[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]





                    OVERSIGHT OF THE SEC'S DIVISION

                         OF CORPORATION FINANCE

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


                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                  
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 24, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-95
                           
                           
                                   ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

91-159 PDF                     WASHINGTON : 2015 
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ANN WAGNER, Missouri
LUKE MESSER, Indiana
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 24, 2014................................................     1
Appendix:
    July 24, 2014................................................    39

                               WITNESSES
                        Thursday, July 24, 2014

Higgins, Keith F., Director, Division of Corporation Finance, 
  U.S. Securities and Exchange Commission........................     8

                                APPENDIX

Prepared statements:
    Higgins, Keith F.............................................    40

              Additional Material Submitted for the Record

Lynch, Hon. Stephen, and Perlmutter, Hon. Ed:
    Written statement of the Council of Institutional Investors..    45
Higgins, Keith F.:
    Written responses to questions submitted by Representative 
      Hurt.......................................................    51
    Written response to a question posed by Representative 
      Stivers during the hearing.................................    52

 
                    OVERSIGHT OF THE SEC'S DIVISION


                         OF CORPORATION FINANCE

                              ----------                              


                        Thursday, July 24, 2014

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Royce, 
Neugebauer, Huizenga, Stivers, Fincher, Mulvaney, Hultgren, 
Ross, Wagner, Messer; Maloney, Sherman, Lynch, Perlmutter, 
Scott, Himes, Peters, Foster, Carney, and Kildee.
    Ex officio present: Representative Hensarling.
    Chairman Garrett. Good morning, and welcome. This hearing 
of the Capital Markets and Government Sponsored Enterprises 
Subcommittee entitled, ``Oversight of the SEC's Division of 
Corporation Finance'' is hereby called to order. Welcome, Mr. 
Higgins. We will begin with opening statements up here, and 
then go to you for your testimony.
    I yield myself 7 minutes.
    Today's hearing will focus on oversight of the SEC's 
Division of Corporation Finance. Corporation Finance Director 
Higgins, thank you for agreeing to join us today and for all 
your hard work that you are doing over at the SEC.
    I want to start off today's hearing by commending Chair 
White, the other SEC Commissioners, and Dr. Higgins for your 
recent decision to move a potential corporate political 
disclosure rulemaking, the SEC's Red Flags Agenda.
    Far too often during the span of this Administration, it 
appears that supposedly independent regulators use their 
position to carry out heavy-handed partisan political attacks. 
Whether it is the targeting of specific political groups by the 
IRS, the armed raiding of Gibson Guitar by the Justice 
Department, the abusing of the law by the National Mediation 
Board, the bullying of fellow Commissioners by the former head 
of the Nuclear Regulatory Agency, the obstructing of an 
investigation of the chemical safety board, the lying about 
delays by the VA Department, or the illegal implementation of 
ObamaCare by Health and Human Services, and the list goes on.
    The Obama Administration officials and their appointed 
regulatory cheerleaders need to stop putting political politics 
above the rule of law. It is not appropriate to abuse 
government-granted power to threaten, cajole, intimidate or 
pressure any opposition into submission.
    So I want to thank Chair White for not letting the SEC fall 
victim to this and for standing up for the SEC's political 
independence from the White House. I am pleased that the SEC is 
not joining in this conga line of partisan regulatory abuses 
and is not turning the disclosure process into a political 
pinata. After all, the SEC is a disclosure-based agency, and 
ensuring the appropriate disclosures of material information to 
investors is at the heart of what the SEC does. And the staff 
of the Division of Corporation Finance is at the forefront of 
this important work.
    I also want to thank Chair White and Director Higgins and 
the staff of Corporation Finance for their ongoing work to 
refocus SEC's disclosure regime on its original purpose. 
Specifically, I commend them on attempting to address the 
problems of disclosure overload and for looking at ways to 
streamline and modernize the integrated SEC disclosure 
regulatory regime.
    If the disclosure process is to be useful to investors, the 
information required to be contained in the disclosures must be 
material to the investors and formatted in a way that can be 
easily utilized by the reader. Over time, more and more 
requirements have been added to disclosures, rendering them 
almost useless to the average retail investor.
    So we must prioritize reforming this regime to ensure the 
investors have the appropriate information to make informed 
investment decisions. By getting what I would say back to the 
basics of disclosure, I believe we will unlock additional 
investment capital in our public markets.
    Another area where I would like to commend Chair White and 
Director Higgins again is your recent work on proxy advisors. 
The guidance the Commission put out several weeks ago is a very 
good first step in addressing the growing and outside influence 
being wielded by the proxy advisory industry.
    So by clarifying that investment advisors are not required 
to vote every share of stock they hold for their clients and 
not every recommendation of the proxy advisers must be 
followed, the SEC reduced the importance of the proxy advisors 
and the proxy process.
    While these steps taken are very positive, there is still 
more that should be done. Similar to the worries regarding the 
extraneous corporate disclosure requirements, there is also a 
concern about the irrelevant and unnecessary shareholder proxy 
proposals being brought by activist corporate gadflies.
    In a recent speech, Commissioner Dan Gallagher stated, 
``Taking money out of the pocket of someone investing for 
retirement or for their child's education and using it instead 
to subsidize activist agendas is simply inexcusable. It is 
incumbent upon the Commission to create a regulatory 
environment that promotes shareholder value over special 
interest agendas.''
    I could not agree more with Commissioner Gallagher.
    The SEC must take action to limit the abuses being 
committed by superfluous activist proposals that run counter to 
and promoting actual shareholder value for the actual investor, 
the average investor. Specifically, the SEC should amend a 
number of the rules of government which investors can afford, 
offer, what shareholder proposals including four things: 
increasing the current percentage ownership threshold; 
lengthening the holding requirement time; providing more 
specifics around what constitutes ordinary business operations 
and significant policy issues; and strengthening the 
resubmission thresholds.
    Like the disclosure process, we must also refocus the 
shareholder proposal so that proposals to address and promote 
shareholder value receive the attention and consideration they 
are due. I have highlighted a number of initiatives of the 
Commission with which I am pleased. Let me turn to several with 
which I have a number of concerns.
    The first is the implementation of the JOBS Act. It is 
unfortunate indeed that the SEC still does not embrace its 
mission to promote capital formation with as much zeal and 
enthusiasm as it does with the Dodd-Frank Act. Our markets and 
economy are worse for it. This committee recently passed 
legislation that I sponsored entitled, ``The Private Placement 
Improvement Act.''
    The purpose of this legislation is to ensure that issuers 
and investors in certain private offerings under Regulation D 
(Reg D) do not face overly complex and burdensome regulatory 
obstacles. So last year, the SEC adopted a rule lifting a ban 
on general solicitation and advertising private offering under 
Rule 506 of Reg D as mandated by Title II of the JOBS Act.
    Unfortunately, the SEC did not stop there. Instead of 
simply removing the ban as intended and opening up this market 
to new potential investors, the SEC decided, for some reason, 
to issue a separate rule proposal, not called for at all by 
Congress. That proposal would impose a number of new burdensome 
regulatory requirements on issuers seeking to use Rule 506. As 
one commenter put it, the JOBS Act on its base is not 
authorizing the Commission to attach new and additional 
conditions to the use of the exemption. It is not for the 
Commission to rely on its general rulemaking authorities 
bringing Congress and the President back in line by adding 
conditions that it believes may enhance investor protection.
    However, that is exactly what the Commission did in that 
case. I believe that many of the additional requirements of the 
SEC's Reg D proposal will, if ultimately adopted, make Rule 506 
a less attractive avenue for small business capital formation. 
This then is clearly at odds with the goals, let alone the text 
of the JOBS Act.
    And finally, I would like to raise the ongoing view by the 
SEC of the accredited investor definition, and let me be clear 
on this point. At a time when small businesses continue to 
struggle to raise capital, and investors are having difficulty 
earning a return on their investment, the SEC should not harm 
small business job creators or the investing public by reducing 
the amount of participants in this field eligible for private 
placement.
    I know there is a long-held understanding that not all 
investments are appropriate for all investors, I find it 
difficult to believe that the SEC will know where to draw the 
line better than each individual investor. If the SEC decides 
to act on this, I do encourage it to err more on the side of 
allowing for investor choice and additional investment options 
rather than telling more investors whether they can and they 
can't invest their own money.
    With that, I want to thank you again, Mr. Higgins and I now 
recognize Mr. Scott.
    Mr. Scott. Thank you very much, Chairman Garrett.
    And I want to thank Mr. Keith Higgins, who is the Director 
of the Securities Exchange Commission's Division of Corporation 
Finance for testifying before our subcommittee today.
    The Securities and Exchange Commission has a good and 
necessary mission and that mission is to protect the investors, 
to maintain fair and orderly and efficient markets, and to 
facilitate capital formation, and any reorganization of the SEC 
should be made in mind to increase its effectiveness in 
achieving its mission and in streamlining the corporation with 
other permanent Federal agencies.
    In support of the Commission's mission to protect 
investors, maintain fair and orderly and efficient markets, and 
facilitate capital formation, the Division of Corporation 
Finance seeks to ensure that investors are provided with 
material information in order to make informed investment 
decisions, both when a company initially offers their 
securities to the public and on an ongoing basis as it 
continues to give information to the marketplace. The Division 
also provides interpretive assistance to companies with respect 
