[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]




                       ENCOURAGING SMALL BUSINESS
                      GROWTH AND ACCESS TO CAPITAL

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 23, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-113


                    U.S. GOVERNMENT PRINTING OFFICE
98-155                      WASHINGTON : 2004
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
SPENCER BACHUS, Alabama              MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware          CAROLYN B. MALONEY, New York
PETER T. KING, New York              LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         JAY INSLEE, Washington
WALTER B. JONES, Jr., North          DENNIS MOORE, Kansas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           BRAD MILLER, North Carolina
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                DAVID SCOTT, Georgia
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania             CHRIS BELL, Texas
GINNY BROWN-WAITE, Florida            
J. GRESHAM BARRETT, South Carolina   BERNARD SANDERS, Vermont
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman       LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
MARK GREEN, Wisconsin                DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas                JIM MATHESON, Utah
SCOTT GARRETT, New Jersey            STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania             ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida           CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 23, 2004...........................................     1
Appendix:
    September 23, 2004...........................................    29

                               WITNESSES
                      Thursday, September 23, 2004

Beller, Alan L., Director, Division of Corporation Finance, 
  Securities and Exchange Commission.............................     3
Connolly, James A. III, President, IBA Capital Funding, on behalf 
  of the CEO Council.............................................    17
Schneider, Thomas, President and Chief Executive Officer, 
  Pathfinder Bank on behalf of America's Community Bankers.......    22
Speight, Frank, Chairman and Chief Executive Officer, American 
  Capital Partners, Ltd., Co-Chairman, National Small Public 
  Company Leadership Council.....................................    20
Sweeney, Joan M., Managing Director and Chief Operating Officer, 
  Allied Capital.................................................    15

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    30
    Beller, Alan L...............................................    32
    Connolly, James A. III.......................................    47
    Schneider, Thomas............................................    50
    Speight, Frank...............................................    55
    Sweeney, Joan M..............................................    58

 
                       ENCOURAGING SMALL BUSINESS
                      GROWTH AND ACCESS TO CAPITAL

                              ----------                              


                      Thursday, September 23, 2004

             U.S. House of Representatives,
      Subcommittee on Oversight and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 11:23 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Sue Kelly 
[chairman of the subcommittee] presiding.
    Present: Representatives Kelly, Paul, Inslee, Moore, 
Maloney, Crowley and Davis.
    Chairman Kelly. [Presiding.] This hearing of the 
Subcommittee on Oversight and Investigations will come to 
order.
    This morning, the Subcommittee on Oversight and 
Investigations convenes to continue its review of efforts to 
encourage small business growth and access to capital. Small 
business drives our economy and creates jobs for millions of 
Americans. In fact, small businesses currently generate nearly 
three-quarters of the net new jobs per year and employ 
approximately one-half of the private-sector workforce.
    Capital is the lifeblood of small businesses and the 
efficient access to capital is a crucial ingredient to a 
strong, growing economy. We must ensure that our small 
businesses have access to capital and that the current 
regulatory scheme encourages future growth and development.
    Available data shows that small businesses are recovering 
from the downturn in the economy begun in 2001 in no small part 
due to the easing of their access to capital. Banks began 
relaxing lending standards in late 2003 for the first time 
since 1998. In turn, demand for small business loans has 
recently increased.
    In terms of our equities markets, over 100 companies have 
undertaken initial public offerings so far this year, making it 
the best year for new offerings since 2000. Despite these 
promising numbers, there are still significant regulatory 
hurdles discouraging small business capital formation.
    Last Congress, the Subcommittee on Oversight and 
Investigations held a hearing entitled ``The SEC's Role in 
Capital Formation: Help or Hindrance?'' In this hearing, the 
subcommittee heard from a number of witnesses who contended 
that the SEC has simply not kept pace with the needs of small 
businesses despite their best effort. Since that time, Congress 
has passed and the President has signed important legislation 
known as Sarbanes-Oxley to improve auditing standards, 
disclosure rules and corporate governance.
    While investors in small companies expect and deserve the 
same protections as those in larger companies, this law places 
a renewed focus on the need to review the current regulatory 
framework to ensure that small businesses are able to develop 
and access capital. There must be concentrated effort to 
modernize our federal securities regulatory framework to ensure 
that we are protecting investors, but allowing small businesses 
to grow.
    Today, we will review the steps that our government is 
taking to address the specific needs of small businesses. In 
1996, under the National Securities Markets Improvement Act, 
Congress was very clear that the SEC ensure competition, 
efficiency and capital formation in its rulemaking.
    This law also granted the SEC general exemptive authority 
to ease regulatory burdens and to meet the needs of all 
businesses, large and small, trying to access the capital 
markets. Regrettably, the commission has not been as proactive 
in exercising this authority to support the needs of small 
businesses.
    It is time to embrace the advantages that new technology 
and the Internet have brought to our society and could bring to 
our government agencies. While the SEC has tried to simplify 
registration and other regulations for small businesses, these 
tasks remain extremely daunting for the average small business 
owner.
    There is a tremendous amount of cost and effort that a 
public company must incur to access the capital markets and 
comply with federal securities laws. In their pursuit to 
protect investors, the SEC must also make it a priority to 
strive for more efficient regulations. The current regulatory 
regime must keep pace with the market and the needs of small 
businesses. Otherwise, investor protections are also going to 
be undermined.
    The commission's inaction has motivated me to draft with my 
colleague from New York, Representative Nydia Velazquez, the 
Increased Capital Access for Growing Business Act, H.R. 3170. 
This legislation removes certain obsolete investment 
limitations on business development companies which were 
created in 1980 by Congress to encourage investment in small 
developing and financially troubled businesses.
    By simply modernizing securities laws, this legislation 
would allow BDCs to provide significant resources to small 
businesses as originally intended by Congress. Since the 
commission's position on the legislation has been frustratingly 
unclear, I urge the SEC to take this opportunity to express 
their support for this legislation that would have a tremendous 
impact on the ability of small businesses to access capital.
    The legislation was first introduced last Congress, passed 
the House unanimously and now awaits Senate consideration. 
After working with the SEC on the legislation for several 
years, it is time for the commission to give a public 
endorsement of the bill and help small businesses by moving the 
process along in the Senate.
    I thank all the witnesses for their appearance before the 
committee to address these important issues. It is my hope that 
we together will make progress that will enable small 
businesses to devote their energies to their customers, and not 
outdated and inefficient requirements that no longer reflect 
the realities of our new economy.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 30 in the appendix.]
    Without objection, all members's opening statements will be 
made part of the record.
    I would like to turn now to Mr. Moore. Mr. Moore, do you 
have an opening statement?
    Mr. Moore. Madam Chairman, I do not have an opening 
statement. I do appreciate the witnesses here today and am 
anxious to hear their testimony.
    Chairman Kelly. Thank you.
    Mr. Paul?
    Mr. Paul. I do not have an opening statement.
    Chairman Kelly. Mr. Paul has no opening statement.
    Mr. Inslee?
    Mr. Inslee. Briefly, perhaps everyone is aware of this, but 
I think probably every member of Congress when they return on 
the weekends talks to small business members about the cost of 
compliance of Sarbanes-Oxley. It is particularly acute, 
obviously, for small business people. I just think over the 
next year or two or more, I hope this committee will be engaged 
in a continuing effort to see if there are ways to accomplish 
our purposes and reduce that obligation of small business 
owners.
    I just throw out the idea almost that we ought to even have 
tiger teams looking for any possible things we can do to reduce 
the cost of compliance as this process goes along. I just hope 
we look at it as an ongoing process, because it is a very, very 
important thing and we all hear it in 435 districts. So I look 
forward to any ideas. Even though a rule has been adopted, I do 
not think it is the beginning of the end. It is the end of the 
beginning.
    Thank you.
    Chairman Kelly. Thank you very much.
    We turn now to our first panel.
    Testifying on our first panel is Mr. Alan Beller, the 
Director of the Division of Corporation Finance and Senior 
Counselor at the U.S. Securities and Exchange Commission. Mr. 
Beller joined the SEC in January of 2002. Prior to joining the 
SEC, Mr. Beller practiced law concentrating on a variety of 
domestic and international corporate securities and derivatives 
issues.
    Without objection, sir, your written statement will be made 
a part of the record. You will be recognized now for a 5-minute 
summary of your testimony.
    If you have not testified before in front of this committee 
or any other committee here on the Hill, there are black boxes 
at either end of the table. They will be lit first with a green 
light, which means you have 5 minutes. The yellow light means 
please summarize. The red light means 5 minutes is over.
    We now turn to your testimony, and we welcome you. Thank 
you.

