[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]




                        LEGISLATIVE PROPOSALS TO

                     ENHANCE CAPITAL FORMATION AND

                       REDUCE REGULATORY BURDENS

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 29, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-18


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas

                     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
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              STEPHEN F. LYNCH, Massachusetts
PATRICK T. McHENRY, North Carolina   ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan              DAVID SCOTT, Georgia
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
STEPHEN LEE FINCHER, Tennessee       BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida              JOHN C. CARNEY, Jr., Delaware
ANN WAGNER, Missouri                 TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 29, 2015...............................................     1
Appendix:
    April 29, 2015...............................................    39

                               WITNESSES
                       Wednesday, April 29, 2015

Deas, Thomas C., Jr., Vice President and Treasurer, FMC 
  Corporation, on behalf of the Coalition for Derivatives End-
  Users..........................................................     3
Gabaldon, Theresa A., Lyle T. Alverson Professor of Law, the 
  George Washington University Law School........................     5
Hughes, Gayle G., Partner & Founder, Merion Investment Partners, 
  on behalf of the Small Business Investor Alliance (SBIA).......     7
Kovacs, Shane, Executive Vice President and Chief Financial 
  Officer, PTC Therapeutics, Inc., on behalf of the Biotechnology 
  Industry Organization (BIO)....................................     8
Quaadman, Thomas, Vice President, Center for Capital Markets 
  Competitiveness, U.S. Chamber of Commerce......................    10

                                APPENDIX

Prepared statements:
    Luetkemeyer, Hon. Blaine.....................................    40
    Deas, Thomas C., Jr..........................................    42
    Gabaldon, Theresa A..........................................    47
    Hughes, Gayle G..............................................    62
    Kovacs, Shane................................................    83
    Quaadman, Thomas.............................................    92

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Letter from the American Bankers Association.................   104
    Letter from Americans for Financial Reform...................   105
    Letter from The Depository Trust & Clearing Corporation......   109
    Letter from the Food Marketing Institute.....................   113
    Summary and No-action Letter from Warner Norcross & Judd.....   115
    Letter from the Independent Community Bankers of America.....   121
    Letters to Chairman Hensarling from Hon. Darrell Issa, a 
      Representative in Congress from the State of California....   122
    Letter from the M&A Source...................................   127
    Written statement of the North American Securities 
      Administrators Association, Inc............................   130
    Written statement of XBRL US.................................   140
Huizenga, Hon. Bill:
    Letter from the Association for Corporate Growth.............   148
    Letter from the Alliance of Merger and Acquisition Advisors..   150
    Letter from the Business Brokers of Florida..................   157
    Letter from the International Business Brokers Association, 
      Inc........................................................   158
    Letter from the Nevada Business Brokers......................   162
    Letter from the Small Business & Entrepreneurship Council....   164
Hultgren, Hon. Randy:
    Written statement of John C. Partigan........................   165



 
                        LEGISLATIVE PROPOSALS TO
                     ENHANCE CAPITAL FORMATION AND
                       REDUCE REGULATORY BURDENS

                              ----------                              


                       Wednesday, April 29, 2015

             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 2:28 p.m., in 
room HVC-210, Capitol Visitor Center, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, King, 
Neugebauer, McHenry, Huizenga, Duffy, Fincher, Hultgren, Ross, 
Wagner, Messer, Schweikert, Poliquin, Hill; Maloney, Hinojosa, 
Scott, Himes, Ellison, Foster, Carney, Sewell, and Murphy.
    Ex officio present: Representative Waters.
    Also present: Representative Moore.
    Chairman Garrett. Good afternoon, and welcome. The 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises is hereby called to order.
    Today's hearing is entitled, ``Legislative Proposals to 
Enhance Capital Formation and Reduce Regulatory Burdens.'' I 
thank the members of the subcommittee for being here, and I 
thank the witnesses on the panel, as well. Forgive me if my 
voice is a little bit off today. I am either suffering from a 
little head cold or some allergies.
    Again, thanks to the panel. We will begin as we do 
normally. I know most of the panel is new to the testifying 
process. Some of them are not so new, and have been around here 
before. So, we will begin with opening statements, and I will 
yield myself 3 minutes.
    Since 2011, this subcommittee has held almost a dozen of 
these hearings, basically to explore ways to do what? To 
facilitate capital formation, and make the U.S. capital markets 
more attractive to companies, and to try to increase investment 
opportunities for all investors. Most notably, this 
subcommittee led the charge, if you will, to implement one of 
the most meaningful updates to our securities laws in recent 
history, in recent memory, and that was the Jobs Act, Jobs 1.0. 
And we are seeing the positive impacts of the Jobs Act as more 
and more smaller companies are accessing the capital markets 
and they are doing so at a lower cost. But I think most agree 
that more needs to be done.
    Therefore, it is incumbent upon this committee and this 
Congress to provide sensible improvements to our securities 
laws to help small companies and startups access the capital 
markets and access capital they need to create jobs and to 
grow.
    The United States has the most fair, most efficient, and 
deepest capital markets in the world. And the primary function 
of the capital markets that we have is to do what? It is like I 
say, it is to help facilitate the appropriate flow of capital 
from investors to companies which need those funds to create 
jobs, to grow the companies, to grow the economy, and for 
prosperity in America.
    So today, America's startups and small businesses continue 
to encounter difficulty, unfortunately, accessing the U.S. 
capital markets to finance operations. Moreover, the costs of 
these companies of going and staying public remain unacceptably 
high. So this afternoon, the subcommittee continues its capital 
formation agenda by considering a dozen bills. And I want to 
thank all of the cosponsors of the legislation that will be 
coming before this subcommittee.
    During the 113th Congress, this committee and the House 
considered many of the bills that are before us today. We 
approved them, and we approved them overwhelmingly with large, 
in some cases unanimous, votes, which is a great thing. One of 
those bills is H.R. 1525, the Disclosure Modernization and 
Simplification Act, my bill.
    This legislation is one that I introduced. I was pleased 
that this legislation was able to pass by this committee on a 
59-0 vote, and by the House with a voice vote last year. And 
what would that bill do? It would direct the SEC to tailor 
regulations, S-K disclosure rules, as they apply to emerging 
growth companies and smaller issuers to eliminate other 
duplicate, outdated, and unnecessary rules and regulations.
    Now, although these bills that we are talking about are 
modest, they are not insignificant to our fellow citizens back 
home or to the entrepreneur or small company that our fellow 
citizen depends upon in order to get his job. So in all of 
this, it is important to remember that capital formation and 
investment protection is not an either/or proposition.
    When investors have additional investment options to earn a 
return and they invest their money, that additional choice is a 
significant protection.
    So, I want to thank again--where I began--all of the 
witnesses for their appearance at this hearing and also for 
their very relevant and helpful written testimony that they 
have all submitted. And I look forward to advancing all of the 
bills under discussion at the committee markup, and then to the 
full House at the earliest opportunity so we can move things 
along. And with that, I yield 2 minutes to the vice chairman of 
the subcommittee, Mr. Hurt.
    Mr. Hurt. Thank you, Mr. Chairman. Thank you for holding 
today's hearing, and I am pleased that this subcommittee is 
moving forward with ideas to increase access to capital for our 
small businesses and startups.
    At a time when unemployment remains high, and my 
constituents are struggling to find employment, it is incumbent 
upon us to do everything we can to reduce the regulatory burden 
on such entities that are so vital to job creation in 
Virginia's 5th District and across this great Nation.
    The bipartisan Jobs Act was one successful example of 
identifying and remedying regulatory burdens that restrict 
economic growth, and we need to build upon that success. We 
must do more to remove or refine costly regulations, 
particularly those that are disproportionately affecting 
smaller public companies who are considering accessing capital 
in the public markets.
    While a single regulation may seem insignificant, the 
combined effects of our regulatory regime can be 
insurmountable. One such requirement is the eXtensible Business 
Reporting Language, or XBRL, which was mandated by the SEC in 
2009. While the SEC's rule is well-intended, this requirement 
has become another example of a regulation where the costs 
outweigh the potential benefits.
    I put forth a proposal that would offer small companies 
relief from the burdens of XBRL: H.R. 1965, the Small Company 
Disclosure Simplification Act, provides a voluntary exemption 
for all emerging growth companies (EGCs) and other small public 
companies from the SEC's requirements to file their financial 
statements via XBRL.
    I believe this proposal is a measured step forward, and 
during the 113th Congress identical legislation was passed by 
this committee by a bipartisan vote of 51-5. I look forward to 
the testimony of our distinguished witnesses and thank them for 
their appearance before the subcommittee today.
    I thank you, Mr. Chairman, and I yield back the balance of 
my time.
    Chairman Garrett. The gentleman yields back. I don't 
believe there are any other opening statements, so at this 
point we will turn to our panel.
    And just as a refresher for our new panelists, your entire 
written statement will be made a part of the record, and you 
will be recognized now for 5 minutes for a summary of your 
testimony.
    We will begin with Mr. Deas, vice president and treasurer 
of FMC Corporation. Welcome to the panel, and thank you.
    You are recognized for 5 minutes.

STATEMENT OF THOMAS C. DEAS, JR., VICE PRESIDENT AND TREASURER, 
  FMC CORPORATION, ON BEHALF OF THE COALITION FOR DERIVATIVES 
                           END-USERS

    Mr. Deas. Thank you, Mr. Chairman, and thanks to the 
members of this subcommittee. I am Tom Deas, vice president and 
treasurer of FMC Corporation, and immediate past chairman of 
the National Association of Corporate Treasurers (NACT). FMC 
and NACT are members of the Coalition for Derivatives End-
Users, representing hundreds of companies across the country 
that employ derivatives to manage day-to-day business risk.
    First, let me sincerely thank you, Mr. Chairman, and the 
ranking member, and also the members of the subcommittee for 
doing so much to protect derivatives end-users from the burdens 
of unnecessary regulation. When it comes to the needs of Main 
Street companies, the members of this committee have worked 
together to get things done. You drove the end-user margin bill 
to enactment and have led the charge on the centralized 
Treasury unit bill sponsored by Representatives Moore and 
Stivers.
    As you oversee the implementation of the Dodd-Frank Act, I 
want to assure you that in my experience, end-users comprising 
less than 10 percent of the derivatives market do not engage in 
the kind of risky, speculative derivatives trading activity 
that became evident during the financial crisis.
    We use derivatives to hedge risks in our day-to-day 
business activities. We are offsetting risks, not creating new 
ones. FMC Corporation has been a proud American innovator since 
our founding some 130 years ago. This is our 84th year of 
listing on the New York Stock Exchange (NYSE).
    When we first listed in 1931, the NYSE was the largest pool 
of capital available to us to grow our business. Today, the 
over-the-counter derivatives market represents an additional 
and even larger pool of funds available to us, and is a 
flexible and cheap way to hedge everyday business risk such as 
changes in foreign exchange rates, interest rates, and also 
global energy and commodity prices.
    We support the transparency in the derivatives market that 
the Dodd-Frank Act attempts to achieve. We also believe it is 
sound policy and consistent with the law to exempt end-users 
from provisions intended to reduce the inherent riskiness of 
swap dealers activities.
    However, at this point--4\1/2\ years after passage of the 
Act--there are several areas where regulatory uncertainty 
compels end-users to appeal for legislative relief.
    First, centralized Treasury units. The Coalition recognizes 
the efforts of the Commodity Futures Trading Commission (CFTC) 
to provide relief on centralized Treasury units, but their 
actions have not addressed the fundamental concern that 
companies must operate at all times in strict compliance with 
the law.
    End user treasurers have long used widely accepted risk 
reduction techniques to net exposures within our corporate 
group so that we can reduce derivatives outstanding with banks. 
However, the internal centralized Treasury units we use have 
been viewed as financial entities subject to mandatory clearing 
and margining even though they are acting on behalf of non-
financial end-user companies otherwise eligible for relief from 
these burdens.
    The Coalition strongly supports H.R. 1317, which would 
clarify that certain swaps with CTUs of non-financial end-users 
are eligible for the end-user exception for mandatory clearing 
and the requirement to post margin for their derivatives 
positions.
    With your help, however, we could successfully navigate the 
complex regulatory issues I have described today, only to find 
that the uncleared over-the-counter derivatives we use have 
become too costly because of much higher capital requirements 
imposed on our banks.
    U.S. bank regulators are implementing significantly 
increased capital requirements on all derivatives. However, 
European regulators have concluded that end-users hedging 
activities are risk-reducing and should attract less capital 
than swap dealers trades. They have exempted non-financial end-
users from these additional capital requirements. This could 
put FMC and other American companies at an economic 
disadvantage relative to our European counterparts.
    Although I have focused here on two main issues, end-users 
are concerned about the web of, at times, conflicting rules 
from U.S. as well as foreign regulators that will determine 
whether we can continue to manage business risk through 
derivatives.
    Our fear is that cross-border regulatory uncertainty could 
conflict, and put FMC and other American companies at an 
economic disadvantage. End user exemptions for margining and 
clearing we thought would apply are still uncertain as they 
affect our risk-reducing centralized Treasury units, 
confronting us with potentially competitive burdens that could 
limit growth and, ultimately, hamper our ability to grow and 
create jobs.
    Thank you for your attention, Mr. Chairman.
    [The prepared statement of Mr. Deas can be found on page 42 
of the appendix.]
    Chairman Garrett. I thank you for your testimony.
    Professor Gabaldon from George Washington University Law 
School, welcome to the panel. You are recognized for 5 minutes.

