[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]








  THE JOBS ACT IN ACTION PART II: OVERSEEING EFFECTIVE IMPLEMENTATION 
                      THAT CAN GROW AMERICAN JOBS

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

                                HEARING

                               before the

                SUBCOMMITTEE ON TARP, FINANCIAL SERVICES
              AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 28, 2012

                               __________

                           Serial No. 112-169

                               __________

Printed for the use of the Committee on Oversight and Government Reform








         Available via the World Wide Web: http://www.fdsys.gov
                      http://www.house.gov/reform

                                _____

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75-590 PDF                WASHINGTON : 2012
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

  Subcommittee on TARP, Financial Services and Bailouts of Public and 
                            Private Programs

              PATRICK T. McHENRY, North Carolina, Chairman
FRANK C. GUINTA, New Hampshire,      MIKE QUIGLEY, Illinois, Ranking 
    Vice Chairman                        Minority Member
ANN MARIE BUERKLE, New York          CAROLYN B. MALONEY, New York
JUSTIN AMASH, Michigan               PETER WELCH, Vermont
PATRICK MEEHAN, Pennsylvania         JOHN A. YARMUTH, Kentucky
JOE WALSH, Illinois                  JACKIE SPEIER, California
TREY GOWDY, South Carolina           JIM COOPER, Tennessee
DENNIS A. ROSS, Florida










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 28, 2012....................................     1

                               WITNESSES

The Honorable Mary Schapiro, Chairman, U.S. Securities and 
  Exchange Commission
    Oral Statement...............................................     4
    Written Statement............................................     7

                                APPENDIX

The Honorable Patrick McHenry, a Member of Congress from the 
  State of North Carolina, Opening Statement.....................    40

 
  THE JOBS ACT IN ACTION PART II: OVERSEEING EFFECTIVE IMPLEMENTATION 
                      THAT CAN GROW AMERICAN JOBS

                              ----------                              


                        Wednesday, June 28, 2012

                   House of Representatives
     Subcommittee on TARP, Financial Services, and 
           Bailouts of Public and Private Programs,
              Committee on Oversight and Government Reform,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 9:35 a.m., in 
Room 2247, Rayburn House Office Building, Hon. Patrick T. 
McHenry [chairman of the subcommittee] presiding.
    Present: Representatives McHenry, and Quigley.
    Staff Present: Ali Ahmad, Majority Deputy Press Secretary; 
Will L. Boyington, Majority Staff Assistant; Drew Colliatie, 
Majority Staff Assistant; Brian Danes, Majority Professional 
Staff Member; Peter Haller, Majority Senior Counsel; 
Christopher Hixon, Majority Deputy Chief Counsel, Oversight; 
Jeff Wease, Majority Deputy CIO; Jaron Bourke, Minority 
Director of Administration; Kevin Corbin, Minority Deputy 
Clerk; Jason Powell, Minority Senior Counsel; Brian Quinn, 
Minority Counsel; and Davida Walsh, Minority Counsel.
    Mr. McHenry. The Subcommittee on TARP, Financial Services 
and Bailouts of Public and Private Programs will come to order.
    In today's hearing, we are going to hear from the Chairman 
of the Securities and Exchange Commission, and, as we know from 
all the headlines in the newspapers today, this is the largest 
news in the world. But in all seriousness, we are very grateful 
for Chairman Schapiro's presence here today. She has always 
been forthcoming and forthright.
    As is the tradition of the Oversight and Government Reform 
Committee, we are going to read the mission statement of this 
Committee so we can keep that in mind for today's proceedings.
    The Oversight Committee mission statement: We exist to 
secure two fundamental principles: first, Americans have the 
right to know that the money Washington takes from them is well 
spent and, second, Americans deserve an efficient, effective 
government that works for them. Our duty on the Oversight and 
Government Reform Committee is to protect these rights. Our 
solemn responsibility is to hold government accountable to 
taxpayers, because taxpayers have a right to know what they get 
from their government. We will work tirelessly in partnership 
with citizen watchdogs to deliver the facts to the American 
people and bring genuine reform to the Federal bureaucracy.
    I will now recognize myself for five minutes for the 
purposes of an opening statement.
    Approximately three years into an economic recovery, 
America's labor and capital markets continue to face 
unprecedented challenges. The U.S. unemployment rate has now 
been above 8 percent for 40 consecutive months and nearly 24 
million Americans are either unemployed or underemployed.
    Since the beginning of the 112th Congress, the Oversight 
Committee has remained committed to identifying and modernizing 
outdated securities regulations that limit job growth and 
access to capital, which, as we know, is a lifeblood of our 
economy.
    Today's hearing advances our efforts as we welcome the 
Securities and Exchange Commission Chairman Mary Schapiro to 
address these major Commission reforms urged by this 
Commission, such as the SEC's new policy on cost-benefit 
analysis, which we welcome, and implementation of the JOBS Act, 
which we want to remain vigorously committed to exercising 
oversight so we know what is happening with Commission 
proceedings. As I said at the opening, I certainly appreciate 
Chairman Schapiro's willingness to engage in this oversight, as 
well as being forthright on her views on all of this. We know 
it is a Commission with five members, but the Chairman 
obviously has significant sway.
    During the Subcommittee hearing in April of this year, 
Chairman Schapiro committed to the policies and principles of a 
staff guidance document and the use of cost-benefit analysis in 
the Commission's rulemaking. As I said, we welcome that. I 
think that is a significant step and we certainly appreciate 
that.
    Chairman Schapiro's dedication to vigorous cost-benefit 
analysis, particularly after former SEC Inspector General David 
Kotz issued a critical report on cost-benefit analysis 
procedures at the Commission, as well as a number of other 
lawsuits. We appreciate the fact that the Commission acted 
swiftly and that Chairman Schapiro went even further and 
published this document and made it public to market 
participants and those that care about what the SEC does.
    We want to talk about that today and we want to give you an 
opportunity to explain where things stand with the cost-benefit 
analysis memo and how that is moving forward. But also we want 
to make sure that the American people know what is happening 
with the SEC's actions when it comes to the JOBS Act, portions 
of which were built around the efforts of this Subcommittee and 
a letter from Chairman Issa to Chairman Schapiro in March of 
last year. That was a very positive exchange and the type of 
reforms the American people can be proud of.
    In particular, Title III of the JOBS Act I have a personal 
interest in, as well as millions of small businesses around the 
Country, and it is based off of legislation I sponsored here in 
the House which is, in essence, crowdfunding, and it creates a 
new federal securities exemption to permit equity-based 
crowdfunding. After I introduced the crowdfunding bill in the 
House, we went through the Financial Services Committee.
    My colleague on this Subcommittee, Carolyn Maloney, who 
also serves on the Financial Services Committee, raised a 
number of concerns in our first hearing. We tried to work 
together to craft an addition to deal with this fraud question 
and to put in place what we thought was finely crafted 
legislative language that would protect against fraudsters and, 
at the same time, give the SEC the power to make those rules 
and do it in a cost-effective way. It was a bipartisan bill. I 
was very proud to work with Carolyn Maloney on that 
legislation, and I think, based on that collaboration, that is 
a big reason why we were able to get over 400 votes for this 
bill coming out of the House. I think that is also why the 
President endorsed this idea not just in his jobs speech, but 
in the legislation we crafted in the House.
    Well, unfortunately, I think a few Senators, with some 
final changes that they made to the JOBS Act, were misinformed 
and misunderstood the opportunity the crowdfunding allows for 
and the nature of crowdfunding and, as such, there was an 
eleventh hour change to the JOBS Act, in Title III of the JOBS 
Act that deals with crowdfunding, that causes some concerns. We 
had a hearing earlier this week, and I am sure, Chairman 
Schapiro, you and your staff saw some of what came out of that 
hearing, and there were concerns about the legislative 
language, but there was broad consensus that the SEC can create 
rules and do so in a cost-effective way to allow crowdfunding 
to take place so that small issuances don't have the heavy 
regulatory burden that the large issuances in our markets bear.
    Now, the large issuances certainly have a greater capacity 
to bear those costs than the smaller issuances. That is just 
economic reality. So I will have a number of questions about 
this crowdfunding piece of the JOBS Act. I am very concerned 
about that implementation and making sure that it is done in a 
cost-effective way so that small issuances can actually occur 
and do so in a way that is economically feasible.
    I certainly appreciate your willingness to be here. I thank 
you for your public service very sincerely. You have had a very 
long career in public service and have done so in a very 
honorable way, and I certainly appreciate that.
    With that, I recognize Mr. Quigley, the Ranking Member.
    Mr. Quigley. Thank you, Mr. Chairman. Despite its 
importance, good morning, I do predict we will have a ratings 
dip in about 15 minutes.
    I also want to thank Chairman Schapiro, who has been a 
regular witness at this Committee and has been exceptionally 
generous with her time. It is a great benefit to the Committee 
to hear your testimony and we especially appreciate it during 
this very busy time at the SEC.
    As you know, Congress passed two major reforms of security 
laws and regulations over the last two years: in 2010, Congress 
passed, and the President signed into law, the Dodd-Frank Wall 
Street Reform and Consumer Protection Act and, of course, 
earlier this year Congress passed, and the President signed, 
the JOBS Act, and, again, I appreciate the Chairman of this 
Committee's role in that legislation, the Subcommittee.
    But the Acts are two sides of the same coin and will both 
be important to job creation and our economic recovery. The SEC 
has significant responsibilities under each Act to promulgate 
new rules. This process is necessarily careful and deliberate. 
Congress has made it clear that rules should be evaluated 
according to their cost and their benefits. With regard to the 
JOBS Act in particular, I hope the SEC carefully considers how 
best to protect investors while achieving our goals in passing 
that law.
    Going forward, I am confident in Chairman Schapiro and the 
SEC, even as they deal with short time lines. However, I think 
it is important that Congress keep in mind the SEC's 
substantial responsibilities when considering its budget and 
resources.
    So I want to thank the Chairman and thank our witness for 
her testimony.
    Mr. McHenry. It is the policy of the Oversight and 
Government Reform Committee to swear in all witnesses, so the 
Chairman has risen.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth, and nothing 
but the truth?
    [Witness responds in the affirmative.]
    Mr. McHenry. Let the record reflect that Chairman Schapiro 
answered in the affirmative.
    We will now recognize the Chairman of the Securities and 
Exchange Commission, Mary Schapiro.