STATEMENT OF ALAN L. BELLER, DIRECTOR, DIVISION OF CORPORATION 
          FINANCE, SECURITIES AND EXCHANGE COMMISSION

    Mr. Beller. Thank you, Chairwoman Kelly, members of the 
subcommittee. I am pleased to appear before the subcommittee 
today on behalf of the Securities and Exchange Commission.
    The stated mission of the Securities and Exchange 
Commission is to protect investors, maintain fair, orderly and 
efficient markets, and facilitate capital formation. The 
commission has long strived to balance its mission to 
facilitate capital formation with its mission to protect 
investors.
    For example, while we can carefully consider how our 
regulatory scheme impacts small businesses, we also believe 
that investors in small companies deserve a proper level of 
disclosures and equivalent protections to those of investors in 
larger companies.
    In most cases, we believe the two goals complement each 
other. The public is more likely to invest in our capital 
markets if they believe that their investments are being 
protected. The strength and vigor of our markets, including our 
markets for small business issuers, notwithstanding the 
difficulties that you have mentioned and that we are aware of, 
are we believe unmatched and are ample proof of this very 
important fact.
    Our mission to facilitate capital formation requires us to 
consider carefully how our rules and regulations impact small 
businesses. In order to ensure that we do this, the SEC has 
taken a number of steps to focus on small businesses.
    Primary among these is the Office of Small Business Policy 
in the Division of Corporation Finance. The office directs the 
division's small business rulemaking initiatives and 
interpretations and comments on SEC rule proposals affecting 
small companies generally. It also answers questions received 
from small businesses by telephone or at its e-mail address, 
and works with outside groups concerned with small businesses.
    The head of the Office of Small Business Policy also serves 
as the commission's Special Ombudsman for Small Business. The 
SEC created this position in 1996 to represent the concerns of 
smaller companies within the entire SEC. The ombudsman also 
answers general questions from small businesses.
    The disclosure operations section of the Division of 
Corporation Finance, whose primary role is to review registrant 
filings, is central to the mission of the Division. Disclosure 
operations is divided into 11 groups, 10 of which are organized 
by industry type.
    The 11th group is the Office of Emerging Growth Companies, 
which reviews substantially all of the initial filings of small 
business issuers. We feel that the small business expertise 
that is developed within this office is as important to small 
businesses and investors as the industry expertise that exists 
in our other groups.
    In addition to these offices, which serve as resources for 
small business, the commission has a special page targeted to 
small businesses on its Web site. This special page includes 
material created to help small businesses understand how to 
raise capital and comply with the federal securities laws, as 
well as links to other information of interest to small 
companies.
    We also coordinate with other government regulators to 
discuss issues related to small business. In April of this 
year, we held our annual conference with state securities 
regulators at which we discussed methods of achieving greater 
uniformity and effectiveness in securities regulation. The SEC 
staff also works closely with the Office of Advocacy at the 
U.S. Small Business Administration on regulatory matters 
affecting small entities.
    I want to talk a moment about the Government-Business Forum 
on Small Business Capital Formation. Since 1982, under the 
mandate of the Small Business Investment Incentive Act of 1980, 
the SEC has sponsored this forum. It is an annual meeting that 
provides the only government-sponsored national forum for small 
businesses to let government officials from different parts of 
the federal government know how their laws, rules and 
regulations impact smaller companies. This year's forum was 
held just this past Monday at our headquarters here in 
Washington.
    The focus of this year's forum was, first, developments in 
auditing and their impact on smaller public companies; and 
second, the current challenge to smaller public companies 
related to disclosure and SEC filings and corporate governance.
    I want to pause. If you are familiar with some of the 
requirements of Sarbanes-Oxley, as I know you are, I think you 
will understand that these two focal points of the forum were, 
I think, direct results of the concerns of small business and 
smaller companies that have been referenced with the expense 
and difficulties of complying with Sarbanes-Oxley for smaller 
companies. That definitely was a focus of this year's forum.
    The recommendations that came out of the forum, I think the 
primary recommendations, we are still reviewing them. We just 
had since Monday to sort out what the primary recommendations 
were. Quite clearly, the most important recommendation is to 
deal with the impact of the internal control assessment and 
audit requirement of Sarbanes-Oxley on small business.
    Other important recommendations involved our exemptions in 
rules that accommodate capital formation by small businesses, 
and the status of nonregistered intermediaries, sometimes 
called ``finders,'' in the capital formation process.
    The finder recommendation was also an important 
recommendation of last year's forum and our Division of Market 
Regulation is currently quite actively involved in looking at 
questions related to how the registration requirement for 
broker-dealers impacts the processes of paid intermediaries 
such as finders, who help small businesses raise money.
    The Division has been in discussions with many small 
business representatives, including a group formed under the 
auspices of the American Bar Association. It is addressing the 
important question of what sorts of requirements and what 
aspects of the registration process are or are not appropriate 
for application to those sorts of intermediaries. Obviously, 
the task for us there is to balance the need to facilitate 
capital formation with the very important mandate to protect 
investors. That is what the division intends to do.
    In terms of our regulation of small businesses more 
generally, a number of our rules and exemptions are 
specifically tailored to provide accommodations for small 
businesses that seek to raise capital in the U.S. Some of the 
accommodations come in the form of general exemptions to our 
registration requirements that apply only to small businesses. 
Others are general exemptions that in fact by their nature have 
greater or special applicability to small businesses.
    These rules and regulations are detailed in my written 
testimony, but briefly, Regulation A provides an exemption from 
registration for nonreporting issuers issuing up to $5 million 
in any 12-month period. Regulation D is an exemption that has 
several prongs to it. Most importantly for small business Rule 
504 exempts offerings of up to $1 million in a 12-month period 
and allows for the issuance of freely tradable securities if 
the companies make offerings in accordance with State laws.
    Rule 506 permits sales without limitation to accredited 
investors and to a limited number of nonaccredited investors 
who are sophisticated. Finally, Rule 701 exempts from 
registration sales of securities of private companies to their 
employees. That has been a very important element in allowing 
small businesses and other private companies to retain their 
employees and compensate them appropriately before they go 
public.
    We have received suggestions, including from the forum, to 
increase the amount of capital that can be raised under these 
exemptions and to loosen the conditions. We are always willing 
to, and frankly are always in the process of, considering those 
recommendations and balancing them against the overall context 
of our investor protection mandate.
    In addition to the exemptions, we have a regulatory regime 
for public companies that is designed specifically for small 
businesses. They have a special set of disclosure rules that 
are simpler and easier to comply with than the rules for larger 
companies. They have a special set of registration forms that 
is also easier to comply with.
    An issue that small businesses now consistently face with 
us involves the Sarbanes-Oxley Act of 2002 and our rules 
implementing that act. In doing that implementation, we tried 
very hard to be sensitive to the concerns of small business 
issuers.
    We made a number of accommodations for them that are 
detailed in my written testimony. I am happy to discuss them 
further.
    Despite these accommodations, we have heard, as has already 
been suggested by a member of the subcommittee, that some 
smaller public companies are burdened by the new rules.
    I think we agree that the rulemaking process that we have 
now completed is not the end, but the end of the beginning. We 
intend to consider over the coming months what, if any, 
appropriate steps we can take to recalibrate the way the 
regulatory system affects small businesses.
    The staff is actively in listening mode. I think the 
commission is actively in listening mode. I think we are going 
to seek advice wherever we can get it. We will try to come up 
with the best solutions that we can.
    I think everyone recognizes that in doing that 
recalibration, it is important to keep front and center the 
principle enshrined in Sarbanes-Oxley that improved corporate 
governance, improved financial reporting, improved auditor 
performance are important for all companies regardless of size.
    The last thing I would like to touch on a little bit is use 
of technology. I know it was raised in the last hearing, the 
importance of the SEC coming to grips with changes and 
improvements in technology.
    I think since 2001, the commission has in fact to a greater 
degree than ever before embraced new technology, embraced the 
use of the Internet. All-Internet offerings are something that 
we have now, at least in one case, blessed and in others would 
consider. The whole Internet auction process is now something 
that we have not only accepted, but frankly facilitated in 
initial public offerings. The use of company Web sites for 
posting of information is something that we encourage, 
consistent with companies continuing to comply with their 
reporting requirements with us.
    We do continue to have concerns about the use of the 
Internet for private offerings where access to the offering 
material is not restricted to the appropriate target class of 
investors. That is a concern that we continue to balance 
against the important advantages that the Internet and 
technology offers.
    We are in the course of a fairly significant overall reform 
project of our Securities Act offering processes. One element 
of that project, when it comes out as a recommendation to the 
commission and if the commission approves, would be a proposal 
that would involve updating the communications process to 
permit use of the Internet and other new technologies in ways 
that are currently not permitted by the statutory restrictions. 
We are cognizant of the need to be responsive to technological 
developments.
    Chairman Kelly. Mr. Beller, if you could sum up.
    Mr. Beller. I think that is the last point I wanted to 
address from my written testimony.
    All I would say again is I thank you for the opportunity to 
be here today.
    The SEC has long considered small businesses to be an 
important part of our regulatory responsibilities. We have 
looked and we are continuing to look for ways to accommodate 
small businesses in the fulfilling of our dual mission of 
facilitating capital formation and protecting investors.
    I would conclude by saying I would be pleased to answer any 
questions that Chairwoman Kelly or any other members of the 
subcommittee might have.
    [The prepared statement of Alan L. Beller can be found on 
page 32 in the appendix.]
    Chairman Kelly. Thank you very much.
    I am interested in the definition of small companies. There 