STATEMENT OF THERESA A. GABALDON, LYLE T. ALVERSON PROFESSOR OF 
        LAW, THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL

    Ms. Gabaldon. I do thank Chairman Garrett, Ranking Member 
Maloney, and the other members of the subcommittee for inviting 
me. I am Theresa Gabaldon from George Washington University. I 
have comments on eight of the proposed bills. I have a few 
general remarks before addressing specific bills, as time 
allows.
    First, although the bills can be broadly characterized as 
deregulatory, deregulation that is not well-thought-out does 
not assist capital formation. I believe the bills generally 
were prepared without appropriate regard to the opportunities 
for abuse, and without regard to the way the proposals would 
interact with other recent deregulations.
    The proposed rules, in the wrong hands, essentially could 
render registration under one or both of the 1933 and 1934 Acts 
optional. I also am concerned that some of the proposals don't 
work coherently together, pushing for modernization on one hand 
and fighting it on another. Overall, the proposed changes would 
adversely affect the quality and availability of the 
information investors need.
    I will move on to the specifics of the bills, in view of 
the time, starting with the ones I believe are most flawed and 
create the most opportunity for mischief.
    First, with respect to the M&A Brokers bill, I will align 
myself with Oliver Wendell Holmes and say that to know what a 
law is you must look at it as a bad man--updating to include a 
bad woman. As this bill is drafted, it literally would permit 
someone banned from the securities industry to publicly offer 
the securities of shell companies to what could be hundreds of 
people who will, in 1 year, be permitted to resell the 
securities without any limit whatsoever. I don't suppose that 
is what is intended, but that is how it could and, in my 
opinion, would operate if allowed to pass in exactly its 
current form. Some of the defects can be remedied with bad-
actor provisions, exclusion of the involvement of most shell 
companies, and limiting public offering activity.
    The SEC's M&A no-action letter of early 2014 outlines 
necessary conditions that would be improvements. And that 
letter also makes this legislation unnecessary. Even if 
improved, what you are left with is a bill to allow unlicensed 
and federally unregulated brokers to compete with those who are 
willing to submit to inspection and other controls.
    The argument for deregulation supposes that this will bring 
down M&A costs for smaller companies. I have a few responses to 
that. One, the cutoffs for eligible privately held companies 
who supposedly need cut rate service are extremely high. This 
relates to a concern that the provision, even if improved, has 
the potential for exploitation by large private equity firms 
who already are pressing the envelope as far as avoiding 
registration is concerned. I don't doubt their ingenuity in 
structuring transactions that could capitalize on this 
exemption.
    Two, the resales to accredited investors, or Section 
4[a](1\1/2\) bill. I started my evaluation of this bill with a 
proposition that the common law Section 4[a](1\1/2\) exemption 
is not broken and does not need to be fixed. This is 
particularly true in light of the relaxation over Rule 144.
    As written, the new exemption would be a perilously easy 
way for affiliates to flip securities either on their own or on 
the issuer's behalf, providing only that separate compensation 
for that service is not received. In addition, first tier and 
subsequent purchasers would assume no real holding risk and 
could be expected to evaluate their purchases less carefully.
    There are other problems with the bill, particularly its 
failure to propose the types of protection associated with 
private placements under Rule 506 and/or the existing resale 
rule of Rule 144A.
    The latter is especially startling since Rule 144A allows 
resales only to qualified institutional buyers, generally 
institutions with portfolios of $100 million or more with 
issuer-sponsored disclosure.
    Moving to the compensatory benefit, or Rule 701 bill, for 
reasons amplified in my written testimony, doubling the limit 
before disclosure to prospective employee investors is 
triggered can't be justified simply by talking about inflation. 
Things have changed since 1999 in addition to the value of a 
dollar. We now have an amendment to Section 12G of the 1934 Act 
that says purchasers under 701 don't count for triggering 
registration requirements. The proposal then would allow large 
issuers, year after year, to place $10 million worth of 
securities with employees who would never receive the benefit 
of disclosure under either Act.
    Finally, I will close with a comment on the XBRL bill, 
stating my conviction that it may well have the effect of 
reducing access to capital and provide very little savings in 
regulatory burden, all while lagging behind a number of other 
countries.
    Thank you once again for permitting me to speak today.
    [The prepared statement of Professor Gabaldon can be found 
on page 47 of the appendix.]
    Chairman Garrett. Thank you, Professor.
    Ms. Hughes, you are recognized for 5 minutes.

    STATEMENT OF GAYLE G. HUGHES, PARTNER & FOUNDER, MERION 
 INVESTMENT PARTNERS, ON BEHALF OF THE SMALL BUSINESS INVESTOR 
                        ALLIANCE (SBIA)

    Ms. Hughes. Good afternoon, Chairman Garrett, Ranking 
Member Maloney, and members of the subcommittee. My name is 
Gayle Hughes, and I am a founder and partner of Merion 
Investment Partners, a family of private equity funds licensed 
by the Small Business Administration as small business 
investment companies (SBICs). Merion was founded in 2003, is 
based just outside Philadelphia, and is involved in providing 
subordinated debt and equity to small businesses that have 
significant growth potential. Merion advises two SBIC funds.
    I am here today representing the Small Business Investor 
Alliance (SBIA), which is a trade association of lower middle 
market private equity funds. SBIA members provide vital capital 
to small businesses across the country.
    Over my 30-year career in the financial industry, I have 
worked with companies from small entrepreneurial firms to 
members of the Fortune 500, and found working with small 
businesses most rewarding. For the last 20 years my partners 
and I have focused on investing in and managing small 
businesses. We work closely with management teams to help them 
achieve their growth objectives.
    The core of our strategy is to invest in small firms and 
provide them with the financial wherewithal and management 
expertise to realize their growth objectives. Merion's first 
SBIC license was approved in August 2003. We sought a second 
license, which was approved in January 2010. And we plan to 
seek a third license later this year.
    Since receiving our first SBIC license, we have invested 
nearly $190 million in 35 small businesses, and have been 
examined 14 times by Federal examiners. A large percentage of 
our investments are made directly with business owners, with 
Merion as the only institutional capital.
    Despite our small size, I am pleased to tell you that of 
the 23 different States represented by members of the 
committee, Merion has made investments that are either 
headquartered in or have significant operations in 78 percent 
of those States. For example, we provided financing to fund a 
growth opportunity for an IT services company in northern New 
Jersey that tripled its revenues, expanded its footprint, and 
nearly doubled its employees.
    In a second example, Merion provided the capital for a 
central Virginia firm that grew revenues at a 23 percent 
compounded annual growth rate and its employment base grew by 
67 percent. We helped other businesses grow from small business 
to global business with hundreds of employees.
    As an SBIC, we are highly regulated and regularly examined 
by a regime designed for private equity and small businesses. 
The cost and time associated with duplicative regulatory 
burdens would materially reduce our ability to focus on finding 
and growing small businesses. Dodd-Frank recognized this issue 
and attempted to address it in the statute, but we know now 
that a few technical corrections are needed to provide relief.
    The SBIC Advisors Relief Act is a common-sense, bipartisan, 
and effective clarification of the investment advisor 
regulation that will enhance the ability of small business 
investors to concentrate on making investments rather than 
filling out forms. It concentrates on three targeted changes to 
current law.
    First, the legislation prevents venture funds from losing 
their exemption from SEC registration when entering the SBIC 
program. Having two exemptions should not be worse than having 
one.
    Second, the legislation helps advisors to both private 
equity funds and SBICs by removing the SBIC capital, which is 
already regulated by the SBA from the calculation for SEC 
registration. This would help my fund and many other funds that 
regularly face this problem of having more than one type of 
small business fund.
    Third, the legislation prevents the duplicative 
registration of SBICs by Federal and State securities 
regulators and returns SBICs to their original, sole Federal 
regulator. Smaller funds have a lower threshold for regulatory 
pain, and one regulator is enough. Our SBIC funds exceed the 
registration trigger, and our fund in wind-down will eventually 
cease to be an SBIC, triggering SEC registration and all the 
associated costs and burdens.
    This does not make sense and does not add investor 
protections. It would create very significant and ongoing costs 
for all of our small business funds. My written testimony 
explains in more detail the elements of this legislation and 
why the solutions and clarifications it makes to the Dodd-Frank 
Act are necessary to ensure that smaller funds will be able to 
continue focusing on small business investing rather than 
filling out regulatory paperwork.
    I would like to thank the subcommittee for examining this 
bill today, and I especially want to thank the sponsors of the 
legislation. In addition to H.R. 432, the SBIA generally 
supports other legislation that is the subject of today's 
hearing. These include H.R. 686, H.R. 1525 and H.R. 1659. These 
bills will contribute to improving access to capital and 
reducing associated regulatory burdens in the capital raising 
and deal-sourcing process.
    Thank you very much for allowing me to present this 
testimony.
    [The prepared statement of Ms. Hughes can be found on page 
62 of the appendix.]
    Chairman Garrett. Thank you for your testimony.
    Next, Mr. Kovacs, welcome to Washington, and welcome to the 
panel.
    Mr. Kovacs. Thank you.
    Chairman Garrett. You are recognized for 5 minutes.

 STATEMENT OF SHANE KOVACS, EXECUTIVE VICE PRESIDENT AND CHIEF 
  FINANCIAL OFFICER, PTC THERAPEUTICS, INC., ON BEHALF OF THE 
           BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO)

    Mr. Kovacs. Good afternoon, Chairman Garrett, Ranking 
Member Maloney, and members of the subcommittee. My name is 
Shane Kovacs, and I am the CFO of PTC Therapeutics, a biotech 
company based in South Plainfield, New Jersey. We are a growing 
company with 250 employees to date, up from about 125 at the 
time of our initial public offering less than 2 years ago. And 
we plan to grow to 400 employees by the end of this year.
    PTC is developing a portfolio of treatments for ultra-rare 
genetic disorders that mostly impact children, and capital 
formation is a key to that lifesaving research and development.
    PTC has spent approximately $800 million in R&D over the 
past 17 years, and we are just now on the precipice of our 
first FDA-approved product. Our story is common in the biotech 
industry. BIO represents over 1,100 companies, and the vast 
majority of them are pre-revenue small businesses.
    Because biotech R&D is typically supported only by 
investment capital, not product revenue, our investors 
emphasize the importance of resource efficiency. Every dollar 
spent on regulatory burdens is a dollar that we are not 
spending in the lab or in the clinic. Yet, a one-size-fits-all 
regulatory regime often prevails, bringing with it damaging 
diversion of capital from science to compliance.
    In my experience, there are three financial metrics that 
biotech investors focus on and understand. It is pretty simple: 
one, how much cash does the company have on its balance sheet; 
two, what is the company's cash burn rate; and three, how much 
time is there until that company needs to go to the markets to 
raise more capital. These high-level metrics are not the focus 
of the existing regulatory regime, which includes high-cost 
regulatory standards like XBRL and SOX 404(b), yet we must 
spend time and dollars preparing the mandated reports instead 
of talking to our investors about a cash position and key non-
financial metrics like our science and our regulatory pathway.
    The Jobs Act has supported over 140 biotech IPOs because it 
strikes a nice balance between capital formation incentives and 
appropriately tailored regulations.
    And I am encouraged by the fact that the subcommittee is 
considering legislation today that will build on the Jobs Act's 
successes. The Jobs Act was a boon to PTC's IPO, and we have 
created 125 new jobs since our offering, with more on the way. 
Clearly, smart policymaking can support job growth and 
innovative R&D.
    And particularly, I strongly support Congressman Hurt's 
Small Company Disclosure Simplification Act. We spend nearly 
$50,000 annually complying with XBRL, all to pay for reporting 
that doesn't include key information on our company which is 
important for investors to evaluate an opportunity in PTC. For 
PTC and other small biotechs, an informed investor is a good 
one. The Jobs Act, including testing-the-waters meetings, was 
critical to our successful IPO because we could share more 
information with investors prior to our offering.
    But XBRL relies on standardized financial metrics better 
suited to comparing financials on much larger companies. So, it 
does not paint a true picture of the opportunity of investing 
in small biotech companies.
    I worked as an investment banker with Credit Suisse for 12 
years on Wall Street before joining PTC, and I can say with 
confidence that investors need to understand the scientific 
foundation of biotech, the clinical progress, and the 
regulatory pathway before really trying to evaluate metrics 
enabled by XBRL.
    Congressman Hurt's bill gives the SEC a chance to improve 
the compliance mechanism to enhance transparency and decrease 
costs, and removes the cost burden from small companies while 
the SEC does its work. I want to thank him for introducing this 
important legislation, and I urge the subcommittee to support 
it.
    I also encourage the subcommittee to take a discerning look 
at any and all regulations governing public company 
disclosures, with the goal of achieving a common-sense, right-
sized regulatory environment, a spirit embodied by Chairman 
Garrett's Reg S-K bill.
    This spirit also applies to Congresswoman Wagner's proposed 
reforms to Form S-1, which I believe represent an important 
change for SRCs, and I believe can go further by extending 
forwarding corporation by reference to EGCs. Emerging biotechs 
like PTC highly value capital formation and capital efficiency, 
and I strongly support your efforts to enhance the capital 
formation ecosystem by reducing regulatory burdens. Enhancing 
the secondary market for Reg-A offerings, reforming Rule 701, 
and enhancing the IPO on-ramp are all important steps toward a 
common-sense disclosure regime.
    Thank you for considering legislation to support the search 
of next-generation medical advances, and I look forward to 
answering any questions you may have.
    [The prepared statement of Mr. Kovacs can be found on page 
83 of the appendix.]
    Chairman Garrett. And, again, I thank you.
    And finally, last but not least, Mr. Quaadman, once again, 
welcome back, and you are recognized for 5 minutes.