to the SEC rules and forms and makes recommendations to the 
Commission regarding new rules and revisions to existing rules.
    I am interested in finding out what changes have been made 
since the implementation of Dodd-Frank, whose fourth 
anniversary we celebrate today. And if the SEC is able to 
conduct any additional reforms in order to improve the 
Commission's effectiveness, well, I would certainly welcome 
such reforms.
    Furthermore, I anticipate the opportunity to discuss 
rulemaking and implementation emanating from Dodd-Frank as well 
as to jumpstart our business startups or the JOBS Act. We need 
to make sure that in this legislation and subsequent 
rulemaking, we still allow the Securities and Exchange 
Commission to evolve with market changes, and that we are not 
preventing the Securities and Exchange Commission from 
conducting its intended purpose.
    Also, I am very much interested in working and getting an 
update on how the SEC is progressing with the Commodity Futures 
Trading Commission (CFTC) and their joint rulemaking for cross-
border harmonization and derivatives and swaps dealing. As you 
know, this comes under Title VII of the Dodd-Frank Act. It is 
imperative that the Securities and Exchange Commission get 
together and do this joint rulemaking.
    The delay causes confusion in our international markets and 
failure to come up with harmonization for our cross border, and 
dealing with our swaps activity puts our business community 
working on international stage at a very serious competitive 
disadvantage and could very well allow for a possible 
reimportation of risk.
    May I conclude, Mr. Chairman with this--the key to this 
cross border is to make sure that the top eight foreign 
jurisdictions who engage in swaps activity have equal robust 
regimes to ours, and in order for us to facilitate that, it is 
you and the CFTC that will determine that to report back to 
Congress within 30 days if one of these jurisdictions does not 
meet our robust regimes.
    So there is a lot to do there. I would be very interested 
to know how quickly the CFTC and the SEC will come together in 
harmony on rulemaking for cross-border swaps and derivatives 
activities.
    With that, Mr. Chairman, I yield back the balance my time.
    Chairman Garrett. Thank you. And the gentleman yields back.
    The vice chairman of the subcommittee, Mr. Hurt, is now 
recognized for 2 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for holding today's subcommittee 
hearing to conduct oversight over the SEC's Division of 
Corporation Finance.
    The Division has a number of consequential initiatives on 
its agenda including the review of our corporate disclosure 
system and finalizing key pieces of the JOBS Act, and I am 
looking forward to hearing your testimony today.
    I am encouraged by Chair White's comments on the need for 
the Commission to conduct a review of its corporate disclosure 
system. She and other Commissioners noted disclosure overload 
is having negative impacts on investors, public companies, and 
the SEC itself. Fostering capital formation in our capital 
markets requires consistently reliable information on public 
companies. However, too much information for the sake of 
information can create inefficiencies and confusion.
    Streamlining our disclosure regime to better reflect the 
SEC's mission of protecting the investors, maintaining fair, 
orderly, and efficient markets, and facilitating capital 
formation will lead to benefits for both business and 
investors. I also want to emphasize that it is imperative that 
the SEC not lose sight of its third important and sometimes 
neglected mission, again, facilitating capital formation.
    Congress has provided the SEC with broad discretion to 
amend securities laws and regulations without sacrificing key 
investor protections. However, the JOBS Act, and the numerous 
bipartisan bills that have passed out of this committee 
highlight the fact that the SEC needs to do more to promote 
capital formation through common-sense updates to its 
regulations.
    One such bill that Representative Sewell and I have 
introduced passed this committee with strong bipartisan support 
to provide relief to small issuers from the disproportionate 
cause of XBRL compliance. The SEC should recommit itself to 
promoting capital formation that will spur growth and 
opportunity, beginning with a full implementation of the JOBS 
Act as well as other recommendations from the SEC's forum on 
small business capital formation.
    I would like to thank Mr. Higgins for appearing before our 
subcommittee today. I look forward to your testimony.
    Thank you, Mr. Chairman. I yield back the balance my time.
    Chairman Garrett. I thank the gentleman, and the gentleman 
yields back.
    The gentleman from California is recognized for 4 minutes.
    Mr. Sherman. Four minutes, thank you.
    There are a number of issues I would like to discuss. One 
of those is the Financial Accounting Standards Board (FASB) 
lease accounting project that I realize comes not directly 
under your purview but you are, to some extent, responsible for 
the need for total disclosure--for a full disclosure, and 
leases are being properly disclosed now. Since it is not broke, 
the folks in Norwalk, Connecticut, feel they need to fix it. 
The effect will be to add $2 trillion to the balance--to the 
liabilities of the balance sheet of American business because 
many tens of thousands, I would say many hundreds of thousands 
will be in violation of their loan covenants and perhaps cut 
our GDP by about half a point.
    Others on this committee have heard me talk about this, and 
I hope that you would realize as your chairman has stated here 
that while you can say you designated--you have delegated 
everything to the Financial Accounting Standards Board, that 
this is an SEC responsibility.
    Second, you are about 2 years behind on issuing regulations 
under the Franken-Sherman amendment to deal with credit rating 
agencies. They gave AAA to Alt-A, and the economy tanked. All 
of the same pressures are there now. That is to say, the issuer 
of the bond selects the credit rating agency.
    If I had been able to select the people who graded my tests 
in college and been able to pay them an average of $1 million 
per test they graded, I would have done better in college.
    Day trading and now minute trading, second trading, 
millisecond trading, is an issue that comes up. It makes people 
think that they can't invest in a fair market if they don't 
have a computer that is specially wired to the market to beat 
somebody else's computer, let alone any human making the 
decision. It used to be that if there was a tiny spread, 
sometimes that went to the buyer, and sometimes that went to 
the seller. Now, all of it is scooped up by those engaged in 
this computerized trading.
    And it is also very hard to see what benefit it has 
provided by having some of our smartest young people sit at 
home all day, avoid shaving, and spend the whole day buying and 
selling stocks and being out of the market at the end of the 
day. I think there is a role for people to make money in our 
capitalist system but it usually should be tied to something 
socially productive.
    And finally, Mr. Higgins, I hope you will discuss either in 
your opening statement or in questions the fact that the 
British and others have transactions taxes. How can we 
establish a per transactions tax that is low enough, that it 
doesn't push business offshore--I think London is doing pretty 
well--and it would have the effect of raising some revenue 
because I am sure you are here to tell us that the SEC doesn't 
have sufficient revenue to do its job such as writing the 
regulations under the Franken-Sherman amendment that you are 2 
years late on. just in case I didn't mention that.
    And it would also have the effect of discouraging 
meaningless trades where people are in and out of a stock in a 
minute or a second. So I hope you will address those issues in 
your opening statement.
    I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Royce is recognized for 2 minutes.
    Mr. Royce. Thank you very much, Mr. Chairman.
    First, let me welcome Mr. Higgins, and say thank you. To 
date, your office has been very professional and forthright in 
their interactions with me and with my staff.
    And I would also praise the Commission because over the 
last 5 years, it has been very active in the pursuit of insider 
trading. I think you have charged now over 570 defendants in 
civil insider trading cases for that period of time. It is easy 
for our constituents to understand insider trading when it 
involves a group of friends sharing information maybe over the 
golf course or through an email exchange between them. It 
becomes a little murkier for investors, and I assume for the 
SEC, when the exchange of information is shrouded in contracts 
and it doesn't look like something that you have seen before.
    I am very interested in the Commission's process for 
looking at novel and creative deals to ensure that they are 
robustly reviewed to ensure strong investor protection and 
market transparency in places where people would try to use 
insider trading as part of a scheme, and I look forward to your 
answers to some questions on these issues this morning.
    And again, I thank the chairman for holding this hearing, 
and I yield back.
    Chairman Garrett. The gentleman yields back? Okay.
    The gentlelady from New York is now recognized for 3 
minutes, or as much time as she is going to consume.
    Mrs. Maloney. First of all, I thank you, Mr. Chairman, for 
holding this important hearing, and I welcome Mr. Higgins.
    There has been a great deal of discussion lately on 
maintaining confidence in our markets, and I have always said 
markets run more on confidence than on capital, and it is 
important that we maintain it. But one of the most important 
and most underappreciated sources of confidence is the accuracy 
and transparency of the financial statements that public 
companies are required to file, and this is where the SEC's 
Division of Corporation Finance plays such an important role.
    As an investor, if you are going to commit your capital to 
a company, you need to know at a minimum how much money the 
company already has, how much it is expected to make every 
quarter, what its normal day-to-day operating costs are, and 
how much it already owes to other creditors. This is the 
information that public companies are required to disclose 
every quarter in their financial statements.
    If an investor cannot have a basic level of confidence in 
these financial statements, that the numbers are accurate and 
any major caveats are disclosed, then the investor won't commit 
his capital to this company, period. The fact that investors 
around the world are so willing to invest in our companies and 
our markets is a testimony to the professionalism and 
dedication of the SEC staff who review those financial 
statements, and it is difficult work, sometimes tedious, often 
frustrating, and always complex.
    The confidence that investors place in these financial 
statements has been hard won over several decades, but it is 
truly the grease that keeps the wheels of commerce spinning.
    So I look forward to hearing from our witnesses today, and 
I yield back the balance of my time.
    Chairman Garrett. The gentlelady also yields back.
    At this point, we return to our panel, our witness, for his 
opening statement. Mr. Higgins, you are recognized for 5 
minutes. Obviously, your written statement will be made a part 
of the record, and, as with every witness, we remind you to 
pull the microphone as close as you can, if that is not 
inconvenient to you. And again, we welcome you here and you are 
recognized for 5 minutes. Mr. Higgins?