are a number of different definitions used. Standard & Poor's 
uses, for instance, a small cap index as a $300 million to $1 
billion company. Some people find it difficult to consider that 
that is a small company.
    But the question is, if you have a company that is $300 
million to $1 billion, how complicated, how difficult is it for 
them to access capital? I am wondering if the SEC should 
reexamine size standards for some of these small businesses.
    Mr. Beller. For purposes of our regulations directly 
related to small businesses, the defined term involves assets 
or revenues of $25 million, that is assets or revenues. So that 
is not anywhere near the $250 million level.
    So, for example, our Regulation S-B, for special disclosure 
rules, our special forms tie to that number. I am sorry, it is 
market cap and revenues, not assets and revenues.
    I think the other important cut-off we have in our 
regulatory regime is that companies with market cap of $75 
million or more are eligible to use shelf registration for 
primary offerings. Companies of $75 million are similarly 
defined as accelerated filers in our new rules that have 
shortened the period in which companies have to file their 
quarterly and annual reports.
    Chairman Kelly. Mr. Beller, my question really was, do you 
think you should reexamine the size standards for these small 
businesses, the ones that you use?
    Mr. Beller. What I think we have to focus on is two things, 
for example, whether the $25 million is the right level or 
whether it should be $50 million, for example; whether the $75 
million for some purposes is maybe even too small; and also 
whether there should be different levels for different 
purposes.
    I am thinking particularly of the internal control 
requirement in Sarbanes-Oxley, where I think we are hearing, 
and I would not be surprised if the members are hearing, that 
$250 million is a definition for small business. Companies with 
$250 million of market cap find the internal control 
requirement to be a burdensome requirement in its current form.
    So yes, we should think about changing them, but I think 
also we should think about whether there ought to be maybe 
different levels for different purposes.
    Chairman Kelly. I am glad to hear you say that.
    Also I am glad that in your testimony, you finally 
acknowledge the need to modernize some of our security laws 
relating to the BDCs. Representative Velazquez and I have been 
working on this legislation now for two Congresses. It has 
passed the House unanimously.
    In spite of all this support and no opposition, we continue 
to ask the SEC for feedback. Don't you think our legislation 
would help many of these small businesses access capital?
    Mr. Beller. We certainly agree with the premise of the 
legislation that the changes in the margin rules in 1999 had an 
unacceptable impact on the operation of the definition for 
eligible portfolio companies. We have been in communication 
with your staff on an ongoing basis on the legislation and the 
rulemaking that you mentioned that is being considered within 
the staff at this point.
    The commission has not taken a position on the legislation. 
I know that it has passed the House. I know that it would deal 
with the eligible portfolio company issue.
    I am more than pleased to take back the request to the 
staff of the Division of Investment Management. The BDCs do not 
come under the jurisdiction of the Division of Corporation 
Finance. I am happy to take that request back to the Division 
of Investment Management and back to the commission itself and 
get you an answer, but I cannot answer that question today.
    Chairman Kelly. I wish you would come back to us with an 
answer for that question.
    One of the problems that I see with small business issues 
at the SEC is they cut across a lot of different internal 
divisions of the SEC. I am wondering if it would not be better 
at the SEC, if it would be better for the people in the 
businesses and the SEC itself, if you had some sort of a small 
business policy office that was a part of the Division of 
Corporation Finance, but separate from, so that they could be 
within the umbrella, but separate so there is one way for those 
of us in Congress and the businesses themselves to get some 
clarity and specific direction. I think it would speed up a 
number of issues.
    As I said, Ms. Velazquez and I have been working on this 
for 4 years and we do not have a response from the SEC. We 
would really appreciate getting one.
    I also would hope that you would come back to us with your 
thoughts about the idea of having a specific separate small 
business policy office. I think that would be very helpful for 
some of these businesses and for the SEC.
    I am out of time. I am going to turn now to Mr. Davis.
    Mr. Davis. Thank you.
    Mr. Beller, I probably will not use my full 5 minutes, but 
I wanted to go back to the area of your testimony that relates 
to Sarbanes-Oxley. I was reviewing the part of your written 
testimony that deals with some of the allowances that have been 
made for small businesses who may be struggling, or who will 
eventually struggle with the compliance aspects of Sarbanes-
Oxley.
    Let me ask you a broader philosophical question. What is 
your position or the SEC's position on whether Sarbanes-Oxley 
ought to apply to certain small businesses at all?
    Can you talk about whether there is any strong public 
interest or any strong public policy rationale that dictates 
that Sarbanes-Oxley even apply to a lot of these smaller 
companies?
    Mr. Beller. Sure. I would answer that in two different 
ways.
    One, as a regulatory agency, we take our direction from 
Congress, of course. The Sarbanes-Oxley Act of 2002 does not 
itself make any distinction between larger companies and 
smaller companies. I think we take that direction very 
seriously. So the direction from Congress is in a sense the 
benefits in that statute are to be directed at all of our 
reporting companies.
    The second answer I would give you is that consistent with 
that direction, I think the commission's philosophical view, 
and certainly mine, is that the benefits of Sarbanes-Oxley to 
improved financial reporting, to improved disclosure, to 
improved performance by auditors, to improved corporate 
governance, and to improved performance of people, gatekeepers 
like lawyers and accountants and underwriters and analysts, all 
of those improvements are important to companies of all sizes.
    So the statute correctly directs us, if you will, as a 
philosophical matter, to apply its principles across the board.
    Mr. Davis. Let me ask a different follow-up. Let's say that 
in the 109th Congress for whatever reason we were to take a 
look at Sarbanes-Oxley and we were of a mindset to make some 
changes in it, recognizing that we make the policies and 
theoretically you do not.
    Give me some guidance if Congress were to be interested in 
carving out exceptions for small businesses or if Congress were 
to be interested in creating a different set of standards. Give 
me some guidance of how we ought to be thinking about that 
process.
    Mr. Beller. I think the honest answer to that is that we 
have certainly heard enough regarding the impact of the burden 
of the requirements to assess and audit internal control over 
financial reporting, that certainly the Chief Accountant of the 
Commission, Don Nicolaisen, and I have both indicated publicly 
that we would like the private-sector individuals, principally 
an organization called the Committee of Sponsoring 
Organizations, or COSO, we would encourage COSO to think about 
whether they should develop an alternative framework that would 
apply to smaller companies. I actually think that that would be 
the most appropriate way to address that burden, and I think 
before we were to do something, before the PCAOB were to do 
something and before Congress were to do something, I would 
like to see what COSO is prepared to do.
    Beyond internal control, what I said earlier holds. We are 
at the end of the beginning. We have completed the rulemaking 
process. We have now very actively entered listening mode, both 
at the commission level and the staff level. I think we are not 
bashful at all about our eagerness to get outside help in that 
listening mode.
    Mr. Davis. Let me try to slip in one question while I have 
a little bit of time left on the clock.
    Can you comment on an issue that, as you know, has been 
very controversial in this chamber and is now before the other 
body, relating to expensing of stock options?
    Of course, as you know, the House passed a particular bill 
and the Senate right now is reviewing it. It is unlikely we 
will get a final product before we adjourn.
    Can you comment for a moment on whether it makes any sense 
to carve out exceptions to the expensing rules for smaller 
businesses?
    Mr. Beller. I think my answer to that would be the same as 
the commission's answer has been with respect to that issue 
generally. Our chairman is certainly very clearly on record as 
to this.
    We believe that the right place for these questions to be 
dealt with is the FASB. We think the FASB has an open and 
appropriate due process. The question of whether there should 
be different treatment for smaller companies and whether there 
should be different treatment for private companies has 
certainly been presented to the FASB. That is where I would 
look to get the answer to that question.
    What I think we are committed to do once the FASB has acted 
is to provide appropriate implementation guidance so that the 
rule that the FASB comes out with is a rule that is 
appropriately implemented by the companies large and small that 
it would apply to. I think that is where we are.
    Mr. Davis. I think my time has expired, if the Chair would 
give me an additional 30 seconds.
    One of the controversies as you know has been the degree to 
which we should be deferential toward FASB. We have had a 
fairly strong discussion over that.
    So if you can answer just theoretically, if Congress were 
to decide to put some kind of restraints on FASB's 
decisionmaking process, as the House has already done, what 
should we be looking at if we were to try to do some kind of a 
carve-out for smaller companies to make them less subject to 
the full expensing requirements?
    Should we be looking at the small companies in the same way 
we look at the large companies when it comes to the expensing 
issues?
    Mr. Beller. Again, I think my answer has to be that we 
would encourage leaving this to the FASB and not the 
legislative process. I am not sure I can give any more guidance 
than that.
    Mr. Davis. Okay. I will take the witness's answer as I do 
not think I am going to get another one, Madam Chairwoman.
    Chairman Kelly. Thank you, Mr. Davis.
    Mr. Paul?
    Mr. Paul. Thank you, Madam Chairman.
    Your mission has been described as protecting investors, 
ensuring orderly markets and promoting capital formation. I am 
going to ask the question, then I am going to develop a little 
bit.
    Has it ever crossed your mind that this is an impossible 
mission and something that is unachievable?
    The reason I ask this is that I think the wrong things get 
blamed for our problems. In the 1930s, we had a bad period of 
time. We had a crash in the stock market and we introduced this 
notion that all we needed were regulations and everything would 
be okay. And yet when they investigated the crash and the loss 
of funds in the late 1920s and early 1930s, they found out 
there was essentially no fraud. There was a financial bubble 
and there was a collapse. Yet during the 1930s, we kept 
introducing more and more regulations and kept the markets out 
of balance for a long period of time and things got worse. 
Therefore, there was no proof that regulations in the 1930s 
were helpful; maybe exactly the opposite was true.
    Today we have problems. We had the collapse of the Nasdaq 
bubble, 80 percent, probably trillions of dollars lost. We had 
Enrons. And yet we did have the SEC and others sort of poking 
around there hoping to prevent this, and it did not do any 
good.
    Our conclusion now is we need even more regulations, so the 
Congress responded. You are right. You do not create these 