   STATEMENT OF THE HONORABLE MARY SCHAPIRO, CHAIRMAN, U.S. 
               SECURITIES AND EXCHANGE COMMISSION

    Ms. Schapiro. Thank you, Chairman McHenry, Ranking Member 
Quigley. I appreciate the opportunity to testify regarding our 
implementation of the JOBS Act, as well as economic analysis in 
SEC rulemaking.
    In the two months since my last testimony on these issues, 
we have continued to work hard to implement the new statutory 
provisions and to ensure that our rulemaking fully incorporates 
appropriate and rigorous economic analysis.
    As you know, the JOBS Act makes significant changes to the 
federal securities laws. It changes the IPO process for 
emerging growth companies; requires the Commission to modify 
the ban on general solicitation in advertising; directs the 
Commission to implement exemptions for crowdfunding offerings 
and unregistered public offerings of up to $50 million; and 
increases the number of holders of record that trigger public 
reporting. The JOBS Act also requires that the Commission 
conduct several studies and prepare reports for Congress.
    The Commission's commitment to the successful 
implementation of the JOBS Act is evident from our actions to 
date. Where provisions of the law were effective upon 
enactment, we have already provided information and guidance to 
the public to assure those provisions are put in place in an 
orderly and effective manner. For example, on the day of 
enactment we posted on the Commission's website procedures for 
submitting draft registration statements for confidential 
review, and that very day we received the first confidential 
registration statement from an emerging growth company using 
those procedures.
    We set up email boxes on the SEC website through which the 
public can submit comments on JOBS Act provisions before we 
even issue any proposed rules. Already we have received 
substantial constructive feedback from a wide range of 
interested parties.
    And soon after enactment the staff prepared and posted on 
the Commission's website several sets of frequently asked 
questions about matters ranging from the law's IPO on-ramp to 
its new registration and de-registration requirements. The 
extensive information the staff has made available is easily 
and clearly accessible on the SEC's website and feedback from 
companies and their advisors has been extremely positive.
    Where provisions of the law required rulemaking, we formed 
intra-agency rule writing teams which are meeting with 
interested parties, considering public comments, and preparing 
recommendations for the Commission.
    As I have mentioned previously, some of the rulemakings 
have unrealistically short deadlines. For example, the 90-day 
deadline for revising Rule 506 and Rule 144(a) to allow for 
general solicitation with the statutory requirement for 
reasonable steps to verify accredited investor status for Rule 
506 offerings simply does not provide time for drafting a new 
rule with a rigorous economic analysis, considering public 
input, and reviewing a proposed final rule at the Commission 
level. We have, however, made significant progress on a 
recommendation and economic analysis, and hope that the 
Commission will be in a position to act in the near future.
    With respect to the crowdfunding provisions, the staff is 
already crafting the many rules required by the Act, has 
published frequently asked questions, and is evaluating the 
more than 80 public comments already received. We are doing our 
best to meet the ambitious JOBS Act deadline of 270 days to 
complete the required rulemaking.
    As I mentioned in earlier testimony, economic analysis is 
an integral part of all rulemakings, including JOBS Act 
rulemaking. The staff guidance for March is being followed for 
both rule recommendations already in process and those at the 
earliest stages of development. Since the guidance was 
implemented, the Commission has approved three final rules. 
Each of these rules included economic analyses consistent with 
the guidance.
    In addition to implementing the guidance, we are 
strengthening our rule writing teams by hiring additional 
economists. In the near future, 16 Ph.D. economists will be 
joining the Commission to assist in rule writing, and we have 
requested an additional 20 economist positions as part of our 
2013 budget request. And, of course, this supplements the 
already 23 economists we have who are devoted exclusively to 
rule writing. Our ability, of course, to fill future positions 
will depend on the resources provided by Congress.
    In conclusion, we are making significant progress in 
implementing the JOBS Act and are providing significant 
guidance to the public to ensure its provisions are workable 
and comprehensible. Further, the economic analysis guidance is 
informing our rulemaking and will continue to do so going 
forward.
    And I would, of course, be pleased to answer any questions 
you have.
    [Prepared statement of Ms. Schapiro follows:]