   STATEMENT OF THOMAS QUAADMAN, VICE PRESIDENT, CENTER FOR 
   CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. Thank you again for 
the opportunity to testify as well and, more importantly, for 
this committee's bipartisan leadership on issues of importance 
to capital formation and business creation.
    Businesses need the ability and the tools to expand from 
small to large, and they must be able to engage in the 
reasonable risk-taking needed to stimulate economic growth and 
job creation. The Jobs Act was an important piece of 
legislation to help further those goals.
    Since the turn of the century, we have had 14 years of 
consecutive declines in public companies in the United States. 
But since we have had the partial implementation of the Jobs 
Act, we have actually seen a dramatic uptick in IPO activity, 
and last year, we actually saw the number of public companies 
in the United States rise for the first time.
    However, when Michael Dell says that he will never operate 
a public company again, we are still in perilous territory. 
Indeed, the long-term trends are not good. We are still seeing 
a large outflow of public companies as well as a series of 
reports that have been released recently, including the Census 
Bureau, that business formation in the United States is at its 
lowest point since numbers were kept, since 1977, and that we 
have had a steady decline in the number of overall businesses 
in the United States since 2008.
    So the package of legislation that we are discussing here 
is important to build on that foundation of the Jobs Act as 
well as to overcome the reluctance of the SEC to modernize its 
rules. One doesn't have to look any further than the Reg A 
example from the Jobs Act to understand how tortuous that can 
be.
    So with the Swap Data Repository and Clearinghouse 
Indemnification Correction Act, this is an important 
clarification needed to bridge international differences in law 
to facilitate better cross-border coordination amongst 
regulators.
    The Holding Company Registration Threshold Equalization Act 
and the SBIC Advisers Relief Act both codified congressional 
intent of the Jobs Act as well as the Dodd-Frank Act.
    The Small Business Mergers, Acquisitions, Sales, and 
Brokerage Simplification Act is an important bill because we 
have an atmosphere where businesses are increasingly looking to 
be acquired. Younger business owners are no longer willing to 
go down the path of the public company, and for older business 
owners, where the business is their largest asset, that is what 
they need to sell in order to retire.
    So we need to have certainty to allow that activity to 
flourish. And unfortunately, while the SEC no-action letter 
does provide relief, we have recently seen, in an unrelated 
area, where the SEC revoked a no-action letter that overturned 
a decades-long process on a Friday night without any SEC 
Commissioners being consulted.
    With the improving access to capital for emerging growth 
companies, this is a needed change to help emerging growth 
companies get financing-simplified disclosures that are 
material to investors. The Disclosure Modernization and 
Simplification Act, the Small Company Disclosure Simplification 
Act, and the Small Company Simple Registration Act, taken 
together, these bills are an important step forward to change 
the 1930s paper-based disclosure model and create one for 21st 
Century markets using tools that investors use to acquire 
information.
    I also want to thank Chair White and Corporation Finance 
Director Keith Higgins for their leadership in trying to 
modernize disclosures. But these bills are important to help 
save those efforts from inertia.
    The Encouraging Employee Ownership Act is an important 
change to make the Jobs Act effective. This will change the 
threshold, based on inflation, which hasn't been changed since 
1988. And these tools are used for employee retention and 
reward and not for capital-raising.
    The RAISE Act is an important piece of legislation as well 
because courts have allowed for the sales of certain 
securities. The RAISE Act will help set parameters around an 
emerging market, ensure liquidity and, most importantly, 
provide for investor protection.
    The treatment of affiliates of non-financial firms that use 
a central Treasury unit is a narrowly tailored bill. It 
codifies congressional intent of the Dodd-Frank Act, and allows 
a non-financial company to use derivatives without clearing, to 
mitigate commercial risk, and lock in prices.
    The bill to amend the Securities and Exchange Act of 1934 
to require the SEC to refund or credit excessive Section 31 
fees is in keeping with the bipartisan spirit of the Investors 
Capital Market Fee Relief Act. This actually creates a 
mechanism to pass back to investors overcharges.
    So, again, Mr. Chairman, these bills are important to build 
upon the foundation of the Jobs Act, and I am happy to answer 
any questions you may have.
    [The prepared statement of Mr. Quaadman can be found on 
page 92 of the appendix.]
    Chairman Garrett. Thanks. I appreciate your testimony, and 
the testimony of the entire panel. So let us look at maybe the 
most fundamental and most important piece of legislation that 
is up here. Oh, it happens to be right in front of me--H.R. 
1525, the Garrett bill. If you look at the--I will just throw 
this out to the professor and then move on to some other bills.
    If you look at what has happened in the history, here, 
Professor, it was back at the end of 2013 when the SEC did 
their review and said that maybe more review wasn't necessary. 
But I think Chair White and Commissioner Gallagher said, hey, 
maybe so, but there are certain areas that--they didn't use the 
term, ``low-hanging fruit'' or what you say that can be done 
for simplification in this area. Can you spend just 10 seconds, 
so to speak, on where those areas are that we could have 
appropriate scaling that this would provide for in the 
legislation?
    Ms. Gabaldon. I am familiar with the concept of low-hanging 
fruit. And to my mind, I would like someone else to identify it 
for me. Because it isn't obvious to me, looking at Regulation 
S-K, exactly what it is that the SEC could be expected to act 
on quickly. I do know that--and we all know that--they have an 
ongoing initiative. This is the fifth, I believe, either task 
force or initiative that has been under way in the last 2 
decades.
    Chairman Garrett. So there is nothing that should be done 
now, even after all that time?
    Ms. Gabaldon. I certainly would not say that there is 
nothing to be done.
    Chairman Garrett. Okay.
    Ms. Gabaldon. And I do think that, as a matter of fact, the 
scaling that we see coming out of the Regulation A-Plus process 
may very well lead the way. I am skeptical of the idea that it 
is of any kind of benefit to put the SEC on a tight timeframe. 
We saw how that worked out as far as Dodd-Frank legislation was 
concerned.
    Chairman Garrett. Yes, right.
    Ms. Gabaldon. And I don't see any particular need to 
replicate that experiment, given that they do seem to be 
working on it and do seem to be making progress with a template 
of the Reg A-Plus.
    Chairman Garrett. Let us ask the other people who are in 
the field. I will jump down to Mr. Quaadman. Can we, on this 
and on a number of other issues that are here before us, simply 
wait on the SEC, on where they say there is additional study 
that needs to be done?
    And also, on the second area that you raise, which is the 
area of saying there are guidance letters that they do, which 
they can repeal back? Is there a need for us to intercede in 
these areas, or should we just allow the SEC to go its course, 
however long that course may be?
    Mr. Quaadman. I think it is important that Congress acts in 
order to push the SEC forward. All of the issues that were 
encompassed in the Jobs Act, the SEC could have done on its own 
and didn't do it. And even where the Congress mandated that the 
SEC do it, it took them a long time.
    I do want to take issue with something the professor said. 
We issued a report last summer where we identified 15 
regulations that are low-hanging fruit. So the issue here is 
that the SEC is now talking about the potential of a concept 
release, but if you take a look at, as an example, the SEC 
issued a concept release to update proxy voting systems in 2010 
and hasn't done anything.
    Chairman Garrett. Let me just stop you there, sorry to 
interrupt, but that just brings me to another point. The SEC 
has various small business advisories on these areas, right? 
And I guess they meet, and year after year they come up with 
these recommendations, right? What is the track record on them 
actually coming up with ideas, and then following suit with 
them and implementing them?
    Mr. Quaadman. That group does come up with a series of 
recommendations. Again, those recommendations became the core 
of the Jobs Act. And the SEC does not follow through--
    Chairman Garrett. We did the Jobs Act.
    Mr. Quaadman. Correct.
    Chairman Garrett. Right, so in other words--
    Mr. Quaadman. That is correct.
    Chairman Garrett. --the SEC didn't take the initiative.
    Mr. Quaadman. No, Congress acted on the recommendations of 
that group, and not the SEC.
    Chairman Garrett. Right. Thanks.
    Mr. Kovacs, you mentioned a couple of bills, mine and also 
Mrs. Wagner's. She is here, and she will probably bring it up 
as well. But it is a great bill, so let us give credit where 
credit is due. What is the significance and the importance of 
that? And you also talked about the EGCs, as far as the reform 
in those areas. Let me just give you some time to flesh that 
out a little bit.
    Mr. Kovacs. I think anything that will reduce the burden, 
keep adequate disclosure but reduce the burden on companies, 
can be helpful.
    Chairman Garrett. Okay, I appreciate that.
    Mr. Deas, can you walk me through, in the brief time that 
we have here, as far as the netting arrangement that you were 
referring to, I guess about two-thirds of the way through your 
testimony, with regard to the net derivative units as it 
actually happens for a company?
    Mr. Deas. Yes, Mr. Chairman. The concept of a centralized 
Treasury unit is to net exposures within a corporate group and 
then trade one smaller amount of derivative transaction with a 
bank. And unfortunately, the original language in Title VII 
provided for the central Treasury unit to work only if it were 
an agent--acting on behalf of the other companies, and it 
didn't include, really, the more common way in which it 
operates, which is netting. And so--
    Chairman Garrett. Was there a risk there if you don't treat 
it that way?
    Mr. Deas. There is actually a risk-reducing activity. And, 
in fact, the risk is higher when it acts as an agent. Because 
the volume of derivatives that the group is doing with banks is 
great. And, of course, it is everyone's aim to accomplish 
netting.
    Chairman Garrett. Right.
    Mr. Deas. That was a major goal of Dodd-Frank. So it was a 
drafting glitch, really, that everyone agreed--in fact, there 
were colloquies entered in July of 2010 saying that, in 
general, there would be these kinds of technical corrections 
fixed promptly. And this is one which has taken 4\1/2\ years.
    Chairman Garrett. Yes. So, I will close on that. My time is 
up. But I guess that is the overall message that I think these 
bills got when they received near unanimity in the past is that 
this is not what we are talking--we are not talking about 
deregulation here, we are just simply talking about re-
regulation or smart regulation to--fixing some of those 
problems that were created in a 2,000-page bill that moved very 
quickly.
    So with that, I now recognize the ranking member of the 
full Financial Services Committee, Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you very much. I would like to start 
with, I think it is Mr. Quaadman. When an entrepreneur wants to 
finance an idea, and she is not independently wealthy, she must 
approach an outside investor, possibly a friend, an angel 
investor, a venture capitalist, or another institution, right?
    Now, how does this entrepreneur convince more sophisticated 
investors that her project, her idea, is worth financing? 
Later, as her business takes off, it seems she will need to 
attract a deeper pool of investors, many of whom may not have 
the benefit of having known about the project from the 
beginning.
    How does she convince these investors to commit their 
funds? She uses various information about her company, 
including financial information, right? It seems that it is in 
the best interest of this budding entrepreneur to provide her 
investors with as much information as possible. If they do not 
receive this information, would you expect them to impose a 
premium to cover the uncertainty about the project? This is an 
additional cost to the company, correct? Have you studied this 
cost? So could you just tell me yes or no?
    Mr. Quaadman. Let me answer it in two parts, Ranking Member 
Waters. Number one is, if you are talking about a private 
company, we were part of a blue ribbon panel that looked at 
financial reporting for private companies. And when investors 
to private companies said financial reports for private 
companies was not as important as what the idea was that the 
company was trying to sell, that is what angel investors were 
worried about. And GAAP accounting doesn't fit with private 
company accounting. Cash flow or cash burn is more important. 
So public company disclosures don't fit there.
    In terms of public company disclosures, I think a study 
that sort of crystallizes it best is a study by Professor 
Larcker out of Stanford University. He just released a study of 
large institutional investors who have trillions of dollars in 
the market. According to the study, 55 percent of them said the 
current disclosure regime is too cluttered, and 48 percent said 
they don't have the time to go through those disclosures. So 
this is a matter of, let us figure out how to make it easier to 
have investors access the information, and then also let them 
sort through the information that they find most material. 
Because materiality, for both private companies where 
disclosure is needed, and public companies where we have 
decided that large amounts of disclosure is important, that is 