     STATEMENT OF KEITH F. HIGGINS, DIRECTOR, DIVISION OF 
  CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE COMMISSION

    Mr. Higgins. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. My name is Keith 
Higgins, and I am the Director of the Division of Corporation 
Finance at the Securities and Exchange Commission.
    I appreciate the opportunity to testify today on behalf of 
the Commission about the Division's activities and 
responsibilities. As has been said already, the mission of the 
Commission is to protect investors, maintain fair, orderly, and 
efficient markets, and facilitate capital formation. The 
Division promotes this mission by overseeing the agency's 
review of company disclosures to the investing public, seeking 
to ensure that investors have access to materially complete and 
accurate information upon which to make voting and investment 
decisions.
    The Division generally carries out its mission by 
selectively reviewing company filings by providing 
interpretative guidance about the securities laws and by making 
rulemaking recommendations to the Commission in the areas of 
company disclosure and securities offerings.
    Through our filing review program, the Division reviews the 
disclosures and financial statements of reporting companies to 
monitor and enhance compliance with our disclosure and 
accounting requirements. The Sarbanes-Oxley Act of 2002 
requires the Commission to review companies' disclosures at 
least once every 3 years, and more frequently where 
circumstances warrant.
    In addition to these mandated reviews, the Division 
selectively reviews registration statements and other filings 
relating to public offerings, business combination 
transactions, and proxy solicitations. During fiscal 2013, the 
Division reviewed the filings of more than 4,500 reporting 
companies, and I expect our reporting company review of 
statistics will be similar for fiscal 2014.
    The Division also provides guidance to market participants 
and the public through, among other things, no-action and staff 
interpretative letters and staff and accounting legal and 
accounting bulletins. Most recently, as the chairman mentioned, 
the Division, together with the Commission's Division of 
Investment Management, issued a staff legal bulletin on proxy 
advisory firms that provided guidance on the availability of 
exemptions under our Federal proxy rules upon which these firms 
typically rely.
    It also provided guidance to the investment advisors about 
their responsibilities in voting client proxies and in 
retaining and overseeing proxy advisory firms. As to our 
rulemaking effort, the Division has been focused on 
implementing the mandatory rulemaking provisions of the Dodd-
Frank and JOBS Acts. Under Dodd-Frank, the Division has been 
involved in numerous completed rulemakings including say-on-pay 
and say-on-frequency votes for executive compensation, 
disclosures about representations and warranties and asset 
level review of asset-backed securities offerings, compensation 
committee listing standards and disclosure, disqualification of 
bad actors under Rule 506, specialized disclosures relating to 
mine safety and conflict minerals, as well as removing a 
person's primary residence from the network calculation in the 
accredited investor definition.
    The Division is currently developing recommendations for 
final rules on the following: disclosure of asset level data 
and offering of asset-backed securities; risk retention for 
securitizers of asset-backed securities; and CEO pay ratio. We 
are also working to implement the remaining Dodd-Frank 
executive compensation rules and payments by resource 
extraction issuers as well as working on the mandated review of 
the accredited investor definition.
    The Division has also been leading a number of the 
rulemakings under the JOBS Act. As the chairman mentioned, last 
year we adopted final rules on general solicitation in the Rule 
506 offerings, and at the same time issued a rule proposal to 
amend Regulation D to enhance the Commission's ability to 
assess the development of the private offering market.
    In October of 2013, the Commission published a proposal to 
implement the crowdfunding rules under the JOBS Act. And in 
December of 2013, the Commission proposed rules to enable 
companies to offer up to $50 million in any 12-month period 
under a new and expanded Regulation A.
    The Division is preparing recommendations for final rules 
on the Regulation D, crowdfunding, and Regulation A proposals, 
and we are also working on proposals to implement the Title V 
and VI changes to the 12(g) standards under the Exchange Act.
    Finally, the Division, as the chairman has mentioned, is 
leading the Commission staff's effort to comprehensively review 
our disclosure system to review the rules, specify what 
companies must disclose in their filings and to make 
recommendations on how to update them to facilitate timely, 
material, and more effective disclosure. Initially, the 
Division is focusing its efforts on the business and financial 
disclosures that are included in periodic and current reports. 
After which, we will focus on the governance and compensation 
information provided in proxy statements.
    The staff is seeking input from a broad range of companies, 
investors, and other market participants on how to modernize 
and update the disclosure so we can make it both more 
meaningful for investors and less burdensome for companies.
    Thank you again for inviting me to testify today. I am 
happy to answer any questions you may have.
    [The prepared statement of Director Higgins can be found on 
page 40 of the appendix.]
    Chairman Garrett. Thank you, again, for your testimony.
    At this point, I recognize myself for 5 minutes, and I just 
have a few matters to go over.
    You went through a whole series of things as far as what 
has been done and the listing of things that are on the plate 
still, I guess. One that I touched upon in my opening statement 
was with regard to proxy advisor firms. And as you indicated, 
you recently issued guidance, and as I said in my opening 
statements that they seem to address the concerns raised by me 
and also raised by investors and businesses also at the past 
SEC roundtables and also at the hearings that we held here in 
this committee last year.
    From a reading of it, the guidance appears to require the 
advisory firms to disclose, for one thing, conflict of 
interest. Also, it requires them to put a system in place to 
address those conflicts of interest and also to try to ensure 
accuracy that correlates advice to the goals of the client fund 
and clarifies when institutional investors must vote shares and 
how they must engage in advisory firms. I think I touched upon 
that in my opening statement as well.
    So all those things are important steps, I think, forward 
in creating oversight over these firms and ensuring a fair, and 
what we call an even-handed shareholding voting process. But 
there are a couple of points just to dig in to a little bit. 
How is the SEC going to--not that they have done this--oversee 
the implementation of all these with regard to the advisory 
firms?
    Mr. Higgins. Mr. Chairman, we keep our eye on--we monitor 
the market, the guidance is out--
    Chairman Garrett. Yes.
    Mr. Higgins. The proxy season really is typically the first 
4 months of the year so we are sort of in a lull in the proxy 
season, but we would expect to watch to see what happens. We 
get feedback from market participants as to how it is working, 
but we don't yet have a work plan on how we are going to test 
how well the guidance did. We expect--because market 
participants haven't been bashful in letting us know where the 
problems are, so we are hoping that we continue to get feedback 
from all sides of the question.
    Chairman Garrett. Okay. So just to go down on one point, as 
far as the complex, there is not going to be a reporting 
requirement on the conflict for each particular one that they 
identify then, for example?
    Mr. Higgins. What the guidance said is that the proxy 
advisory firm has the obligation, if there is a significant 
relationship that has to be addressed--
    Chairman Garrett. Right.
    Mr. Higgins. --the guidance said that the proxy advisory 
firm must provide that to the client on or about the time that 
it delivers the report, and we are confident that the proxy 
advisory firms can implement that.
    Chairman Garrett. Okay.
    Mr. Higgins. There is no one-size-fits-all.
    Chairman Garrett. Right. Okay. So we are in a lull because 
it just passes now, so when we get through the next period, the 
next season of proxy advisors, will you be reporting back to 
us? Will you be issuing a report? How do we know as far as the 
success or not in this area?
    Mr. Higgins. Right. We don't have any current plans to 
issue a report, but it is something we will give some thought 
to. As far as how you measure success, it will be hard. There 
will be some things that won't be particularly transparent to 
us. You mentioned the guidance provides some guidance on how 
clients can agree with their investment advisors when and how 
to vote shares.
    Those are the agreements that we might not be privy to; if 
they are registered investment advisors, our Office of 
Compliance Inspections and Examinations could take a look at 
that and add that to the list of things that they look out for 
when they come in to do their exams.
    Chairman Garrett. All right. Let me--my time is going by.
    Moving on to shareholder proposals and what have you, do 
you agree with me that the SEC should amend a number of the 
rules that govern which investors can offer what and what 
shareholder proposals--I won't go down it--but just in general 
in that area?
    Mr. Higgins. There has certainly been a lot of angst on the 
shareholder proposal process. The one thing about it is that 
nobody is completely happy with the process.
    Chairman Garrett. Right.
    Mr. Higgins. We understand that. I think that we have a 
shareholder--yes, rulemaking position in on resubmission 
thresholds, Commissioner Gallagher has given speeches on--
    Chairman Garrett. Yes, I have heard that.
    Mr. Higgins. --thresholds. All of those are issues on which 
there is widespread debate. I don't think the staff has a view 
on what should be done. I think the only observation I would 
make is that any proposal will need to try to find a consensus.
    Chairman Garrett. So let me just--my time is almost out 
here. Will you commit to proactively monitor the proxy voting 
process to ensure that it is not abused? Because there are 
allegations, I am sure you know, from the stakeholders that 
certain activist shareholders are trying to do things through 
these methods that they maybe cannot accomplish in another 
means. So will it be your goal to try to proactively monitor 
what they are doing? The proxy voting process to ensure that it 
is not abused by just this small class of what we call activist 
shareholders and special interest groups who are looking to 
advance their own particular goals that may not be to the 
detriment overall of the other investors and other 
shareholders?
    Mr. Higgins. This is on the 14A shareholder proposal 
process. We devote a substantial amount of staff resources 
every year during the 3 months of the proxy season on reviewing 
shareholder proposals on calling balls and strikes, if you 
will, on what proposals can be included and excluded.
    Chairman Garrett. Okay.
    Mr. Higgins. So we are actively involved in watching that.
    Chairman Garrett. All right. I appreciate it.
    The gentlelady from New York is now recognized for--
    Mrs. Maloney. Thank you.
    Mr. Higgins, earlier this year the New York State Common 
Retirement Fund, which is overseen by our State Comptroller Tom 
Dinapoli, tried to get a shareholder vote at the annual meeting 
of two large financial institutions on a resolution concerning 
the disclosure of incentive-based compensation for employees 
who take high risks for these institutions. Unfortunately, both 
of the financial institutions decided to exclude the 
comptroller's resolution from their proxy materials and the 
staff in the Division of Corporation Finance sided with these 
institutions in this dispute saying that the financial 
institutions could exclude the resolution because it dealt with 
so-called ``ordinary business operations.''
    This seems to be contrary to the SEC's previous statement 
that incentive-based compensation for bank employees who take 
material risks is in fact a significant policy issue and does 
not merely concern so-called ``ordinary business operations.'' 
Because the staff's decision appeared to be based on a simple 
misreading of the resolution, the comptroller tried to appeal 
the decision to the full Commission, but the staff refused to 
even present the appeal to the Commissioners. And this was very 
troubling to me. I know that throughout the hearings on Dodd-
Frank, the incentives were talked about, that the incentives 
were there to increase risk as opposed to sound financial 
practices.
    This was troubling to me. Can you please explain to me how 
this happened?
    Mr. Higgins. Right. Well, the proposal of which you speak, 
the reason that the staff concluded that it could be excluded 
was that the proposal was drafted to focus on employees who 
could expose the institution to material risk, that was the 
first cut that needed to be made. The second was then to look 
at any incentive compensation those persons might be paid. The 
significant policy issue, and these are technical issues that 
maybe only a lawyer can love, had to do with incentive 
compensation paid to individuals who expose the institution to 
material risk. The proposal as drafted talked about employees 
who could expose the institution to risk whether or not they 
receive any incentive compensation. On that basis, and again a 
very technical area, the staff did not believe the proposal met 
the significant policy issue standard, and as a result agreed 
with the company that it could be excluded.
    Mrs. Maloney. Okay. Will you commit to working with the New 
York State Common Retirement Fund next year ahead of time so 
that we can prevent this situation from happening again?
    Mr. Higgins. The one thing about the shareholder proposal 
process is that we stand in the middle. We provide informal 
advice to people who ask us about what we believe can be 
excluded and what can be included. We try to be scrupulously 
fair and stand in the middle and not appear to aid either side. 
I believe it would be problematic for us to either get together 
with companies or with proponents in advance because it would 
seem as if we would have already decided the issue before it is 
presented. We have to let each side advocate for their 
