that does not. This opinion was later echoed by Wunderlich, in his capacity as
CEO of Wunderlich Securities, when responding to a question from Rep. John
Carney (D-Del.).
Additionally,
Duffy expressed interest in adding a safe harbor provision to his Tick-Size
Discussion Draft, as proposed by Quaadman.
Several
Members also asked the panelists to share their concerns with the trio of
BDC-related legislation being considered by the Committee. Garrett asked
Abshure to detail why he opposed the expansion of asset classes that BDCs could
invest in. Abshure said he does not see any value in allowing BDCs to invest in
financial services companies because financial services companies are “conduits
for capital to go elsewhere, increasing the cost of capital [for small and
mid-sized companies].”
In
related Member questions on criticisms of the three BDC proposals, Arougheti
noted that Fifth Street is the only BDC firm that opposes the increase in
leverage or a change in the asset coverage ratio. He said 40 percent of
investors in BDC stocks are sophisticated institutional investors and they are
responsible for driving growth in the sector, not retail investors. Arougheti
also highlighted the different business models of BDCs, and said 50 percent of
leverage in the BDC industry is provided by large banks. In closing, he said
the loan agreements between BDCs and banks already include risk assignments for
different asset classes that BDCs invest in, so an increase in the leverage
ratio for BDCs would not inherently introduce more risk to BDCs. Quaadman
echoed Arougheti’s remarks, noting that a change in the leverage ratio from 1:1
to 2:1, as contemplated in the legislative proposals, “is not a big change.”
Rep.
David Scott (D-Ga.) asked the panelists if allowing BDCs to invest in hedge
funds and private equity funds enables them to circumvent the general
prohibition on selling interest in private funds to retail investors. Abshure
said the changes in BDC law currently being proposed would “effectively allow
hedge funds for unaccredited investors.” Pushing back on Abshure’s assertions,
Rep. Mick Mulvaney (R-S.C.) noted that pension funds invest in hedge funds and
private equity funds, and BDCs are required to disclose their investments to
investors.
When
asked by Rep. Brad Sherman (D-Calif.) if a “high leverage” BDC designation
would address his concerns, Frank and Abshure said it would not.
Rep.
Robert Hurt (R-Va.) asked Quaadman to detail why the Chamber is asking for a
delay on XBRL disclosure requirements. Quaadman said XBRL is still a work in
process, and the SEC has had a “number of problems” getting the initiative off
the ground. In that light, the Chamber is asking for a delay to give the SEC
time to sort out the problems with XBRL, and to examine how investors are
currently using new reporting language.
For
testimony and a webcast of the hearing, please click here.