the key threshold for how information should be disclosed.
    Ms. Waters. Professor Gabaldon, do you have any thoughts 
about the importance of information to an investor's funding 
decision? In your opinion, what happens when investors have 
less information, less confidence in the information they have, 
or find it harder to compare the information to other 
companies? Who bears the cost of invester uncertainty? How do 
some of the bills being considered today affect investor 
confidence in American issuers, especially small businesses?
    Ms. Gabaldon. It seems clear to me that to the extent 
several of the bills head in the direction of reducing 
disclosure to investors, that does come at a cost to the 
entities that are trying to raise capital.
    Reduced disclosure increases investor risk. Without a 
doubt, the investor will be interested in seeking a higher 
return. And therefore, to the extent disclosure is reduced or 
there is less time made available for contemplation of what is 
disclosed, or to the extent that what is disclosed is not 
comparable to what is being disclosed by other entities, it may 
reduce regulatory burden. But in my view, it does nothing to 
assist capital formation.
    Ms. Waters. Thank you very much.
    I yield back the balance of my time.
    Chairman Garrett. The gentlelady yields back.
    I now recognize the vice chairman of the subcommittee, Mr. 
Hurt.
    Mr. Hurt. Thank you, Mr. Chairman. I want to thank each of 
the panelists for appearing today. And I want to start with 
Professor Gabaldon. First of all, just to set the stage for the 
piece of legislation that we have introduced now for the second 
Congress in a row, would you admit that what we are talking 
about here is not whether or not the information is disclosed 
through financial statements? Wouldn't you agree that the issue 
here with XBRL is the format in which it is reported? Would you 
agree with that?
    Ms. Gabaldon. Yes.
    Mr. Hurt. Would you also agree that the format in which it 
is presented has been criticized for perhaps distorting the 
information and really affecting the quality of the 
information, as I think Mr. Kovacs testified or made clear in 
his testimony. Would you agree with that?
    Ms. Gabaldon. I agree that--I heard what Mr. Kovacs said, 
but I would also point out that regulators in the United 
Kingdom, in Japan, in China, and in Israel have all come to the 
conclusion that XBRL reporting is appropriate and not 
distortive.
    Mr. Hurt. And that is right, and that is from the 
regulators' standpoint, right? That is what you just said.
    Ms. Gabaldon. Correct.
    Mr. Hurt. That is why I was curious. In looking at your 
testimony, you say that you believe that this bill, if passed, 
would put investors and analysts at a disadvantage. I guess my 
question is, who is in the best position to know whether this 
information is useful and puts them at an advantage? The 
regulators or the investors themselves?
    Ms. Gabaldon. I believe that the regulators are 
experienced. I believe that the regulators also need to rely 
on, or are helped in their analysis, by the existence of XBRL. 
And that helps them make better judgments about the regulations 
that they devise, which is ultimately--
    Mr. Hurt. But wouldn't you agree that certain--certainly, 
the regulators have experience, and many of them have been in 
the investing world and have been analysts. But I guess my 
question is, at the end of the day, who is in the best position 
to know? And I guess the reason I am asking that question--and 
you didn't really answer it--is because if you look at a 2012 
study that Columbia published, it says that only 10 percent of 
investors use this format, or found it in any way, shape or 
form useful. Doesn't that tell you something?
    Ms. Gabaldon. It tells me that there is a learning curve, 
and that the more XBRL is utilized, the more useful it will 
probably become.
    Mr. Hurt. What about the cost-benefit part of this? Don't 
you think it is appropriate for the regulators to be looking at 
the cost of things? And that would be--I think Mr. Kovacs 
testified that it costs his company $50,000 to pay an XBRL 
contractor to do this work. And he also testified that 
investors aren't interested in it, analysts aren't interested 
in it. Doesn't that mean something to you?
    Ms. Gabaldon. What it means to me is that I suspect that 
his company may be an unfortunate outlier, from what I have 
read.
    Mr. Hurt. Well, 90 percent of investors and analysts didn't 
think it was useful in the 2012 study. I wouldn't call that an 
outlier. But anyway, thank you for your answers.
    Mr. Kovacs, I just wonder if you could talk a little bit 
more about the idea that investors and analysts somehow would 
be put at a disadvantage. And what I thought was most 
remarkable about what Professor Gabaldon said was that emerging 
growth companies would be put at a disadvantage by this bill. 
And that this would actually restrict capital in a pretty 
sophisticated marketplace. I was wondering if you could comment 
on that?
    Mr. Kovacs. It is interesting--in preparation for today's 
meeting, I actually reached out to a number of the Wall Street 
analysts who cover our company and cover the industry, and a 
couple of the large institutional investors, and asked them, 
``Do you know what XBRL is? And if so, do you think it is 
important to your assessment in investing, at least, in 
biotech?'' And the response I got was that they didn't even 
know what XBRL was, and, from at least investing in small 
biotech companies, the critical information in evaluating an 
investment in us or one of our peers is really to understand 
our data, our science, and what is going on in terms of our 
future as opposed to looking at the historical financial 
detail.
    By the way, XBRL is really just a way of quickly getting 
the financial information to compare costs to other companies. 
Our 10Ks and 10Qs kind of lay out financials that are pretty 
straightforward to be able to go on EDGAR and pull that 
information and get it pretty quickly.
    Mr. Hurt. Right.
    Mr. Kovacs. I don't think people are using XBRL.
    Mr. Hurt. Thank you.
    I yield back.
    Chairman Garrett. Thank you. Very good.
    The gentlelady from New York is recognized.
    Mrs. Maloney. The analysts and investors that I have talked 
to say the more information they get in an easy, understandable 
form, the better. All of us can find information if we go on 
the Internet and spend hours looking for it and researching it. 
But if it is in a format that is usable, then it is much, much 
better to use. Now, I believe in testimony, Professor 
Gabaldon--by the way, thank you all for being here, and I thank 
the chairman and my colleagues for bringing these bills 
forward--you testified that over time the cost will continue to 
go down. And there was one study from the CPAs, the American 
Institute of CPAs, that estimated the median cost of doing XBRL 
for a company would be roughly $8,000. I don't see that as 
onerous. And I am concerned. I am all for small companies, but 
the more information you have easily attainable, the more 
investors will be likely to invest in it.
    And I would like to ask Professor Gabaldon, do you think 
people are more likely to invest in a company that has data 
they understand or in a dark pool where they don't understand 
it and it is not out there?
    Ms. Gabaldon. I most definitely think they are more willing 
to invest in companies about which there is easily accessible 
information.
    Mrs. Maloney. I agree. And this debate reminds me somewhat 
of our debate on Sarbanes-Oxley, where everyone was opposed to 
it, industry was opposed to it. It had gotten to the point--
when major companies crashed overnight, losing their pensions, 
going bankrupt, dragging this country down--that there wasn't 
faith in the system. So we brought all the dark money back onto 
the balance sheets. The cost of complying keeps going down 
every year, and now no one is complaining about it.
    And hopefully, we won't have an example of a company that 
crashes with a grade A rating overnight, losing jobs and 
disrupting the economy.
    Now I would like to ask Professor Gabaldon--I would like to 
ask you, really, about the XBRL. I think this is an important 
debate. In your testimony you noted that H.R. 1965, which 
exempts a large number of public companies from the requirement 
to use XBRL, would be a step backwards. Why do you see it as a 
step backwards? Could you elaborate a little bit?
    Ms. Gabaldon. That would basically permit 60 percent of the 
publicly traded companies in America not to use this tool 
which, I believe, is an important research tool for investors 
and certainly also useful for the SEC as it evaluates filers 
and also goes through the exercise of considering its own 
regulations.
    In addition to the figure that you mentioned earlier, it 
appears that of small reporting companies, 69 percent incur 
annual costs of $10,000 or less annually. In the U.K., where 
they have some experience with this, some filings have come 
down to approximately 100 pounds per filing, or--
    Mrs. Maloney. Now, I have another question. This bill 
before us is intended to help small companies. But in my 
opinion, I believe that it hurts small companies. Because if 
small companies aren't included in the data set that analysts 
and investors use to analyze industries and make investments, 
then they are unlikely to attract much attention from the 
markets.
    Investing in any--I think most people, investors large and 
small, want as much information as possible. So my question is, 
in addition to putting investors, analysts, regulators, and 
researchers at a disadvantage, do you think the bill would even 
put small companies at a disadvantage? And again, back to the 
professor.
    Ms. Gabaldon. I do, and I think that could happen on an 
individual basis as well as on a composite basis. If the United 
States has a reputation for permitting 60 percent of its 
companies not to provide this information, whereas other 
countries do provide this information in a readily accessible 
form, the number of overseas investors whom might be interested 
in looking at American investment opportunities is going to 
decline.
    Mrs. Maloney. Okay. I have always said that markets run 
more on trust than on capital. And one of the things that our 
economies had is more trust than other economies. People want 
to invest in America because they trust our regulation, they 
trust our markets, they trust our workers. I think we have a 
responsibility to keep that standard. And I feel that excluding 
60 percent of the companies from disclosure is not the right 
way to go.
    My time has expired, so thank you very much.
    Chairman Garrett. The gentlelady's time has expired.
    Just moving down the row, the gentleman from Texas, Mr. 
Neugebauer, is recognized for 5 minutes.
    Mr. Neugebauer. Thank you, Chairman Garrett, and thank you 
for calling this important hearing. I look forward to reviewing 
these legislative proposals to enhance capital formation for 
small and emerging growth companies.
    I think nearly everyone can agree that these unnecessary 
regulations are a burden both to individuals and the economy. 
But they are even a greater burden for our smaller businesses 
and startups. I was extremely pleased that in my TRIA 
legislation we were able to include some relief for end-users 
in using derivatives to hedge their risks. And we are examining 
some additional proposals in that same vein today.
    Mr. Deas, one of the questions I have is, how much capital 
would end-users have to set aside for inter-affiliate swap 
transactions to comply with the requirements imposed by Title 
VII of the Dodd-Frank Act?
    Mr. Deas. Congressman, we don't have that number 
specifically for central Treasury units. But in a survey that 
we have done, the amount of capital if the end-user exemption 
from clearing and margining is not fully implemented, could be 
$260 million for the average non-financial member of the 
business roundtable.
    Mr. Neugebauer. That is a big number.
    Mr. Deas. Yes, sir.
    Mr. Neugebauer. What kind of problems did this Title VII 
create for the inter-affiliate derivative trading? How does 
that impact the trading?
    Mr. Deas. Yes, sir. There was an explicit exemption in the 
bill as originally passed for centralized Treasury units, but 
only those that act as an agent. We believe there is consensus 
that it was a drafting error, that a more common way in which 
we all operate these units as netting out these exposures and 
thereby producing that risk reduction of a lower volume of 
derivatives was omitted. And the proposed fix in H.R. 1317 
would remedy that.
    Mr. Neugebauer. So the regulators really haven't been able 
to resolve that? It is going to take a legislative fix?
    Mr. Deas. Yes, sir. The CFTC issued a no-action letter in 
2013, and amended it last year. But the fundamental difference 
is that for companies that operate as Dodd-Frank insists, and 
make boards of directors declare every year that they are in 
strict compliance with the Act, that no-action letter doesn't 
get to that fundamental issue. It merely says that the staff 
won't take an enforcement action. It skirts the issue of 
whether it is actually in compliance with the law or not. And 
by a plain reading, it would not be in compliance.
    Mr. Neugebauer. Mr. Quaadman, in the subcommittee that I 
Chair, the Financial Institutions Subcommittee, we have seen 
consolidation in our community banking area by almost 1,000; we 
have lost 1,000 community banks. And the primary reason, not 
just according to community bankers but according to some 
studies, has been the fact that this regulatory environment 
makes it very difficult for smaller institutions to be in 
compliance and to have a business model that is economic.
    One of the things that I struggle with is that when we are 
trying to talk about providing capital formation for smaller 
companies and startups is people assume that everybody who is 
starting up a company or who operates a small business is a 
crook and is trying to take advantage of potential investors 
out here.
    And so what we do is, we make the environment so burdensome 
out there that it is difficult to be in compliance and, more 
importantly, there is the cost of trying to navigate through 
that. And so at what point in time do we say, we have to at 