respective positions.
    Mrs. Maloney. Yes, but giving them the guidelines of how 
their proposal could be--
    Mr. Higgins. We hope our letter was clear on how they might 
revise it.
    Mrs. Maloney. Thank you.
    I am a big advocate of your XBRL system which companies 
file their financial statements in the standardized structure 
data format, and I believe it is the way of the future, and I 
must say that many of the companies that I am privileged to 
represent are really thrilled that they can have a standard 
format and get the materials done each month and get the 
information back. And I think that you should be moving toward 
a structured computer-readable financial statements.
    Where does this stand right now? My time is almost up. Are 
you doing an RFP? Are you developing this in-house? What data 
elements are you capturing in the XBRL system? And basically, 
what they are trying to--what they are required by law to 
report to you, you are putting in a standardized form so it is 
easier for companies and easier for you to understand and for 
the public to understand?
    Mr. Higgins. Correct.
    Mrs. Maloney. Where does it stand right now?
    Mr. Higgins. That is what is required right now, the 
financial statements are required to be in XBRL. There is a 
separate schedule that needs to be filed in XBRL that has the 
financial statements and the financial statement footnotes 
tagged so that there is--
    Mrs. Maloney. Is it computerized and available now to 
companies and is it available online to members of the public--
    Mr. Higgins. It is.
    Mrs. Maloney. --who want to study it?
    Mr. Higgins. The XBRL data is available to anybody who 
wants to go online. Companies have to file it and all companies 
have--
    Mrs. Maloney. Did you develop it in-house?
    Mr. Higgins. It was before my time. It was several years 
ago. XBRL is a relatively well-known computer technology that--
    Mrs. Maloney. But the standardized form, from what I am 
being told by some companies, seems to be new. They feel that 
this cuts their paperwork and makes it easier for them to file, 
the changes that you have made. Anyway, thank you.
    Chairman Garrett. That was an improvement. Great. Thank 
you. The gentlelady yields back.
    The vice chairman of the subcommittee is recognized for 5 
minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    Again, Mr. Higgins, thank you for appearing before our 
committee and for your testimony.
    As we discussed prior to your testimony, I represent 
Virginia's Fifth District. It is a rural district. We have the 
University of Virginia, which I know you are familiar with, in 
our district.
    Access to capital is an extremely important subject for me 
as a Representative of a district where in some places we have 
unemployment as high as nearly 10%. Job creation is the order 
of the day. That seems to me to be the most important thing 
facing my constituents, and capital formation, obviously, is an 
important part of that.
    Because of the University of Virginia, we have emerging 
growth companies that are coming out of the research that takes 
place there at the University of Virginia. And I am glad that 
Mrs. Maloney mentioned XBRL, because that is something--
constituents that I have talked to who have had to deal with 
that system find it less than satisfactory and have real 
concerns about the cost and ultimately whether or not it 
benefits the investor in any way, shape or form.
    So from the people that I talked to and from my 
constituents, we believe that it is not ready for primetime, 
although hoping that at some point that it will be useful to 
investors but at this point that it is not and so we have 
introduced--so Representative Sewell and I have introduced 
legislation that would exempt emerging growth companies from 
those requirements, certainly until that time that it is a more 
useful program.
    But with that said, I know that the JOBS Act required the 
SEC to study the Reg S-K. You all came back with a report and 
it sounds like Chair White has asked for follow-up. I think 
there was probable--there were some who were disappointed that 
there was not more meat in the original report. It was 
presented, it was based on that.
    My question in terms of the disclosure issue and XBRL was 
very much a part of that regime--I guess my question is as you 
all go forward, looking at corporate disclosure, what are your 
goals and what are the timelines? This is very important 
because I think there is a lot of concern about the pace at 
which these JOBS Act proposals have been implemented. What is 
the goal in your mind of this corporate disclosure project and 
when can we see some results?
    Mr. Higgins. It is hard to predict when we will see 
results. What the Division is doing right now is, as the Chair 
asked, preparing recommendations. We would expect that those 
recommendations would likely take the form of some sort of a 
release that could be exposed to the public because although 
within the Division we know disclosure pretty well, we need to 
hear from companies, investors, market participants as to what 
it is they want, what it is that is burdensome, what it is that 
could be added to. There is a whole host of things on which we 
need public input.
    So we are moving on that. The next step would be to get--
    Mr. Hurt. How would you articulate the goals of--what were 
the goals? And again, if you could--
    Mr. Higgins. Our goal--
    Mr. Hurt. Go ahead.
    Mr. Higgins. --always is to provide investors with material 
information with which they can make voting and investment 
decisions, and to make it as less burdensome on companies as 
possible to provide that information. We know there are 
examples of information that is now required, the historical 
stock price chart. People don't go to the 10-K to get a 
company's stock price, they go on Yahoo Finance or Google or 
something.
    So these are things that could be cut out. There will be 
small steps. There may be bigger steps that can be taken.
    But our goal is effective disclosure. The phrase 
``disclosure overload,'' to the extent that there is more 
disclosure than investors need, we don't think that is right. 
In the process, we may find out that investors are looking for 
more and we have already heard from some investors that they 
think disclosure can be enhanced on issues like short-term 
borrowings. So our goal is to find the balance.
    Mr. Hurt. And I would ask you to also consider that 
obviously these disclosure requirements, in addition to--in 
many instances not providing useful information, efficient 
information to investors, they cost companies a lot of money 
for an emerging growth company. Those dollars could be put into 
research and development as opposed to something that is 
useless to investors and it is not helping them at all. So I 
would ask you to, obviously, consider that as part of your 
goal.
    Thank you, sir.
    Mr. Higgins. Thank you.
    Chairman Garrett. The gentleman yields back.
    Mr. Perlmutter? Welcome to the committee.
    Mr. Perlmutter. Thanks, Mr. Chairman. Good morning.
    Chairman Garrett. Good morning.
    Mr. Perlmutter. I would like to first, if I could, ask 
unanimous consent to make a letter to you and to Congresswoman 
Maloney dated July 23rd from the Council of Institutional 
Investors a part of the record.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Perlmutter. And then I would like to yield the balance 
of my time to Mr. Scott.
    Chairman Garrett. Mr. Scott is recognized.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Let me ask you--I have a couple of points I want to ask 
you. But first, now under Section 953(b), corporate governance, 
the SEC is to come back with the rulemaking regarding 
compensation for top executive pay. And you have an October 
deadline of coming up with that rule, how are you progressing 
with that?
    Mr. Higgins. Well, the 953--
    Mr. Scott. Yes.
    Mr. Higgins. The CEO pay ratio?
    Mr. Scott. Yes, 953(b), the Wall Street Reform Act requires 
the SEC to issue a regulation mandating that companies disclose 
a ratio pay between the CEO and their median employees and we 
trying to get at this--the whole issue now is fairness and 
equality in pay.
    Mr. Higgins. The Commission issued a rule proposal last 
September on which we have received over 128,000 comment 
letters, 950 of which are unique. It is on the regulatory 
rulemaking agenda of the Commission for this fiscal year which, 
as you know, has an October deadline.
    Mr. Scott. Right.
    Mr. Higgins. But that was set back at the time, it is--what 
the Commission thought it could get accomplished in that 
timeframe. There is no strict deadline on that but it is the 
goal that the Chair has indicated. She would like to get a 
final rule done on that this year and we are working to develop 
recommendations for the Commission to make that happen.
    Mr. Scott. Yes. But do you feel right now you will be able 
to meet that deadline or will it be an extension? I know there 
has been some discussion.
    Mr. Higgins. Right. We are working hard on a recommendation 
for the Commission which they could act upon during the course 
of this year, but I can't promise that the Commission--I can't 
speak for the Commission. They set their agenda. I can't speak 
for what their deadline will be on acting on that proposal.
    Mr. Scott. Have you gotten tangible research as to how wide 
this gap is? Do you feel that this disparity is a crucial 
factor in the governance or corporate governance in your role? 
I guess what I am asking is does the SEC feel the sense of this 
wide gap within what top CEOs are making?
    And I don't, at all, deny people for making money. They 
should, certainly. But there is an issue is is this grasp for 
this money way at the top of the corporate structure 
detrimental to this disappearing of the middleclass.
    Mr. Higgins. I am not sure that the Commission has a view 
on that. I think what the Commission has a view on is that 
Congress enacted 953(b), directed the Commission to adopt 
rules. We are working to get those rules done as we are with 
all of the mandated rulemakings that we have been--
    Mr. Scott. And so you are--what I mean is the part of the 
law is there and we can expect the SEC to come forth with that 
rulemaking?
    Mr. Higgins. It is a mandate of Congress and we take it 
seriously.
    Mr. Scott. In my opening remarks, I did touch upon the 
cross border.
    Mr. Higgins. Right.
    Mr. Scott. And I want to rectify my comments on that. My 
understanding is that the--we just passed the bill which is the 
SEC reauthorization that does require you and the SEC to issue 
a joint rule. This is very critical as we move forward because 
it involves an international situation.
    Swaps and derivatives are now a growing part of the world 
economy, $800 trillion of the world economy. So in that light, 
could you just tell me if there have been any discussions going 
forward within the SEC in reaction to House Resolution 1256 
where we incorporated that requirement that you and the CFTC 
come up with a harmonization for cross border and the 
reauthorization?
    Mr. Higgins. The cross-border swap area is not part of what 
the Division of Corporation Finance does--that is trading and--
    Mr. Scott. Yes, I understand that but--
    Mr. Higgins. I would be happy to have someone get back--
    Mr. Scott. Yes.
    Mr. Higgins. --to you on that but it is not anything of 
which I can speak because I simply don't know.
    Mr. Scott. Okay. I would--I just want to clear that up 
because I might have misspoken in thinking that you did qualify 
that but that is a great concern to many of us on both the 
Financial Services Committee and the Agriculture Committee, and 
we haven't heard anything from the SEC--
    Chairman Garrett. So can we follow that up maybe in your 
next round?
    Mr. Scott. Thank you.
    Chairman Garrett. Mr. Royce is now recognized for 5 
minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    Again, as it relates to insider trading as I mentioned in 
my opening, take for example a company that seeks to purchase 
another firm. We call the other firm the target. The company 
enters into a contractual relationship with a hedge fund to 
purchase the shares of the target for the benefit of the 
company before the announcement of the intent to acquire the 
target.
    The company and the hedge fund basically call their 
agreement a joint venture or they call it a partnership. Does 
the existence of the contract somehow make what would otherwise 
be illegal trading by the hedge fund in the target companies' 
stock legal insider trading?
    Mr. Higgins. Congressman, I obviously can't speak to any 
particular situations, but in general, there is--and I would 
also say that it is really the Division of Enforcement that 
handles insider trading but I am familiar with the law in that 
area. There are two rules under the Commission's jurisdiction 
that address insider trading. The first, Rule 10b-5, requires--
in order for someone to be liable for insider trading under 
10b-5 based on Supreme Court precedent, there must be a breach 
of some duty owed by the person trading to the source of the 
information.
    In the instance that you cite, if one company brought 
another company in and said, let's work together, I want to 
take this company over, I will let you in on it, that wouldn't 
be any breach of any duty.
    Mr. Royce. But let me throw in one other factor for your 
consideration before we get to the other caveat.
    Mr. Higgins. Okay.
    Mr. Royce. What if the company had taken steps towards a 
hostile deal before entering into the agreement and the company 
and the hedge fund's interest were not aligned under the terms 
of the agreement?
    Mr. Higgins. Right. Taking substantial steps, the other 
insider trading rule is 14e-3--
    Mr. Royce. Okay.
    Mr. Higgins. --which deals with tender offers and when a 
bidder has taken substantial steps to commence a tender offer, 
anyone who gets material nonpublic information from that bidder 
who trades on it is liable for insider trading irrespective of 
any breach of a duty. So that is how 10b-5 and 14e-3 work 
differently.
    I am not sure I completely understood the--where the one 
person might be working counter to the purposes to--
    Mr. Royce. Why they wouldn't be aligned? In my view, they 
wouldn't be aligned because one party can walk away from the 
transaction at any time. The other party, the hedge fund, 
clearly is now tied in to the agreement, is benefiting from the 
rise in the stock price as a result of the rumor being driven 
of the hostile takeover, right? So these interests are not, in 
fact, aligned. And I am also confused as to how this is any 
different than a couple of buddies out on a golf course--