    Mr. McHenry. Thank you, Chairman Schapiro. Thank you for 
your testimony.
    Members may have seven days to submit opening statements 
for the record.
    I will now recognize myself for five minutes.
    In your written statement, Chairman Schapiro, you said 
something very encouraging: On the same day the President 
signed the JOBS Act into law, the staff received a 
confidentially submitted registration statement from an 
emerging growth company that used the new procedures the staff 
had posted earlier. That was fast action, right? That is 
positive.
    And by its nature you have entrepreneurs who are waiting; 
they want to act; they want to use this. You outline in your 
opening statement that one of the things you have done on 
crowdfunding is to inform market participants that it is not 
yet available; the rules have not yet been crafted. Clearly, 
entrepreneurs want to participate, want to be active.
    So, to that end, there is another provision within the JOBS 
Act, which is the lifting of the general solicitation ban. As 
you outline in your statement, you believe that the July 4th 
deadline will not be met. Is that correct?
    Ms. Schapiro. That is correct, Mr. Chairman.
    Mr. McHenry. When do you foresee this happening?
    Ms. Schapiro. I expect that in the next two days we will 
actually publically publish the timeline for the Commission 
consideration of lifting the general solicitation ban, and I 
expect that it will be done this summer.
    I think it is important to note that if it were as simple 
as just eliminating the general solicitation ban, and I read 
the transcript from the prior hearing, so I understand that 
there was some discussion about this, that would be a 
relatively straightforward thing to do. But, of course, the 
statute actually requires that we require issuers to take 
steps, reasonable steps to verify that purchasers of the 
securities are in fact accredited investors, using whatever 
means the Commission determines appropriate.
    Taking steps to verify means there are probably lots of 
alternatives for doing that. Under our cost-benefit analysis 
guidance, we have to actually look at the different 
alternatives and weigh the costs and benefits of different 
alternatives for verification of accredited investor status. So 
we want to create something that is workable and usable. That 
is absolutely our goal. But it is a bit more challenging a 
rulemaking than it might seem on the surface because of that 
extra statutory requirement.
    With that said, the staff is significantly along in both 
the economic analysis and the rule drafting, and will come 
before the Commission this summer.
    Mr. McHenry. Okay. Well, in context of this, entrepreneurs 
are waiting, and we would urge you to move forward with that.
    Now, there is also a deadline of December 31st for the 
Section III of the JOBS Act, which is the crowdfunding portion. 
Do you foresee meeting this deadline?
    Ms. Schapiro. I don't foresee not meeting the deadline. The 
staff is working very hard on it. There are lots of rules, as 
you know. I know that you weren't happy about all of the rules 
that were added, the requirements, but we are working already 
on the issuer disclosure requirements, which are fairly 
straightforward, but also the intermediary and funding portal 
requirements of the statutory provisions. So I think it is 
challenging, but I don't have a reason to tell you at this 
point that we won't make that deadline.
    Mr. McHenry. When will you issue a timeline for this 
rulemaking?
    Ms. Schapiro. We haven't formally issued a timeline. We 
don't normally formally issue specific timelines. We did, under 
Dodd-Frank, give general ranges of three-month periods during 
which we hoped to get certain rules across the finish line or 
proposed. Because this one has a pretty short time frame, we 
need to get proposals to the Commission in the next several 
months so we can have a comment period and then take it to 
final.
    I will say we have benefitted enormously in this one in 
particular from the advanced comment period that we had. I 
believe we have gotten close to 80, if I am remembering the 
correct rule, comment letters about how we ought to implement 
these rules. We have had multiple meetings with funding 
portals, with associations that represent the crowdfunding 
industry, and with individuals. So that is really helping to 
short-circuit some of the process in the sense that we are 
building up a base of knowledge very quickly at the SEC for 
handling this.
    Mr. McHenry. So due to the potential costs associated with 
the layers of lawyers and accountants and financial 
intermediaries, and on and on and on, on crowdfunding, we had 
testimony earlier this week that one expert believes that, 
because of that layering on of the Senate provisions inserted 
on crowdfunding, that if the rules are not implemented 
correctly at the SEC, the crowdfunding could be ``stillborn.'' 
That is a pretty strong statement.
    But after conducting a rigorous cost-benefit analysis on 
crowdfunding rules under the JOBS Act, if you believe that 
these costs would render impracticable some or all of the uses 
of crowdfunding, basically price out small issuances, will you 
commit to telling this Committee immediately that that is the 
case?
    Ms. Schapiro. I absolutely would. But our goal is to create 
a workable exemption. This exemption exists under statute. Our 
approach is going to be to follow the language of the statute, 
but to create exemptions that actually can make crowdfunding 
work. And my personal belief is that the requirement to using 
intermediary can be enormously helpful here because it can 
routinize a lot of the things that people might be concerned 
that they need to have lawyers to do for them or accountants to 
do for them.
    So I think it will be both an investor confidence issue to 
use an intermediary, will give people some confidence that 
there is a regulated entity in this process somewhere; but I 
think it will also make it much easier for entrepreneurs to 
navigate the exemption and its requirements.
    So we will be very sensitive to these issues about cost and 
I will, of course, come back to Congress if we think there are 
things that are statutorily required that make it unworkable, 
but I am optimistic that we can write the rules that satisfy 
both the needs of small businesses to be able to use this 
effectively and efficiently, but also have basic investor 
protections in place.
    Mr. McHenry. Even small issuances?
    Ms. Schapiro. Yes, even small issuances.
    Mr. McHenry. Okay. Thank you.
    I will now recognize Mr. Quigley.
    Mr. Quigley. Thank you, Mr. Chairman.
    To the other side of that coin, Ms. Schapiro, I supported 
the JOBS Act and the crowdfunding provisions in it, but all the 
questions I asked are still what we are concerned about today, 
because many of the investors in crowdfunding are going to be 
comparatively unsophisticated, and there is information 
asymmetry or disparity there. How do you take that into 
consideration on the SEC side, because they are perhaps 
particularly vulnerable for the lack of sophistication or 
expertise of practice and investing in this sort of project?
    Ms. Schapiro. Congressman, I think it is a very fair 
question and I want to say that the version of the bill as 
passed did build in a number of investor protections, including 
disclosure requirements for issuers, the use of intermediaries 
who are subject to oversight of the SEC or a self-regulatory 
organization.
    But also there are requirements for intermediaries to take 
measures to reduce the risks of fraud in these transactions, so 
those requirements will obviously be built out in the rules, 
but they include background checks, for example, on people who 
are associated with the issuer. And then I can tell you that we 
will monitor very closely how the exemptions are used, and if 
problems arise we will address those very quickly.
    It is our goal, obviously, to protect investors and I think 
everybody clearly shares the goal of having this be a useful 
exemption, and if it is fraught with fraud, it won't be useful 
for anybody. So we understand that balance. We will work very 
hard to get it right, but I do think the statutory provisions 
build in some basic investor protections that will be very 
helpful.
    Mr. Quigley. Thank you. You are have often asked about 
cost-benefit analysis. It is hard to quantify everything, put 
everything we might need into the issue of investor confidence, 
but earlier this week we had a hearing on this matter and 
Professor John Coffee of Columbia University Law School 
testified, he said the greatest enemy of job creation today is 
not over-regulation, but the loss of investor confidence. In 
particular, ``American investors have lost confidence in the 
initial public offerings process and the integrity of the 
mechanisms for capital raising.'' I want to get his quote 
right.
    As this process went on, I think it was March 13th, you 
wrote a letter to Senate Banking Committee Chairman Tim 
Johnson, and the Ranking Member, Senator Shelby. You said 