some point in time have some rules that make sense and some 
disclosure and some transparency, but yet allows these smaller 
startups to find it economic to access the capital market? 
Because otherwise, you are just going to see more and more and 
more private activity and not much public activity.
    Mr. Quaadman. Chairman Neugebauer, I think you really hit 
it on the head, and that is why I raised that Census Bureau 
report earlier. Because ultimately what is going to happen is, 
the bigger companies are going to be able to spend the money 
and engineer their way out of it. What we are seeing with these 
reports is, we are seeing that it is on the lower end. With the 
smaller businesses, they are no longer being created.
    And we all acknowledge that the employee participation 
rates are at the lowest they have ever been. We have seen 
sluggish job creation. And the reason for that is, if you take 
a look at SBA studies and the like, coming out of a recession, 
90 percent of job creation happens in firms with 100 employees 
or less. That is exactly where we are not seeing the job 
creation. And so we need to have rules that are going to help 
build from the bottom up, because that is what we have always 
done.
    Mr. McHenry [presiding]. The gentleman's time has expired.
    And for Members' knowledge, there are 8\1/2\ minutes left 
on sustaining the ruling of the Chair, a procedural motion on 
the House Floor. It is the Chair's intention to keep the 
hearing going, and people can depart and return in order to ask 
questions.
    We will now recognize Mr. Hinojosa for 5 minutes.
    Mr. Hinojosa. Okay, thank you. Thank you, Mr. Chairman. I 
would also like to thank the distinguished panel members for 
sharing their insights on this issue. When it comes to our 
economy and capital markets, the United States is the envy of 
the world. We are so not only because our economy values and 
rewards entrepreneurship and innovation, but because our 
markets are transparent, safe, and liquid. My first question is 
going to be for Mr. Shane Kovacs and for Mr. Tom Quaadman.
    H.R. 1675 revises the SEC's Rule 701 by both raising and 
then indexing for inflation the permissible aggregate sales 
threshold of securities sold without certain disclosures to 
employees and to other parties as part of their compensation 
from $5 million to $10 million. Does raising the threshold to 
$10 million increase the risk that employees will not receive 
vital information about the company employees which they need 
to make informed decisions? Mr. Kovacs?
    Mr. Kovacs. For companies like PTC, biotech emerging growth 
companies, we are in a position where we need to attract 
talent. We need to attract talent from other companies that may 
be larger and better capitalized, and able to compensate with 
cash more than maybe we could afford as a small, growing 
company. And therefore, we have to incentivize employees with 
stock and options in the company which has growth potential.
    And certainly as a private company or public companies we 
need to do that. And for a private company, I can imagine that 
raising the threshold from $5 million to $10 million, in terms 
of the value that you are going to give to employees, without 
having to put together some large disclosure statement on the 
company and all those incremental costs, I don't foresee that 
raising that bar from $5 million to $10 million would really 
have any real impact as to putting the employees at risk. In 
fact, I would almost think the employees would applaud that 
because it would enable the companies to give more equity in 
the company to them in the form of compensation.
    Mr. Hinojosa. Okay.
    Mr. Quaadman?
    Mr. Quaadman. Yes, thank you, Mr. Hinojosa. Number one, the 
Jobs Act raised the number of employees who would be eligible 
for this, but we didn't change the threshold dollar level. 
Number two, with private companies--proprietary information--we 
are trying to look at this through the lens of a public 
company. These are private companies. By allowing proprietary 
information to get out into the public, which this could very 
well happen, that will destroy a company. That will destroy 
their ability to grow. So these are employees who are 
incentivized to succeed. It will allow firms to get the talent 
that they need.
    And, I am just reminded that there is a gentleman by the 
name of Eddie Antar, who was known as ``Crazy Eddie'' in New 
York, who did everything possible to destroy his company, which 
he did. And he is now a consultant to go out there and tell 
regulators and people what you can do. Rule 701 is never 
anything that he has ever raised.
    Mr. Hinojosa. Thank you.
    My next question is for Tom Deas. H.R. 1317 would exempt 
certain Treasury affiliates from clearing and margin rules. Are 
you concerned that said exemption would undermine transparency 
in the derivatives market by allowing some Wall Street banks to 
avoid clearing requirements for swaps if they are affiliated 
with a non-financial end-user?
    Mr. Deas. Congressman, I don't believe that the bill 
provides for that. From the inception of Dodd-Frank, it has 
been permitted for an operating subsidiary of a financial 
company that is engaged in commercial business activity to 
avail itself of the end-user exemption.
    And we are talking about a central Treasury unit that has 
the risk-reducing activities of netting out these exposures 
which is to the benefit of the--lowering the systemic risk in 
the system. And it should be what we would all want.
    And there are very extensive anti-abuse provisions in the 
bill that are utilized by the regulators that would stop any 
company from exceeding what is permitted under the law.
    Mr. Hinojosa. Your response helps me a great deal.
    I think that my time has expired, and I yield back.
    Mr. McHenry. I thank the gentleman from Texas. I will now 
recognize myself for 5 minutes. I just want to ask more broadly 
about capital formation and secondary markets. Mr. Quaadman, 
there is existing case law on the sale in secondary markets of 
restricted securities, right? And some would argue that you 
don't actually need to have congressional action for that to 
occur, and that would be correct, right? But as it now exists, 
there is friction and cost associated with that friction in the 
resale of those securities. Is that correct?
    Mr. Quaadman. That is correct. And because we are talking 
about case law, we don't have a uniform set of standards. That 
is why I think the RAISE Act which you have proposed--you allow 
for the SEC to actually put in place a set of rules that will 
allow for those markets to function, to allow businesses to 
have liquidity. But most importantly, to actually create 
investor protections. Which, if we are talking about a hodge-
podge of case law, there is a lot that can slip through the 
cracks.
    Mr. McHenry. So greater investor protection with clarity.
    Mr. Quaadman. Correct.
    Mr. McHenry. Okay. But you talked about liquidity in the 
secondary markets. And so that question of liquidity, it does 
provide liquidity in the secondary markets for this resale. Why 
is that? First of all, is that important, and--
    Mr. Quaadman. Yes, because what we are--
    Mr. McHenry. --if so, why?
    Mr. Quaadman. Yes, what we are seeing is as a lot of the 
different regulatory initiatives are coming online--so Basel 
III, Dodd-Frank, other things are coming online--we are 
increasingly seeing: one, liquidity crunches; and two, a lack 
of market-making activity.
    Now, that gets even worse as you go down to the lower scale 
of business formation because you have traditional actors--let 
us say a community bank or whomever else--are being shut out of 
an ability to provide assistance to startups and people who are 
looking to create a business. So this type of liquidity is an 
important piece because there is a market demand for it.
    Mr. McHenry. Okay. Market demand--so the RAISE Act will 
make it easier for private companies to raise capital?
    Mr. Quaadman. Correct.
    Mr. McHenry. Is that the case?
    Mr. Quaadman. Yes, that is correct.
    Mr. McHenry. Okay. So explain that functionality one more 
time here just so it is clear on the record.
    Mr. Quaadman. Sure. What we need to have is--as I said, we 
have seen a tremendous drop-off in business creation. We are 
seeing a large drop-off in businesses overall. And we are 
seeing a lack of capital formation because of a number of 
different regulatory initiatives.
    What the RAISE Act does is, it builds out what the courts 
have allowed in terms of these secondary markets. And it will 
inject liquidity but, most importantly, investor protections 
which help provide the trust and confidence that was mentioned 
before that markets operate on.
    Mr. McHenry. Okay, so the ability to take that initial 
group of folks, for them to sell their securities, that 
actually provides that clarity and broadening that market a 
bit, right?
    Mr. Quaadman. Yes.
    Mr. McHenry. It will create better, basically, 
establishment of price, right?
    Mr. Quaadman. Right.
    Mr. McHenry. And with codified rules, it basically--a 
larger game plan, more folks can have assurances that they are 
participating in something that is safe and effective and 
legal?
    Mr. Quaadman. Right. Because you are going to provide the 
information, you are going to provide the price discovery, and 
you are going to lower costs.
    Mr. McHenry. So what about community banks as private 
issuers?
    Mr. Quaadman. Again, community banks, as I said, are being 
shut out of providing help to startups. And community banks 
traditionally have provided that help because they know the 
businesses or they know the individuals who are trying to start 
a business. This allows for another way for community banks to 
provide that capital formation operation that they 
traditionally have through another means.
    Mr. McHenry. Okay.
    So Mr. Kovacs, in your experience in the world of biotech, 
is enhanced liquidity in the secondary markets important in 
biotech? And if so, why?
    Mr. Kovacs. Absolutely. I think that is true, at least from 
my experience as a banker. Liquidity is always important in 
terms of attracting capital. There is all sorts of capital out 
there and it has restrictions on it. And restrictions are often 
driven both by the--mainly often by the liquidity and whether 
or not there is a resale market so some can get in and out of 
that investment.
    Mr. McHenry. So something like the RAISE Act, would that 
help stimulate private avenues of financing?
    Mr. Kovacs. I am less familiar with the intricacies of the 
RAISE Act proposal, but I can comment on liquidity being a good 
source to attract additional capital.
    Mr. McHenry. Okay. I certainly appreciate it. I appreciate 
all of your answers to my questions. And with that, my time has 
expired.
    I will now recognize Mr. Carney for 5 minutes.
    Mr. Carney. Thank you, Mr. Acting Chairman, and thank you 
to the panelists for coming. I want to recognize and thank my 
colleagues on both sides of the aisle for working together on 
these bills. These are bills that we passed in the last 
Congress overwhelmingly. We are here again to consider them, to 
maybe improve them, and to get your feedback.
    Mr. Deas, there is an FMC operation in the State of 
Delaware. We appreciate that presence there, and it is nice to 
see you this morning.
    As you may know, Delaware is a center of excellence for 
corporate formation, corporate governance, and corporate law. 
Most of that is because of the expertise and the nature of our 
Delaware chancery court, where Delaware-based domiciled 
companies can get their disputes litigated quickly and by 
expert judges.
    We spend a lot of time focusing on the issues here that we 
are talking about today. Some of my friends that work in the 
Division of Corporation alerted me to a problem that we were 
having in this country with IPOs, which led to my cosponsoring 
the IPO on-ramp bill with my friend, Mr. Fincher from 
Tennessee, whom I notice is not here.
    So I would like to ask a couple of questions about that. I 
have been told by the folks in Corporations that IPO numbers 
are way up. And at least anecdotal feedback is that the IPO on-
ramp bill was instrumental in the decisions that some of those 
emerging growth companies made to go public.
    Mr. Kovacs, one of the things we have heard is that for bio 
companies and pharmaceutical companies, maybe the on-ramp isn't 
long enough. It is 5 years, as you may know, with different 
stages. Could you comment on whether that is an issue for bio 
and pharmaceutical companies, and whether we ought to look at 
that question?
    Mr. Kovacs. Yes, I think what is interesting from the on-
ramp, 5 years is actually, I think, an interesting and good 
runway. But it is some of the other limitations for emerging 
growth companies, when you are successful, that reduce that on-
ramp. For instance, we have been the benefit of a strong 
capital market and a lot of interest in biotech, which has 
brought our stock price and our market cap above this $700 
million threshold. And so now this year we will lose our 
ability of that 5-year runway, then we will have to become SOX-
compliant under Section 404(b), which will incur additional 
burdens and cost to our company in--north of a million dollars. 
So--
    Mr. Carney. So that would be helpful.
    Mr. Kovacs. Yes.
    Mr. Carney. And one of the things we hear, again somewhat 
anecdotally, from the people that I have talked to is that the 
blackout period, for want of a better term, where emerging 
growth companies can keep their information confidential as 
they explore the potential of going public, has been the most 
significant thing. Actually, not the 404(b) audit thing, which 
we thought would be the big incentive. Do you have any comments 
on how that might be improved and enhanced?
    Mr. Kovacs. Yes. Investing, at least in biotech where I 
think there has been a huge boon in terms of the number of IPOs 
as a result of the Jobs Act, is complicated. Because the 
investors have to spend a lot of time going through pre-
clinical data, thinking about--talks and issues. It is a 
complicated investment. And so to be on a roadshow, where you 
get a 30-minute interview, effectively, with all these 
investors isn't enough time to evaluate. And therefore, being 
able to go and do test-the-waters meetings while you are on 
