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

                        LEGISLATIVE PROPOSALS TO ENHANCE

                          CAPITAL FORMATION AND REDUCE

                          REGULATORY BURDENS, PART II

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

                                    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

                                   __________

                                  MAY 13, 2015

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-22

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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
    TOM EMMER, Minnesota

                         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:
        May 13, 2015.................................................     1
    Appendix:
        May 13, 2015.................................................    37

                                   WITNESSES
                            Wednesday, May 13, 2015

    Bullard, Mercer E., President and Founder, Fund Democracy, Inc.;
      and MDLA Distinguished Lecturer and Professor of Law,
      University of Mississippi School of Law........................     7
    Burton, David R., Senior Fellow, Economic Policy, The Heritage
      Foundation.....................................................     6
    Kruszewski, Ronald J., Chairman and Chief Executive Officer,
      Stifel Financial Corporation, on behalf of the Securities
      Industry and Financial Markets Association (SIFMA).............     4
    Quaadman, Tom, Vice President, Center for Capital Markets
      Competitiveness, U.S. Chamber of Commerce......................     9
    Weild, David, Chairman and Chief Executive Officer, Weild & Co.,
      Inc............................................................    11

                                    APPENDIX

    Prepared statements:
        Bullard, Mercer E............................................    38
        Burton, David R..............................................    62
        Kruszewski, Ronald J.........................................    76
        Quaadman, Tom................................................    83
        Weild, David.................................................    91

                  Additional Material Submitted for the Record

    Garrett, Hon. Scott:
        Letter regarding venture exchanges...........................   135
    Ellison, Hon. Keith:
        New York Times editorial entitled, ``The Title Insurance
          Scam,'' dated May 12, 2015.................................   139
    Ross, Hon. Dennis:
        Written responses to questions for the record submitted to
          Tom Quaadman...............................................   140

                        LEGISLATIVE PROPOSALS TO ENHANCE
                          CAPITAL FORMATION AND REDUCE
                          REGULATORY BURDENS, PART II

                                  ----------

                            Wednesday, May 13, 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 2:09 p.m., in
    room HVC-210, Capitol Visitor Center, Hon. Scott Garrett
    [chairman of the subcommittee] presiding.
        Members present: Representatives Garrett, Hurt, Neugebauer,
    Huizenga, Duffy, Stivers, Hultgren, Ross, Wagner, Messer,
    Schweikert, Poliquin, Hill; Maloney, Scott, Ellison, Foster,
    Carney, and Murphy.
        Ex officio present: Representative Hensarling.
        Chairman Garrett. Good afternoon, everyone.
        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, Part II.''
        I welcome the esteemed panel and my colleagues who are here
    today. We will begin with opening statements, and I will yield
    myself 3 minutes. And, again, I wish everyone good afternoon.
        Today the subcommittee meets for, as I said, the second
    time in as many weeks to explore four pieces of legislation
    that would further reduce barriers to capital formation and
    help to make the U.S. capital markets even more attractive to
    both companies and to investors.
        Now, the first of these bills is a discussion draft, which
    I have put forward. And what would it do? It would authorize
    the creation of and establish a regulatory framework, if you
    will, for what some have dubbed venture exchanges.
        So what are these venture exchanges? What could they be?
    And why are they necessary? To put it simply, they would be
    security exchanges specifically tailored to foster the
    secondary trading of securities for not the large cap, but for
    small caps and pre-IPO companies.
        As multiple witnesses have testified already to this
    committee over the years, our current equity market structures
    in many ways have disadvantages for small issuers who
    oftentimes find that their stocks are trading in illiquid
    markets with little to no research coverage. Now, this has the
    ultimate effect of raising the cost, therefore, of the capital
    for these companies and, of course, that impacts their ability
    to grow and to then hire new workers.
        In many ways, the creation of these new formats or
    exchanges is a logical next step in the wake of the 2012 JOBS
    Act, which is now a law. And while the JOBS Act did a great
    deal to facilitate primary offerings by companies, it really
    did comparatively little to address some of the structural
    issues that exist in the secondary market for the smaller
    companies.
        As SEC Commissioner Dan Gallagher put it in a speech last
    year, these exchanges ``should bring market makers and analysts
    to these exchanges, thereby creating some of the ecosystem
    supportive of small companies that has been lost over the
    years.''
        Under the discussion draft, these venture exchanges would
    list securities such as those issued by emerging growth
    companies or reg A plus issuers and would be exempt from
    certain SEC rules that are more befitting of large cap markets.
        Now, while this is the first time that this committee will
    consider legislation in this area, this idea is certainly not
    new and has gained a significant amount of support in recent
    years as these markets for small companies have become more
    pronounced.
        And so, I look forward to exploring this draft, and these
    other bills as well, offered by Mr. Hurt, Mrs. Wagner, and Mr.
    Hill.
        And, again, I want to thank all the members of the panel
    and, also, the members of the subcommittee and the sponsors of
    these bills.
        And with that, I will yield to the gentlelady from New York
    for, 5 minutes?
        Mrs. Maloney. Four minutes.
        Chairman Garrett. Four minutes. Okay, we will go for 4
    minutes. We will compromise right in the middle.
        Mrs. Maloney. Thank you, Mr. Chairman, for calling this
    hearing to review these important bills.
        And I thank all of the panelists for being here.
        Many of our colleagues are voting. They will be coming back
    soon.
        While the system of securities laws in the United States is
    complex, the central tension underlying our securities law is
    simple: Investors want as much information as possible on the
    companies they are investing in as quickly and as accurately as
    possible.
        The companies that issue the securities, on the other hand,
    want to spend as little time as possible preparing the
    disclosures that investors crave. It is a job of public policy
    to strike the right balance between these competing desires.
        Most of the bills before us today would in one way or
    another alter the current balance between investor protection
    and lower cost for public companies. For example, the
    Accelerating Access to Capital Act would allow very small and
    thinly traded companies to sell securities faster using the
    self-registration process. This would no doubt reduce costs for
    these small companies, but it could also reduce key investor
    protections.
        Traditionally, self-registration has been limited to
    larger, well-known issuing companies that are widely followed
    by the markets. In 2007, the SEC decided to expand the number
    of companies which are eligible to use self-registration. In
    doing so, however, the SEC was careful to balance this against
    the need to maintain investor protection.
        The SEC was comfortable allowing certain very small
    companies to have a limited ability to use self-registration to
    offer securities to investors, but only on the condition that
    the company has at least one class of securities traded on the
    exchange.
        This was because the exchanges have their own standards
    that companies must meet in order to get their securities
    listed on the exchange, and these listing standards provided
    investors with sufficient assurance that the company is
    legitimate, has a reasonably wide investor base, and will have
    enough trading interest to ensure a reasonable amount of
    liquidity in the stock.
        But this bill would do away with these protections and
    would allow very small companies that trade in over-the-counter
    markets and not on a registered exchange to sell securities
    using self-registration. Allowing a small company whose stock
    is very thinly traded to quickly sell a large amount of
    securities under a self-registration raises serious concerns
    about potential market manipulation. And I would like to hear
    more from our witnesses about this issue.
        Another bill, the Fair Access to Investment Research Act,
    would extend the SEC's research safe harbor to allow broker-
    dealers to publish research on exchange-traded funds and other
    investment companies. I think that this is an interesting and
    worthwhile idea.
        And while I have some concerns with the way the bill is
    currently drafted, I hope that we can work together toward a
    solution that allows for more quality research on a fast-
    growing market while also minimizing the potential for abuse.
        I look forward to hearing from the witnesses on all of
    these bills.
        And I yield back. Thank you.
        Chairman Garrett. The gentlelady yields back. Thank you
    very much.
        I now recognize Mrs. Wagner for 1 minute. Welcome.
        Mrs. Wagner. Thank you, Mr. Chairman, for recognizing me
    for 1 minute.
        Today we will be considering some important legislative
    proposals that will help facilitate capital formation and
    reduce regulatory burdens for small companies.
        My legislation, the Accelerating Access to Capital Act of
    2015, will broaden eligibility for smaller companies to use
    Form S-3, a simplified registration document filed with the SEC
    that is currently available to larger companies. This will help
    get small companies off the sidelines and help them secure
    funding to grow their business and, more importantly, create
    jobs.
        The benefit of Form S-3 is that it allows forward
    incorporation. By reference, it enables companies to provide
    offerings off the shelf, giving them greater flexibility to
    time their issuances with favorable market conditions. These
    benefits allow companies to avoid delays and interruptions in
    the offering process, which preserves their continued access to
    capital while reducing costs and eliminating uncertainty
    relating to funding.
        I thank you, Mr. Chairman. And I yield back the balance of
    my time.
        Chairman Garrett. The gentlelady now yields back.
        And I believe that is all the opening statements we have.
    We will now turn to the witnesses.
        Some of you have been here before, and others have not. For
    those who have not, your entire written statements will be made
    a part of the record, and we will yield you each 5 minutes for
    an oral summary of your testimony.
        I believe in those machines in front of you there is a
    green light, a yellow light, and a red light. The yellow comes
    on, I believe, at the 1-minute warning sign.
        So, with that, we are going to now begin with the
    representative from SIFMA.
        But before we do that, we have an introduction to be made,
    and I will yield to Mrs. Wagner to make that introduction.
        Mrs. Wagner. Thank you.
        I would like to introduce a new panelist, Mr. Chairman.
    Today, I would like to introduce one of my constituents, Ron
    Kruszewski, as one of our witnesses and welcome him before this
    subcommittee, sir.
        Ron currently serves as chairman of the board of directors
    at Stifel Nicolaus, a brokerage and investment and banking firm
    in my hometown of St. Louis, Missouri, after first joining the
    firm as CEO in 1997.
        In addition to his prominent involvement in the industry,
    such as currently serving on SIFMA's board of directors and
    being appointed by the St. Louis Federal Reserve Board to a
    term on the Federal Reserve Advisory Council, Mr. Kruszewski
    has also played an active, active, role in the St. Louis
    community.
        I thank you, Ron, for joining us here today, for doing your
    civic duty in coming before Congress.
        And, with that, I yield back the balance of my time.
        Chairman Garrett. The gentlelady yields back.
        And, sir, you are now recognized for 5 minutes. And
    welcome.