something similar: We must balance our responsibility to 
facilitate capital formation with our obligation to protect 
investors and our markets. I am concerned that we lack a clear 
understanding of the impact that the legislation's exemptions 
would have on investor protection.
    If your concerns and the point that Professor Coffee made 
are as accurate as they seem, how does the SEC take into 
consideration in this cost-benefit analysis, how do you put a 
dollar figure on lost investor confidence?
    Ms. Schapiro. It is notoriously hard to quantify the 
benefits of any regulation. How do you quantify the benefits of 
preventing a fraud? How do you quantify the benefits of 
somebody who is burned----
    Mr. Quigley. Because it is not just the dollars they lost, 
which some people----
    Ms. Schapiro. No. It is their unwillingness to ever engage 
with the markets again----
    Mr. Quigley. And people that are out there are just not 
putting their dollars in.
    Ms. Schapiro. Exactly. It is a concern about the integrity 
of the marketplace, whether they are placed at a competitive 
disadvantage vis-a-vis institutions; whether they are getting 
accurate and honest information from issuers; whether the 
market structure itself is tilted against the individual 
investor and in favor of the institutional investor. And those 
are all things we worry about all the time because, at the end 
of the day, investor confidence is the oxygen that the markets 
survive on, and if we lose it, it is extraordinarily hard to 
regain it.
    And if you look at one very specific example I like to use, 
after the flash crash of May 6, when the markets plummeted very 
quickly and companies traded $40 a share to $0.02 a share, we 
saw net outflows from equity mutual funds every single week for 
about eight or nine months because people just said this is not 
a marketplace for me; I don't have confidence in its integrity. 
That was a market structure issue, not an information 
disclosure issue, but, nonetheless, we know market confidence 
matters enormously, and investor confidence.
    It is hard to quantify and the GAO, in a recent study, 
recognized how difficult it is to quantify the benefits of 
investor confidence. Where we can't quantify it, we will talk 
about it qualitatively and we will talk about why it matters, 
and we will talk about the larger economic crisis and what that 
has done to investor confidence and use that as part of our 
analysis.
    Mr. Quigley. Thank you.
    I yield back.
    Mr. McHenry. I recognize myself for a second round of 
questions.
    My colleague referenced your letter of March 13th to 
Chairman Tim Johnson and the Ranking Member of the Senate 
Banking, Housing and Urban Affairs Committee, Richard Shelby. 
You outlined a number of concerns you have with the 
legislation, the JOBS Act that we passed, and in particular you 
have a number of concerns with the legislation that I wrote 
that was inserted into the JOBS Act on crowdfunding. Was this 
letter in response to a letter sent to you?
    Ms. Schapiro. No, Mr. Chairman, it was not.
    Mr. McHenry. So it was unsolicited?
    Ms. Schapiro. It was unsolicited. These were my views that 
I thought were important for me personally to express to the 
Senate Banking Committee.
    Mr. McHenry. Do you have my address? And I only say this in 
a joking fashion because I have seen you a number of times. You 
have been before this Committee a number of times. I appreciate 
you being forthright with me. And as the Chairman of the 
Securities and Exchange Commission, or if you were just a 
citizen, I would respond to your letter. I would read your 
letter. In fact, I read your letter at the time, and had you 
raised these objections to me or--I don't want to speak for my 
colleague from New York, Carolyn Maloney, but we would have 
addressed these provisions in the bill that we passed out of 
the House with over 400 votes. I think the President would have 
liked to have heard that before he issued a statement of 
administrative policy on my crowdfunding bill. And, finally, 
this is right before the Senate takes this issue up and you 
outline these concerns.
    Chairman Schapiro, I would welcome your input to my 
legislation in an effort for me to fix it, and I would welcome 
your engagement in this process, but when I see this, I view 
that as being sideswiped by a regulatory body at the eleventh 
hour. This caused me great concern, and I don't think that was 
the most responsible action for you to take. The more 
responsible thing I would encourage you to do is to communicate 
so we can fix it coming out of the House and address these 
concerns.
    I amended half of my bill, over half of my bill because of 
a concern that a colleague of mine across the aisle had. If the 
Chairman of the Securities and Exchange Commission came to me 
with concerns about legislation I was writing that the 
Securities and Exchange Commission was going to write rules 
based upon, I would absolutely, absolutely take that into 
account.
    So I just want to express to you my deep regret that you 
didn't address this earlier or to me. And to send an 
unsolicited letter to the Senate at the eleventh hour is, I 
don't think, the best way to go. If you were responding to some 
letter, I think that would maybe be more valid, but in the 
future I would like you to address that, especially if I have 
anything to do with the legislation. I would certainly welcome 
it.
    Ms. Schapiro. Mr. Chairman, I appreciate that and I will 
absolutely make sure that, with future bills, that I talk to 
you or to the sponsors of those bills in advance. I did testify 
about some concerns we had with respect to a number of 
provisions. I don't know whether they were directly 
incorporated in legislation at the time, but with respect to 
the capital raising process and the small business capital 
raising process in particular, but I hear your point.
    Mr. McHenry. Thank you.
    Now, earlier this week, Mr. Cartwright testified before the 
Subcommittee and he said, ``After all, the SEC had sufficient 
authority to do almost everything the JOBS Act did without any 
legislation at all. Unfortunately, the JOBS Act was necessary 
precisely because the SEC did not believe in the need for what 
the JOBS Act seeks to accomplish.''
    The reason why I say this in context with your letter 
earlier is you have testified since the JOBS Act became law 
that you would abide by the law. But your letter to Tim Johnson 
and Richard Shelby exhibits that you didn't like the law as it 
was written. So do you believe that the SEC had the authority 
to make these changes that are within the JOBS Act?
    Ms. Schapiro. Mr. Chairman, my letter raised some specific 
issues and concerns I had that I thought should be addressed in 
final legislation that I believe were important for investor 
protection and, frankly, important for successful capital 
raising so that we could avoid the potential for fraud or 
misconduct. But I have also, as you rightly point out, said 
many times that it is the law of the land; we will implement it 
faithfully; and I think every action we have taken to date 
demonstrates exactly that.
    The positive feedback we are getting from the small 
business community, from our small business advisory committee, 
and even some of the witnesses last week, Mr. Cartwright in 
particular, who made the point of saying the SEC seems to be 
doing this with fervor and with--those weren't his words, but 
with real commitment. So I think everything we are doing 
demonstrates our fidelity to the statute and to accomplishing 
the goals of the statute.
    I would have to go through. I think there are some things 
the SEC could have done on its own, certainly could have even 
done when Mr. Cartwright was general counsel of the SEC, but I 
couldn't tell you, off the top of my head, whether every single 
thing that is in the JOBS Act could have been done without a 
legislative change. We would be happy to do that analysis and 
provide it for the record.
    Mr. McHenry. I am more interested in you doing the 
rulemaking that is currently obligated.
    Ms. Schapiro. I am too. I would like to make this work.
    Mr. McHenry. So, again, to this crowdfunding piece. Now, 
the structure of crowdfunding is different in many respects. We 
have great experience with charitable crowdfunding, gift-based 
crowdfunding. The nature of somebody investing $20 in the local 
coffee shop that they go to every day, they want to own a piece 
of it, is structurally and motivationally different than 
somebody investing $10,000 in the Facebook IPO. Do you agree 
with that?
    Ms. Schapiro. Absolutely.
    Mr. McHenry. So sort of the lower dollar issuances 
structurally are very different; the motivation is different by 
investors. Is that something that you would foresee the SEC 
incorporating, that structural difference?
    Ms. Schapiro. Well, I think certainly there will be many 
structural differences between offerings done through a 
crowdfunding exemption and a full-blown public offering that is 
done like Facebook or another large company, so we will see 