something we have seen a lot, and something that you have seen 
a lot--exchanging information are not sellers of the target 
shares subject to the same imbalance of information as 
investors in the stock that is victim to a traditional insider 
trading scheme? I would assume the fraud is the same regardless 
of the structure, and does this somehow labeling this buying 
scheme a joint bid insulate it from insider trading charges? 
That is my concern.
    Mr. Higgins. And that is a question that I don't think that 
either the Commission or the courts has answered on whether two 
parties getting together counts on co-bidders and--
    Mr. Royce. And I would also like to know what the SEC's 
process is for examining a novel or a creative deal structure 
and what are the SEC's options to investigate conduct related 
to these types of transactions?
    Mr. Higgins. If a filing comes in to the Division, it would 
come in, typically, to us either through a proxy solicitation 
or a tender offer or a merger, we have criteria that we use to 
screen. If it meets the criteria and we look at it and 
typically hostile deals tend to meet our criteria for 
screening. We would look at it. We would provide comments. We 
would review it against the applicable disclosure requirements 
as well as the anti-fraud provisions of our laws, make comments 
to the participants and work through those, the goal always 
being that investors get clear, accurate material information.
    Mr. Royce. Thank you.
    Thank you, Mr. Chairman.
    Chairman Garrett. I thank the gentleman.
    Mr. Scott is recognized for his second 5--
    Mr. Himes. Thank you, Mr. Chairman. I yield my time. Do you 
want my time?
    Chairman Garrett. No, actually it is--
    Mr. Himes. Okay.
    Chairman Garrett. We are just going down the row. You have 
not had your time, I don't believe or--
    Mr. Himes. Do you want my time?
    Mr. Chairman, I yield my time to Mr. Peters.
    Chairman Garrett. Okay. So, here we go. Mr. Himes is 
recognized, and yields his time to Mr. Peters.
    Mr. Peters, you are recognized.
    Mr. Peters. Thank you, Mr. Himes, and thank you, Mr. 
Chairman, for that. I appreciate it.
    Hi, Director Higgins. It is great to have you here. I would 
like to briefly discuss some legislation that I introduced last 
year and ask you a couple of questions following that, that 
would amend financial disclosures of publicly traded companies. 
As you know, publicly traded companies must disclose certain 
information in registration statements, prospectuses, and other 
periodic mandatory filings including a general description of 
the company's business, a description of the company's 
principal products and services, and a description of the 
company's subsidiaries.
    Companies must also disclose the total number of employees 
that they have and anticipated changes in the number of 
employees working in various corporate departments. While 
corporations must disclose their total number of employees, 
they do not need to disclose where they are based. Elimination 
of 700 jobs in the United States, for example, and the creation 
of 1,000 jobs abroad, in China perhaps, would register only as 
a net gain of 300 jobs.
    I believe responsible investors have a right to know how 
publicly traded corporations are spending their money and 
whether they are hiring and investing in the United States or 
sending earnings overseas, where companies are hiring or laying 
off employees could be determinative, and it could be material 
information, certainly, for potential investors.
    My bill, the Outsourcing Accountability Act, will simply 
add location of employees to the annual SEC disclosure 
requirements. These reports would need to disclose the total 
number of employees in the United States broken out by State as 
well as the total number of employees abroad, broken out by 
country. The SEC would be given the authority to issue 
regulations to implement this measure. And finally, the bill 
would harmonize with the JOBS Act by exempting companies for 
the first 5 years after their IPO to avoid increasing 
compliance burdens on newly public employees.
    So, Mr. Higgins, although I have introduced this 
legislation to require this disclosure, do you believe that the 
SEC currently has the authority to implement those proposals 
through rulemaking and without congressional action?
    Mr. Higgins. Does the Commission have a--I believe the 
Commission would have authority to implement--to adopt a rule 
such as that even absent a congressional mandate.
    Mr. Peters. Okay. Good.
    Do you believe that the disclosing of the physical location 
of employees would impose less of a burden on companies than 
disclosing the median of the annual total compensation of all 
employees of the company and the ratio of that median to the 
annual total compensation of the CEO, which was a rule proposed 
by the Commission just last year as you know?
    Mr. Higgins. I don't really have any sense of--we don't 
have information on what it might cost to do it. Just off the 
top of my head, it seems less burdensome, but without actually 
getting information from participants, from the companies that 
actually have to prepare this information, it would be hard for 
me to speculate.
    Mr. Peters. Obviously, the calculations involved in the 
rule that you did last year are fairly involved, and it would 
certainly be reasonable to think that a company--it would be 
very easy for them to know where they send their paychecks 
every month. That is information that is probably just a push 
of a button away.
    Mr. Higgins. Right.
    Mr. Peters. Is that an accurate statement, sir?
    Mr. Higgins. It seems--that seems right to me. Yes.
    Mr. Peters. Right.
    And given the changes are straightforward and certainly not 
particularly complex, I think given the fact that the company 
certainly should know where they send their paychecks every 
month or however often they pay, do you believe the SEC has the 
capacity to implement this proposal without difficulty?
    Mr. Higgins. If Congress passes a law, and the President 
signs it mandating that the Commission adopt rules, the 
Commission will proceed to do that. What we would do in that 
and as we do with any rulemaking is that we would have our 
economists looking at the cost and benefits of such a rule. We 
put it out for a notice-and-comment rulemaking so that we could 
get public input from companies, from investors, and from other 
market participants as to their views on the rule, and we would 
take that all together in fashioning final rules.
    But I don't see any structural or other impediments to 
adopting a rule such as that just as long as we have enough 
time and ability to attend to it and we have a pretty full 
rulemaking calendar.
    Mr. Peters. Right. I realize that. Thank you, Director 
Higgins. I appreciate that.
    Mr. Chairman, I yield back.
    Chairman Garrett. The gentlemen yields back. Mrs. Wagner is 
recognized for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman.
    I thank Mr. Higgins for being here also.
    In your testimony, sir, you indicated that you all are 
seeking input from a broad range of companies, investors, and 
other market participants. What does the Division plan to do to 
address the 43 remaining recommendations of the SEC's forum on 
small business capital formation?
    Mr. Higgins. We do every year have a government business 
forum on small business capital formation. We get input from 
the participants so they put together recommendations. We, as 
you know, received 43 recommendations this year.
    It was interesting to us that none of them had a high 
priority attached to them. All were either medium or low 
priority. Obviously, the ones that were medium were the ones we 
should be looking at first.
    Of the top 10, I think about 8 or 9 of them dealt 
principally with the existing rulemaking proposals that the 
Commission has already--mostly either a crowdfunding or Reg A 
plus and so with those, we are taking those into account as we 
work through to get a final rule proposal on those rules.
    Mrs. Wagner. In the past, Congress has had, I think, very 
little insight into the SEC's process. And here, I am talking 
really about the process for evaluating the small business 
forums, recommendations. Do you, in fact, have a process and 
would you be willing to work with the committee to make your 
process a little more open or transparent?
    Mr. Higgins. We do have a process. We work with the forum 
and we get their recommendations. We put a report together on 
what the recommendations are and to the extent that we have the 
opportunity to talk to the Commission to see if they want us to 
pursue those, we would--something that we would--
    Mrs. Wagner. As I have said, we would love to be brought 
into the process more. I think it is a little more transparent 
and I am wondering if you are willing to allow us to do that. 
It might help in prioritizing some of the legislation and 
policy we put forward.
    Mr. Higgins. We are happy to work with the committee on any 
matter.
    Mrs. Wagner. Great.
    Mr. Higgins, angel investors such as St. Louis Archangels 
in my district are creating jobs across the Nation with your 
investment in startups. What is the Division doing to make sure 
that any rules under consideration do not hurt angel groups or 
harm the prospects for high potential startups across America?
    Mr. Higgins. We don't single out angel groups as a favored 
group, but we look at how our rules or our proposals affect all 
groups. And angels in particular, what we have attempted to do 
is, we realized that after the general solicitation rules came 
out, there were questions that came up about how that affected 
angel investing, and what we have attempted to do is, we put 
out staff guidance on issues that we think can be helpful--
    Mrs. Wagner. And have you received feedback on your report 
or your guidance that has--
    Mr. Higgins. We have. And I think it has been favorable. I 
spoke last fall at an angel convention here in Washington, D.C. 
I spoke to the group about the things that we were doing, and I 
think we got very positive feedback and--
    Mrs. Wagner. So, again, regarding the JOBS Act, an 
unfortunate oversight left savings and loans out of these 
provisions. To fix these, I introduced the Holding Company 
Registration Threshold Equalization Act of 2013, along with 
Representatives Womack, Himes, and Delaney. It passed the House 
by an overwhelming majority of 417-4. Mr. Higgins, what is the 
SEC doing to fix this issue?
    Mr. Higgins. We are currently working on the 12(g) Title V, 
Title VI rulemakings right now and that is an issue that is 
among the issues that--
    Mrs. Wagner. Any timeframe, sir?
    Mr. Higgins. We are hoping to have a proposal out this year 
but--
    Mrs. Wagner. Okay. Great. Thank you.
    Question, since 2008, the small business capital formation 
forum has recommended that the SEC change its rules to permit 
forward incorporation by reference in registration statements 
on Form S-1 by all companies. The forum said that the current 
rules are an impediment to capital formation and add little or 
nothing to the availability or quality of subsequent public 
information. We have had witnesses come before the committee 
who have crossed the ideological spectrum who have said the 
same thing and that change is long overdue.
    What is the Division doing to remove this unnecessary 
impediment that adds little or nothing to investor protection?
    Mr. Higgins. Right. We don't have any current rulemaking 
project on that right now. If we were to look at the question, 
I think what we would want to look at is forward incorporation 
has historically been available for companies that have had a 
market following for some period of time.
    And so, we would want our economists to take a look at how 
information gets disseminated by companies that don't have as 
big a market following as some others. But it is an issue that 
we do understand.
    Mrs. Wagner. And take very seriously. I have introduced the 
Small Business Freedom to Grow Act which includes this 
recommendation and it passed our committee by a large 
bipartisan vote, so I am hoping it will be coming to your 
attention very soon.
    I thank you, Mr. Chairman, for your indulgence, and I yield 
back.
    Chairman Garrett. I thank the gentlelady.
    And now, the Chair recognizes Mr. Foster for 5 minutes.
    Mr. Foster. Thank you.
    I would like to ask a few questions about the conflict 
mineral disclosure rules. Although Section 1502 requires 
mandating disclosures by publicly traded companies of the 
origins of listed conflict minerals, because of complex 
products and complex supply chains, many private companies that 
supply components to these publicly held companies are also 
effectively covered under the rule.
    In fact, there is a private company in my district that has 
been grappling with the cost associated with conducting due 
diligence as required by this rule, and in correspondence with 
my office, they noted that they had been soliciting mineral 
information from their suppliers, both in the United States and 
the United Kingdom, but they have received very low response 
rates, and this has led them to expend many hours of employee 
time and many resources trying to follow up with the suppliers.
    So I have several questions related to this. First, in 
light of the D.C. Circuit striking down a portion of the rules 
requiring issuers to describe certain products as having been, 
``not found to be conflict-free,'' is there a clear definition 
of what would satisfy the due diligence requirements on the 
Form SD? Should they simply rely on their suppliers and their 
responses as truthful?
    Is there a de minimis level of component value at which 
they can say, okay, we will just take your response to that 
phase value and not have to delve further in?
    Mr. Higgins. The rule does not have a de minimis--
    Mr. Foster. Okay. So that--all the way down--
    Mr. Higgins. --aspect to--
    Mr. Foster. And so, microscopic components in the sub-
assembly have to be documented as being conflict mineral free?
    Mr. Higgins. That is correct. It is the obligation of the 
public company to conduct due diligence under an 
internationally recognized due diligence framework to try to 
assess where that mineral came from.
    Mr. Foster. Do you think that might be a useful addition to 
this?
    Mr. Higgins. I am not sure. What would--
    Mr. Foster. Just say that any component that costs less 
than one penny or is less than a tenth of a percent of the 
total value of what it is that you are supplying to a publicly 
held company, I--
    Mr. Higgins. Congressman, I wasn't at the Commission when 
the conflict mineral rule was being developed and adopted but I 
do know that there was a lot of comment back and forth on the 