    STATEMENT OF RONALD J. KRUSZEWSKI, CHAIRMAN AND CHIEF EXECUTIVE
        OFFICER, STIFEL FINANCIAL CORPORATION, ON BEHALF OF THE
     SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

        Mr. Kruszewski. Thank you, Congresswoman Wagner.
        Chairman Garrett, Ranking Member Maloney, and distinguished
    members of the subcommittee, thank you for providing me the
    opportunity to testify today on behalf of SIFMA and share our
    views on such a critically important topic. As introduced, my
    name is Ron Kruszewski, and I am chairman of Stifel, a 125-
    year-old investment banking firm based in St. Louis, which I
    have had the privilege of leading for 19 years.
        To put any discussion of capital formation in context, I
    would note that the securities industry sits at the fulcrum
    between investors and those in search of capital. On the one
    hand, the U.S. securities industry employs nearly 900,000
    people and 4,000 registered broker-dealers, serving clients
    with $16 trillion in assets. On the other hand, the industry in
    the aggregate has raised $2.4 trillion for businesses and
    municipalities in the United States in the last year alone.
        For those reasons, the work this committee is doing to
    fine-tune and improve our securities loss is important and
    appropriate. We applaud your focus on promoting capital
    formation and decreasing burdensome friction in the securities
    laws while upholding necessary customer protections.
        Market reforms like decimalization, Sarbanes-Oxley, and
    various SEC rulemaking and disclosure requirements have
    produced benefits for investors, but have also resulted in
    unintended obstacles standing in the way of capital formation,
    creating a one-size-fits-all market structure that often fails
    to provide adequate flexibility for small cap issuers. Because
    of the leadership of this committee, we have the JOBS Act, the
    Tick Size Pilot, and the public debate with respect to capital
    formation, which I know is alive and well.
        Turning to the specific subject of today's hearing, I would
    like to discuss two proposals that are illustrative of how
    Congress can and should influence the SEC's capital formation
    agenda. SIFMA strongly supports Congressman Hill's legislation
    to provide access to research. Anomalies and conflicts in
    current regulation result in disparate treatment for research
    on different types of securities.
        Legislation appears to be necessary to spur action at the
    SEC because they have failed to create a safe harbor for
    research on ETFs or other open-end funds, even though the need
    to provide clarity has been on their radar for decades. The
    impacted product has exploded in popularity, growing tenfold
    over the past decade, to reach $1.6 trillion in 2013.
        Similarly, we understand Congressman Huizenga's legislation
    to deregulate the M&A broker industry was influential in
    spurring the SEC to action. Back in January 2014, just weeks
    after this committee passed Congressman Huizenga's legislation,
    the SEC issued a no-action letter regarding M&A brokers.
        This no-action letter stemmed from more than a decade of
    SEC discussion and consideration of this issue; therefore, we
    believe it is premature to legislate an overriding and
    permanent form of relief on an issue where the SEC has already
    acted.
        SIFMA has also been asked to comment on the discussion
    draft to establish venture changes put forward by Chairman
    Garrett. We appreciate the focus on market liquidity for
    smaller companies and support all efforts to rebuild the
    ecosystem for small companies.
        SIFMA supports the SEC moving forward with a study of
    innovative ideas, to improve liquidity in small and mid-cap
    stocks, but any prescriptive solutions that risk damaging the
    competition in our equity markets that has fueled innovation
    needs to be carefully considered.
        It is critical that any changes to market structure for
    less liquid securities be considered to avoid the unintended
    consequence of impeding competition in the name of possible
    increasing liquidity. SIFMA and its member firms are committed
    to working with Chairman Garrett to ensure that the legislation
    establishes a regulatory regime for venture exchanges that is
    both workable and efficient for all market participants.
        Additionally, SIFMA is supportive of Congressman Hurt's
    effort to ensure that reviews of the SEC rule book are
    conducted on a regular basis. We strongly believe that
    regulators need to review the interplay between the rules and
    their aggregate effects rather than each rule in isolation.
    SIFMA has joined in this view by the Administration, as
    demonstrated by the recent Executive Orders.
        The members of this committee are to be commended for
    working together in a bipartisan manner to identify problems
    and develop solutions to improve capital formation and job
    creation in America. Our robust capital markets distinguish our
    economy from every other on Earth, but without consistent
    attention and improvement, will not be as efficient as
    possible.
        Thank you for the privilege of testifying, and I look
    forward to your questions.
        [The prepared statement of Mr. Kruszewski can be found on
    page 76 of the appendix.]
        Chairman Garrett. Thank you very much.
        Mr. Burton from the Heritage Foundation, welcome to the
    panel, and you are recognized for 5 minutes.

     STATEMENT OF DAVID R. BURTON, SENIOR FELLOW, ECONOMIC POLICY,
                        THE HERITAGE FOUNDATION

        Mr. Burton. Thank you, Chairman Garrett, Ranking Member
    Maloney, and members of the subcommittee. My name is David
    Burton, and I am a senior fellow in economic policy at The
    Heritage Foundation. The views I express in this testimony are
    my own and should not be construed as representing any official
    position of The Heritage Foundation.
        The focus of my testimony today is going to be on the
    secondary market for securities with a particular focus on
    Chairman Garrett's discussion draft of the Main Street Growth
    Act, which would establish venture exchanges.
        Improving the secondary market for small capitalization
    firms will help investors and help them achieve a higher rate
    of return and reduce risk. It will improve entrepreneurs'
    ability to raise capital and will also promote innovation,
    lower costs--innovation with respect to production processes--
    new products for consumers, and generally enhance prosperity in
    the United States.
        There are three key steps, in my view, to improving the
    secondary market for small firms. One is improving the
    regulatory environment for existing non-exchange over-the-
    counter ATS securities.
        This can primarily be achieved by providing exemption from
    owner's blue sky laws with respect to primary and secondary
    securities for companies that have continuing reporting
    obligations, which would include small public companies, but
    also the new regulation A tier 2 companies, as well as
    potentially crowdfunding companies, if that regulation is ever
    at issue.
        We could also improve the markets by re-establishing a list
    of marginable OTC securities that existed before NASDAQ made
    the transformation from a broker-dealer market to an exchange
    that was maintained by the Federal Reserve.
        And we could remove impediments to the market making by
    dealers, particularly in thinly capitalized stocks caused by
    regulation SHO's requirement that broker-dealers cover their
    short position within 3 days.
        The second thing we can do, which I will talk mostly about,
    is establish venture exchanges.
        The third thing we can do is improve the secondary market
    for private resales, including the codification of Section
    4(a)(1-1/2), with a particular focus on making sure that
    platforms that facilitate those transactions are covered by the
    statutory exemption.
        Now, the discussion draft that Chairman Garrett came up
    with is a very positive framework for establishing venture
    exchanges. I have a few recommendations on things that would
    make it work better. Probably the first would be changing the
    definition of ``venture exchange.''
        It incorporates, by reference, the Title I definition of
    ``emerging growth company,'' which has a 5-year time limit. And
    I don't think we necessarily want to limit the ability of firms
    to participate in these venture exchanges to only 5 years. That
    has a relatively easy fix: Just alter the definition by
    eliminating the 5-year requirement in emerging growth
    companies.
        Again, changing regulation SHO with respect to market
    makers, in effect, holding short positions so they can meet buy
    orders. Making it clear that the large exchange listing
    requirements that are in Section 18(b)(1)(B) with respect to
    covered securities don't apply to securities in the venture
    exchanges. It is, I think, very important for that to get
    handled, and it is not so evident when you are thinking about
    these things.
        And then the last thing I would raise is permitting market-
    making support programs so that an issuer that wants to engage
    market makers and get an active market made in the securities
    can compensate the broker-dealer both to make markets, and also
    to provide research in the security potentially.
        With that, I will close my statement. And I appreciate the
    opportunity to testify today.
        [The prepared statement of Mr. Burton can be found on page
    62 of the appendix.]
        Chairman Garrett. Great. Thanks, sir, for your testimony.
        Professor Bullard from the University of Mississippi,
    welcome to the panel. You are recognized for 5 minutes.