that play out in disclosure requirements, with respect to sales 
practices. In all sorts of ways there will be many structural 
differences.
    Mr. McHenry. The regulation of portals, as opposed to 
broker-dealers, you will take that into account as well?
    Ms. Schapiro. Yes. The statute accounts for funding portals 
to be--a funding portal could be a broker-dealer, and we know 
of broker-dealers who are interested in doing this. But we also 
know of entities that are doing funding for charitable and 
other endeavors, as you point out, that are also interested in 
expanding into being crowdfunding portals under the JOBS Act, 
and we would expect them to be regulated differently. There are 
some limitations on their business, but the statute is quite 
clear that they should be regulated differently.
    Mr. McHenry. Okay, so the SEC will take that into account.
    Ms. Schapiro. We absolutely will, and we will obviously 
also put all of this out for comment. And the portals have been 
in to see us, a number of them, already, to talk about the 
things that they think are actually important to include, 
because I think they believe that they can perform a real 
service here and support entrepreneurs who want to utilize the 
crowdfunding exemption to do it successfully; and they want 
repeat business, so they want it to be successful, and we hear 
that from them over and over again, that they want this to 
work.
    Mr. McHenry. And to that end we heard from one portal who 
was represented by a gentleman, David Hillel-Tuch, who 
testified that ``every securities market and/or offering has a 
potential for fraud, but crowdfunding structures help minimize 
that risk. Crowdfunding is highly transparent and there is 
substantial feedback from other community participants, the 
crowd. The crowd helps police players and keeps them honest. 
Portals provide a clear and central location for communication 
by potential investors to analyze and share their views on 
offerings. The web-based structure also allows portals and 
regulators to provide risk disclosure and investor education. 
In addition, we expect portal operators to undertake a 
gatekeeping role in authenticating issuer identity and 
requiring minimum standards for issuers.''
    And this is before rules have even been written he outlines 
this. So do you agree that inherently the structure of 
crowdfunding, because of the structure of crowdfunding, there 
are significant protections against fraud?
    Ms. Schapiro. I think, in a sense, it depends. I think 
those are important protections. Many of those are actually 
captured in the statute and I think they are very important. 
But I think we can also have a situation where a portal isn't 
policing the issuer, and isn't ensuring that proceeds aren't 
transmitted before they should be, and isn't ensuring that 
there is disclosure.
    And that is why the rules actually matter, that we capture 
those very ideas that are also in the statute in the rulemaking 
regime so that all portals are subject to it because, frankly, 
as you know, one that decides that the rules don't apply to 
them and anything goes and allows fraud to happen will hurt 
every single honest one that is out there, and that is why the 
regulatory regime matters; and we can't just assume that 
because people have approached crowdfunding responsibly in the 
charitable context, that when this business is opened up, and 
there is the opportunity to solicit many millions of investors, 
that everyone will still continue to play by those high ethical 
standards, and that is what the regulatory regime is there to 
do.
    Mr. McHenry. I would say with billions of dollars already 
operating in this environment, with minimal fraud, that it 
shows that light touch regulation, transparency, basic rules of 
the road, would be sufficient, can be sufficient to that end of 
mitigating fraud.
    To a different provision, the Minority recommended a 
witness, John Coffee of Columbia University Law School, and I 
had a few questions. Incidentally, he offered this and I 
thought it was very interesting. Innocent and material 
exemption. That is Rule 508 in Reg D. So it is done for 
accredited investors currently, if I am to understand 
correctly. So this innocent and material exemption could be 
applied to crowdfunding issuances. Do you foresee that and 
would you support that?
    Ms. Schapiro. I can't predict what the Commission will do, 
but we----
    Mr. McHenry. Would you support it?
    Ms. Schapiro. The staff and I have talked about it. We 
think it makes a lot of sense. I obviously want to explore it a 
little bit further, but as an initial reaction I think 
something like that does make sense. We are not looking to 
catch people with footfalls, so insignificant deviations from 
the requirements of the exemption shouldn't blow the exemption, 
from my view, and it has worked in other contexts. So we would 
absolutely be looking at that.
    Mr. McHenry. Great. That is a great answer.
    Now, in terms of the structure of the bill, we have small 
issuances and we have a graduated scale up to $1 million, the 
idea being that smaller issuances under $100,000 are a little 
different than issuances of $900,000. Do you foresee and would 
you support the rulemaking that, in essence, categorizes 
issuances based on their size?
    Ms. Schapiro. I think it is a very good question and it is 
something that we have not made any decisions about. At a 
minimum, it is something we could ask questions about in a 
proposing release, about whether we should create some kind of 
scale for different size issuances. As you know, we have a lot 
of comfort with scale disclosure at the SEC in other contexts. 
Title I, the IPO on-ramp, has a number of scale disclosure 
provisions in it that we think are very manageable from our 
perspective, so it is something we would definitely be looking 
at.
    Mr. McHenry. With that, I will now recognize Mr. Quigley 
for 14 and a half minutes.
    Mr. Quigley. Actually, I just have one area of interest, 
Madam Chairman. The other day we talked about leapfrogging and 
the pressures the SEC faces to deal with these two major bills, 
Dodd-Frank and the JOBS Act, and that there was a concern that 
there was pressure on you to leap ahead and get to the rules 
completed that aren't due yet, when there are rules dealing 
with Dodd-Frank that haven't been completed and past deadlines. 
Do you feel this pressure? And how do you address the political 
realities out there of getting all these done on a timely 
basis?
    Ms. Schapiro. Well, we absolutely feel the pressure and I 
wish we could be moving more quickly to get all of these rules 
completed at the agency, but we have tried to prioritize based 
on deadlines for Dodd-Frank. We have either proposed or adopted 
three-quarters of the more than 90 rules that we are required 
to do; we have done 14 of the 20 or so studies. And this summer 
I expect we will complete several more of the rules. The 
biggest piece that is left are the over-the-counter derivatives 
rules, which we would hope to----
    Mr. Quigley. That is on Dodd-Frank.
    Ms. Schapiro. That is Dodd-Frank.
    Mr. Quigley. And the biggest part left on JOBS Act?
    Ms. Schapiro. JOBS Act? I would say probably the General 
Solicitation Rule, Reg. A, and the crowdfunding exemption. So 
there are pieces of all of those. We will endeavor to meet the 
end-of-the-year deadline for crowdfunding. General Solicitation 
had a 90-day deadline and Regulation A doesn't actually have a 
deadline, but it is a very significant rulemaking. So we do the 
best we can with our staff, and balancing many of the JOBS Act 
requirements fall to the Corporation Finance Division.
    They also have responsibility for the asset-backed 
securities rulemaking that is going on under Dodd-Frank, as 
well as conflict minerals in the Congo, extractive industries 
disclosure rules, and all the compensation disclosure rules, 
including pay ratio. So there is a huge burden in that one 
division and they are doing a phenomenal job and they are 
pushing things through, but we just keep our noses to the 
grindstone and try to turn things out as best we can, roughly 
prioritizing based on the statutory deadlines.
    Mr. Quigley. Well, good luck with all that, as they say, 
and I thank you for your service.
    Mr. McHenry. I thank my colleague.
    I have a few questions on cost-benefit analysis, and I am 
going to start by saying that I appreciate your prompt action 
on cost-benefit analysis, and the draft guidance that you have 
put forward and you have made public, that you testified that 
the Commission staff is abiding by currently is a welcome sign, 
and I think that is a good government initiative and showed 
strong leadership on your part to make that happen, and I do 
appreciate it. And like I said at the very beginning, you have 
had a distinguished career in public service that is a rarity 
in this day, to have a career in public service and maintain 
your reputation at the same time.
    So with this cost-benefit analysis I just have some 
questions on that. And we do appreciate, when we have document 
requests, that you and your staff comply to the best of your 