problems. You do what we tell you, so we passed Sarbanes-Oxley 
and now you are making this effort.
    I still maintain maybe the impossibility of solving our 
problems through regulation because we are not directing our 
attention to the problem. To me, the problem is the bubble. You 
do not create the bubble. As a matter of fact, nobody can 
prevent the correction once the bubble is created. Right now, 
we have had a partial collapse of the bubble, but we probably 
have a long way to go.
    So far we as legislators always have to do something, and 
we are doing something, and you are responding and you are 
doing your best. But you are involved in trying to cause 
capital formation while what we are doing is causing costs of 
capital formation to go up.
    I do not think we have the right definition of ``capital 
formation'' because in a free market economy capital comes from 
savings. It does not come out of the thin air. I think what we 
talk about when we talk about capital formation, and when you 
talk about it, I think you are alluding more to allocation of 
credit, how to send some credit over into small business in 
places where we think it is necessary.
    I think that is completely different than capital 
formation. Capital formation means productivity and savings, 
yet our savings rate is real low, so we are not doing a heck of 
a lot to create real capital. Of course, we do create credit 
out of thin air.
    I just am concerned that we are on the wrong track, and 
that all your good efforts will not pay off very well because 
we have not asked the question: How have we created the bubble 
and the collapse and the mal-investment and all the debt in the 
system?
    And some people lose money, and we have very disorderly 
markets. When you think about it, they are very disorderly. 
Just one day this week, the dollar lost 1 percent. This affects 
everybody's investments, exporters and importers, and prices, 
and the whole works.
    So once again, the question is: Has it ever occurred to you 
in the slightest manner that maybe the regulatory process is on 
the wrong track and it cannot solve the problems that we face?
    Mr. Beller. I guess I would say that I agree with you that 
the SEC is not, without trying to address whether there is a 
regulator or which regulator it is, the SEC is not the 
regulator to address issues of bubbles and collapsing of 
bubbles and productivity and savings rates and the other things 
that you very properly allude to as the critical underpinnings 
of a capital market.
    I think when we talk about capital formation, what I think 
we think our mission is, is to eliminate obstacles in the way 
that markets operate, including regulatory obstacles, that is, 
thinking about our own rules, that keep the capital formation 
process that you are talking about from operating in a free 
market, competitive way. I think that is a mission that we can 
appropriately address.
    I think there is evidence that it is a mission that can be 
consistent with our investor protection mission if we do it 
right. I think that the fact that the global markets, which 
have lots of models available to them other than ours, the 
global markets have more often than not followed the U.S. lead 
in terms of both the way we regulate markets to encourage 
capital formation and the way we regulate companies to 
facilitate their being able to raise capital and to foster 
investor protection.
    I think that trend following the U.S. lead in the global 
markets is actually also true of Sarbanes-Oxley. If you look at 
what is happening in Europe, certainly, and what is happening 
in some parts of Asia even, you will find best practices and 
legislation and EU directives, all of which to some degree 
mimic what Congress did in Sarbanes-Oxley and what we did in 
implementing it.
    So I think if you narrow what capital formation means to 
the narrower concept that I think we use, and not savings and 
productivity and the like that are really not part of our 
function, I think the mission is a possible one. The mission 
can be swamped by forces outside our control. That is, bubbles 
can come and go and our regulatory function does not really 
address them in any way.
    Mr. Paul. May I have 30 seconds for one quick one?
    Chairman Kelly. So ordered.
    Mr. Paul. If there is an argument made that these 
regulations are too great a burden for the small company, 
wouldn't this be the perfect argument to show that if it is a 
burden to small companies, it is also a burden to the large 
company and it would make the case that all the regulations are 
not beneficial.
    Mr. Beller. It would, and I think we do think about that. I 
think if you take internal control as an example, though, I 
think you can fairly reach a conclusion that differentiates 
larger companies from smaller companies.
    The internal control mechanism at larger companies depends 
on processes, depends on checks and balances, depends on 
documentation. And properly so, because there is no one 
consciousness that knows all the things that are going well or 
going badly across the board.
    A smaller company, you will find, and certainly when we get 
down to the $25 million level, you will find that it is the 
rule, rather than the exception, that the CEO knows everything 
that is going on, or the CFO knows everything that is going on 
in the financial area.
    The right kinds of control mechanisms and the right kinds 
of assessments really could be different in that environment. 
So when we talk about right-sizing the framework for thinking 
about internal control, it is those kinds of issues. I think 
you can get to saying small businesses ought to have different 
treatment or ought to be recalibrated.
    There are other instances where, as you say, you can fairly 
argue that what is burdensome for the small companies is 
proportionately burdensome for the large companies and why are 
we doing it at all. We do think about that.
    Chairman Kelly. Thank you, Mr. Paul.
    Mr. Beller, there is clearly some overlap between the work 
of the SEC and the work of the Small Business Administration 
for small private businesses and small public companies. 
Especially there is an overlap when small businesses reach the 
point where they want to go public.
    I am interested in the fact that the SBA I know has written 
to the SEC for comment on proposals that could have an impact 
on small businesses. I want to know what the SEC is doing to be 
proactive for the small businesses? How are you working, what 
are you doing to try to work more closely with the SBA to make 
that juncture a little easier for people to navigate?
    Mr. Beller. I think we have good relations and good 
communications with the Small Business Administration, 
certainly with the Office of Advocacy. The head of our Office 
of Small Business Policy is in I would say ongoing 
communication with them about their concerns and our concerns.
    Chairman Kelly. But you do not have a small business 
advocate at the commission, nor does the commission have one 
person designated to be a small business liaison. That might 
help, don't you think?
    Mr. Beller. I took your earlier point about whether it 
should be someone within the Division of Corporation Finance or 
whether there should be a separate office. I think we feel we 
do have someone who acts as a liaison between the agency and 
small business for all issues. That is the head of the Office 
of Small Business Policy.
    You correctly observed that that office is within the 
division and I think fairly ask, is that the best place for it 
to be. But there is such a person, and that person certainly 
believes that part of his function is to be the liaison.
    We will certainly take your question back and consider it. 
I would say that one of the reasons that person is in the 
division--and in a sense it could be in any of three divisions: 
there are four divisions in the SEC--and functions that get 
spun off outside those divisions, they think more multi-
divisionally, but they risk becoming orphans. That is, I think, 
the issue we have to address in thinking about the right place 
for that office.
    But we do have an office. The man who heads that office 
firmly believes, and I as the division director firmly believe, 
that he is the liaison between the commission as a whole and 
small business. We talk to the other divisions about that 
liaison function.
    Chairman Kelly. Is that apparent to the small businesses 
who need that person?
    Mr. Beller. I think we try to make that point extremely 
clear. I think, for example, the small business forum, the 
forum that was just held last Monday, is organized by that 
office. It is held by that office, organized by that office, 
but the subjects that are raised include the finders issue from 
market reg; include BDC issues and investment management.
    The small businesses who participate in that forum, I think 
it is crystal clear to them that the head of that office is the 
liaison for all purposes within the agency, yes.
    Chairman Kelly. Since you brought up the small business 
forum, there was in the report, I think it was this last 
report, that there was a recommendation that the commission 
create a position to act as a small business liaison, and that 
one commissioner serve as an advocate.
    I think that that is something that we would be very 
interested in seeing happen. I would hope that you will 
consider that. You seem to indicate that you will.
    We thank you very much. The Chair notes that the U.S. Small 
Business Administration will submit a statement in writing due 
to their inability to be appear before this subcommittee today.
    We thank you very much for appearing here, Mr. Beller.
    The Chair also notes that some members probably will have 
some additional questions for this panel which they may wish to 
submit in writing. So without objection, the hearing record 
will remain open for 30 days for members to submit written 
questions to these witnesses and to place their response in the 
record.
    We thank you very much, Mr. Beller. We appreciate your 
sharing time with us today. Thank you.
    Mr. Beller. Thank you for the opportunity to appear before 
you. Thanks very much.
    Chairman Kelly. Thank you.
    As Mr. Beller leaves, I would like to bring up our second 
panel. We have several private-sector witnesses to discuss the 
current state of small business development and access to 
capital.
    Our first witness is Ms. Joan M. Sweeney, the chief 
operating officer and chief compliance officer of Allied 
Capital in Washington, D.C. Ms. Sweeney has worked with Allied 
Capital since 1993 and oversees the company's daily operations. 
Prior to joining Allied Capital, Ms. Sweeney was employed by 
Ernst and Young, as well as Coopers and Lybrand and the SEC 
Division of Enforcement.
    We welcome you, Ms. Sweeney.
    Also appearing on our second panel is Mr. Frank Speight, 
chairman and chief executive officer of American Capital 
Partners in West Palm Beach, Florida. Mr. Speight is 
representing the National Small Public Company Leadership 
Council, a Washington, D.C.-based group seeking to educate the 
White House, Congress and federal agencies about the economic 
contribution of small publicly held companies.
    In addition, we also hear from Mr. Thomas Schneider, the 
President and chief executive officer of Pathfinder Bank in 
Oswego, New York. Mr. Schneider will be representing America's 
Community Bankers, an advocacy group of community banks whose 
members have assets which aggregate more than $1 trillion and 
pursue progressive entrepreneurial and service-oriented 
strategies in financial services to benefit their customers and 
communities.
    Our final witness of the day is Mr. James Connolly III, the 
President of the IBA Capital Funding in Perrineville, New 
Jersey. Mr. Connolly is representing the CEO Council, a group 
which advocates on behalf of CEOs of small public companies. 
Mr. Connolly is also the director of the new business 
development of InvestTrend, a fee-for-service financial 
analysis organization.
    Without objection, your written statements will be made 
part of the record. You will each be recognized for 5 minutes.
    We will begin with you, Ms. Sweeney. We welcome you here.