      STATEMENT OF MERCER E. BULLARD, PRESIDENT AND FOUNDER, FUND
    DEMOCRACY, INC.; AND MDLA DISTINGUISHED LECTURER AND PROFESSOR
            OF LAW, UNIVERSITY OF MISSISSIPPI SCHOOL OF LAW

        Mr. Bullard. Chairman Garrett, Ranking Member Maloney, and
    members of the subcommittee, thank you for the opportunity to
    appear before you today.
        I am going to briefly summarize my thoughts on the four
    bills before the committee today. And although I don't
    necessarily agree with all of them, I certainly commend the
    subcommittee for diligently seeking to improve and modernize
    the Federal securities laws.
        I have two general thoughts that apply broadly to these
    bills as well as some that have become law. The first goes to
    the public-private distinction for securities offerings and
    issuers on which the Federal securities laws are based.
        Recent legislation and recent bills are threatening to
    undermine the integrity of that construct by creating
    conflicting standards. Those who seek further reform should
    consider an omnibus bill, similar to the approach taken when
    the Federal securities laws were first enacted.
        The second broad point goes to the role of regulation and
    regulators. Legislation is getting too far into the weeds where
    the SEC can simply do a better job. The crowdfunding bill is an
    example of what can go wrong when Congress attempts to draft
    detail rules. Also, statutes are inherently poor vehicles for
    complex regulation. Congress should lay down broad principles
    and allow or direct the SEC to implement them.
        As for the bills before the panel, the one that most
    concerns me is the Accelerating Access to Capital Act. The Act
    would allow reporting issuers to conduct shelf offerings where
    they have a public float of less than $75 million and are not
    exchange created. Shelf offerings are intended to shorten the
    time needed to raise capital in the public markets, which
    generally allows issuers to take advantage of favorable market
    conditions.
        This means, of course, that when issuers are able to sell
    at a higher price, investors are also buying at a higher price.
    This is not such a concern when stock prices bear some rational
    relationship to intrinsic value. But non-exchange-traded micro
    cap stock prices are extremely volatile and highly illiquid and
    their investment returns look more like a lottery than a
    market.
        Providing a high-speed vehicle for micro cap offerings will
    inevitably result in sales at grossly inflated prices.
    Volatility, illiquidity, and lottery-like returns also make
    non-exchange-traded micro cap stocks the favorite playground of
    market manipulators.
        While micro cap stocks constitute a tiny part of the
    market, they represent an overwhelming majority of enforcement
    actions for market manipulation. The same characteristics that
    make shelf offerings riskier--high volatility, pricing
    inefficiency, investment returns with extreme outliers--make
    micro cap stocks attractive candidates for market manipulators.
        The SEC carefully crafted the shelf offering eligibility
    test at the act of the weak, and then it did so as part of an
    ongoing review that has demonstrated sensitivity and
    responsiveness to the concerns of small businesses. The action
    is an example of micromanaging securities regulation that is
    better left to rules and regulators.
        The Fair Access to Investment Research Act correctly
    reflects the failure of the SEC to regulate research conflicts
    as to registered investment companies and ETFs to appropriately
    reflect the difference between those and other securities.
        And I agree that ETF research regulation should be less
    restrictive. However, the Act uses a nuclear bomb where a
    mallet and a chisel are needed. It also uses legislation in an
    area that calls for the kind of flexibility that only
    regulations can provide.
        Regarding the Venture Exchange Act, Congress has
    historically allowed the SEC substantial leeway to regulate
    securities exchanges. The SEC has continuously and effectively
    exercised that authority to create a remarkably broad range of
    options for exchange operators, issuers, and investors.
        In the Act, Congress takes the opposite approach by
    assuming the role of regulator and dictating specific
    operational characteristics of the exchange. The requirement of
    pricing in nickel increments, for example, directly conflicts
    with the SEC's pilot nickel pricing program. The wholesale
    exemption for both reg NMS and reg ATS is unwarranted, as I
    believe at least Mr. Burton on this panel agrees.
        Finally, the Regulatory Review Act requires the SEC to
    review its rules every 10 years, and this is exactly what the
    SEC should do. However, the SEC is already subject to
    retrospective rule requirements that make the Act unnecessary.
    In addition, I have made a number of suggestions in my written
    statement that would make the Act more workable.
        I thank you again for the opportunity to appear before the
    committee today and, again, for your ongoing commitment to the
    revision of the Federal securities laws. I would be happy to
    answer questions about these bills or any others that are
    before the subcommittee.
        [The prepared statement of Mr. Bullard can be found on page
    38 of the appendix.]
        Chairman Garrett. The gentleman yields back.
        From the U.S. Chamber of Commerce, welcome, Mr. Quaadman.

     STATEMENT OF TOM 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 before you today here at Part II of
    the hearing.
        At Part I of the hearing 2 weeks ago, I talked about the
    need to generate long-term economic growth and job creation and
    that, in order to do so, businesses must have the tools and
    opportunity to grow from small to large. Efficient capital
    markets that are liquid, deep, and well-regulated are a key for
    this growth to occur.
        I am also a fan of the ideal espoused by Justice Oliver
    Wendell Holmes that the free marketplace of ideas is where the
    best ideas should come out to the fore. The bills that are
    before us today meet that ideal and also advance the efficient
    capital markets we need through innovation, injecting
    competition, and giving regulators the tools to keep up with
    dynamic markets.
        The SEC retrospective review bill drafted by Mr. Hurt is
    needed because past efforts at retrospective reviews by the SEC
    have either been ignored or have been ineffectual at best. The
    JOBS Act and the discussions that we have been having the last
    several weeks about a JOBS Act 2.0 are needed because of the
    failure of the SEC to ever conduct such a rule or to modernize
    its regulations.
        This bill will allow for periodic review to ensure that
    regulations are meeting their intended purpose, whether or not
    changes are needed, or, if rules are obsolete, that they be
    removed from the books.
        I would suggest four changes to improve the draft bill.
    First, regulations should be prioritized so that the
    regulations that are economically significant should be
    reviewed first. Under that term, ``economically significant''
    are those regulations that cost the economy $100 million or
    more, and that is a term that has been used in different
    legislation such as the Unfunded Mandates Reform Act (UMRA) or
    the Small Business Regulatory Enforcement Fairness Act
    (SBREFA).
        Second, rules with thresholds that have not been adjusted
    for 20 years should be prioritized. Again, an example is reg A
    or, as we were discussing 2 weeks ago, the Rule 701 thresholds
    that have not been adjusted since 1988, making it more
    difficult for companies to attract and retain talent.
        Third, a retrospective review should undergo public notice
    and comment process as provided by the Administrative Procedure
    Act. Such a notice and comment process will allow the SEC to
    get informed commentary from a wide variety of stakeholders.
    This will also prevent what has submarined other retrospective
    reviews, namely, that it gets shuffled into staff-driven
    process and is quietly ignored.
        Fourth, entities that have delegated powers, such as the
    Financial Industry Regulatory Authority (FINRA) or the Public
    Company Accounting Oversight Board (PCAOB), as examples, should
    also be included in such a retrospective review, since, in
    fact, their standard setting or rulemaking can be as
    economically significant as regulations drafted by the SEC.
        The Main Street Growth Act drafted by Chairman Garrett
    would authorize venture exchanges to help drive liquidity to
    companies that are going public. This should also be viewed in
    the context of creating a competing system with the OTC markets
    and alternative trading systems. We believe that bills should
    be adjusted to give exchanges and the SEC the flexibility to
    develop systems to efficiently match investors with businesses.
        Additionally, we would ask that there be authorized a
    retrospective study to look at past efforts, such as the
    American Stock Exchange, AIM in London, Boston exchange, to
    find out what worked, but, most importantly, what did not work.
        Second, we think there should also be authorized under the
    bill a prospective study to collect data by a certain date to
    see if venture exchanges are working and how they are operating
    in conjunction with the OTC market systems and ATS. This is
    similar to what is in the Tick Size Pilot Program.
        Finally, the other two bills before us--the Fair Access to
    Investment Research Act by Congressman Hill, we believe that
    this is a common-sense change that will provide more
    information to investors to assist in their decision-making.
        Additionally, the Accelerating Access to Capital Act by
    Congresswoman Wagner would modernize the use of registration to
    allow businesses to become public companies faster, assisting
    liquid markets.
        Thank you again for the opportunity to testify on these
    bills, and I am happy to answer any questions you may have.
        [The prepared statement of Mr. Quaadman can be found on
    page 83 of the appendix.]
        Chairman Garrett. And, again, thank you for your testimony.
        Mr. Weild, welcome to the panel. And you are recognized now
    for 5 minutes. Thank you.