de minimis--on whether there should be a de minimis exception 
and the Commission concluded at that time that there would not 
be consistent and that was consistent with what they believed, 
I think, congressional intent to be on that. So, whether that 
is an issue that should be revisited, I don't really have a 
view.
    Mr. Foster. Okay. Yes. And so, that is it.
    And the other thing is at what point do you just take your 
supplier's word for it? You could easily imagine that you got 
in a situation where you go down your suppliers list until you 
find the first one willing to lie and then that is it. What are 
the requirements, for example, for a privately held corporation 
to look behind the scenes on each one of their suppliers?
    Mr. Higgins. Right.
    Mr. Foster. I am calling for some clarity as to what is the 
definition of due diligence. At least, the companies in my 
district that have contacted us on this don't feel that they 
know what the real definition is.
    Mr. Higgins. Right. Well, the rule is new. Obviously, this 
was the first year that it was mandated, and as with any new 
rulemaking, perhaps we will get feedback from suppliers like 
the other one in your district as well as other companies that 
will inform our taking a look at whether something can be done 
to provide better guidance.
    Mr. Foster. And what are the SEC's plans for enforcement 
against companies whose reports are deemed to be incomplete on 
this?
    Mr. Higgins. As with any new rulemaking, what we typically 
do is we will look at the forms, the reports that have been 
filed to determine whether there is any general problem, 
whether companies are generally not getting the rule correct, 
and if that is the case, we typically would issue guidance of 
general applicability. As to the review of individual filings 
if in the course of a company's Sarbanes-Oxley 3-year review, 
if the staff were to determine that the company had a 
materially incomplete filing, it would likely issue a comment.
    Mr. Foster. Right. So you would only be acting against the 
publicly held company and not their private subcontractor?
    Mr. Higgins. Correct. That is the only company which is 
subject to the rule.
    Mr. Foster. Okay. I am in my last 15 seconds.
    Just a quick question that you may have to follow up with 
me on is this issue of the calculating of the ratio of CEO pay 
to median income, a lot of the complexity is just--if 
calculating the exact median salary is in principle a pretty 
complicated and computer-intensive job, you need a list of all 
salaries which may or may not be a big issue, but if there was 
a--if you could get back with some other simplification, for 
example, that you have an answer which was accurate enough to 
10 per cent in the median, if that would be a significant 
simplification, I would be very interested and maybe the 
Congress would take action there.
    Mr. Higgins. We could get back to you on that.
    Chairman Garrett. Thank you.
    Mr. Huizenga is now recognized for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that 
and I actually want to continue to explore a little bit what my 
colleague from Illinois was talking about because I, too, am 
running into manufacturers that are very much struggling with 
what to do and how to handle the conflict minerals part of the 
requirements in Dodd-Frank. And I actually would love to work 
with Mr. Foster and others if we can find some legislative 
resolution to this because, as I think he had mentioned, the 
D.C. Circuit Court of Appeals ruling certainly adds a fog to 
this whole issue.
    And I am curious, in your opinion, do companies need to 
comply with the conflict minerals rule in light of that ruling?
    Mr. Higgins. We think they do. A portion of the rule was 
struck down but a substantial portion of the rule was upheld 
and the Commission's process in adopting the rule was upheld. 
And so, the Commission made the determination that the rule 
which Congress had mandated that we adopt was upheld and we 
needed to go forward with implementing.
    Mr. Huizenga. I, like you, wasn't here when they wrote 
Dodd-Frank. I am just dealing with the echo effects of it and 
this is a rather large echo effect that I think is obviously 
well-intentioned. Nobody wants to see atrocities anywhere and 
this was specifically geared towards the Democratic Republic of 
Congo (DRC).
    Will you all review the guidance and clarify it for these 
companies?
    Mr. Higgins. If there is a way that we can clarify what the 
private suppliers' due diligence obligations are, we would be 
happy to take a look at that. This is the first time that I 
have personally heard of the issue. Again, it is the first year 
of implementation and we will be happy to--
    Mr. Huizenga. And I am concerned, I guess philosophically. 
We are on a little bit of a slippery slope here as well using 
securities laws to battle societal ills here. Even Chair White 
had a couple of ``series of questions'' whether, ``using the 
securities loss and the SEC's powers of mandatory disclosure'' 
to accomplish what many deemed laudable goals such as improving 
mine safety in those kinds of things and the human rights 
atrocities that are there.
    Is it the proper role of the SEC to go in and try to 
correct these things or is that--philosophically, what do you 
think the role is?
    Mr. Higgins. My philosophical answer is it sort of goes 
back to my junior high civics class and that is when Congress 
passes a law, and the President signs it into law and directs 
an agency to adopt the rules, that agency should adopt the 
rule.
    Mr. Huizenga. I got it. Okay. So you are executing your job 
as instructed. I understand that. I guess it is up to us and I 
am--in fact, I have mentioned this to the chairman as well, I 
think it would behoove us on this committee and I am happy to 
be Vice Chair of the Monetary Policy and Trade Subcommittee to 
go see it for ourselves.
    We have had some hearings here with folks from the Congo 
with mixed reports, at best, as to the effectiveness of this 
and as to whether we are actually maybe even causing more harm 
to the localized economy, and I am not talking about the 
warlords and others who may be controlling the area. I am 
talking about the real people who are dependent upon those jobs 
and on the mining that is there.
    I have not quite a minute left, and I know another one of 
my colleagues is talking a little bit about the pay ratio and I 
think that was--the quote was getting at the fairness issue. Do 
you believe that anywhere in this 953(b)--does it fit within 
the SEC's three-part mission of protecting investors, 
maintaining fair, orderly, and efficient markets, and 
facilitating capital information? Is that the job of the SEC?
    Mr. Higgins. That is the mission of the SEC, as many people 
have said here today. I guess I would turn again to 953(b) as 
Congress directed the Commission to implement--
    Mr. Huizenga. I know you were directed to do that but the 
question is, does publishing pay ratios where there is no 
guidance as to whether it is part-time, foreign, or contracted 
out to get the bathrooms clean really going to maintain fair, 
orderly, and efficient markets? Facilitate capital formation? 
Protect investors? I am lost as to how that actually happens?
    Mr. Higgins. I think my personal view on it, I am sorry to 
say, is irrelevant; the mission of the Commission is to follow 
the law.
    Mr. Huizenga. I get it. And you are doing that well, and we 
could keep talking until the chairman notices that I am over my 
time. But I am rather enjoying this.
    I guess I would express to my colleagues that we have a 
role here, and the SEC has a role here, and I am not sure that 
the SEC is executing that.
    So thank you, Mr. Chairman. I appreciate the additional 
time.
    Chairman Garrett. It was such a very important discussion 
that was going on by the gentleman, and I believe both sides 
were being receptive to it, so I wanted to give you the 
latitude there to go on. So, thank you.
    And with those extra seconds in mind, the gentleman from 
California is recognized. We will be looking for equally 
insightful comments to--
    Mr. Sherman. One insight is that the job of the SEC is to 
carry out the statutory mandates that we pass in Congress that 
we impose on the SEC. It is not just their job to protect 
investors. We have assigned them through statute an effort to 
try to diminish the harm done by conflict minerals, for 
example, or to try to illuminate for this country the growing 
gap between CEOs and medium pay.
    If tomorrow we passed a statute that because we conclude 
there is a surplus of green paint in this country, everything 
at the SEC has to be painted with green paint, then that also 
becomes part of their mission. Let's hope we don't have such an 
enormous surplus.
    Speaking of the pay disclosures, when are you going to get 
the job done?
    Mr. Higgins. Right. We have active rulemaking projects on 
all of them. With CEO pay ratio, we have a proposal out. The 
other ones, we are working on--
    Mr. Sherman. When are you going to get it done?
    Mr. Higgins. Unfortunately, I don't control the agenda. The 
Commission has a lot--
    Mr. Sherman. What is your best estimate as to when it will 
be done?
    Mr. Higgins. I just don't really have an estimate. We would 
like to get it done--I would like to get this done--
    Mr. Sherman. You are--
    Mr. Higgins. It is a mandate that we need to get done.
    Mr. Sherman. Will it be done a year from now?
    Mr. Higgins. I can't predict--
    Mr. Sherman. Will it be done 2 years from now?
    Mr. Higgins. I just can't predict.
    Mr. Sherman. Ten years from now?
    Mr. Higgins. I won't be in the job then, but I don't--
    Mr. Sherman. But sitting where you are now is the best 
person to predict whether it will be done 10 years from now. 
Will it be done 10 years from now?
    Mr. Higgins. Yes. I am confident of that.
    Mr. Sherman. Nine?
    Let's see. I have--well, let's focus on the accounting 
issue. Has your Division or the SEC in general looked at the 
economic harm and unfairness of the lease accounting proposal 
pending at the Financial Accounting Standards Board?
    Mr. Higgins. Dealing with the FASB is the role of the 
Commission's Chief Accountant--
    Mr. Sherman. Right.
    Mr. Higgins. And the Chief Accountant doesn't report to me 
but I would be happy to have the Chief Accountant get back to 
you on what they have done on the lease accounting standards.
    Mr. Sherman. Do you have a Chief Accountant?
    Mr. Higgins. He has announced that he is leaving, but we 
still have a Chief Accountant.
    Mr. Sherman. I know. I called over there and he wouldn't 
talk to me, and the reason was that he was packing his bags. So 
your optimism that the Chief Accountant will get back to me on 
that--
    Mr. Higgins. I am sure that someone could get back to you.
    Mr. Sherman. They did. They didn't say anything, but they 
did call back. The box was checked.
    Okay. What happens under the conflict mineral rules if a 
non-public company simply lies when it is a supplier to a 
public company? Are they subject to any criminal penalties or 
anything else?
    Mr. Higgins. Criminal penalties? I don't know the answer to 
that.
    Mr. Sherman. Is there any--assuming you are really good at 
lying, is there any reason for a supplier not to lie and just 
say, no conflict minerals here?
    Mr. Higgins. Well--
    Mr. Sherman. If they do that, what penalties do they face--
    Mr. Higgins. The public--
    Mr. Sherman. --if they are non-public?
    Mr. Higgins. The public company has an obligation to 
conduct a reasonable due diligence and if there are no red 
flags around that, I would assume the public company could--
    Mr. Sherman. So you have to lie--
    Mr. Higgins. --rely on that information.
    Mr. Sherman. So if the supplier is able to lie with the 
effectiveness sufficient to fool the duly diligent, they are 
home free.
    Mr. Higgins. I don't know what the consequences are of a 
private supplier lying to a public company in satisfying its 
diligence obligations. I can look into it, but I just don't 
know the answer off the top of my head.
    Mr. Sherman. Okay. Finally, as to computerized trading, 
they are taking money off the table. They are not performing 
any service to the economy that I can ascertain. We got a flash 
crash, why do--what is the benefit to our society and to our 
markets to not having--to taking any one of several steps that 
would minimize this computerized trading?
    Mr. Higgins. I don't know whether you were here for the 
hearing where Mr. Luparello, who is the head of the Trading and 
Markets Division testified, and whatever answer he gave you 
would be my answer because that is--it is really is in his area 
and not mine. I just don't--our Division doesn't deal with high 
frequency trading.
    Mr. Sherman. I am looking at the SEC chart, and you are one 
of like 30 boxes. So it is hard to know which one of the 30 at 
the SEC's responsibility we are addressing here today, but it 
is nice to know that my part of addressing it is concluded. 
Thank you.
    Chairman Garrett. Indeed. Mr. Mulvaney is now recognized 
for 5 minutes.
    Mr. Mulvaney. Thank you, and I appreciate the questions by 
Mr. Foster from Illinois, and Mr. Huizenga from Michigan, for 
taking that opportunity to remind us all that the SEC is in 
charge of regulating conflict minerals.
    As someone who is still fairly new to the committee, and 
still fairly new to Congress, I hope that still strikes some 
people in addition to myself, that it is just patently absurd 
that the Securities and Exchange Commission is in charge of 
regulating conflict minerals.
    That an entity that is supposed to protect investors, 
maintain fair, orderly, and efficient markets, and facilitate 
capital formation is in charge of making sure stuff doesn't 
come from Congo, a country, by the way, just ironically, that 
also receives taxpayer subsidies from the Export-Import Bank, 
another topic that we will be taking up shortly.
    And for folks who follow the markets and who rightly will 
ask the next time that an investor is damaged or injured that 
markets are not fair, orderly, and efficient, or the capital 
formation has been somehow impaired and they ask a very 
reasonable question, where was the SEC, why weren't they doing 
their job?
    The answer will be, well, they were doing their job, they 
were making sure that we didn't have stuff coming in from 
Congo. And they are doing that job because we told them that is 
their job, and I hope that I am not the only person who thinks 
that is just one of the craziest things I have heard since I 
have been in Congress.
    It is relevant to what I want to talk to about, Mr. 
Higgins, because I have to take the opportunity, if I can, to 