STATEMENT OF JOAN M. SWEENEY, CHIEF OPERATING OFFICER AND CHIEF 
               COMPLIANCE OFFICER, ALLIED CAPITAL

    Ms. Sweeney. Thank you, Madam Chairwoman and members of the 
subcommittee. I am Joan Sweeney, the chief operating officer of 
Allied Capital Corporation. We invest in the American 
entrepreneurial economy as the nation's largest business 
development company or BDC.
    Thank you for the opportunity to discuss the essential role 
that BDCs play in providing growth capital and expertise to 
smaller businesses.
    I also want to thank you, Madam Chairwoman and 
Congresswoman Velazquez, for your efforts in passing H.R. 3170, 
the Increased Capital Access for Growing Business Act. If 
enacted, this important piece of legislation will increase the 
number of American companies that could access capital from 
BDCs.
    Allied Capital has been investing in growing businesses for 
46 years, and over that time we have provided financing to 
thousands of companies. Our assets today are over $3 billion 
and we have investments in 116 portfolio companies, which 
generate aggregate annual revenues of approximately $11 billion 
and employ more than 105,000 people.
    We provide both mezzanine debt and equity capital. We 
believe that smaller companies need additional financing 
sources. The U.S. financial services industry has been 
contracting as a result of consolidation. This trend has 
reduced the amount of debt capital available to smaller 
companies. In addition, the cost of being a public company in a 
post-Sarbanes-Oxley world is higher than ever. Going public has 
become less attractive, and more companies are seeking private 
financing options.
    Small public companies, however, cannot turn to a BDC as a 
private financing source because under current law they are not 
eligible. This is unfortunate because BDCs, as regulated 
entities, provide transparency as to their investing activities 
and are a natural match for smaller companies.
    Deprived of this option, many small public companies, 
desperate for capital, have instead sought private financing 
from private equity and hedge funds, which provide private 
investment in public equities, or PIPE financing.
    These unregulated funds have little transparency as to 
their activities, and may not have the best interests of the 
small company in mind. Some have even structured ``death 
spiral'' PIPEs where the fund intends to profit from the fall 
of the small firm's stock price.
    Congress saw the need for alternative financing sources for 
small companies in 1980 when it created BDCs. In defining the 
types of businesses eligible for BDC financing, Congress 
defined an ``eligible portfolio company'' as a company that did 
not have a class of marginable securities under the rules of 
the Federal Reserve.
    According to the legislative history, Congress intended the 
pool of eligible portfolio companies to be very broad, and it 
was estimated that 8,000 of the 12,000 publicly traded 
companies at the time would be eligible.
    However, in 1999 the Federal Reserve greatly expanded the 
definition of marginable securities. Today, any security listed 
on the Nasdaq stock market is considered marginable, which is a 
substantial shift from what was marginable in 1980.
    The Federal Reserve's changing view of marginability 
collided with congressional intent for BDCs and drastically 
reduced the universe of companies eligible for BDC financing. 
Small public companies needing cash for growth are no longer 
eligible, and recently questions have been raised about the 
eligibility of private companies with outstanding debt 
securities, since debt securities are also now marginable.
    BDCs may invest limited capital in companies that are not 
eligible, but we do not think there should be any limit when it 
comes to providing growth capital for smaller companies.
    One investment that Allied Capital made is in a small 
public company called Blue Rhino, which you may recognize as 
the supplier of the propane gas cylinder for your outdoor 
grill. This company came to us in 2001 for $15 million in 
financing. Their stock was trading at only $3.70 per share, and 
their market capitalization was less than $100 million. They 
were not suitable for a secondary public offering.
    Our financing enabled the company to grow its sales 
substantially in 2001 and 2002. The company increased in value, 
its shareholders benefited, and Allied Capital's shareholders 
benefited with a capital gain.
    BDCs work well. BDCs can play a much more meaningful role 
in providing capital to entrepreneurial companies if the 
definition of ``eligible portfolio'' company is updated.
    We encourage the subcommittee to review the rulemaking 
activity of the SEC to ensure that the definition is 
appropriately amended both to restore Congress's original 
vision and to provide consistency with the provisions of H.R. 
3170.
    Thank you for the opportunity to testify today.
    [The prepared statement of Joan M. Sweeney can be found on 
page 58 in the appendix.]
    Chairman Kelly. Thank you very much.
    We move next to Mr. Connolly.