    STATEMENT OF DAVID WEILD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
                           WEILD & CO., INC.

        Mr. Weild. Thank you. Chairman Garrett, Ranking Member
    Maloney, and distinguished members of the subcommittee, thank
    you for inviting me to speak today at this important hearing.
        My named is David Weild. I am chairman and CEO of Weild &
    Co. I was formally vice chairman of the NASDAQ Stock Market
    with responsibility for all of its listed companies, and I ran
    the equity new issues business at Prudential Securities.
        The Main Street Growth Act, which is going to be the focus
    of my comments, will establish a new class of stock exchanges
    catering to the needs of small cap companies and their
    investors. It has the potential to go down as one of the most
    important acts to come out of this or any Congress by creating
    essential infrastructure to support U.S. economic growth, bring
    back American entrepreneurial swagger, re-ignite the American
    dream, and create millions of jobs.
        When corporations access capital, they hire people. Those
    people spend money on the economy. And everything from lawyers
    and accountants to construction workers and restaurant
    workers--there is a multiplier effect. The benefits become
    widespread. Startups, according to the economist Robert Litan,
    have collapsed, from nearly 15 percent of all companies in the
    late 1970s, to just 18 percent by 2011.
        For the first time in 3 decades, business deaths exceeded
    business births. In our published studies, we have documented a
    collapse in the number of small IPOs, a collapse in the number
    of publicly listed companies, and a collapse in the number of
    small IPO book-running investment banks, from 164 in 1994, to
    only 31 in 2014.
        One-size-fits-all U.S. stock markets have been a disaster
    for our economy. The Main Street Growth Act would reverse this
    by establishing an alternative market structure, one allowing
    its sponsors broad discretion in addressing the needs of small
    cap companies, their investors, and the broker-dealers,
    research providers, and market makers needed to support them.
    This is a noble and important act for the American people, and
    it deserves the attention and support of both parties.
        I offer the following improvements to the Act. Some are
    similar to what David from Heritage Foundation said. First,
    venture exchanges should be opened up to all currently
    reporting SEC-registered U.S. companies that are under $2
    billion in equity market value or have less than $1 billion in
    revenue and are public for 5 years or less. That is the EGC
    definition.
        But to his point, they really should be broadened and
    people shouldn't automatically just be pushed off the exchange.
    A venture exchange could help already public companies attract
    new investors, attract research coverage that they so
    desperately need, improve share prices, and lower the cost of
    growth capital.
        Second, create an orderly transition for companies to
    graduate from a venture exchange. Companies should be permitted
    to stay on a venture exchange, for example, until they have met
    some higher threshold, say $2.5 billion for 12 consecutive
    months.
        Third, explicitly permit broker-dealer member-owned venture
    exchanges. And fourth, we recommend that listing thresholds be
    adjusted annually for inflation.
        Consumers, investors, and the poor are harmed by low-cost,
    one-size-fits-all stock markets. This is what I refer to as the
    low-cost paradox of small cap markets. The lack of sufficient
    aftermarket economic incentives causes broker-dealers and
    institutional investors to pull out of these markets.
        The Main Street Growth Act will reverse this harm.
    Consumers will benefit as more companies are able to access
    equity capital. More new companies means more competition and
    innovation. Thus, the apparently simple, unarguable benefit of
    low-cost trading has paradoxically harmed the consumer by
    causing a collapse in the capital formation infrastructure of
    our economy.
        Venture exchanges, by improving access to equity capital,
    will support the scientists, engineers, and entrepreneurs who
    will find cures for cancer, global warming, and the other great
    challenges that we face. Investors will benefit as the
    trajectory of long-term economic growth will be tilted upward
    by improving the rate at which startups are created and by
    improving the rate at which companies go public to free up more
    equity capital for investors to reinvest and start new
    companies.
        And finally, the poor will benefit. I have said this to
    members of the Black Caucus, and I will repeat it here: African
    Americans, according to the Pew Institute, have an average net
    worth of only $11,000 as of 2013. They are not day-trading
    stocks, as they simply don't have enough money to be invested
    in the stock market. Thus, they derive no personal benefit from
    low-cost trading. But poor people do need jobs. They need
    higher wages. And these are things that venture exchanges in
    the Main Street Growth Act can bring in time.
        I believe that the Main Street Growth Act will help create
    a better future for all of America's children. It is in that
    spirit that I brought my 14-year-old son here today to leave a
    lasting legacy for future generations of a better, more
    competitive America, filled with opportunity for all.
        And I urge both parties, Democrats and Republicans, to come
    together and pass this important Act because I think, really,
    sincerely, America's future will greatly benefit from it. Thank
    you.
        [The prepared statement of Mr. Weild can be found on page
    91 of the appendix.]
        Chairman Garrett. Thank you, Mr. Weild, and your son, also,
    for joining us today.
        I thank the panel. And I will begin by yielding myself 5
    minutes for questions.
        Just in case anyone missed it, Mr. Weild, you gave actually
    one of the most comprehensive statements with attachments, some
    charts, and what have you, but let's not miss your second
    paragraph, the second sentence, of your statement. I just take
    this one at random here.
        ``It has the potential to go down as one of the most
    important acts to come out of this, or any, Congress by
    creating essential infrastructure in support of U.S. economic
    growth.'' In case anyone missed that point, I just wanted to
    reemphasize that. So thank you for that.
        Yes. Now that I have humility, I always say I have
    everything.
        So to get to it, first of all, in a sentence or two, since
    we don't have much time, where are we right now with regard to
    not venture exchanges--we don't have the venture exchanges, per
    se, but we do have small cap companies trading elsewhere. In a
    sentence, explain to us where that market is right now.
        Mr. Weild. Small cap markets trade on either the low end of
    the NASDAQ or the low end of the New York Stock Exchange or in
    the over-the-counter market. And those markets are really
    pretty dysfunctional many times because they are what academics
    call asymmetrical order-book markets, big buyers, no sellers.
        They need intermediaries to create liquidity. And since
    there is no economic model to support that, a lot of that
    liquidity isn't there. And so institutions have actually
    progressively moved capital out of small cap stocks over time.
        Chairman Garrett. Okay. So that is where we are right now.
    I am going to jump back and forth.
        Mr. Burton, you list two or three different things that we
    could do. You are in support of the bill, but you say there are
    one, two, three things we could do.
        What we do in this bill--and it is just a draft--is to set
    up exchanges. Right? What your suggestions are, you could do
    this with exchanges.
        And back to Mr. Weild again on this as well.
        Do you need exchanges in order to get this done?
        Mr. Burton. I think the exchange is very positive. It would
    create an alternative framework that private actors may decide
    is the best way to go.
        And we do have an established OTC market today, and making
    that work better is also positive. And it has one advantage
    over the exchange approach; namely, it could be done
    immediately and it is self-effectuating.
        The exchange process, while it is very positive, is going
    to take time because the SEC has to write rules and then
    private actors have to establish the exchange rules and get
    them up and running and raise the capital to make it happen.
        Chairman Garrett. Let me just jump in there.
        As a real side note, Professor Bullard, you raised that we
    get into the weeds too much on some of these bills. And then
    really quick to Mr. Quaadman, only a sentence each.
        We saw with the JOBS Act 1.0 that we are waiting 2-plus
    years after the fact and we still don't have the regulations
    even though that passed as bipartisan and the President signed
    it, and everyone was on board.
        You will agree that sometimes the regulators don't actually
    work in a timely manner, even though when Congress is explicit
    as to what they want them to do and set more than just the
    principles, but explicitly what they want in a bipartisan
    matter. You will agree with that, won't you?
        Mr. Bullard. I agree with that.
        Chairman Garrett. Okay. And so, Mr. Quaadman, then, is
    there a time and place where we need to dig down a little bit
    in the legislation, whether it is my bill or some of these