file is important, as well as many companies like the idea of 
being able to file confidentially because the biotech market 
can swing positively and negatively pretty quickly.
    And it is always sort of the tainted company if the market 
went away when you are on file and say, well, you couldn't get 
your deal done. So this allows companies to file and just be on 
file publicly for 30 days before you launch your deal. So both 
of those have been positive.
    Mr. Carney. Any other panelists with comments, positive or 
negative? Please?
    Ms. Gabaldon. I would comment very positively with respect 
to the Jobs Act and the benefits that it has bestowed. I 
definitely think that there have been some huge advantages as 
far as the on-ramps. And I know that a lot of companies have 
been taking advantage of that, and we are seeing the results.
    There are a couple of bills that affect the on-ramp and the 
EGCs, and I am a little concerned, particularly about the 
follow-on provision having to do with EGCs. I am not sure of 
its status right now, whether it is still part of the bill or 
not, but I think that specifically is quite problematic insofar 
as it would allow public filing 2 days before stock is to be 
issued, which seems to me to be an unworkably short period for 
the public to evaluate anything.
    In addition, the idea of shortening the period between 
public filing and the roadshows from 21 to 15 days strikes me 
as a bad idea, and unnecessary, because right now the average 
is something like 40 days before the roadshow takes place. And 
the justification that, oh, this will allow a company to dive 
through a market window before the market goes down is, to my 
mind, just a way of saying that it is a way to take money from 
investors who immediately are going to experience a diminution 
in value.
    Mr. Carney. Thank you very much. I see my time has expired.
    I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    I now recognize Mr. Hultgren.
    Mr. Hultgren. Thank you, Chairman Garrett. And thank you 
all so much for being here.
    I want to start by saying that I am grateful that the 
Financial Services Committee is going to be considering a bill 
I have introduced, H.R. 1675, the Encouraging Employee 
Ownership Act of 2015. This bipartisan, common-sense law will 
make it easier for companies in Illinois and nationwide to 
offer their hardworking employees a stake in their own 
businesses.
    My constituents in the 14th District in Illinois have shown 
me the value of employee ownership. For example, when you walk 
into Scot Forge, a locally employee-owned manufacturer, you 
notice their employees' energy from upper management on down to 
the shop floor. They are proud of their work because it 
contributes to their share in the business.
    Companies like Scot Forge have an easier time hiring and 
retaining talented employees, and this is true in other 
industries such as the biotech field. Brian Hahn, chief 
financial officer of a biotech company, GlycoMimetics, 
Incorporated, testified that expanding opportunities for 
employee ownership would help innovative biotechs to attract 
talented workers and compensate them competitively without 
incurring additional compliance burdens.
    Unfortunately, some companies are not offering employee 
ownership because regulations limit how much ownership they can 
safely offer. SEC Rule 701 mandates various disclosures for 
privately held companies that sell more than $5 million worth 
of securities for employee compensation.
    This information includes business-sensitive information 
like financials, capital expenditures, and risk factors within 
the company. Businesses that want to offer their employees more 
ownership have to decide if they want to make these 
confidential disclosures that would greatly damage future 
innovations and put them into the wrong hands.
    In 1999, an American Bar Association subcommittee expressed 
concerns with these disclosures, stating in a letter that these 
disclosures risked having this information come into the 
possession of a company's competitors. The letter continues 
that they could result in serious injury to the company. One 
would be naive to think this could be avoided with a 
confidentiality agreement. And this is not to mention the cost 
of preparing these disclosures.
    The Encouraging Employee Ownership Act (EEOA) addresses 
this problem and opens up more opportunities for employees to 
share in the companies they work for every day. My bill is a 
simple, bipartisan fix that amends SEC Rule 701 to raise this 
disclosure threshold from $5 million to $10 million and adjusts 
the threshold for inflation every 5 years.
    Last year's version of the bill set the threshold at $20 
million, but as a bipartisan show of good faith we lowered it 
to $10 million. This won't put employees at risk of fraud. The 
SEC said, in their 1999 rulemaking, that there haven't been any 
major allegations of abuse of Rule 701, and this hasn't changed 
since.
    They also noted that employees know a lot about the 
businesses and they don't need as much disclosure as the 
typical investor with no particular connection to the company. 
What's more, companies will have to comply with all pertinent 
anti-fraud and civil liability requirements. This means that 
every investor will receive information that a reasonable 
investor would need before making an investment decision.
    So I believe the EEOA will empower all levels of a business 
and help create a stronger working middle class. We should 
applaud employee ownership from the shop floor to the 
boardroom. I welcome your support for the Encouraging Employee 
Ownership Act of 2015, and I thank our generous cosponsors, 
Representatives Fitzpatrick, Stivers, Delaney, Polis, Higgins, 
and Sinema.
    The first question I wanted to ask was to Mr. Quaadman. I 
have read and heard from several sources that companies are 
worried about the required disclosures containing confidential, 
business-sensitive information that could be harmful. I wonder 
if you could elaborate on the danger that these disclosures 
pose to private companies, especially if they were provided to 
former employees and got into the hands of competitors. Are 
there costs associated with these disclosures?
    Mr. Quaadman. Yes, thank you, Mr. Hultgren, and thank you 
for introducing this bill. It is an important step forward also 
to implement the Jobs Act.
    So I think with your statement, with your question, you 
sort of hit it on the head, right? Because number one is, there 
has been no history of abuse with Rule 701. But number two, and 
more importantly, you are dealing with start-up companies that 
are trying to grow and are using a proprietary model in order 
to grow and effectuate the next great idea. And the problem is, 
if that information leaks out, it could either hamper the 
ability of that company to be successful or it could actually 
destroy them.
    So, again, the opponents of this bill are trying to impose 
a public company disclosure model on a private startup and it 
is apples and oranges. Or it is North Pole-South Pole; it is 
that diametric. So, again, companies, employees are 
incentivized to help the company be successful. Because if they 
are, that stock is going to be worth a lot of money.
    At the same time, they have a good idea of what they are 
trying to do and how they are trying to get there. And, at the 
same time, owners of the company are trying to make sure that 
they have the talent to be successful. So this bill is a win-
win.
    Mr. Hultgren. Thank you for that. I see my time has 
expired.
    I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    I now recognize Mrs. Wagner.
    Mrs. Wagner. Great. Thank you, Mr. Chairman, and thank you 
all for joining us today to discuss important legislation that 
will help empower small businesses to raise more funding and 
which will allow them to grow and create more jobs, my 
favorite, favorite topic.
    Small businesses create more jobs than any other business 
sector in America, and are leading the way on exciting new 
products and technologies. In fact, studies have shown that 
startups create an average of 3 million jobs annually. Ensuring 
that small businesses are able to raise capital is absolutely 
essential to getting our economy back on track while we are 
still recovering from the financial crisis.
    For that reason, I have introduced legislation, along with 
my colleague on the other side of the aisle, Representative 
Terri Sewell, H.R. 1723, the Small Company Simple Registration 
Act, which would streamline how small businesses file 
additional registration documents in order to continue offering 
securities to willing investors. In fact, this common-sense 
idea was originally proposed by the SEC's own working group on 
capital formation.
    Mr. Kovacs, how are small issuers harmed by not allowing 
forward incorporation by reference for Form S-1 registration 
statements?
    Mr. Kovacs. It is interesting. The friction costs 
associated with raising capital can be quite high. And any way 
that you can reduce those costs yields more capital to the 
companies that need it. By allowing forward incorporation on an 
S-1, per se, means that you don't have to be continually--if 
there is some delay in the offering, you are continually 
updating those statements. You just reference your Q when you 
are next filing. We do that all the time as a public company. 
We reference forward aspects of our proxy when we file our K. 
So this is just allowing less costs in terms of updating an S-1 
if there is, for some reason, a delay or you are doing a 
follow-on offering inside of a year after your initial IPO.
    Mrs. Wagner. You may have answered my next question 
somewhat here. But how would allowing forward incorporation by 
reference for Form S-1 registration reduce and simplify 
disclosure burdens for smaller issues? Obviously, you talked 
about the cost factor, but there must be compliance issues and 
simplification of the process, correct?
    Mr. Kovacs. Yes. I mean, there are time aspects, too. 
Companies that want to do another follow-on offering inside of 
a year of the IPO use S-1. We did it. We went public in June of 
2013, we did a follow-on offering in February of 2014. We had 
to go and update the entire S-1. It required a couple of 
visits, a few weeks of time and outside legal counsel and--
    Mrs. Wagner. Weeks.
    Mr. Kovacs. Yes, of going to get things done and updated. 
Whereas if we could have referenced our K, which was going to 
get filed about 2 weeks later, it would have been much simpler.
    Mrs. Wagner. In your opinion, would it be appropriate to 
also extend this provision to emerging growth companies?
    Mr. Kovacs. Yes, I think so. We were an emerging growth 
company at the time, and it certainly would have been helpful.
    Mrs. Wagner. Mr. Quaadman, how else does the current SEC 
registration process make it more difficult for smaller issuers 
to raise capital?
    Mr. Quaadman. First of all, just to answer your last 
question, I also would welcome an extension to emerging growth 
companies, as well.
    Part of the issue is, and I think what your bill is getting 
at, is that if you create a company file can use incorporation 
as a way to streamline disclosures and get the information out 
to investors without repetitive disclosures. So what we are 
faced with here is that the explosion of disclosures, 
particularly for smaller companies, isn't providing material 
information to investors.
    So what we need to do is to determine, and press on the SEC 
to determine, what are material disclosures, how can it be 
disclosed effectively? Because this will actually help 
investors get the information, it will help smaller companies 
communicate that information. And your bill is an important 
step forward in that.
    Mrs. Wagner. What are some of the other filing and 
disclosure burdens that disproportionately affect small 
business issuers?
    Mr. Quaadman. So you start to look at things like historic 
stock price, disclosures about the public reading room at the 
SEC that individually sound like small things. But you start to 
add them up and add them up and they are costly and they are 
burdensome and there is a time opportunity cost. I was talking 
to a company that we were doing some regulatory meetings with 
who is also an emerging growth company. And he was talking 
about the fact that he has a choice right now: he can hire two 
compliance people to deal with more disclosures that are not 
going to give more information to investors; or he can hire 
scientists. He asks, ``Which do you think I would rather do?''
    Mrs. Wagner. We hear it all the time. We hear it in every 
industry, not just the financial services sector--businesses 
that want to hire people to grow their business as opposed to 
hiring compliance officers, lawyers, people who are going 
through all of this red tape. I appreciate your indulgence, Mr. 
Chairman.
    My time has expired, and I thank the panel very much.
    Chairman Garrett. Absolutely. Thank you. The gentlelady's 
time has expired.
    Mr. Ellison, welcome back, and you are recognized for 5 
minutes.
    Mr. Ellison. Yes, and I thank the chairman for the time.
    I originally voted for H.R. 1965 last session. But after 
digging into the issue of XBRL, I have come to really wonder 
whether or not I cast the right vote. You don't hear Members of 
Congress admit that maybe they didn't vote the right way often, 
but I have to admit that I am not sure that I was right. And 
the reason has to do with some research I have done which shows 
that XBRL filing costs are lower than expected, according to 
some writers. And so, I actually think that it is probably a 
good idea to move toward a 21st Century searchable electronic 
database, and probably not a good idea to move away from it.
    So I am wondering. Dr. Gabaldon, in February 2015 the 
investor advocate at the SEC, Rick Fleming, said H.R. 1965 
would be harmful to disclosure. If we exempt more than two-
thirds of the issuers, approximately 6,000 companies, from 
using XBRL-formatted reporting, do you think that this would be 
harmful to firms and markets?
    Ms. Gabaldon. It seems clear to me that it would. The 
United States would have a reputation as being not very 
technologically hospitable as far as would-be investors and 
would-be analysts are concerned. And I find that very 
concerning.
    And I also think that in light of the fact that, frankly, 