talk about the JOBS Act, to talk about especially crowdfunding. 
It continues to sort of stick in my craw that we have rules on 
conflict minerals. We got those in a very timely fashion but we 
are now 18 months late on some of the crowdfunding rules. The 
Reg A-plus rules are also late and it seems like at least for 
some of us, the priorities are out of whack. Again, I am not 
blaming you, but to have conflict minerals rules before we have 
crowdfunding rules seems to me to be a case of misplaced 
priorities.
    So I am going to ask you about some of the proposed rules 
because the SEC does have some proposed rules floating out 
regarding crowdfunding. And I want to dig down on some of the 
places where I want your opinion, sir, as to whether or not how 
do you think these proposals will affect capital formation; 
specifically it is the rule that if I am going to try and raise 
more than $500,000 through crowdfunding, I have to get an 
audit, have those audited financial statements.
    I used to run a small company. Audit and financial 
statements are very, very expensive. In fact, we were rarely 
audited and we had reviews up on audited financial statements. 
Do you think, sir, that requirement will positively or 
negatively impact the ability of small businesses to access 
capital through crowdfunding?
    Mr. Higgins. It is a question that the Commission has asked 
in the rule proposal. Congress set the $500,000 threshold for 
audited financial statements but gave the Commission the 
ability to change that and raise it up to a million dollars.
    The Commission stopped with the $500,000 in the proposal 
but asked for comment and we received comments from a variety 
of people--some saying, yes, $500,000. Some people want it 
lowered, other people want it raised. So these are comments 
that we are considering as we prepare a final rule proposal.
    Mr. Mulvaney. But I think you would agree with me that it 
would make it less likely that businesses would access 
crowdfunding if they have to go to the additional cost in time 
of having audited financial statements.
    Mr. Higgins. I don't know that, but I do know that audited 
financial statements cost more than reviewed financial 
statements.
    Mr. Mulvaney. Got it. Also, one of the proposals is that 
these businesses follow the generally accepted accounting 
principles (GAAP). Is there a similar impact there to the 
audited financial statements requirements?
    Mr. Higgins. We are getting comment on that as well. I 
guess GAAP is now establishing a private company financial 
statement regime which would be different than GAAP. We are 
getting comment on that. I think our office Chief Accountant is 
helping us think through and analyze that issue. But GAAP is 
pretty well-known, I guess as opposed to what--the cash method 
or income tax or something like that, although at the lower 
levels, I think some of those suffice.
    Mr. Mulvaney. And finally, Mr. Higgins, on the rule--the 
proposed rule regarding only using a single intermediary, is 
that something you all continue to look at as opposed to 
allowing businesses to use multiple intermediaries?
    Mr. Higgins. We are getting comments on both sides of that. 
Some people are saying that a single intermediary focuses the 
protection better. Others think that it might limit the ability 
for companies to be able to raise money.
    Mr. Mulvaney. Thank you. Since we mentioned GAAP, let me 
change gears on you for just a second because we had Chair 
White in May giving a speech explaining that she wanted to use 
international financial reporting standards (IFRS) more 
aggressively in the future, and I wonder if you have an 
opinion, sir, as to whether or not using the IFRS in our 
capital markets might create confusing situations where we sort 
of have two competing systems at the same time, a double GAAP 
so to speak.
    Mr. Higgins. I believe the Chair's position on IFRS is that 
she would like to get a sense of the path forward by the end of 
this year, I think is what she has said publicly. And whether 
it causes confusion currently, foreign issuers are allowed to 
file under IFRS. There is no GAAP reconciliation required.
    I think the Commission is committed to a high quality set 
of global accounting standards. If IFRS turns out to be that, I 
think that would probably be the direction to go. On the other 
hand, there is a lot of debate going on and whether that is the 
right direction, and I think the Commission is trying to sort 
through what the path forward will be for U.S. companies.
    Mr. Mulvaney. Thanks, Mr. Higgins. Thanks, Mr. Chairman.
    Mr. Higgins. Sure.
    Chairman Garrett. Mr. Lynch is recognized for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. I appreciate that. 
Thank you, Mr. Higgins, for helping the committee with this 
work.
    I would like to ask unanimous consent to put in the record 
a statement by the Council of Institutional Investors relative 
to the oversight of the SEC's Division of Corporation Finance.
    Chairman Garrett. I understand that has already been 
entered.
    Mr. Lynch. I'm sorry?
    Chairman Garrett. It has already been entered into the 
record.
    Mr. Lynch. Thank you.
    Chairman Garrett. But with the unanimous consent, we will 
do it a second time.
    Mr. Lynch. Thank you, sir.
    Mr. Higgins, I would like to talk a bit about the well-
known seasoned issuer (WKSI) waivers. As you know, a WKSI 
waiver is something that the Division of Corporation Finance 
controls, the Director controls that.
    And just to clarify, the WKSI label enables a well-known 
seasoned investor to use automatic shelf filing rather than 
going through the whole detailed filing with the SEC; automatic 
shelf registration, I think is what it is called. But what is 
problematic is that the SEC in Congress through regulation and 
through the laws have basically prohibited, in certain 
instances, companies from using that label or designation if 
they have been found guilty of serious felonies or in some 
cases misdemeanors.
    And those measures are intended to protect the investors 
and the markets from bad actors. As I said under the Federal 
securities law and regulation, issuers are automatically 
disqualified by Congress or the SEC from claiming WKSI status 
when they or their subsidiaries among other factors convicted 
of certain felonies or misdemeanors are determined to have 
violated the anti-fraud provisions of the securities law.
    However, in practice, the SEC frequently waives these 
disqualifications allowing issuers to claim the benefit of WKSI 
status. Since 2010, the Commission has granted at least 30 WKSI 
waivers, and I guess not surprisingly, 29 of those waivers went 
to very large financial institutions and broker-dealers.
    In many cases, these issuers are receiving their second, 
third, even fourth WKSI waiver in less than 4 years. As SEC 
Commissioner Kara Stein notes in her recent dissent from the 
SEC's waiver for the Royal Bank of Scotland, some large firms 
have received more than a dozen waivers over the past several 
years.
    One large financial firm alone in a 10-year period received 
22 different waivers from the SEC. So that is problematic. I 
agree with Commissioner Stein's remarks that nearly every 
factor in the Division of Corporation Finance's revised 
statement on well-known seasoned issuer waivers weigh strongly, 
I think especially in the case of a waiver for the Royal Bank 
of Scotland.
    The egregious conduct by the Royal Bank of Scotland was 
part of a widespread scheme undertaken by a number of large 
banks to manipulate the LIBOR rate for their own profit and the 
LIBOR rate is determinant for about $350 trillion in 
derivatives. It basically underpins the entire U.S. derivatives 
market.
    So by manipulating the LIBOR, those banks were manipulating 
the entire U.S. derivatives market. And the manipulation of 
LIBOR by the Royal Bank of Scotland harmed millions of 
Americans, and this was at a time when our Nation was facing 
its worst financial crisis since the Great Depression.
    We didn't get much action here in Congress over this whole 
scandal. I don't know how that happened. But we had very, very 
little attention on this committee with respect to the 
manipulation of the LIBOR rate.
    In such situations, the SEC needs to ensure that the 
American people are protected from egregious conduct by 
financial institutions and the SEC should be penalizing the 
Royal Bank of Scotland for its conduct instead of granting them 
a waiver. And I just want you to persuade me that I am wrong 
here.
    Mr. Higgins. The WKSI status that you refer to, when an 
issuer is convicted of a crime or an anti-fraud violation, it 
automatically disqualifies them from WKSI status.
    The rules that the Commission adopted built in a waiver 
process if for good cause shown the issuer shows good cause why 
the waiver shouldn't apply. The focus of the inquiry is whether 
the conduct for which the issuer has already been punished, I 
mean, it is not a question that--
    Mr. Lynch. How are they punished?
    Mr. Higgins. I think they paid a multibillion dollar--it 
was a significant--no, it was hundred--
    Mr. Lynch. So we can pay out of--
    Mr. Higgins. That is what the Justice Department--
    Mr. Lynch. That is being paid in many cases by the 
investors. So the people who perpetuated this are not getting 
penalized. The investors are getting penalized with the fine 
and that is it?
    Mr. Higgins. The WKSI disqualification was never considered 
by the Commission to be a penalty for the underlying conduct. 
What it was is an automatic disqualification because it called 
into question whether the issuer could produce reliable and 
accurate disclosure. It might. If the issuer could show with 
good cause that it didn't affect that and that conduct was 
unrelated to their disclosure--
    Mr. Lynch. But you have one company here 22 times. At one 
point, I know you are going to say it is annecdotal, but at 
some point, it becomes a pattern and practice.
    Chairman Garrett. And with that--
    Mr. Lynch. Thanks for your indulgence, Mr. Chairman.
    And thank you, Mr. Higgins.
    Mr. Higgins. Thanks.
    Chairman Garrett. Mr. Stivers is recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. Thank you for being 
here, Mr. Higgins.
    I was just looking at some speeches by some of the members 
of the SEC and in October of 2013, Chair White essentially 
talked about how increasing the disclosure regime can lead to 
information overload.
    I looked at another speech that Commissioner Gallagher gave 
in July of 2013 that talked about when you require too much 
disclosure, it really is becoming a regulatory creep and 
doesn't provide real value to investors. And then a speech by 
Commissioner Piwowar in January of 2014 where he again 
expressed concerns about the continual growing disclosures and 
how it leads to information overload.
    And then I looked at the speech you made in February maybe, 
or April that says, and I will quote a little bit of it, 
``While it may be called disclosure overload or cutting the 
clutter, losing the excess baggage, we can all probably agree 
on the need to reduce the material disclosures.''
    However, essentially you say that one person's meat is 
another person's fat. I guess my first question is, you do work 
for the Commissioners, right?
    Mr. Higgins. I do.
    Mr. Stivers. Okay. So you do share their belief that there 
could be some information overload in the disclosure or not?
    Mr. Higgins. I believe that there could be disclosures that 
investors don't find useful and the companies find burdensome. 
I also believe that it could go the other way. There could be 
information that isn't there that investors would find useful 
and companies may find burdensome. And the job of the 
Commission is to balance that.
    Mr. Stivers. Right. And so my next question is, what are 
you doing about it?
    Mr. Higgins. Right.
    Mr. Stivers. How are you reaching out to figure out what 
disclosures are overly burdensome to companies and not useful 
to investors? And even to find information that would be useful 
to investors that is not included in disclosures, although if 
everybody is talking about disclosure overload and mission 
creep, my guess is there is a lot more that you might be 
requiring today that is not useful to investors as opposed to 
stepping this up. But what are you doing about it? How are you 
fixing that problem and seeking information?
    Mr. Higgins. Right. We have reached out to a lot of--first 
of all, people can send an email to [email protected]. They 
can send in their recommendations, their comments, and their 
thoughts about how we can get better, more effective 
disclosure.
    We have gone out, and we have met with interested groups of 
investors and companies. I spent some time at a large mutual 
fund complex speaking with portfolio managers and equity 
analysts about information that they find to be useful.
    And it is eye-opening, really these folks at big financial 
institutions want more information. They would like to see 
companies--
    Mr. Stivers. And big institutions have a lot of means to 
get their own information. Your job isn't to work for big 
financial institutions. Your job is to protect the investors. 
And so, is it your job to substitute for their own due 
diligence?
    Mr. Higgins. Not at all. Our job is to make sure that 
investors have the accurate material information necessary to 
make voting and investment decisions and that is the input we 
are seeking.
    Mr. Stivers. Great. Keep seeking comment and information 
and then act. Because I do find the SEC seeks information a 
lot, sometimes acting slowly, and I share that frustration 
with--and I know you are a Commission, it is not like there is 
one person directing you, I get it. There is a variety of 
opinion but I just read three of the five Commissioners who 
have a fairly similar position.
    But keep seeking information but then at some point, please 
act. I am running out of time. I do want to ask you about every 
year you get recommendations on capital formation from your 
small business capital formation commission. Tell me, how many 
of those have you acted on?
    Mr. Higgins. Right. If you are referring to the small 
business--the government small business forum.
    Mr. Stivers. Yes, the small business forum. So have you 
acted on any of their recommendations?
    Mr. Higgins. We have acted on recommendations.
    Mr. Stivers. Do you have any idea how many? Do you know the 
percentage?
    Mr. Higgins. I don't, but I can--
    Mr. Stivers. You have to get back to me on that because--
    Mr. Higgins. And a lot of those recommendations became part 
of the JOBS act and--
    Mr. Stivers. Right. And do you know why it became part of 
the JOBS act? Because the SEC didn't act on them. So, that is 