    other ones, to actually specify exactly what we want more than
    just principle?
        Mr. Quaadman. Yes. And I think what you are doing with your
    bill and with the other bills is you are setting out those
    broad policy directives and letting the SEC work out the
    details.
        Chairman Garrett. Okay. Then running down to Mr. Weild, so
    on ours--and I am still trying to get this picture in my mind.
    I am asking for your help on all these things to try to see
    this continuum as far as what the market is made up of, what
    listing of exemptions that we need to have in order to
    facilitate this, and what we need to make sure that you don't
    actually drive out--either kill some of the markets that are
    working good today--right?
        Mr. Weild. Right.
        Chairman Garrett. --but, also, maybe to facilitate it going
    forward.
        So is that what we really want to have, maybe a continuum
    in the opportunity for doing this, with exchanges being a
    piece? Is that clear?
        Mr. Weild. I think that the beauty of an exchange solution
    that is focused on it is to give you a statistic. About 80
    percent of listed companies are sub $2 billion in market value,
    but they only represent about 6 percent of total market value.
    So they are very different than large-cap S&P 500 stock.
        So to create an institutionalized solution where people are
    focusing explicitly on the needs of this very different group
    of stocks and their ecosystem I think will actually set this
    country's stage so that we can drive a lot more capital
    formation into companies a lot sooner, which, in turn, will
    trickle down and start creating a higher start-up rate and get
    our entrepreneurial mojo back.
        Chairman Garrett. There you go, to coin a phrase.
        And at the end of the panel--
        Mr. Kruszewski. Ron is fine.
        Chairman Garrett. Ron. Yes. Thank you. I was going to call
    you Ron, but it didn't seem appropriate.
        Mr. Kruszewski. That is fine.
        Chairman Garrett. Would you like to comment?
        Mr. Kruszewski. All the things you have been reading about
    over the last 15 years from ``Flash Boys'' to everything else,
    what has happened is that market structure has gone towards
    speed in many things while destroying ecosystem for small
    companies.
        And this idea in re-creating an ecosystem for small
    companies to have liquidity is extremely important. Of course,
    the devil is in the details, and that is where it lies. But,
    without question, this needs to be done.
        Chairman Garrett. Great. Thank you very much. I appreciate
    the panel.
        With that, I yield to the gentlelady from New York for 5
    minutes.
        Mrs. Maloney. Thank you very much.
        Professor Bullard, I would like to ask you about the ETF
    research bill. I support the concept of reforming the rules for
    research reports on investment companies like ETFs, but I share
    many of the concerns with the current draft of the bill that
    you outlined in your testimony.
        So my question is, wouldn't we be better off simply
    directing the SEC to amend the Rule 139 safe harbor for
    research reports to include registered investment companies
    subject to the appropriate conditions?
        Mr. Bullard. Yes, ma'am. There is a lot that needs to be
    done with respect to registered investment companies, not just
    ETFs, because I think the proposers of the bill certainly
    recognize correctly that they present very different risk.
        The problem with research reports is essentially that they
    become advertising in a form of underwriting message with
    respect to offerings, whereas registered investment companies,
    although continuously in registration, do not present the same
    risks.
        And I agree, although it hasn't been decades that the SEC
    has enacted on ETF research reports, that it needs to do so.
    And it may very well need to be ordered by Congress to do so.
        I think clearly, the SEC has become dysfunctional in terms
    of doing its rulemaking. I think that you have to look at the
    leadership of the SEC to answer the question of why that is
    happening.
        But that, in principle, does not mean that the Congress
    should step in and do detailed rulemaking, such as, for
    example, Mr. Quaadman said that the Main Street Growth Act
    applies broad policy directives.
        I would like to know from him whether prohibiting penny
    pricing, requiring nickel pricing, prohibiting sending
    information to a securities information processor--how those
    are broad policy objectives.
        Thank you.
        Mrs. Maloney. Also, Professor Bullard, on the Accelerating
    Access to Capital Act, you noted in your testimony that the SEC
    requires companies to be exchange traded before they can use
    shelf registration to sell securities because the exchanges
    have their own investor protection requirements that companies
    have to meet.
        Can you describe some of these standards that the exchange
    traded requirement brings with it. And why are they so
    important?
        Mr. Bullard. The exchanges typically impose various
    governance requirements, certain rights for shareholders. They
    have what are called listing requirements that apply to the
    size of the company. And as a practical matter, we know
    empirically that they offer the kind of trading and liquidity
    that has been in issue at this table that is indicative of a
    market price.
        But if you look at the empirical research on non-exchange-
    traded OTC stocks, you see exactly the opposite. You see study
    after study demonstrating that these stocks are highly
    illiquid. They are extremely volatile. They have lottery-like
    returns, in the sense of having huge variance in their returns.
    As a group, the pink sheets are generally having negative
    performance.
        Now, I think I agree with the panel. Those problems need to
    be solved. But they are not going to be solved by the approach
    that is taken by this bill.
        Mrs. Maloney. So if we get rid of the exchange-traded
    requirement, do you think that the risk to investor protection
    would outweigh the benefits to the companies?
        Mr. Bullard. Absolutely. What it would allow is non-
    exchange-traded companies, limited, at least currently, only by
    a 33\1/3\ percent cap on their previous offerings, to make
    offerings with immediate access to an on-ramp in an environment
    where virtually all of their prices, when there is trading, are
    fluctuating wildly.
        And it is not clear to me why you would want to allow
    somebody to get even faster access to take advantage of market
    conditions when, by definition, the market conditions that are
    favorable to that kind of company are when it is trading at its
    peak, and studies show that peak has very little to do with
    intrinsic value.
        Mrs. Maloney. Thank you.
        Mr. Kruszewski, I would like to ask you about the M&A
    broker bill. I noticed in your testimony that SIFMA has
    significant concerns with the bill, and I would like to
    understand them a little better.
        My understanding is that after the Financial Services
    Committee passed a similar bill last Congress, the SEC took
    action on this by issuing a no-action letter that provided
    relief to small M&A brokers. But the SEC's no-action letter
    included 10 additional conditions to protect buyers and sellers
    that this bill does not include.
        So I have two questions for you. First, is this bill even
    necessary anymore now that the SEC has already granted relief?
        Mr. Kruszewski. Well, no. What this bill does effectively,
    in my opinion, is deregulate M&A across-the-board. The
    thresholds of $25 million of earnings before interest, taxes,
    depreciation, and amortization (EBIDTA) can be billion-dollar
    companies.
        At one point, Facebook had no EBIDTA and had a market cap
    privately well in excess of $1 billion. And there are investor
    and buyer and seller protections, for which being registered is
    important.
        The idea that the friction should be reduced for selling
    the local hardware company is notable and is understandable,
    but the bill goes far, far beyond that by almost deregulating
    all large private M&A.
        Mrs. Maloney. Wow. And, also, my time is up, but I would
    like a clarification. This bill doesn't include several
    important protections that the SEC so-called no-action letter
    does include.
        Would passing the bill have the effect of removing
    protections that the SEC has deemed to be necessary?
        Mr. Kruszewski. Effectively, yes, because the passing of
    the bill would make the institutions not subject to broker-
    dealer requirements. So, effectively, it removes the
    protections that the SEC outlines in the no-action letter from
    the marketplace.
        Mrs. Maloney. My time has expired. Thank you very much.
        Chairman Garrett. Thank you. The gentlelady yields back.
        And before I say this, I just want a clarification on the
    record. Professor Bullard says that our bill prohibits data
    from going to the SIP. Actually, the legislation says that they
    should not be required to submit any of that information. So
    not being required to is different from saying that you can't
    submit the data. So, actually, they could still be doing it.
        With that, I will yield 5 minutes to the vice chairman of
    the subcommittee, Mr. Hurt.
        Mr. Hurt. Thank you, Mr. Chairman. And I thank you for this
    hearing. I also thank you for putting up for consideration
    today a bill that we have submitted relating to a 10-year