  STATEMENT OF JAMES A. CONNOLLY III, PRESIDENT, IBA CAPITAL 
             FUNDING, REPRESENTING THE CEO COUNCIL

    Mr. Connolly. Thank you. Good morning, Chairwoman Kelly and 
members of the subcommittee.
    Chairman Kelly. It is a busy day.
    Mr. Connolly. I am certainly aware, and I thank you for 
taking the time. I do not know that I will be as compelling to 
listen to as Mr. Allawi, but I will try. I have congratulated 
Ms. Sweeney for truly cooking with gas, as Blue Rhino is 
certainly a great stock and a valuable addition to the 
marketplace.
    To begin again, good morning, Chairwoman Kelly and members 
of the subcommittee. First, allow me to thank you for the 
opportunity to appear before you to present a somewhat 
different perspective than has been heard here today on small 
business capitalization as experienced by the over 7,000 
publicly traded companies currently listed on either the Over-
The-Counter Bulletin Board or the Pink Sheets.
    We are gratified that our efforts to communicate with the 
Congress and relevant federal agencies, under your leadership 
as advocates for small business, results in my appearance here 
today.
    My name is James Andrew Connolly III. I am a native New 
Yorker and am here as a founding member of the CEO Council, a 
Maryland-chartered 501(c)(6) organization of small public 
company executives, with both a growing network of local 
chapters and an expanding membership base throughout the 
country.
    Our stated purpose is to enhance the public markets for 
investors and couple this with affordable financing options for 
smaller public companies. We are seeking to achieve these goals 
with both a member-driven advocacy effort, along with 
supplementing the information available to the markets as to 
the opportunities open for investment in these engines of 
economic growth, job creation and innovation.
    Our market space of 7,000 companies includes hundreds of 
millions of dollars in market capitalization, tens of thousands 
of employees, and likely hundreds of thousands of stockholders. 
We are the dirty little secret of the securities markets, much 
maligned, overregulated, and often referred to as ``penny 
stocks'' in the same sentence as ``scam.''
    I can state with certainty that the perception of fraud is 
not the same as fraud, and the substantial majority of these 
companies are operated in an ethical and businesslike manner. 
They are responsive to their customers, good employers and 
contributors to their communities along the way. They operate 
in all 50 States and probably in most congressional districts. 
They range from startups to well-seasoned enterprises who all 
share the competitive challenges of a global marketplace, a 
recovering economy and the burden of often-unaffordable 
compliance costs.
    It is frequently the case when apportioning resources that 
a microcap CEO is compelled to choose between expanded 
reporting costs and new hiring, payroll and benefits or audits 
and expanded legal advice. Public transparency costs, whether 
as traditional investor relations or fully compliant research 
dissemination, director indemnification or liability coverage, 
without which many of these companies cannot attract qualified 
outside directors, compete for scarce corporate resources and 
are therefore often lacking.
    Heretofore, our microcap colleagues have had to compete 
without being able to collectively represent their interests as 
significant contributors to the economic well being of the 
United States, not to mention often very good investments 
without running the gauntlet of regulatory indifference at 
best, and outright hostility to our continued existence at 
worst.
    This has not occurred in a vacuum. There clearly have been 
instances of abuse. We hear of them in the press when advised 
to avoid penny stock investments, and unfortunately with 
regular and necessary enforcement actions that become highly 
publicized.
    Taken cumulatively, these facts explain both the virtual 
impossibility of obtaining either startup or expansion capital 
on terms that are rational, as well as diminished liquidity in 
secondary trading.
    Undoubtedly, the modern era of instant execution, online 
trading and affordable transaction costs, combined with the 
relative lack of substantive reliable data on many microcap 
securities, has led to an overall lack of transparency and 
created multiple opportunities for both fraud and market 
manipulation.
    The CEO Council was formed with these challenges in mind 
and has worked deliberatively over the past 3 years to effect 
what we hope are progressive changes.
    We took an early and active role in opposing the BBX as 
envisioned by Nasdaq. They, like all profit-motivated 
organizations, hoped to escape the costs of regulating the 
Over-The-Counter Bulletin Board without provision for the 
thousands of companies who either would not, could not, or 
chose not to list, thereby relegating them to Pink Sheet 
status, which demonstrably would lead to a major loss of both 
market capitalization and reduced investor liquidity.
    The council has maintained an active presence at the 
annual, most recently on Monday concluded SEC Government-
Business Forum on Small Business Capital Formation held every 
year since Congress mandated it in 1980.
    We have contributed to its agenda and suggested several of 
the hundreds of recommendations that small business owners, 
regulators and industry practitioners have suggested for 
implementation. Sadly, far too few have been adopted or 
implemented. As a matter of fact, Madam Chairwoman, virtually 
every year one of those recommendations is to re-adopt the 
recommendations from the year before.
    It often seems that the various, admittedly dysfunctional 
divisions of the SEC are in conflict with each other when 
responding to our concerns. The perception of enforcement 
appears to be guilty until examined innocent. Corporate finance 
clearly has a Fortune 1000 focus, and it is left to the small 
business ombudsman, Mr. LaPorte, to represent our interests 
within the bureaucracy, often to no avail.
    I have included with my written testimony for the 
subcommittee's review the recommendations from 2002 and 2003.
    If I may, just as an aside, I would like to point out that 
recommendation number 24 last year was mine. It called upon the 
SEC to work diligently to expand financial literacy within the 
investor community so that investors are much more confident 
and aware of the realities of investing.
    The NASD has had some significant negative effects on our 
marketplace as well. In their determination to disallow broker-
dealers to receive any compensation for filing form 15(c) 211, 
despite substantial costs to fully due diligence a listing, the 
200-plus market makers in Pink Sheet-listed companies shrank to 
40 active submitters, creating less than a fully open and 
competitive marketplace.
    If the attorneys and accountants have no problem being paid 
for rendering professional services and are fully registered, 
licensed professional market makers who, through their due 
diligence prior to a filing, are the first line of defense 
against fraud, any less deserving?
    Time does not permit me to cite many other obstacles 
microcap companies encounter in a full discussion here today, 
but with your indulgence I will cite three other significant 
proposals that the CEO Council would recommend.
    Firstly, I am aware that there is interest at both the 
American Stock Exchange in New York and the Pacific Coast 
Exchange in San Francisco in the development of a specialist-
based new venture or microcap exchange. This should be fully 
explored at both the SEC and the NASD, neither of which appear 
to be overly interested in those proposals from the indications 
I have received, as its potential for small company access to 
capital is very promising.
    Secondly, we would like to propose a new regulatory regime 
for small business issuers. This might include consultative 
roles for organized participation by all elements of the 
capital markets with investor advocates, institutional 
investors, regulators, issuers and other interested parties 
operating in a framework to create what some have called the 
``enterprise exchange.'' There are opposing views on whether a 
specialist or a dealer market is a better solution, but we 
believe this is worth exploring.
    Finally, we believe that regulation 15(c) 211 should be 
improved and streamlined, such that nonreporting issuers should 
provide financial information to the marketplace, and that 
regulation 15(c) 211 should be right-sized to fit this goal.
    Additionally, despite multiple efforts, some with very 
substantial congressional support, I might add, the information 
on this form which every publicly traded company in the Pink 
Sheets or Bulletin Board needs to file to effect trading, and 
therefore is available in the repository of the NASD, and I 
believe in most cases at the SEC, could form the basis of 
informed investor interest and is maintained by the NASD, where 
individuals have been refused by them to have these documents 
fully disseminated to the public as filed. There are data 
vendors who would gladly supply this information, several free 
of charge, as transparency, we all agree, is a paramount goal.
    Investor protection and small business capitalization need 
not be mutually exclusive and hopefully this dialogue today 
will add to the efforts expended by many of us who are deeply 
concerned that without both regulatory changes and a more fully 
informed investor base through increases in financial literacy, 
coupled with enhanced disclosures, the microcap marketplace can 
once again thrive and be a hotbed of innovation and growth for 
our economy.
    Thank you for hearing our concerns today, as well as your 
willingness to address them. I know the members of the CEO 
Council are pleased to be a resource. We hope you will call on 
us in your future efforts to keep our markets the most 
efficient and transparent in the world.
    With your permission, we would like to add to the record in 
the allotted record period time. Thank you again.
    [The prepared statement of James A. Connolly III can be 
found on page 47 in the appendix.]
    Chairman Kelly. So moved.
    Thank you very much.
    Mr. Speight, we welcome you here today.

   STATEMENT OF FRANK SPEIGHT, CHAIRMAN AND CHIEF EXECUTIVE 
  OFFICER, AMERICAN CAPITAL PARTNERS, LTD., REPRESENTING THE 
        NATIONAL SMALL PUBLIC COMPANY LEADERSHIP COUNCIL