the SEC's relationship with technology thus far has been 
anything but overwhelmingly impressive. EDGAR is a very 
difficult tool to use. Allowing them to move forward with 
something that does have some promise, that has been pioneered 
successfully in other countries and appears to be very useful 
and cost-effective in those countries seems to me to be the 
clear way to go.
    Mr. Ellison. Okay. So have you had a chance to look at this 
article that I am holding in my hand? I don't know if they have 
given you a copy.
    Ms. Gabaldon. I believe so, yes.
    Mr. Ellison. Do you have any off-the-cuff sort of 
reflections on it?
    Ms. Gabaldon. I think that it really--
    Mr. Ellison. Just for the record, for clarity--sorry for 
interrupting--it says it is AICPA-XRL.US and then it is styled: 
``Research Shows XBRL Filing Costs Lower Than Expected.''
    Ms. Gabaldon. Correct. And it does make it clear that 69 
percent of small reporting companies experience an annual XBRL 
expenditure of $10,000 or less. There is a large number who are 
paying as little as $2,000 a year. To my mind, that is a very 
small amount. And I mentioned earlier as well that in the U.K., 
it has gone as low as 100 pounds for some types of filings. And 
I don't see any reason that couldn't be replicated here.
    Mr. Ellison. Okay. Some say that the cost of compliance is 
too high. That is their view. And as you just pointed out, this 
article indicates the costs are going in the downward 
direction. Do you think that the compliance costs are 
appropriate? Do you think that they are exorbitant? Do you 
think the trend is headed in the right direction?
    Ms. Gabaldon. The trend is encouraging as far as it really 
seems to come in under budget, so to speak, less than people 
were fearing would be the costs. And they do seem to be 
declining. And I do believe that the SEC gets a lot of benefit 
out of being able to run the numbers easily when it can check 
to see if one company is out of line.
    In addition, they can make use of it as a tool to evaluate 
their own regulations, which seems to me to promise very clear 
benefits that are well worth the steadily declining costs.
    Mr. Ellison. So what do other countries do, say like 
Britain, Israel, Japan? What do they do?
    Ms. Gabaldon. They use XBRL. And in addition, the European 
Union in general is working towards something like XBRL if not 
XBRL itself.
    Mr. Ellison. I read that in June 2013 the European 
parliament approved a proposal that would assign European 
securities and markets authority the task of developing a 
single electronic format for financial statements filed with 
European exchanges. Any kind of reflections on that?
    Ms. Gabaldon. It seems that we will be a genuine outlier if 
we don't step into the 21st Century.
    Mr. Ellison. Okay. So if H.R. 1965 became law, would the 
United States run the risk of being behind foreign 
jurisdictions in terms of the sophistication of and ease of use 
for information contained in public filings? I think I know 
what your answer is, but I would like to give you a chance to 
elaborate.
    Ms. Gabaldon. It wouldn't just be running the risk, it 
would be a fait accompli at that point. We would be behind.
    Mr. Ellison. Okay. Thank you for your time, ma'am, and 
thank you to all our guests.
    Chairman Garrett. The gentleman's time has expired .
    Mr. Poliquin, you are recognized for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very 
much. And I want to thank everybody for being here today, and 
for addressing how we can have small businesses that really are 
the engine of growth in this economy and in hiring and 
providing our families with more opportunity. So I appreciate 
everyone taking the time to come here and be here today.
    I represent Maine's 2nd District. If you haven't been there 
to vacation, you really should. It is a great place to go, and 
you can spend money. We are a State that needs that. So I 
invite all of you to come up when you have a chance.
    I represent a highly rural part of our State, where in the 
last year alone, we lost 3 paper mills, 1,000 jobs, in 
Bucksport, East Millinocket, and in Old Town. And the reason 
for that, in part, is because in New England, and in particular 
in Maine, we have converted burning oil and coal to burning 
natural gas in order to produce electricity. And the 
electricity, of course, is used to run our machines to make our 
paper.
    We are the greatest papermakers in the world, and we are 
surrounded by all these trees in Maine. But we have a real 
problem with this. So not only do we need to produce more 
product and get that product up to Maine by increasing the 
pipeline capacity and drive down the cost so we can be more 
competitive and keep these jobs going, we also need to make 
sure we have an opportunity for our paper mills--many of which 
are owned by other companies; they are subsidiaries of larger 
companies--to hedge their bets and be able to secure long-term 
natural gas and other commodity prices such that they can keep 
these mills open.
    So doesn't it make sense--and Mr. Deas, I will ask you this 
question, if you don't mind, sir--that we can allow a parent 
company to be able to execute those financial transactions on 
behalf of their subsidiaries in order to make sure the entire 
enterprise is able to secure, in this case, natural gas or 
whatever they are trying to secure for the entire enterprise to 
make sure you keep the risk down, keep the cost down, be more 
competitive and keep these companies growing and creating jobs?
    Mr. Deas. Congressman, yes. And the first 18 years of my 
career was at Scott Paper Company and S.D. Warren Company in 
your State in the--
    Mr. Poliquin. Sure. Thank you.
    Mr. Deas. --in the mills that you mentioned. And energy, of 
course, is a big part of that business and my business. And 
hedging those activities at the lowest cost involves netting 
out opposite-way trades. That happens in the foreign exchange 
market and other examples of exposure. And doing one trade with 
a financial counterparty, a bank--and a smaller amount--lowers 
costs and, ultimately, makes us more competitive.
    Mr. Poliquin. And with no risk to the secondary market.
    Mr. Deas. No, sir. It actually reduces your systemic risk 
in the market by reducing the amount of external derivatives 
outstanding.
    Mr. Poliquin. I would like to move on to another question 
if I can, and Ms. Hughes, I will direct this to you if I may, 
please. I support Congressman Hultgren's bill, H.R. 1675, that 
he just mentioned a moment ago, when it talks about how you can 
incent small businesses that are just starting up. And all the 
challenges and all the excitement you have with small 
businesses taking off, especially in your space, Mr. Kovacs.
    But often, these companies are strapped for cash or have no 
cash. And as you mentioned earlier, sir, they have no product, 
they have no revenue stream. And so how in the dickens do you 
attract the capital that you want to make sure you grow your 
business and you can be successful for the investors and for 
those who are hired by the enterprise?
    So Ms. Hughes, with your experience in this space and the 
number of companies that you folks get involved with, give us 
an idea of opportunities you might have run into in the past 
where you want to incent people, but you don't want to take on 
debt and maybe you can't borrow money because the company is so 
small.
    Why not offer them a piece of the action, and why not offer 
them stock in the company? Doesn't that create an exciting 
environment for folks to really want to dig in, make the 
company successful, grow, produce products we want in this 
country, and hire more people?
    Ms. Hughes. I can say yes, absolutely. Every single time we 
have employees involved in the ownership of the company they 
are much more committed and much more interested in what is 
going on, improving the production and efficiencies within the 
businesses themselves.
    I don't have a tremendous amount of experience in the 
start-up market, unfortunately. We deal with very small 
businesses, but most of the businesses we are involved with 
have revenues of about $10 million, and we are helping them 
through the next phase of growth. But absolutely, employee 
ownership is a real driver when trying to create value and 
growth over time.
    Mr. Poliquin. And Mr. Kovacs, therefore, doesn't it make a 
lot of sense to support H.R. 1675 that Mr. Hultgren was talking 
about a little bit before? Doesn't that make a lot of sense?
    Mr. Kovacs. I think it does.
    Mr. Poliquin. Yes. Thank you very much.
    I appreciate it.
    Chairman Garrett. Thank you. The gentleman yields back.
    Mr. Hill is recognized for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman, and I thank the panel 
for your patience and indulgence this afternoon. Thanks for 
being with us.
    Ms. Hughes, I want to start with you, and tell you I was 
impressed by looking at Mr. Luetkemeyer's and Mrs. Maloney's 
bill on this SBIC simplification process. Having been a 
community banker and investor in SBICs, I certainly know a lot 
about duplicated regulation. We had the Fed and the State and 
the FDIC and the State insurance commissioner, the State 
securities commissioner, the SEC, and FINRA, and I am sure I am 
leaving someone out and we will get a letter from them. But I 
have a lot of empathy for this issue of duplication. And hasn't 
the SBA had exclusive regulatory oversight over SBICs since the 
late 1950s?
    Ms. Hughes. Yes, 1958.
    Mr. Hill. So, did the Dodd-Frank Act tell us to just 
inadvertently step on it in the private equity space, as they 
now have opened the door for duplicate regulation of SBIC 
managers or SBIC advisors?
    Ms. Hughes. Actually, I think that Dodd-Frank tried to get 
it right in that they recognized that SBICs were already 
regulated by a Federal regulator and they were excluding them. 
I think the catch was really that it is the solely commentary. 
So if you solely invest in SBICs, then you are exempt from 
registration. But I don't think anybody really thought through 
the fact that multiple licensees often get to a point where 
they have a very small piece of a fund left. And at that point 
in time, typically, when the debentures are repaid, you would 
hand back your SBIC license.
    At that point, I now manage a dollar beyond a non-SBIC so 
my other SBIC monies prompt registration with the SEC.
    And that would prompt duplicate registration and cost and 
burden. So I think the idea is to streamline it so that it--
focus on the SBA has done a good job, they have done this for a 
long time, we are very closely regulated from the beginning to 
the end as they vet the management teams coming in. And we are 
not opposed to regulation, we appreciate their insights, but we 
just don't want it to be from multiple sources, I think is the 
point.
    Mr. Hill. Yes, and I think it is good for the record to 
show the SBA has a long track record here, including a 
disciplinary action against bad actors who have SBIC funds that 
don't need another one. But it certainly should not result in 
duplicate oversight. I think they do a good job. And no one 
knows the SBIC space better than the SBA. And the cost of 
getting an SBIC approved is extensive. It is months and 
months--9 months, 12 months--and very expensive to fill out the 
highly specialized forms that are required there.
    Ms. Hughes. It is. We have become expert in that.
    Mr. Hill. What would you say it costs to register to have 
an SBIC--
    Ms. Hughes. To get an--
    Mr. Hill. I know it is the best bargain in Washington in 
legal prices. What would you say to that?
    Ms. Hughes. Through the fund-raising process, on average I 
would venture a guess that you are spending somewhere between 
$100,000 and $200,000, all in start-up costs, but certainly not 
all paid to the government. But certainly attorneys back and 
forth as everything is approved, all of the paperwork 
associated with checking the boxes, completely vetting your 
track record and those kinds of components, as well as the 
importance of being able to fundraise in the marketplace and 
bring private capital to the mix. To be able to invest in those 
small businesses is critical.
    Mr. Hill. I know our State has really benefited over the 
years by an expansion of SBIC opportunities. And so, thank you 
for your comments. I certainly support the effort to streamline 
this and remove the duplication.
    Mr. Kovacs, you mentioned Section 404 in kind of a sidebar 
in your testimony. Can you catch me up on--I thought small 
filers were exempt under 404 at a lower level of scrutiny. Can 
you talk to me about why you keep that on your list, please--
    Mr. Kovacs. Yes, for emerging growth companies, you have 5 
years before you become SOX 404(b)-compliant, which is where 
myself and my CEO sign off saying that we have internal 
controls. But that is when the auditors sign off, and therefore 
there are all sorts of additional SOPs and outside the auditors 
there is a lot more regulation around 404(b).
    Normally, we would expect we would have 5 years to be 
404(b)-compliant, but there are a few things that take that 
away from you. One is if you had a billion dollars of revenue. 
We are clearly far from a billion dollars of revenue; it is a 
small biotech. We have, really, no revenue today.
    But our market cap has done well because people see that 
our drug is getting close to market and there is enthusiasm for 
the long-term potential in our company. And so our stock prices 
have performed and our stock has gone through the $700 million 
threshold. And now we are losing our emerging growth company 
status, even though we still really are an emerging growth 
company.
    And so now I have to become SOX-compliant by next year. And 
I have to hire more people, I have to bring in outside 
consultants, and I have to pay my auditor more money to get 
ready for that.
    Mr. Hill. Thanks for that clarification.
    And, Mr. Chairman, I yield back. Thank you.
    Chairman Garrett. Thank you. The gentleman yields back.
    Mr. Huizenga is recognized for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that, 
and it is my pleasure to have a bill that we are discussing 
today, as well. And I know some of you had referenced it, H.R. 
686, the Small Business Mergers, Acquisitions, Sales, and 
Brokerage Simplification Act of 2015. It was interesting 