capacity to do that, and that is helpful. That doesn't make 
headlines, but we certainly appreciate it. You do have a very 
fine staff and we are very grateful, and my interaction with 
the Commission staff, and the commissioners, for that matter, 
that we have integrity in this body, and that is very important 
not just for our oversight role, but for the public, I mean, to 
have confidence in the markets. And that is obviously a 
challenge with some of the things that we have seen in the past 
with market failures and fraud that occurs in our public 
markets, just like fraud occurs, and lawbreaking happens in 
society.
    In our letter to you on May 23rd, we asked whether job 
creation specifically will be considered in economic analysis, 
and in your response from June 11th you said, in performing the 
foregoing analyses with respect to particular rulemaking, the 
Commission may need to consider the impact of the rule on job 
creation, economic growth, and competitiveness of the U.S. 
exchanges and issuances.
    So I want to understand the word may. Now, I am not a 
lawyer, so the difference between may and shall is very 
significant. I want to understand why it is may consider job 
creation.
    Ms. Schapiro. Sure. I think we don't really look at our 
economic analysis as going specifically to that one factor, but 
we must consider burdens on competition of our rules and we 
must consider whether our rules will promote efficiency, 
competition, and capital formation. And if you equate capital 
formation potentially to job creation, it will certainly be 
covered in that.
    So I think we don't separately pull out a line and say this 
will create X number of jobs or this will hurt X number of 
jobs, but we would talk about if our rule might cause people to 
reorganize their businesses in such a way that they avoid our 
rule and, therefore, move overseas. That would obviously have 
an impact on jobs in the United States. So it is a broader 
inquiry that we must do, but we don't single out job creation 
necessarily as a specific factor. So I think that is the reason 
for the use of the word may.
    Mr. McHenry. Is there a distinction between must and shall? 
And I am not trying to do this as trivia, just in----
    Ms. Schapiro. Not to me.
    Mr. McHenry. Okay.
    Ms. Schapiro. I think generally things are written as shall 
in rules and legislation, and I take it as a directive.
    Mr. McHenry. Okay. So when we are talking about economic 
growth, most people think about economic growth in terms of job 
creation, and that, to me, is a question. You outline, as well, 
the Commission is hiring 16 economists and asked for funding to 
hire an additional 20 more in 2013. It is also interesting, 
because we asked this as well, in contrast, in fiscal year 2012 
the Commission hired 67 new attorneys. Fourteen more have 
specific start dates within the next few months, an additional 
24 candidates have been offered positions or are pending 
background checks, and another 65 positions are under active 
recruitment. So that is a total hiring of 170 folks. This is a 
more than 10 to 1 ratio of attorneys, lawyers versus 
economists.
    So given that recognition that economic analysis must be 
done, there is still this great prioritization of hiring 
attorneys.
    Ms. Schapiro. I am happy to address that. And I should add 
we have, in addition to the 16 Ph.Ds who are joining us this 
summer, we already have 23 economists working on economic 
analysis just in our Division of Risk Strategy and Financial 
Innovation. We have other economists who do risk modeling and 
quantitative analysis.
    But you are right, we hire more lawyers than we do 
economists, although this is, I think, the largest ramp up in 
economists in the agency's history, because we are, everyone 
needs to remember, a law enforcement agency as well, and we 
bring in the neighborhood of more than 700 enforcement cases 
every year to try to remedy violations of the federal 
securities laws.
    And the other thing that is important is that we have a lot 
of accountants who also both support the enforcement 
initiatives, but also oversee FASB and the accounting standards 
setting.
    The lawyers we are hiring come to us with very specific 
experiences really critical to the agency's ability to carry 
out its mission, so we have been hiring people from hedge funds 
and private equity funds with expertise in broker-dealer risk 
and operations, structured finance expertise, trading 
backgrounds, expertise in exchange traded funds and 
derivatives. So we have lawyers who are responsible for much of 
the market structure, the investment company regulation, and 
the corporate finance disclosure review regulation, and we need 
them to do our jobs and we need them, obviously, very much to 
do the enforcement work.
    Mr. McHenry. I certainly understand that and, as I 
mentioned, the current guidance on economic analysis is on your 
website, and you making that public is appreciated and 
commendable, as well. In our panel that we had, we had four 
panelists earlier this week, they all lauded this, and it is 
rare that you can get four individuals testifying before this 
Subcommittee and agree on anything, so that is a very positive 
thing. And this is binding on staff now?
    Ms. Schapiro. Yes, it is.
    Mr. McHenry. Okay. And is this the final rule?
    Ms. Schapiro. It is the operative document right now. The 
staff is following this guidance as it is published on the 
website. We have asked the commissioners if they have comments 
and additions or changes that they would like to see, and we 
are working through that process to see if there are views that 
the Commission would like to have expressed, in which case it 
could become a Commission document, the Commission could 
actually vote on it. But right now this is the operative way 
forward for the staff in the rule writing divisions.
    Mr. McHenry. Will you make those comments public?
    Ms. Schapiro. Any changes we make to the document we would 
certainly make public.
    Mr. McHenry. And would you explain why those changes were 
made? Would you commit to doing that as well?
    Ms. Schapiro. If it is permissible to do that, if there is 
not some rule that prohibits it.
    Mr. McHenry. Okay. Some law or rule?
    Ms. Schapiro. Yes, you know, deliberative process or 
something.
    Mr. McHenry. I am very interested because if it is 
applicable now to the staff and binding on the staff now, then 
any changes could endanger the analysis that is already out 
there and impact, so we would have pre-memo and then have this 
sort of interregnum here that we are currently in, apparently. 
So the concern there is that with any changes----
    Ms. Schapiro. We explain why.
    Mr. McHenry. Yes.
    Ms. Schapiro. That seems fair to me. So, as I said, I have 
no objection, not having been told yet by the general counsel's 
office that there is a reason we can't do that.
    But I just want to add I think this guidance----
    Mr. McHenry. Well, they are proximate, so I am sure I can 
just look at faces and determine.
    Ms. Schapiro.--this guidance, I am enormously proud of it 
and I am enormously proud of the staff work that went into it 
because, frankly, I think it informs good policymaking, and 
that is what we need to be about; and it really forces us to go 
through the kind of process you would hope that policymakers 
would engage in before they pass rules that can have a very 
profound effect on many people.
    Mr. McHenry. You released a memo to us with one of our 
document requests, and it is a memo dated--if we can put it up 
on the slide. This is a draft of October 31st of last year, and 
you released this. It looks like a completed draft. And, go to 
the next page, this deals with President Obama's Executive 
Order that outlines that independent agencies are supposed to 
develop a plan for a retrospective of existing regulations, and 
this was a directive, well, more of a presidential request of 
sorts to independent agencies saying you should be doing this 
and looking back at rules.
    I don't mean this as a gotcha, we can certainly provide you 
with the memo, but what was interesting is that it outlines in 
a timely fashion from the President's instruction to 
independent agencies from July of last year, this draft was 
from October 31st and it outlines the elements of the plan.
    And if we go to the next page here. So we are publishing a 
plan on the Commission's website. Has that been done?
    Ms. Schapiro. Excuse me. No, Mr. Chairman. That requires 
the Commission to approve the plan, and the Commission has not 
yet voted to approve the plan.
    Mr. McHenry. Has it been brought up at a Commission meeting 
or is it still----
    Ms. Schapiro. It has not been brought up at a meeting; it 
was provided to the commissioners, I believe, October 31st of 
2011 for their comment, their input, their changes, their 
views, and that process has gone very slowly and we don't have 
all of their views incorporated into it.
    But I should hasten to add that that does not mean we are 
not doing many things that are already in the plan, because the 