    retrospective review at the SEC of rules that have been adopted
    there.
        It seems to me that in its effort to protect investors,
    maintain efficient markets, and promote capital formation, this
    is a common-sense piece of legislation that should be well-
    received. And I thank all of you who have commented on it for
    today's hearing.
        Mr. Bullard indicates, although he does offer some kind of
    suggestions, if we proceed with the legislation--he begins with
    the premise that it is not necessary. And I guess I would like
    to hear from Mr. Kruszewski and Mr. Quaadman about whether this
    is necessary.
        Do we need to have a 10-year review of regulations and
    rules at the SEC? And, if so, why so? Do we have other examples
    where agencies have been asked to do this where you have had
    positive results?
        So maybe we could go to Mr. Kruszewski and then Mr.
    Quaadman.
        Mr. Kruszewski. Your bill is a very common-sense one. It
    is. As for the question of whether it is needed, I would just
    look at the fact that both the Administration and everything I
    have read suggests that it should be done. It just hasn't been
    done.
        Mr. Hurt. And just for the record, you are referring to the
    President's Executive Order--
        Mr. Kruszewski. Yes.
        Mr. Hurt. --from July 2011 that sets all of this out, but
    the SEC has not taken any positive action?
        Mr. Kruszewski. Exactly. Across industry, the review of
    regulation should be done to determine if it is even necessary
    anymore, let alone the impact on the economy.
        So the fact of this bill seems to be that while everyone
    wants it done, including the President's Executive Order,
    apparently, from my seat, it is not being done.
        And what I like about the bill, besides its common-sense
    approach, is the fact that it requires a report to be made to
    Congress that it is, in fact, being done. So it is a pretty
    simple bill with simple outcomes, but important outcomes for
    the economy.
        Mr. Hurt. Thank you.
        Mr. Quaadman?
        Mr. Quaadman. Mr. Hurt, number one, the JOBS Act itself is
    chock-full of regulations which were outmoded and which the SEC
    could have modernized on its own and did not do so.
        As I mentioned in the last hearing as well, we also issued
    a report last year where we identified 15 to 20 regulations in
    the corporate disclosure area that are outmoded and out of date
    and no longer make sense in the 21st Century economy.
        I believe, also, in Executive Order 13563, the Obama
    Administration ordered Executive Branch agencies which were
    under their direct control to do such a retrospective review,
    which is currently under way.
        I just want to just mention one point, which was raised
    earlier, which Professor Bullard mentioned. If he had read page
    6, paragraph 3 of my testimony, he would have seen what our
    position was on the Tick Size piece.
        Mr. Hurt. Okay. So I guess another question that I have is,
    Mr. Quaadman, do you think that the 5-year timeframe in order
    to kind of get this decennial review on a regular timeline--is
    that 5 years enough for the SEC to be able to conduct this for
    significant regulations?
        Mr. Quaadman. Yes. And that is why I made the suggestion
    that this be prioritized with economically significant
    regulations, then thresholds. I think, with the 5-year
    timeline, you could do that. With the decennial period on top
    of that, you can get at the low-hanging fruit.
        The problem with previous reviews has been that it has been
    a lot of window dressing. So either there have been meaningless
    regulations that have been looked at or they have just been
    swept under the rug. So, yes, I think that timeline provides
    the process that could be built out for it.
        Mr. Hurt. And I would love to work this in really quick.
        Mr. Bullard, you said that you believe that the APA should
    not be applied to this if it goes forward. I think I am correct
    in your statement.
        And I was wondering if I could get Mr. Quaadman's response
    to your assertion that APA shouldn't--go ahead, Mr. Bullard, do
    you want to articulate your position? Mr. Bullard, if you want
    to quickly articulate your position. And then, if Mr. Quaadman
    has time to respond.
        Mr. Bullard. It is primarily an administrative issue. The
    burdens on the SEC of having to deal with both APA requirements
    and the litigation that would follow would, again, just throw
    gum in the works and make it difficult for them to do their
    jobs.
        Mr. Hurt. Okay.
        Mr. Bullard. And, otherwise, I just think it is necessary,
    given that you can communicate on the basis of rules, anytime
    you want. I filed the rulemaking petition. The SEC adopted the
    rules.
        Mr. Hurt. Okay. Mr. Quaadman, really quick.
        Mr. Quaadman. Transparency is a good thing and stakeholders
    should have the right to explain to their government why
    regulations may be working or not working.
        Mr. Hurt. Okay. Thank you.
        Thank you, Mr. Chairman. My time has expired.
        Chairman Garrett. The gentleman's time has expired.
        Mr. Scott is recognized for 5 minutes.
        Mr. Scott. Thank you, Mr. Chairman.
        I'll tell you what concerns me a little bit about the
    venture exchange. From my reading of it, it seems that it
    permits venture exchanges to operate with lower listing
    standards for issues and exempts them from some requirements
    and from some investor protections that are applicable to the
    other national security exchanges.
        Do you all feel some concern about that, that while the
    intent is very good--there is no question about that--reducing
    investor protections in this venture exchange bill tends not to
    put the consumer concerns and protections in proper focus? Do
    you have any concerns about that?
        Mr. Burton. I don't think it meaningfully reduces the key
    consumer protections or investor protections. It doesn't change
    anything relating to fraud with respect--or misrepresentation
    at the Federal or State level. It doesn't change disclosure
    requirements.
        It does alter the way that markets are made, and it does
    reduce the listing standards in the sense that you don't have
    to achieve New York Stock Exchange governance requirements or
    New York Stock Exchange capitalization requirements.
        But if you impose those sorts of requirements on small cap
    companies, they are not going to be able to ever be listed. So
    that is almost a necessary predicate to going down this route
    of having an intermediate-level exchange. So I understand your
    concern, but in this case, I really don't think it is
    warranted.
        Mr. Scott. Okay. But if the bill reduces certain
    disclosures, it reduces compliant costs, don't you think that
    might make it more difficult for investors to properly evaluate
    the companies as a potential investment?
        Mr. Burton. If it did that, I think that there would be
    cause for concern. But any of these companies are either going
    to be registered companies that have to comply with the smaller
    reporting company disclosure rules, or reg A companies, which a
    lot of people call mini-registrations. It is a hop, skip, and a
    jump from being a public company.
        So these firms all have very serious disclosure obligations
    with respect to the key things that investors need to know to
    make an informed investment judgment.
        Mr. Scott. So why would we have two sets here, one for
    these venture smaller operations and with the national firms?
    Why would we have certain protections for them for the
    customers and not for the investors, but not here? That is sort
    of what I am trying to figure out.
        Mr. Weild. I don't think it really changes investor
    protections at all. I think from a disclosure standpoint, it
    was already Title II of the jobs that were regulation A plus.
    This Act doesn't speak to disclosure, per se.
        And, actually, the thing that I am concerned about in the
    current functioning of stock markets is that listing standards
    in both the New York Stock Exchange and NASDAQ are actually
    quite low or quite accessible. It is not the listing standards
    that are the problem.
        The problem is that the companies--that the whole ecosystem
    has collapsed, meaning smaller broker-dealers to take these
    companies public and support them; the economic model doesn't
    work.
        And I think that what the Venture Exchange Act allows you
    to do is to create an economic model that will get firms back
    into the game to support small companies once again.
        But I don't think it--if there is an investor protection
    issue, it would be around sales practice abuses. And my view
    there is that the right way to deal with sales practice abuses
    is through enforcement, not prevention, not to kill the goose
    that lays the golden egg.
        Mr. Bullard. If I could just disagree there, I don't think
    the question is really being answered. The question is, why
    should there be listing standards that are developed completely
    outside the reg NMS and the reg ATS structure the SEC has
    created, which Mr. Burton, in his written testimony, has agreed
    is inappropriate as a wholesale exception, and they should not.
        What will happen with the venture exchanges is you will now
    create something that is outside of a very good structure where
    the SEC, unlike in many cases, has been very effective and
    extremely responsive, and there is really no reason to do that.
        If you look at the OTC market's Web site, what you will see