my push here and I have 8 seconds left. But, you have a great 
advisory council of small business people who are telling you 
the things they need and the burdensome things that are 
weighing on them. Please, listen to them. That is my plea to 
you.
    Mr. Higgins. Right. Thank you.
    Mr. Stivers. I yield back, Mr. Chairman.
    [The SEC's written response to the above question can be 
found on page 52 of the appendix.]
    Chairman Garrett. The gentleman yields back. Mr. Carney is 
recognized for 5 minutes.
    Mr. Carney. Thank you very much, Mr. Chairman, for having 
this hearing. And thank you, Mr. Higgins, for coming in and 
helping us do our important business.
    Yesterday, we had a hearing before the full Financial 
Services Committee with a great panel which included our former 
chairman and ranking member, Barney Frank. And we had a lengthy 
discussion about risk retention and mortgage lending 
securitization and mortgage lending under Section 941 of Dodd-
Frank where there was a requirement at the SEC, along with the 
banking regulators, with HUD and with the FHFA-prescribed rules 
about risk retention, not less than 5 per cent of an economic 
interest in a material portion of that credit risk for any 
asset that a bank might transfer.
    And, of course, you came out with a rule, the agency came 
out with a proposed rule in March of 2011, and then a 
reproposal in August of 2013. And the issue that former 
Chairman Frank complained about was the fact that the original 
statute that he described, and I have his testimony here, said 
that there are three categories of mortgages: those that fell 
below QM standards which were subject to certain legal 
constraints; QM mortgages which were the minimum standards; and 
then QRM which were the super good quality mortgages.
    And that in the reproposed rule that the Commission--the 
agencies I should say came out basically where QM and QRM were 
essentially the same. Thereby, according to former Chairman 
Frank, taking out the risk retention provision because some of 
those QRM mortgages are not subject to that.
    What was the thinking from the SEC's perspective of that 
reproposed vis-a-vis risk retention in the mortgage lending 
space?
    Mr. Higgins. The reproposed rule proposed that QRM equal QM 
as the preferred approach but also offered an alternative 
approach which added additional features to QM in order to get 
to QRM, seeking comment recognizing that it was an issue of 
substantial concern.
    Mr. Carney. How would you respond to former Financial 
Services Committee Chairman Frank's objection that the clear 
statutory intent was to have three categories, if you will: the 
non-QM lower standard; the QM minimum standard; and the QRM 
super quality standard? And therefore, is QRM subject to 
certain exceptions under the Act or under the regulation?
    Mr. Higgins. That is a view that has been expressed not 
only by former Chairman Frank but by many commenters who have 
written in on the joint agency rule proposals. We are working 
through those comments. Joint agency rulemaking is an 
interesting process.
    Mr. Carney. Difficult, for sure.
    Mr. Higgins. Because they are different agencies with 
different missions. The Fed's mission is different than HUD's 
mission, which is different than the SEC's mission, and so on.
    Mr. Carney. We will see what happens from there based on 
public comment.
    And lastly, in my last minute-and-a-half, my friend and 
colleague Mr. Fincher and I worked in the last Congress on the 
IPO On-Ramp. It may be familiar but it was part of the JOBS 
act. It didn't require any rulemaking I don't think, a minimum 
maybe.
    I wonder if you could comment on the successor or what you 
have heard about some of the On-Ramp provisions. But the one I 
am most interested in is the quiet period, if you will, prior 
to an emerging growth company deciding whether to go public or 
not.
    They are able to issue reports to potential investors to 
gauge interest confidentially publicly and whether or not--what 
I have heard from companies is that it is very helpful because 
they don't have--
    Mr. Higgins. Testing the water--this is the testing the 
waters provision?
    Mr. Carney. Right. That is correct.
    Mr. Higgins. Okay. Yes. This was an area that I practiced 
in. I was in private practice for 30 years prior to coming to 
the Commission.
    Mr. Carney. Great. So you are the perfect person.
    Mr. Higgins. So, I did lot of IPOs. Before the JOBS Act or 
right after the JOBS Act came in. But testing the waters 
started off, right, we understand people were a little skittish 
about it. I think part of it was that investors only have so 
much time and they wanted to deal with deals that were real 
deals, not works in progress.
    However, we have heard anecdotally that the process is 
being used in a lot of deals. Initially, it was used in the 
biotech industries but I think now it is across-the-board. And 
we haven't seen any problems with it and to the extent it is 
helpful, we think that is great.
    Mr. Carney. And in my remaining 15 seconds, any other 
feedback with respect to IPO On-Ramp?
    Mr. Higgins. The confidential filing process has worked 
very well.
    Mr. Carney. Right.
    Mr. Higgins. Companies like it, and it has worked well for 
us--things are working well.
    Mr. Carney. Great. Thanks very much. Keep up the good work.
    Chairman Garrett. Thank you. The gentleman yields back. Mr. 
Hultgren is now recognized for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. I do want to thank 
Director Higgins for being here.
    First, I would like to focus on the lineup questions that 
Representative Lynch brought up, and I wonder if you can help 
me understand this a little bit more. Director Higgins, as you 
know, in 2005 the SEC undertook securities offering reforms 
which among other things created a new category of issuers 
known as the well-known seasoned issuer or WKSI.
    The main purpose of creating of WKSI was to enhance 
flexibility in accessing capital markets. As I understand that, 
there are certain instances, however, where issuers that would 
otherwise be considered WKSI can become ineligible and request 
that the Commission review their applications to grant a waiver 
so that the entity can once again gain WKSI status. Is this 
correct?
    Mr. Higgins. Correct.
    Mr. Hultgren. Once the request is made for a waiver, does 
the Commission just rubberstamp an approval on the request and 
call it a day?
    Mr. Higgins. Not at all.
    Mr. Hultgren. Conversely, does the Commission just 
categorically deny all waiver requests?
    Mr. Higgins. The Commission doesn't--typically, they come 
in to the Division of Corporation Finance. We have been 
delegated authority from the Commission to act on the waivers.
    And they come in, we talk informally with companies. 
Companies that we talk to informally that we don't believe 
would qualify for a waiver because they haven't shown good 
cause, they may not even come in and make a request.
    Mr. Hultgren. So it sounds to me like there is a process in 
place through which the Commission can consider on a case-by-
case basis whether to approve or deny a waiver request. I 
wonder if you could walk through in a little more detail what 
that process is once the waiver request is received by you and 
your staff. What considerations do you give that request?
    Mr. Higgins. What typically happens is there is a phone 
call first that comes in. Our Office of Enforcement Liaison 
speaks with the company about the particular facts and 
circumstances. And to understand better whether it is totally 
out of the question that they would get a waiver or whether 
they would present a plausible case.
    If they think it is worth presenting a case, the company 
would submit a letter where they would focus on the factors 
that we lay out in our public guidance when we will grant WKSI 
waivers and they will put their case forward. At that point, we 
will go back and forth on the letter with them, ask them 
questions about it.
    And if we are satisfied that they have made the case, we 
would recommend granting a waiver. The Commission can always 
decide to take the authority--to decide it on its own and a 
case where they have done that, the Royal Bank of Scotland is a 
good example. But we do have delegated authority, and we would 
grant the waiver if we believe they met the applicable 
standard.
    Mr. Hultgren. Thank you. So it sounds like it is a 
thoughtful process and not something--to me it seems it was 
being characterized to something different because I hear more 
sounds like it is a process that does work.
    Switching gears a little bit, the SEC has had an important 
three-part core mission: to protect the investors; to maintain 
fair, orderly, and efficient markets; and to facilitate capital 
formation. Certainly, a key component of this mission is 
ensuring that investors can access a wide variety of 
transparent investment options.
    I would like to talk about the SEC's definition of 
accredited investor. This determines which investors, those 
deemed sophisticated, have access to a wider variety of 
investment options. Unfortunately, I think this definition has 
not been significantly updated since it was first promulgated 
back in 1982.
    While this issue may be decided in Washington, it has a 
very significant impact on Main Street. A newer definition of 
accredited investor will not only hurt potential investors in 
my district but it will also cut off small businesses in my 
district for much needed potential sources of capital.
    Thankfully, the SEC is reviewing the definition of 
accredited investor, and I am hopeful it will take the 
opportunity to expand this definition. While I am thankful that 
the SEC takes its mission to protect investors very seriously, 
I am also hopeful that it will recognize that today's investor 
has access to a wider variety of information that was not even 
available 10 years ago.
    So my question, Director Higgins, is as follows: Linking 
the definition of accredited investor purely to income network 
is an antiquated and counterproductive measurement. As you may 
be aware, the United Kingdom recently added two additional ways 
that maybe an accredited investor, whereby a person who does 
not meet the income network requirements, will take a test or 
show through education or advanced degree that they would be 
able to assume the risk involved in investing a non-public 
securities.
    I wonder, is the Division considering an educational 
component as you begin to update the definition of an 
accredited investor?
    Mr. Higgins. We are, as part of our review of the 
accredited investor definition.
    Mr. Hultgren. So you are looking at that; you expect there 
will be some changes there?
    Mr. Higgins. It is up to the Commission to make changes, 
but we are definitely looking at it and it will be part of our 
discussion that will be part of our report.
    Mr. Hultgren. Good. And there is an understanding or 
recognition of how this does impact Main Street and our 
constituents as well, and how very different access information 
is now than it has ever been before?
    Mr. Higgins. Again, we will get comments, I am sure, on 
both sides of the issue, but we do understand the importance.
    Mr. Hultgren. Again, thank you for being here. My time has 
expired. I yield back.
    Chairman Garrett. Thanks. The gentleman yields back.
    Mr. Fincher is now recognized.
    Mr. Fincher. Thank you.
    Chairman Garrett. The gentleman will have the last word.
    Mr. Fincher. Thank you, Mr. Chairman. I appreciate the 
willingness of the chairman to allow me to participate in 
today's hearing.
    Just a couple of questions to wrap up--I am going to echo 
what my good friend, Mr. Carney talked about. He and I did have 
in the JOBS Act the last time, the On-Ramp Provision in that 
bill. JOBS, J-O-B-S, which is what is super important in 
getting the economy running again, people working, that is how 
we produce revenue in this country.
    And just a few minutes ago, my good friend, I am glad he 
brought up Ex-Im Bank that is a key part of the process and 
reforming it, making it more transparent accountable and it is 
all about jobs in our districts is what is important.
    But back to specific questions, former SEC Chairman 
Schapiro attempted to water down the JOBS Act that was passed 
in the House in 2012, and the President ultimately signed into 
law. I hear many SEC staffers do not like the JOBS Act possibly 
because it was not invented at the SEC.
    And because Congress had to act to help small companies and 
entrepreneurs access the capital markets more effectively, do 
you believe that the SEC should exhibit the same zeal, 
sustained effort, and enthusiasm when implementing the JOBS Act 
that it has done with Dodd-Frank?
    Mr. Higgins. I think that we should implement it faithfully 
in accordance with our mission. Absolutely.
    Mr. Fincher. Do you feel that some staffers have taken the 
opinion that they really turn the cold shoulder to the JOBS 
Act?
    Mr. Higgins. None have expressed it to me, Congressman.
    Mr. Fincher. Okay. And then lastly, what is the SEC's 
capital formation agenda outside of the JOBS Act? Are there 
specific rule changes the SEC is considering that would be 
helpful to small companies looking to raise capital and that 
would distinguish them from larger companies?
    Mr. Higgins. As we are often reminded, we still have some 
wood to chop on the JOBS Act front. We are focused on getting 
that done. Our Office on Small Business Policy in the Division 
is open for business. We answer more than a thousand requests 
each year from small businesses and other market participants 
who are interested in small business capital raising.
    So we are available to try to provide guidance on the rules 
that have already been adopted so that people can have some 
certainty in how they are applied and make it easier and more 
cost-effective to do. So, the Division is committed to this 
small business capital formation.
    Mr. Fincher. With that, I yield back, Mr. Chairman. Thank 
you again for your patience.
    Chairman Garrett. It was well worth the wait. I think 
everyone would agree with that. No one is commenting.
    Seriously though, Mr. Higgins, we do appreciate your time 
and your work at the Commission.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witness and to place his responses in the record. Also, 
without objection, Members will have 5 legislative days to 
submit extraneous materials to the Chair for inclusion in the 
record.
    And with that, there being no further business before the 
subcommittee, I thank you once again, and this hearing is now 
adjourned. Thank you.
    [Whereupon, at 11:59 a.m., the hearing was adjourned.]
    
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