plan incorporated a number of current processes that had been 
ongoing at the Commission for years, like the 10-year 
regulatory flexibility act analysis and responses to requests 
for relief and guidance, or rulemaking petitions that ask us to 
revisit rules. Our Advisory Committee has raised rules with us 
that give them concerns. We have roundtables where rules are 
raised for us to review.
    We obviously have lots and lots of meetings with industry, 
and they are not shy about telling us about rules that they 
think we need to look at. So a lot of these processes are going 
on, but you are right, we have not published the retrospective 
rule review because the Commission has not yet voted to do so. 
I am perfectly comfortable with it as it is and would vote to 
go forward.
    Mr. McHenry. Will this be on the agenda for incoming 
months?
    Ms. Schapiro. I think if we can't break it loose, we will 
need to put it on a public meeting agenda at some point, yes.
    Mr. McHenry. Well, it was interesting because--and I do 
appreciate this, and I mean this sincerely, that you have 
released this. We requested documents dealing with this and you 
freely submitted it to us, and I think it is a reasonable draft 
and it was done in a timely fashion to when the President 
requested it, and, to me, part of it says we will put this on 
the website, we will make this public.
    And I want to put this on the slide, because the fact you 
support it--this is an important slide. One more after this. We 
will take several steps to enhance public understanding of our 
retrospective review processes and to engage in more active 
public outreach seeking input for our identification of rules 
for review and our conduct of such reviews, including--and you 
go through a number of things, public outreach and on and on 
and on.
    So it is a good memo, and I think the fact that the staff 
came forward, that you support it, is a very positive thing, 
and I think it would be helpful to the market to see this 
process that you have outlined and done it in accordance with 
the President's Executive Order.
    Ms. Schapiro. Well, I agree with that, Mr. Chairman. In 
fact, I would point out that in developing this document we 
went out to the public twice, in March of 2011, where we asked 
for public input on reviewing existing rules, especially rules 
that impacted smaller businesses, and then again in September 
we invited public comment specifically on how we should develop 
this plan. So it was done with some care and some thought, so I 
will endeavor to see if I can get it broken loose.
    Mr. McHenry. Thank you. I appreciate that. As I said, I 
know you are one of five commissioners, but the chairman has 
significant sway.
    Ms. Schapiro. I hope that is true.
    Mr. McHenry. So dealing with cost-benefit analysis, so the 
SEC is going forward.
    We can take the slides down.
    The SEC has put forward this memo; it is binding on the 
staff to actually look at the costs and the benefits of 
rulemaking. It is done in a way that I think economists would 
say is appropriate and rigorous. The procedures, going forward, 
for a review process are significantly different than the 
previous Commission's process for economic analysis, which has 
been viewed as more or less perfunctory, rather than essential 
and essential check-off in order for a rule to go forward. You 
can tell the memo I think is good, in my opinion.
    But there are also self-regulatory agencies, and these 
SROs, FINRA, PCAOB, the Municipal Securities Rulemaking Board, 
these SRO rules are subject to Commission approval and, as 
such, I believe that they should be subject to the same 
economic analysis that the current guidance demands. Do you 
think that SROs should do cost-benefit analysis in their rules?
    Ms. Schapiro. It is a very good question. You know, there 
are 32 self-regulatory organizations, and they file something 
around 2,000 rules with us every year. So just the volume is 
quite extraordinary. And I think many of the rules, 77 percent 
of the rules, in fact, go effective immediately upon filing 
with the SEC. Of those that are left, a number have to do with 
new products, new lines of business, particularly for 
exchanges.
    And in Dodd-Frank Congress very much streamlined the 
process for those remaining rules in a way that would actually 
bolster those businesses' ability to get to market faster, 
encourage innovation, and speed. So engaging in a full-blown 
cost-benefit analysis for each of those rules could defeat the 
purposes that were just put in place, of making us go very 
quickly to approve those rules in order to allow them to get to 
market quickly.
    Mr. McHenry. Now, it is a small number that are non-
ministerial and non-procedural in nature. Would you say that 
major and significant rulemaking?
    Ms. Schapiro. Well, I think there is probably a way to talk 
about it where it does make sense. I think there are probably 
some category of rules where more analysis ought to be done. 
The do an analysis of burdens on competition in SRO rules, and 
we at the SEC, in approving those rules, are in fact required 
to do what we call the ECCF analysis, efficiency, competition, 
and capital formation analysis, when we are looking at SRO 
rules. So there is that which is already done. But there is 
probably a small subset of SRO rules where further analysis, we 
should be talking about that. I don't disagree with that.
    I do think it would be a mistake to have a blanket 
requirement across all SRO rules because the analysis can take 
a very long time and, again, many of them are more routine and 
operational, and probably don't call for that kind of an 
effort.
    I would just also add, as you know, under the JOBS Act, the 
PCAOB rules that would apply to emerging growth companies have 
to be determined by the SEC to be necessary in the public 
interest and promote efficiency, competition, and capital 
formation, so there is that addition.
    Mr. McHenry. And to that point the question of public 
interest. Look, I am in your wheelhouse right now; I am talking 
about an SRO and I am talking about the SEC, and you have great 
expertise with your prior experience, your previous job with 
FINRA, of course. So you have great experience with this. So 
there is certainly rulemaking from the SROs that should take 
into account the draft guidance that you have put forward for 
the economic analysis.
    Now, how can the SEC rule determine whether or not 
something is in the public interest? Let's just set aside the 
ministerial part. Let's set aside sort of paperwork provisions 
and some basic procedures that so many of these rules, by their 
nature, the SROs can react faster than a government regulatory 
body in adapting those wide variety of rules. So how can you 
determine if it is in the public interest if there hasn't been 
an economic analysis done on significant rules?
    Ms. Schapiro. Well, the SROs are required to discuss the 
reason for the rule, the justification of the rule, what 
benefits they believe the rule will bring to different 
constituencies. They are required to discuss the potential 
impact of the rule change on competition. When we put the rules 
out for--this is a very important part of the process, is when 
we put the rules out for comment and commenters give their 
views on the burdens on competition or the necessity for the 
rule, we then work with the SRO staffs to make sure they 
respond to those comments in any final rule approach.
    I don't want to leave the impression there is nothing there 
for SRO rules; there is. I think the question is on whether on 
rules that have a more major, profound impact we should be 
seeking more economic analysis I think is a fair question for 
us to look at.
    Mr. McHenry. So if we can go to the slide on the dissent 
from SRO rulemaking, it reads: Any rulemaking, whether by a 
self-regulatory organization such as the MSRB, which is the 
Municipal Securities Rulemaking Board, or by the Commission 
itself should be the product of a careful and balanced 
assessment of the potential consequences that could arise. The 
decisionmaking process that led to the Commission's approval of 
the MSRB's proposed rule changes fall short of meeting the 
benchmark. The Commission has a fundamental oversight role with 
respect to SROs, and an undue deference to an SRO in the SRO 
rulemaking process undercuts the basic structure of that 
regulatory relationship.
    Now, I understand this is a dissent; the majority, three 
commissioners, you being one of them, were on the other side of 
this. If you could respond to that, I would appreciate it.
    Ms. Schapiro. Sure. I think what I would say is that the 
majority of the Commission believed the rule did adequately 
address the commenter's concerns and did an adequate analysis 
for us to conclude that the rule was appropriate. I will also 
say, though, that this rule was about to become effective by 
operation of the calendar, because at the outside we only have 
240 days to approve or disapprove a rule, and then it goes into 
effect.
    So that said, I think we will always be willing to try to 