    is a pretty thorough and entertaining set of standards that
    they have provided for these small companies within the
    existing regulatory structure.
        They require that a skull and crossbones appear next to a
    lot of listings. I think the message there is pretty clear.
    But, apparently, Congress wants to get into the business of
    deciding whether private businesses should include those kinds
    of warnings.
        That is the issue and that is the question being answered
    here.
        Mr. Kruszewski. OTC markets does it in compliance with
    their own rules. The skull and crossbones is not dictated by
    ATS.
        Mr. Bullard. I did not say it was.
        Mr. Kruszewski. I know that.
        Mr. Bullard. But they are subject to reg ATS.
        Mr. Kruszewski. But the venture exchange legislation would
    be basically comparable in many respects to what is currently
    done on regulation ATS.
        Mr. Bullard. Why don't you support complete wholesale
    exemptions from reg NMS and ATS? In your testimony, you said
    you did not support that. Are you now changing your position?
        Mr. Kruszewski. Wouldn't that--
        Mr. Bullard. I am not supposed to ask the questions.
        Chairman Garrett. Just like the skull and crossbones, it
    was entertaining as well to hear the back-and-forth.
        With that said--
        Mr. Bullard. I haven't seen it.
        Chairman Garrett. Mrs. Wagner is now recognized for 5
    minutes.
        Mrs. Wagner. That was the most entertaining round of
    questioning. So I thank you all. And thank you, Mr. Chairman.
        I have submitted, as I mentioned earlier, a discussion
    draft, the Accelerating Access to Capital Act of 2015, which
    would allow smaller emerging growth companies that have an
    established reporting history with the SEC to use the more
    simplified Form S-3 when offering securities. Once again, this
    is an idea that the SEC's own working group on capital
    formation has recommended previously, but has seen no action on
    since.
        I am doing to do kind of a lightning round here. So work
    with me, gentlemen, if you would.
        Mr. Weild, this series of questions, sir, is for you.
        In comparison to the Form S-1, how does Form S-3 relate in
    terms of cost to small issuers?
        Mr. Weild. It drops the cost fairly significantly. It
    allows you to pre-register securities and take them down
    opportunistically without any inhibition whatsoever to get into
    markets. And in my written testimony, I am actually for
    expanding the application of Form S-3 to smaller companies.
        Mrs. Wagner. How does being able to offer securities off
    the shelf under Form S-3 help small issuers?
        Mr. Weild. I was the one who did the first overnight equity
    offering off of the Form S-3 shelf registration back in the
    1990s because it allows the hedge fund to meet up with the
    institutional investors. The more that you hung out as a
    company marketing a security, the more that investor--or
    certain types of investors would parse and short the stock and
    manipulate the stock price to the adverse consequence of the
    company.
        So this allows them the flexibility of getting in the
    market without taking less price risk, and I think it is very
    beneficial. It drives down the cost of capital for
    corporations.
        Mrs. Wagner. Due to accessibility of documents filed with
    the SEC available over the Internet, is the one-third cap on
    securities offered through Form S-3 still necessary?
        Mr. Weild. I think the concern is the level of dilution of
    a company and people not having an opportunity to react to it.
    And I think--and that is a micro--that particular point is
    something I would rather let the SEC decide, and I would defer
    on that one.
        But I think it is very important. The market structure is
    so dysfunctional and we work with some really small cap
    companies that it is grinding up value for these corporations.
        Managements are struggling with it to get them support.
    They should be spending their time running their businesses.
    And our view is that we really need to worry about the systemic
    risk of not starting businesses, which is what we are seeing in
    the economy. It is probably the bigger threat to the U.S.
    economy.
        It is not the flashy systemic risk of flash crashes and
    credit crises and things like that, but it is just as important
    and it is just as big a threat to the long-term survival of
    this country.
        Mrs. Wagner. Thank you, Mr. Weild.
        Now moving to the flashy, Mr. Quaadman, how does the
    requirement that securities be listed on a national securities
    exchange for Form S-3 hinder the ability of smaller issuers to
    raise capital?
        Mr. Quaadman. What you are creating is--what we have now is
    we have a system where the cost and the compliance cost,
    without the information that is going to be useful for
    investors, is actually inhibiting the ability of businesses to
    go into the markets.
        So I think, if you take this bill in conjunction with your
    1723 bill, you are going down the road of creating a company
    file that allows for information to get out to investors
    without the inhibitions to raising capital.
        Mrs. Wagner. To Mr. Weild's point, Mr. Quaadman, why do
    Federal securities laws treat all issuers as if they are all
    large, highly sophisticated companies?
        Mr. Quaadman. I think this is where Congress made a very
    important point with the JOBS Act that has been very
    successful, is that we need to split it up. You can have your
    traditional public company, but then you also have to recognize
    that for emerging growth companies that are acting in these
    thinly traded markets, we need to give them a little more.
        So we have actually done a pretty good job of balancing
    investor protection and liberalizing some of the disclosure
    requirements, which I think are to Mr. Scott's point.
        And I think this also allows for--because, remember, these
    are companies that are registering with the SEC already--
    providing for that registration, getting information out, yet
    getting rid of some of the inhibitions that have been
    preventing this from happening.
        So it is not that the information isn't going to be there
    or that the SEC cannot oversee this to prevent abuses from
    happening.
        Mrs. Wagner. Does this bill recognize, do you think, the
    difference between small and large companies? And how else can
    we further recognize that difference in our securities law?
        Mr. Quaadman. I think what your bill does is that, by
    allowing this change, you are getting rid of a hurdle for these
    companies to get into the market. So I think it actually speeds
    it up and it is helpful.
        I think, in conjunction with Mr. Garrett's bill, you start
    to put these things together and you actually create competing
    mechanisms against existing systems. So that is why I said in
    my oral statement that you are actually creating competition,
    which should work.
        And the reason why we called for a study by a certain date
    is you can look at all these things collectively to see what is
    working, what is not, and what can be adjusted.
        Mrs. Wagner. Great. Thank you very much.
        I yield back.
        Chairman Garrett. The gentlelady yields back.
        I just want to correct the record. Did you say you were
    moving from the flash to the flashy with Mr. Quaadman? Is that
    what you were saying?
        Mrs. Wagner. I was speaking about highly sophisticated
    companies versus smaller and emerging growth companies. But
    what I understand--
        Mr. Quaadman. As long as it is not a flash crash.
        Chairman Garrett. Thank you.
        I now recognize Mr. Ellison for 5 minutes.
        Mr. Ellison. I would like to thank the chairman and the
    ranking member for the time.
        Mr. Bullard, do you have any concerns about H.R. 1965? That
    is the bill that exempts two-thirds of the firms from
    submitting XBRL data.
        Mr. Bullard. Absolutely. I think we just heard a reference
    from Mrs. Wagner as to the importance of that information being
    accessible. And I can tell you, as a professor, it is extremely
    frustrating, even being very familiar with the electronic data
    gathering, analysis, and retrieval system (EDGAR), trying to
    find information and decipher it.
        For example, the SEC still does not require the most
    obvious way to let people know what changes in registration
    statements have happened, which it is required of people to
    provide a red-lined version. And I mentioned that at a PCAOB
    Advisory Council meeting at which Chair White was in
    attendance, and we still see no movement there.
        The SEC continues--I think everyone in this committee room
    would probably agree--to be a 20th Century agency in terms of
    technology, and eliminating any kind of accessibility
    information is exactly the wrong direction to go.
        Mr. Ellison. What are other countries doing in terms of
    this registration?
        Mr. Bullard. I have no idea.
        Mr. Ellison. Okay.
        Mr. Bullard. In terms of our use of extensive markup,
    anybody--
        Mr. Ellison. I guess my question is, will this put the
    United States at any kind of a competitive disadvantage?
        Mr. Bullard. I think it weakens our position. If I were to
    guess, I would say we are probably much more technologically
    advanced than other countries, but I haven't looked at that
    question.
        Mr. Ellison. Okay. Thank you.
        Turning to another question, I would like to get similar