earlier, the chairman, towards the beginning, had talked a 
little bit about the recommendations that the SEC has developed 
and then not acted upon. This was one of those. It was 7 years 
running. A gentleman from our district or right near our 
district, Shane Hansen--a partner at Warner Norcross & Judd--
who chaired the M&A section of the bar, approached me and said, 
``Look, we have been trying to move them along here, and we 
just simply cannot get this done. This makes a tremendous 
amount of sense.''
    And what it is, is under the current system there is a one-
size-fit-all approach to SEC registration for brokers. And I 
felt that we needed to have a more tailored registration system 
for these smaller, family-owned, oftentimes privately-held 
mergers and acquisitions for these brokers.
    I know, Mr. Quaadman, you have talked a little bit about 
this previously. I don't know if you care to comment on why you 
believe the SEC should have this more tailored registration, 
and maybe Ms. Hughes, as well?
    Mr. Quaadman. Sure. Thank you, Mr. Huizenga, and thank you 
for reintroducing the bill.
    As I said before, we support the bill. And I made reference 
in my opening remarks about the no-action letter with the SEC. 
I think that was welcome. I frankly only think that they issued 
that no-action letter because you introduced the bill in the 
last Congress. Because the SEC has just not been willing to 
move on ideas that the emerging growth committee has been 
coming out with.
    But more importantly, what the regulator can giveth, the 
regulator can taketh away. So we saw earlier this year, in 
January, on the Friday night before the Martin Luther King 
weekend, where on a corporate governance issue that the Chair 
issued guidance overturning a decision staff had made in what 
is known as the Whole Foods decision that had overturned 
decades of practice in terms of shareholder proposals.
    So our concern here is that if it is just left to a no-
action letter, you can get a new chairman next year, and a no-
action can go away and we are right back to where we started.
    Mr. Huizenga. Or a Chair could change his or her mind.
    Mr. Quaadman. Correct. So we think that your bill is a 
sensible way to get the parameters out there, get it set in 
stone, get this done. And so we are not going to have any give 
and take that can make this go away.
    Mr. Huizenga. And, Mr. Chairman, I would like to--and I 
will get to you, Ms. Hughes, or somebody else who was starting 
to speak. But I would like to submit for the record letters of 
support for H.R. 686 from: the Small Business & 
Entrepreneurship Council; the Business Brokers of Florida; the 
Nevada Business Brokers Association; the International Business 
Brokers Association; the Alliance of Merger and Acquisition 
Advisors; and the Association for Corporate Growth.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Huizenga. Thank you. And I will note that this 
committee passed this bill last Congress on voice vote, where 
it hit the Floor. And as I try to tell constituents back home, 
yes, things actually do pass Congress. And, in fact, they are 
all shocked that this one passed unanimously, 422-0. Most don't 
believe that Congress can actually work that way, but we are 
hoping that we are going to have a similar action here in this 
term, as well.
    But I don't know, Ms. Hughes, if you wanted to comment?
    Ms. Hughes. Sure. We do a lot of business with small M&A 
and business brokers who are transacting mostly small private 
companies. They truly add value. A lot of those companies are 
very interested in dealing with the smaller firms. They are a 
little bit afraid of the larger, bigger houses and would far 
rather deal with the guy down the street whom they have known 
for 20 years as they bring their company to market because it 
is their baby for which they are transacting, or they are 
trying to raise money to generate fine growth capital.
    Ms. Gabaldon. Could I quickly--
    Mr. Huizenga. Yes.
    Ms. Gabaldon. I just wanted to say I think that in many 
cases, the guy down the street may be registered at this point 
in time. But in addition, I think it is critical to note that 
the SEC no-action letter has a number of protections that are 
built into it that I think are very important and that the 
committee should seriously consider.
    Mr. Huizenga. And we just hope to codify a number of those 
things.
    So with that, Mr. Chairman, I will yield back the balance 
of my time.
    Chairman Garrett. The gentleman yields back 9 seconds.
    Ms. Moore, welcome to the subcommittee.
    Ms. Moore. Thank you so much, Mr. Chairman. And I want to 
thank you for your indulgence. I am not a member of this 
subcommittee so I am very grateful that you yielded the time. I 
want to apologize to the witnesses. I just cannot see any of 
your names from over here, from this vantage point, I have no 
idea with whom I am speaking. So, just indulge me.
    I have a couple of bills that are under the jurisdiction of 
this subcommittee, and I want to talk about H.R. 1317, the End-
User Affiliate Clearing Exception. I listened very carefully to 
Mr. Quaadman, on the end there, when you talked about the 
importance of legislating, even though the regulators sometimes 
issue these no-action letters. So I think this question is for 
Mr. Deas, about the no-action letter of the CFTC that really 
endorsed the idea that commercial businesses ought to be able 
to aggregate their swaps into a SCTU, as they indicated in 
their no-action letter which is similar to my bill.
    So I guess I want to know, do you think that it is 
important to pass H.R. 1317? And can you just briefly address 
the notion that this bill could permit a large swap-dealing 
bank to buy a commercial business selling widgets, and then 
transact their entire swap business using this subsection of 
the end-user exception?
    Mr. Deas. Yes, thank you for that question. The basis of a 
no-action letter is that the action covered by the letter is 
probably not in compliance with law. But the staff, in this 
case the CFTC Division staff, is committing, for so long as 
that letter is outstanding, not to take an enforcement action. 
We all feel so strongly about compliance with law and that 
there is a special provision in Dodd-Frank that requires boards 
of directors of companies that avail themselves of the end-user 
exception for clearing and margining to affirm, every year, 
that they are in compliance with the law in order to use that 
end-user exception.
    So it puts treasurers and other officers of the company in 
a very awkward position. And there has been broad, bipartisan 
support for this fix that is to just the drafting to make the 
intent clear and which everyone wants to achieve.
    The second part of your question, this idea that there 
could be this kind of loophole. First of all, I would say that 
from the beginning, from the passage of Dodd-Frank, it has 
always been the case that an operating company engaged in 
appropriate end-user commercial activity that happens to be 
owned by a financial parent can avail itself--it was in the 
law--of the end-user exemption. What we are talking about is 
permitting other companies in that group to trade through a 
centralized Treasury unit and reduce the risk by reducing the 
amount, the volume, of derivatives outstanding through netting 
them in the central Treasury unit.
    So this just clarifies what was really, we believe, the 
intent of the drafters. And we urge continued consideration for 
this bill.
    Ms. Moore. Thank you so much. And just briefly, can you 
explain the credit support language in the bill, and what that 
accomplished, and how it protects the system and provides 
regulators with the flexibility to tailor the regs?
    Mr. Deas. The credit support language is meant to assure 
that there wouldn't be some separate derivative activity 
outstanding that doesn't ultimately come back within the group, 
the parent company in the group. And so there is a provision 
providing for that kind of credit support for the inter-company 
derivative transactions.
    Ms. Moore. Thank you so much.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Garrett. The gentlelady yields back.
    The vice chairman of the subcommittee requests recognition.
    Mr. Hurt. Thank you, Mr. Chairman.
    I just have a couple of follow-up questions for Ms. 
Gabaldon. Were you familiar with the article that was 
circulated earlier and referred to in questioning?
    Ms. Gabaldon. Yes.
    Mr. Hurt. Who published that?
    Ms. Gabaldon. I don't know who--
    Mr. Hurt. AICPA.
    Ms. Gabaldon. AICPA and XBRL.
    Mr. Hurt. XBRL US?
    Ms. Gabaldon. Yes.
    Mr. Hurt. Mr. Kovacs, in his testimony, talked about XBRL 
contractors. So obviously, you have to do--if you are going to 
have to pay to have this work done because you can't do it in-
house, you would get an XBRL contractor. Is that correct?
    Ms. Gabaldon. Yes.
    Mr. Hurt. And who do AICPA and XBRL US represent? They 
represent folks who are looking for--who are investing and who 
are in the analyst business?
    Ms. Gabaldon. The AICPA is an association for certified 
public accountants, and--
    Mr. Hurt. XBRL US--
    Ms. Gabaldon. That is a non-profit organization.
    Mr. Hurt. Okay, because in the list--
    Ms. Gabaldon. It is definitely an--
    Mr. Hurt. In the list of all of the different folks who 
were going to be disadvantaged by this proposal, you said 
investors would be disadvantaged, analysts would be 
disadvantaged. You said emerging growth companies would be 
disadvantaged. But you didn't say the folks in the XBRL 
contracting business would be disadvantaged. You think they 
would?
    Ms. Gabaldon. I think they have employees, too.
    Mr. Hurt. Okay. So I guess my last question for you is, is 
you understand this would be a voluntary--the bill would make 
this filing voluntary.
    Ms. Gabaldon. I do understand that, and I do also want to 
make the point that I don't think that the AICPA has any 
particular dog in the fight. And I think that is noteworthy, 
but--
    Mr. Hurt. Okay. Well, they have their name on this article. 
It doesn't say exactly where this came from. But I guess they 
have that much of a dog in the fight they published an article 
about it, correct?
    Ms. Gabaldon. I think that, in general, the AICPA engages 
in a lot of studies. I get the newsletter from them, as a law 
professor, that just talks about studies they have conducted 
that they think are going to be helpful to the readers.
    Mr. Hurt. All right.
    Turning to Mr. Kovacs, do you understand that our proposal 
is voluntary?
    Mr. Kovacs. Yes.
    Mr. Hurt. Then I guess my second question is, if you look 
at this article it says--it may be that a company pays $10,000, 
it may be that a company pays $20,000, or it may be that a 
company pays $50,000. Why would would any company pay $1 if the 
information is not something that they believe is useful to 
investors and analysts? Why would you pay even $1?
    Mr. Kovacs. I can only speak for us; I think we would 
probably opt to not pay it.
    Mr. Hurt. Let me ask you this: If this were made law, would 
you all opt out of having to file XBRL?
    Mr. Kovacs. Yes, at this point in time I think that would 
probably be the direction we would take. We would rather 
probably hire somebody as opposed to paying that to a third 
party.
    Mr. Hurt. Okay.
    Mr. Kovacs. The hiring.
    Mr. Hurt. Even? Okay.
    Mr. Kovacs. A scientist or someone like that.
    Mr. Hurt. I just have a few minutes.
    Mr. Quaadman?
    Mr. Quaadman. Yes. Mr. Hurt, so yes it is voluntary. Number 
two, what is important here is that XBRL is a delivery system, 
right? And that has been a very problematic system that 90 
percent of investors aren't using. And people who have been 
involved with it acknowledge that there have been problems with 
it.
    So the issue here is, can we get a better delivery system 
that uses electronics to get the information out there? But can 
we do it in such a way that if an emerging growth company 
doesn't want to be a guinea pig they don't have to be, so they 
can save their money?
    The third part of your bill, about the cost-benefit 
analysis, actually provides that lever on the SEC to continue 
to improve the delivery system. So I think this provides the 
additional legislative pressure to get us into a 21st Century 
delivery system. So the information is still going to be there 
for investors, the delivery system here is going to--you can 
volunteer in and out.
    And one thing I just want to note, as well--as far as the 
United States being an outlier, I had a meeting with the 
European commission, with the people who are dealing with their 
shareholder directive, last November. And they said, ``You know 
what? A Latvian investor who invests in a U.K. company can put 
their money there, but they can't vote in the governance of 
that U.K. company. So tell us how you guys do it.'' So if we 
are going to have a voluntary XBRL exemption for U.S. 
investors, we are still going to have the most sophisticated 
information and corporate governance system by far, and that is 
why we have the deepest capital markets. And actually, we think 
your bill helps us get into the 21st Century.
    Mr. Hurt. Thank you.
    I yield back.
    Chairman Garrett. The gentleman yields back.
    And looking around, I think that is all that we have as far 
as Members. Without objection, I seek unanimous consent to make 
the following written statements a part of the record: the 
Honorable Darrell Issa; the American Bankers Association; 
Americans for Financial Reform; the Depository Trust & Clearing 
Corporation; the Food Marketing Institute; the Independent 
Community Bankers of America; the M&A Source; the North 
American Securities Administrators Association; Shane Hansen, a 
partner at Warner Norcross & Judd; and XBRL US.
    With that, we bring to a close today's Capital Markets 
Subcommittee hearing. As always, I thank the members of the 
panel.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their 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.
    So with that, I again thank the panel, and this hearing is 
adjourned.
    [Whereupon, at 4:26 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             April 29, 2015
                             
                             
                             
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