improve the analysis of SRO rules and rule filings, and 
obviously we have all read the dissent. Don't agree with it, 
but we have all read it, and we will strive to do more.
    Mr. McHenry. Okay. Thank you. I did want to give you the 
opportunity to comment on that.
    So I just have a couple other provisions within the JOBS 
Act that I just want to get your feedback on.
    Will you exempt Reg. A from the shareholder cap under 12G 
of the Exchange Act? Do you foresee that?
    Ms. Schapiro. So I understand from the expert that we will 
consider it, but there was not an explicit exemption provided 
in the statute. But it is something we will consider.
    Mr. McHenry. Well, do you believe that the SEC has that 
authority to provide for that exemption?
    Ms. Schapiro. Yes.
    Mr. McHenry. Okay.
    Ms. Schapiro. I am told.
    Mr. McHenry. Okay. Okay. And, again, I am not trying to 
play gotcha, and if I go back to questions about SROs, you can 
play gotcha with us.
    Ms. Schapiro. I wouldn't do that. And, obviously, we can 
always supplement the record, I assume, on that point.
    Mr. McHenry. Absolutely.
    Ms. Schapiro. But the Reg. A rulemaking, which is going to 
be a significant one, is one that does not have a time limit, 
so we have prioritized general solicitation and crowdfunding.
    Mr. McHenry. Excellent. Very good. Okay, so to accredited 
investors. Accreditation is obviously unnecessary in the case 
of transactions among family members, so will the Commission 
create an exemption to the accreditation requirement, if it 
applies to the 1500 additional investors, in cases where the 
shares are transferred or sold to children or grandchildren or 
family members, in cases where shares are received as gifts or 
inheritance?
    Ms. Schapiro. I don't think we have made any decision about 
that. It is certainly something we will look at.
    Mr. McHenry. If you could comment on that for the record.
    Ms. Schapiro. Sure.
    Mr. McHenry. Thank you.
    And the increase to the registration threshold for banks 
from 500 to 2,000 shareholders, it failed to include S&L 
institutions, so will the Commission correct this apparent 
oversight?
    Ms. Schapiro. Well, this is an issue I have spoken with a 
number of members of Congress about and our staff has met with 
the Community Bankers Association, and we are in the process 
right now of trying to understand the similarities and 
differences, frankly, between thrift and bank holding companies 
so that we can understand, for example, what types of reports 
thrifts file, as banks do, with their regulators, whether 
shareholders have access to them. We are also talking with the 
OCC about that. So it is an issue that is still open. I 
understand the deep interest in it.
    I will say that we have done the research to say that we 
believe there are about 114 thrift and S&L holding companies 
that are registered right now under the Exchange Act, and of 
those about 86 have fewer than 1200 shareholders of record and 
could delist. So given that large a universe, I think we 
probably need to approach this through rulemaking, rather than 
through a one-off exemptive process or something. But it is 
very much on our radar right now.
    Mr. McHenry. Okay. Okay. Thank you. I appreciate that and I 
appreciate your willingness to comment on that.
    Then I would be remiss if I didn't ask about money market 
funds. And I know you have made enormous comments on this, but 
we are talking about a $2.5 trillion industry, so there is 
strong opposition from the industry, as well as some State and 
municipal treasurers, as well, and what that would do to 
liquidity, especially in this time where we are looking to what 
is happening in Europe and the implications that that obviously 
has on world markets and liquidity in the world market. So I 
would give you an opportunity to comment, please.
    Ms. Schapiro. I would be happy to. And as you have rightly 
pointed out, I can talk for a very long time on this very 
subject because I feel very strongly about it.
    The American taxpayer was on the hook when the Reserve Fund 
broke the buck in the form of a guarantee of money market 
funds, which at that time were over a $3 trillion industry in 
the United States, and my view is the American taxpayer should 
never be put in that position again. One way to ensure that is 
to try to deal with the structural weaknesses that exist in 
money market funds in a way that allows their value to actually 
float to reflect the value of the underlying securities, just 
like any other mutual fund, so this event of breaking the buck 
is not a monumental event that causes people to run for the 
doors.
    And that is the second weakness, is that as the value of a 
money market fund moves towards $0.99, away from the true $1.00 
value, there is a huge incentive to get your money out at $1.00 
and leave the losses concentrated in those slower moving small 
business and retail investors who are left in the money market 
fund, and the potential to create a panic is extraordinary.
    In 2008, when Reserve broke the buck, within a matter of a 
couple days $300 billion was pulled out of money market funds, 
and it was really only stopped because the Treasury and the Fed 
stepped in with a guarantee program and a liquidity facility, 
and I think before we have another crisis, I hope we never do, 
but in the event we do, I think it would be wise for us to have 
taken the steps to bolster the resiliency of money market funds 
to withstand or to prevent runs. They are very valuable tools. 
They are used by retail investors, by businesses, by State and 
local governments, as you pointed out, and we think they can be 
made stronger and better by either having a small capital 
buffer to absorb those small variations in price or to have 
their value actually float.
    Mr. McHenry. So the Commission has a 337-page proposal, as 
we read, I believe it was yesterday in Bloomberg, I believe. So 
the staff proposal, did it go through the economic analysis?
    Ms. Schapiro. This is a proposal to the Commission, so 
nothing has been made public or published, but it contains an 
extensive economic analysis, yes.
    Mr. McHenry. Okay, it does. And it is an either or, either 
float the nav or hold more capital and curb redemptions?
    Ms. Schapiro. Those would be choices that funds could 
choose between.
    Mr. McHenry. Okay. Okay. And from what we have heard and 
read, there is not a unity of thought on the Commission quite 
yet.
    Ms. Schapiro. Not quite yet. And I am ever the optimist, 
and now that they have a document to look at and obviously it 
is going to take a little time to read it and absorb it and 
have conversations with the staff about it, we will see where 
we go from there. But I am optimistic that people will think 
that this is something that needs to be publicly aired and 
discussed and debated.
    Mr. McHenry. Okay. Thank you.
    Chairman Quigley, if you have any final comments or any 
final time you would like.
    Mr. Quigley. I thank you again for your service and 
appreciate your coming back again and again.
    Mr. McHenry. And two final things of note. Would you be 
willing to come back in September and give us an update? We 
will be happy to work with your schedule. We know you obviously 
keep a very hectic and busy schedule, and we do appreciate your 
willingness to submit to congressional oversight.
    Ms. Schapiro. Of course, I am more than happy to come back.
    Mr. McHenry. Thank you. I appreciate it. And again, I have 
said this a number of times, but I do appreciate your public 
service and I do appreciate your willingness to be open and 
transparent and engage in this conversation, this discussion. 
To that end, I would love to give you any opportunity to 
address anything that I have not raised or any comments or any 
corrections or additions you would like to make.
    Mr. Quigley. Although that would be hard to imagine.
    [Laughter.]
    Ms. Schapiro. I can't think of anything. Thank you.
    Mr. McHenry. Thank you. Look, I deeply care about this and 
the work that the SEC does. I want to make sure it is done 
correctly and the American people know what is happening in 
this process so there is some certainty in the marketplace 
about the process, the procedures of the SEC.
    And the final comment I would make to the ability to raise 
capital in this Country is that entrepreneurs are waiting for 
these opportunities that will come out of the rulemaking that 
you are undertaking. Your work is important and it has an 
enormous impact on large and small businesses and economic 
growth, and entrepreneurs are waiting, and we are certainly 
interested in the work you are doing and certainly appreciate 
your willingness to work with the public and work with 
interested parties, get their feedback and make sure that these 
rules are done well.
    So thank you for your testimony. Thank you for being here 
today.
    This hearing is now adjourned.
    [Whereupon, at 10:53 a.m., the subcommittee was adjourned.]





                                 
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