    Mr. Speight. Good morning, Madam Chairwoman and members of 
the subcommittee. I want to thank you for the opportunity to 
appear before you today to testify on the issue of small 
business access to capital.
    My name is Frank Speight. I am the founder, chairman and 
CEO of American Capital Partners, Limited, a registered 
business development company which is based in West Palm Beach, 
Florida. I also serve as co-chairman of the National Small 
Public Company Leadership Council, a Washington, D.C.-based 
group that seeks to educate and inform the White House, 
Congress, and federal agencies about the crucial issues 
impacting the nation's small publicly traded companies and the 
economic contributions that those companies are making.
    Let me first congratulate Chairwoman Sue Kelly on the House 
passage of the bill called Increased Capital Access for Growing 
Businesses Act, H.R. 3170, that would modernize outdated 
securities laws to ensure that small businesses have better 
access to capital through business development companies, or 
BDCs.
    We have enjoyed working with Congresswoman Kelly on behalf 
of the Leadership Council. It is exciting to see the first 
fruits of her efforts to broaden access to capital for BDCs, 
which are publicly traded investment companies that invest in 
both public and private companies and generate necessary 
injections of capital for all businesses.
    I am here today in support of her efforts and to urge that 
access to capital be broadened to encompass all small and 
developing companies. Small business is the engine of the 
economy.
    The ability of small business to raise funds and have 
access to loans or the necessary capital markets is essential. 
When small businesses do not have the capital they need, they 
are unable to make the investments they require to grow their 
business. This, in turn, hampers growth in the overall economy. 
We must do all we can to create a greater access to capital 
markets for all small business.
    An important step in providing greater access to the 
capital markets for small public companies can be taken by 
reinstating a modified and updated version of SEC Rule 504, 
which was among the reforms created by the Reagan 
Administration.
    For small businesses in particular, the paperwork and legal 
costs are prohibitive oftentimes for raising money through the 
capital markets. The Reagan Administration wisely knew that the 
SEC Rule 504 made it easier for small firms to raise money from 
the stock market by exempting them from many SEC regulations 
and registrations if they raised $1 million in a calendar year.
    To briefly review, the results of Reagan's SEC reforms were 
immediate. Small businesses fueled the boom of the 1980s and 
1990s. Small businesses quickly realized that they could raise 
capital as never before, and the sector became the engine of 
growth for the new economy.
    For example, in 1984 two friends who owned a small ice-
cream shop in Vermont wanted to build a full-fledged 
manufacturing plant to sell their product nationally. The 
friends decided to bypass an underwriter or a broker and raised 
$750,000 by selling directly to Vermont residents. A year after 
raising this seed capital, Ben & Jerry's listed on the Nasdaq 
and soon became one of the best-selling brands in the United 
States.
    According to a report in The New York Times in 1983, the 
SEC's changes under the Reagan Administration had brought an 
additional $500 million into the markets in less than 2 years.
    Also, as Philip Koslow wrote in his book, The Securities 
and Exchange Commission, published in 1990, ``The SEC's new 
approach undoubtedly contributed to the expansion of the 
markets and the growth of new capital. Wall Street, which had 
seen some hard times since the 1970s slump, began to boom. New 
buildings were going up throughout the financial district in 
lower Manhattan, and firms were hiring thousands of new 
workers. Suddenly, Wall Street was the place to be for 
energetic and ambitious young people. All this activity clearly 
bolstered the economy in the short run.''
    During the early 1990s, the reforms of Rule 504 were 
liberalized even further and once again small businesses fueled 
an economic boom. According to the Small Business 
Administration, more than one-half of all U.S. employees work 
for companies with 500 employees or less. These firms produce 
47 percent of all business receipts and nearly all the new job 
growth. Firms with more than 500 employees actually had a net 
decrease of jobs from 1992 to 1996. Some economists credit 
small business for the dramatic growth in American productivity 
that was responsible for the incredible prosperity of the 
1990s.
    But since that era, the SEC has found many excuses to roll 
back the reform policy that the Reagan Administration put into 
place. During its reign, Rule 504 successfully proved to build 
prosperity by giving small companies more access to the capital 
markets.
    The SEC would argue, as I heard today, that Rule 504 still 
exists on the books. But in reality, the SEC has taken the 
teeth out of the measure and it is of little use, by relegating 
the decisionmaking process to the States and taking it away 
from the federal level.
    Under the former 504 guidelines, accredited investors could 
receive unrestricted securities for their investment, thus 
allowing them the necessary liquidity to lessen their risk 
exposure. It also allowed them the opportunity to more quickly 
reinvest the proceeds from an investment into another small 
public company and there expand the capital base.
    There is a tremendous need to modernize outdated securities 
laws to ensure that small businesses have better access to 
capital.
    My recommendation is a reinstatement of SEC Rule 504 to its 
former parameters, but with several modifications. These 
changes would be to increase the annual cap on the money small 
businesses can raise to $2 million, from the former $1 million. 
This would allow small microcap public companies the access to 
the levels of capital they truly need in today's marketplace.
    Also, require the SEC to develop some kind of mechanism to 
streamline the process for filing. If a small public company is 
current in its SEC filings, they should be allowed to file an 
easy 504 notification filing, with supporting documentation 
such as a legal opinion letter on EDGAR, similar to the current 
same-day filing S-8 that is currently in place for compensating 
consultants.
    Madam Chairwoman and members of the subcommittee, small 
businesses are the backbone of our economy. There is no 
question about that. It is critical, absolutely critical, I 
believe, for small businesses of all kinds to have more access 
to capital in order to create jobs, buy products, invest in 
this beautiful country of ours, and ensure a strong and growing 
economy.
    Thank you, Madam Chairwoman, for your time.
    [The prepared statement of Frank Speight can be found on 
page 55 in the appendix.]
    Chairman Kelly. Thank you very much, Mr. Speight.
    Mr. Schneider?

 STATEMENT OF THOMAS SCHNEIDER, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, PATHFINDER BANK, REPRESENTING AMERICA'S COMMUNITY 
                            BANKERS

    Mr. Schneider. Good afternoon, Chairwoman Kelly and members 
of the subcommittee. Thank you for inviting me to testify. I am 
Tom Schneider, President and CEO of Pathfinder Bank in Oswego, 
New York. Pathfinder is a community bank traded on Nasdaq with 
capital of $22 million. I am here representing America's 
Community Bankers.
    I am proud to report that the climate for small business in 
my community is improving. Small businesses are the economic 
engine in our country. They are our job creators and they are 
vital customers for my bank. Small businesses are growing and 
creating much-needed jobs, often because community banks across 
our nation focus on helping local businesses with their capital 
needs.
    Oswego, New York, is located in the old manufacturing heart 
of our nation. As the U.S. economy has shifted from a 
manufacturing economy to one that is service-oriented, our 
community has had to adapt. Pathfinder Bank has been proud to 
provide capital to aid in that transition. My bank proudly 
offers several types of financial products to meet the capital 
needs of the small businesses in the Oswego area.
    One of the greatest tools we have is also one of the best 
private-public partnerships ever created by Congress, the 
programs of the Small Business Administration. The SBA is an 
excellent partner in carrying out the mission of providing 
capital to small businesses. We use two primary programs, the 
7(a) loan program and the 504 loan program. These guarantee 
programs allow community banks the opportunity to provide 
capital to small businesses that would not otherwise qualify 
for credit.
    We also offer something else. Community banks offer access 
to the decision maker, and that decision maker knows the people 
and the area. Because we know and understand the unique needs 
of small businesses, community banks are often more flexible in 
their decisionmaking. Often, making a loan decision will come 
down to the character and integrity of the applicant. As a 
community banker, I know the people of my community and I can 
make that decision
    We have a vivid example of this in the case of the 
community hospital in Oswego. A few years ago, the hospital 
needed capital to renovate and expand services it provides in 
our community. It tried working with a large institutional 
bank, but the hospital did not meet the bank's cookie-cutter 
criteria and the hospital faced the prospect of being denied 
the funds it needed. We at Pathfinder Bank knew the hospital 
and the people running it. Working with another community bank, 
we were able to serve the people of Oswego by helping secure 
the financing for the hospital.
    There is a second topic I would like to address today, the 
effect of the Sarbanes-Oxley Act. It has had an impact on how 
small, publicly traded banks such as Pathfinder do business. 
Ultimately, the legislation will make our economy stronger by 
increasing corporate accountability and providing greater 
confidence for investors.
    However, small banks are seeing large cost increases. A 
recent survey of ACB members found that the biggest impact of 
Sarbanes-Oxley appears to be higher compliance fees and costs. 
Sarbanes-Oxley is important to reeling in the conduct of bad 
corporate lawyers, executives and accountants.
    However, we believe that some of its provisions are 
unnecessary for the banking industry because we are already 
tightly regulated and tightly supervised by federal regulators. 
Parts of the law are particularly burdensome on the smaller 
community banks.
    That is why we suggest that the costs and fees associated 
with complying with Sarbanes-Oxley may justify allowing smaller 
organizations to be exempt from portions of the law.
    In addition, ACB and its members support efforts to see if 
there are requirements that can be streamlined or waived by the 
Securities and Exchange Commission to promote greater access to 
the capital markets for small businesses. While many of the 
existing regulations may be necessary for larger and more 
complex companies, they may be an unnecessary obstacle to small 
businesses in seeking access to capital markets.
    Because Pathfinder Bank is publicly traded, we have access 
to capital and can therefore make more loans to small 
businesses in our community. Before that, we were like any 
other small business. We had to seek capital so we could 
further expand our services and product lines, and more 
importantly hire additional employees.
    I am proud to bring to the subcommittee's attention an 
effort to bring greater visibility and capital to community 
banks. In partnership with Nasdaq, we created the America's 
Community Bankers Nasdaq Index of over 500 community banks 
traded on Nasdaq. This focuses attention on community banks as 
a vital sector of the financial services industry and our 
nation's economy.
    In conclusion, Pathfinder Bank and ACB believe there is a 
prosperous climate for Americans to start and to grow small 
businesses. Community banks across our great country are 
willing and able to meet the capital needs of small businesses.
    Chairwoman Kelly and members of the subcommittee, thank you 
again for allowing me the time to testify today. I am available 
to answer any questions you may have.
    [The prepared statement of Thomas Schneider can be found on 
page 50 in the appendix.]
    Chairman Kelly. Thank you very much, Mr. Schneider.
    I would like to ask you, Ms. Sweeney, if BDCs are allowed 
to invest in all private companies, Pink Sheet companies, 
bulletin board companies, any company that is facing some sort 
of a de-listing, would that increase the number of public 
companies to which you can offer capital assistance?
    Ms. Sweeney. Well, today, because of the way the Federal 
Reserve change happened in 1999, we cannot invest in any 
company that has a marginable security. So that under some very 
narrow interpretations would mean even private companies, if 
they already have an outstanding debt issuance to a private 
issuer, because that is a marginable security.
    So what was proposed in H.R. 3170, which is essentially 
update the definition, allow BDCs to finance any company with a 
market capitalization of $250 million or less, that opens up 
the universe to all private companies and to small public 
companies.
    Because I think you made an interesting point in the 
earlier panel, the definition of what is small, when it comes 
to a public company today, needs to be reexamined.
    The S&P small cap index picks up above $250 million. There 
is this universe of companies below $250 million, Blue Rhino is 
a classic example, that need capital. They cannot access; they 
cannot do a secondary. There is no research on these companies. 
There are no investment banks who think they are worth their 
time for the fee that they will earn to raise the capital.
    So we think that that definition, for very many purposes, 
needs to be reexamined.
    Mr. Connolly. Will you marry me?
    [Laughter.]
    Chairman Kelly. Mr. Connolly, do you want to comment on 
that?
    Mr. Connolly. Ms. Kelly, I must say, I have just asked Ms. 
Sweeney if she would like to marry me.
    [Laughter.]
    Those are the most incredible points that have not I think 
effectively been presented either to this committee, and 
certainly to the larger media, the public perception as well, 
is that we are bandits. Not for nothing, as they say I guess 
back in the 'hood.
    I am a third generation in my family in the marketplace. My 
grandfather came back from World War I in 1915; went to work 
for Brown Brothers, and became a specialist in the New York 
Stock Exchange, probably mid-way when these guys were founded, 
the SEC. I do not know if he was responsible for the necessity 
of their creation.
    My father was on the street for 30 years and when I was 
born he was working for the President's family's firm, G.H. 
Walker and Company. I have spent my professional career working 
to assist small public companies, both as a licensed 
professional regulated broker and also as an investor direct, 
specifically, venture, however one wants to define it. In that 
entire period of time, there are very, very few companies with 
market caps of over $250 million that I have even met.
    So the truth of the matter is that the BDC bills, the 
support that you and Ms. Velazquez cumulatively have put behind 
that effort, and by the way we have been knocking on their 
doors for 3 years as an organization, the CEO Council.
    So I would share your frustration, I suspect, in getting 
responses.
    But you can do something about it. So to that extent, this 
hearing I think is a critical link in making both my community 
of 7,000 companies in the marketplace be aware that Congress is 
certainly concerned to the level of hearing, certainly 
considering potential technical corrections, I guess, if you 
were to the possibility of Sarbanes-Oxley looking at the issues 
that day to day the ladies and gentlemen of our community have 
to address.
    Chairman Kelly. Thank you.
    Does anybody else want to address that?
    In that case, Mr. Speight, you started to talk about Rule 
504. There is a problem evidently at the SEC in trying to 
balance the interests of capital formation and investor 
protection. It is a very tricky one, and it goes to what Ms. 
Sweeney and Mr. Connolly were just talking about. The problem 
is that investor protection sometimes seems to get in the way 
of the capital formation part.
    Have you any suggestions to the SEC? Obviously, this is 
going to be printed testimony which we can pass on to the SEC. 
I would be interested in any suggestions you might have.
    Mr. Speight. I honestly believe that you can have your cake 
and eat it too. I really do believe that you can reinstate 
something similar to the 504 exemption, increase the limits to 
it. All companies that would have access to it would have to be 
fully reporting companies. That obviously tells the marketplace 
the financials of the company, any changes that have been made 
to the company. I think that the commission can keep in place 
all the anti-fraud provisions in it.
    I was in a meeting where a representative from the SEC 
basically told us that their estimate was that out of the 504 
offerings, about 1 to 1.5 percent were fraudulent. I think that 
is an overreaction to basically take the teeth out of an 
exemption that did so much for small companies because of 1 to 
1.5 percent fraud. That is my opinion.
    The predecessor company to American Capital Partners, 
Dunhill Capital, did 24 504 offerings in 1998 alone. That is 
$24 million that was pumped into small public companies and you 
can multiply us by thousands of other funding sources.
    I think it is a travesty that they took the teeth out of 
something that allowed small companies to access $1 million a 
year in capital in such an easy way, and they could reinstate 
it and still keep the anti-fraud provisions in there, make the 
company report, make the company even file an immediate 
notification that they are doing a 504, and what the terms of 
that 504 are.
    Let the public know. Let it be transparent. Nobody has a 
problem with that.
    Chairman Kelly. One of the problems that the agencies in 
government seem to have, though, is that many agencies really 
do not have the funding right now to put in the information 
technology systems so that, for instance, you are talking about 
reporting.
    One of the problems is that some of the rules that they 
promulgated back in the early 1900s still apply, so that you 
have to do certain things by written note and telephone because 
it is mandated in the rule.
    Some of the rules need to be changed, but also I am hopeful 
that we can get the agencies to shift some of their funding 
priorities so that they can put in the information technology 
that is necessary so that we can perhaps open up the doors 
more, especially to something like the 504. We will have to 
wait and see.
    I have one question here, if I can find it, for you, Mr. 
Schneider. In your testimony, you spoke of the existing SEC 
regulations that for the large complex companies, so they 
probably or maybe an unnecessary obstacle for the small 
business access to capital markets. You offered a couple of 
examples.
    I would be interested if you have any ideas of what 
regulations you feel could be streamlined or eliminated beyond 
what you started talking about. I think you are in a very 
interesting position with regard to your bank being a small 
company, in a sense.
    I know for a fact that when we wrote the Sarbanes-Oxley 
bill, there was no intent to try to curtail. There was only an 
intent to try to make a transparent system so that investors 
would feel comfortable, everyone could see what was going on in 
the companies and we could then have a certain comfort level 
with people investing in the market.
    Obviously, there are some things there you would like to 
see changed. You suggested a couple of them. I would be 
interested in hearing any others.
    Mr. Schneider. When it comes to the governance and the 
independence of the organization, those were very easy things 
for us to adapt to. I think we adopted a very comprehensive set 
of governance guidelines. Our audit committee was already 
functioning after years of examination by the New York State 
Banking Department and the FDIC. It was already functioning in 
a very independent and effective manner.
    I think it is going to come about for us, and it is just 
transitioning now, but on the certification and attestation of 
internal control systems, which 305 does account for, and 
accounts for at the $500 million level. We are a $300 million 
bank. I think that that limit was put in there because the 
resources at our organization, and I was happy to hear Mr. 
Beller's comments regarding it because he seemed to be aware of 
the fact that in a smaller organization the knowledge of the 
internal control system is inherent in the CFO and the CEO 
positions.
    But going through the process of that documentation now of 
that system is going to be very costly. That cost has already 
begun for us. I would probably put that cost somewhere at about 
$100,000 for us to get from here to there by December of 2005, 
which is the set of financials that we are going to have to put 
out that are going to have to be attested to by our external 
auditors.
    After that, there is going to be the accelerated filings of 
10Qs and 10Ks quarterly in annual reports. I think that that is 
going to be a difficult transition for smaller organizations, 
too. I think it is going to put a strain on the whole system. 
The external auditors that we utilize do not really get into 
it. We have a fiscal calendar-year end of 12/31. They do not 
get into us until February because they are working with their 
larger clients in January.
    So I am not certain how we are going to be able to meet 
those accelerated 10K filing requirements if the access to, and 
many companies are running fiscal years on calendar years. I am 
not sure how you are going to get your access to your external 
auditors in time to go through that whole certification-
attestation process, with everybody feeling comfortable that 
the external auditors are opining to the financial statements.
    It just seems like, and I think you talked about technology 
and that solution perhaps lies there, but for us we are still 
operating with a good transaction processing system. It is not 
the greatest accounting system in the world, so it takes us a 
while. And that ``while,'' frankly, is a better internal 
control because we are spending more time in the compilation.
    I am not so sure that you can achieve both quality and 
speed simultaneously. I think that the quality is probably more 
important to the stability of the place than speed is at this 
juncture. Those would be the two areas that I would think are 
going to be cost-burdensome.
    Chairman Kelly. Both of those areas are very serious things 
that we really do need to take a look at and work with.
    I want to thank all of you for taking the time to come here 
to speak to us. I want to just simply throw out one more 
question to all four of you. Are there any messages that you 
would like to leave this committee with that you have not had 
the opportunity to speak about today?
    Mr. Connolly. Fairly simply from my testimony, Madam 
Chairwoman, the one item that I specifically alluded to 
crafting this statement relative to rule 15(c) 211 and its 
transparency.
    That came as a shocking statement from the President of a 
firm called Knobias.com or ``no bias'' as it may be referred 
to, who is the repository as an information source for 
professional market players and individuals of all data that is 
available for small fees in the penny stock and bulletin board 
arena.
    The President of that firm, which is Mississippi-based, 
indicated to me that for the last 5 years, with some 
substantial congressional assistance, as you can imagine, it 
found a stone wall at both the NASD and the SEC in terms of 
getting that 15(c) 211 information, which is the basic 
financial information submitted prior to a company trading 
publicly, to be released on an FTP server at Knobias's expense 
and at no cost to the American public, that material and 
information transparent to the marketplace would be available.
    To the extent that the committee finds that of interest 
that those two organizations would preclude the public from 
having a basic fundamentally transparent set of facts on which 
to make an investment decision, I know that is of great concern 
to us.
    Chairman Kelly. Thank you.
    Anyone else?
    Then we thank you very much.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for the members to submit written questions to 
these witnesses and place their responses in the record.
    I thank all of you for your time and your patience and your 
very interesting comments here today.
    This hearing is adjourned.
    [Whereupon, at 1:01 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                           September 23, 2004


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