    views regarding the policy implications of the Accelerating
    Access to Capital Act. Myself and 25 other Democratic Members
    voted against the Wagner bill last session because we were
    concerned that the bill reduced important information to
    investors.
        Do you have any concerns that this bill could reduce
    information to investors?
        Mr. Bullard. Yes. That really is the issue. The bill asked
    the right question that the SEC should be looking at, and that
    is with respect to the paragraph 6, opportunity for an entity
    that has less than a $75 million public float, should they
    still be subject to a restriction on how many securities they
    sell as a percentage of their float. That is what Mr. Weild is
    referring to as the dilution problem. And I think reasonable
    minds can disagree about that.
        But the SEC, when it established that float, had originally
    proposed a 20-percent float. It did some research to answer the
    question asked before as to what was an appropriate number, and
    they were persuaded to raise that number.
        Unfortunately, I was not able to find any further research
    on where that number is, and that is exactly the kind of
    research that the SEC should be doing on an ongoing basis and
    is animating Mr. Hurt's concerns.
        Those kinds of issues that are extremely detailed really
    need to be considered by the SEC, but it is not fair to ask me
    to defend the SEC's capacity to do that review. I think that is
    a separate issue.
        And I agree they may need to be required to look at those
    questions, because I think it is asking exactly the right
    question. It is looking in the right direction, but Congress is
    not the place to do that.
        Mr. Ellison. So, as I indicated before, last May is when we
    looked at this bill before.
        Have there been any new developments since that time that
    bear on this issue of whether this is the right approach?
        Mr. Bullard. As to the use of Form S-3?
        Mr. Ellison. Yes.
        Mr. Bullard. Nothing comes to mind--
        Mr. Ellison. Okay. Never mind.
        Mr. Bullard. --that would change that environment.
        Mr. Ellison. Yes. My staff recommended that question. So we
    will just move on along.
        All right.
        Mr. Bullard. My staff failed to give me an answer.
        Mr. Ellison. No problem.
        Last Tuesday, the SEC announced its approval for a 2-year
    Tick Size Pilot Program which would study the impact of
    requiring small company shares to be quoted or traded in nickel
    increments.
        Considering the SEC action, is the Garrett bill
    appropriate?
        Mr. Bullard. I think it is an example of the SEC doing
    exactly what it should be doing in many areas that are the
    subject of some of these bills, and that is looking at flexible
    options and doing a lot more experimentation.
        We really need the SEC to stop feeling that, if it adopts a
    rule, it has to apply to everyone because it feels it has to
    defend any potential failures on just one front. We need to see
    a lot more of that. The SEC is doing it. And then requiring
    that you have a venture exchange that has nickel pricing is
    really interfering with and undermining that effort by the SEC.
        The current structure of the regulations propriety
    exchanges where I think you have over 90 ATS exchanges has
    created an enormous amount of diversity in that market, and we
    need to reward the SEC for providing additional flexibility in
    the form of the pilot program and not undermine it by creating
    competing exchanges that have provisions that will be very
    difficult to change, given that they are in statutory form.
        Mr. Ellison. I have exceeded my time. Thank you. I yield
    back, Mr. Chairman.
        Chairman Garrett. Thank you. The gentlemen yields back.
        The gentleman from Arizona is recognized for 5 minutes.
        Mr. Schweikert. Thank you, Mr. Chairman.
        And to my friend at the other side, my staff has just
    stopped writing questions because, apparently, I don't ask
    them.
        There is actually--I would love a little more depth on the
    discussion on researchers being able to publish on ETF. And for
    whomever feels they are the most competent on this one, I sat
    through this seminar a couple of weeks ago and it was the first
    time I had come across something called a managed ETF.
        How does this work? What happens with the information? Tell
    me why it is wonderful.
        Mr. Bullard. I spent a lot of time on ETFs while I was at
    the SEC in the office that approves them when they were first
    being approved. And the managed ETF is a new product that
    should have been allowed to come out a decade ago, but it is--
        Mr. Schweikert. It is now starting to get some legs?
        Mr. Bullard. Right. And what it does is it uses a
    particularized pricing mechanism that still relies on the
    close-of-the-day NAV to be the price at which you buy rather
    than actually buying at an ongoing price in the market.
        Mr. Schweikert. I am sort of a fan of the concept.
        Mr. Bullard. Yes.
        Mr. Schweikert. My interest here was, for whomever is on
    the panel, on my ability as a researcher to put out data
    saying, ``Here is the concentration risk. Here are these
    things.'' Because right now, I come from a world where I think
    it is absurd that there is a restriction on putting out
    information.
        Mr. Kruszewski. We should all be for transparency for more
    information. And it is a safe harbor that is required so that
    you can put out more information on a sector of the market that
    is growing very fast.
        And so it is very hard to understand any objection to
    providing thoughts on a product that is now $1.6 trillion. It
    will be double that, probably, in a few years. It is a very
    fast-growing product, and the SEC rules are outdated with
    respect to that product.
        Mr. Schweikert. Sad question.
        Is our language broad enough to make it the publication of
    research information on a managed product?
        Mr. Bullard. Oh, it would be broad enough to allow an
    enormous amount of research by issuers, broker-dealers, on
    products that aren't even ETFs.
        To get to the substantive answer of the question, I don't
    see it as a size issue. It is that, essentially, registered
    investment companies are pools of securities. They are not
    operating companies. And they are in continuous registration.
        So the risk of the underwriter, when going to market in an
    IPO, putting out these research reports essentially as a way of
    conditioning the market does not exist for these types of
    products.
        And the SEC should have had a completely different, much
    less regulated track quite some time ago. But it is just as
    applicable to other registered investment companies as ETFs.
        Mr. Schweikert. You said something--I want to come back.
    But this is sort of a follow-up from my conversation from Mr.
    Quaadman.
        I come from a view of the world that the best regulation is
    ultimately sunshine information. Do you see a problem here?
        The ability to publish research and attach it to your
    offering--wouldn't the ultimate solution be trying to have as
    robust of information environment as possible?
        Mr. Quaadman. Yes. And I agree with Mr. Kruszewski that we
    need to have that safe harbor to allow that to happen. Because
    what we have now is two separate standards that have developed
    with broker-dealers. There are safe harbors that allow for some
    research, and that allows investors to make a decision. But
    with ETFs, we don't have that.
        I think, also, Mr. Bullard also makes a very good point as
    well. Markets are dynamic. So we are talking about ETFs today.
    We could be talking about another product 10 years from now. So
    I think we also want to be flexible to allow for those safe
    harbors to provide for those research to benefit investors.
        Mr. Schweikert. Okay. Mr. Chairman, just probably one or
    two left.
        Professor, you actually said something earlier that sparked
    my ears. And you sit on which committee over at the SEC?
        Mr. Bullard. I was at the SEC's Office of Exemptive
    Applications, which is where you would go to create ETFs.
        Mr. Schweikert. And a little while earlier in the
    testimony, you said the rulemaking right now is dysfunctional.
        Mr. Bullard. Yes.
        Mr. Schweikert. Is that an argument for us to be
    substantially more prescriptive when we work on pieces of
    legislation here?
        Because I am still--is the word ``outraged'' or
    ``enraged?''--on crowdfunding and on some of these other things
    that we passed as our goal to try to expand opportunity for
    everyone.
        And we are sitting here, what, some 3 years later, and it
    is still trapped over there. There is something horribly wrong
    at the SEC.
        Should we become dramatically more prescriptive to them
    because of their inability to do their job?
        Mr. Bullard. I would agree in terms of mandating
    rulemaking. But I think that, ultimately, it is
    counterproductive to become prescriptive in the sense of
    detailing the rules.
        Mr. Schweikert. When you say ``mandating''--and, sorry, Mr.
    Chairman--timeline?
        Mr. Bullard. The timeline, self-executing.
        Mr. Schweikert. Right.
        Mr. Bullard. Broad policy. Just tell the SEC to create an
    exemption for registered investment companies from 139 and do
    it within a year.
        Mr. Schweikert. Okay. I yield back. Thank you, Mr.
    Chairman.
        Chairman Garrett. All right. Or else.
        Mr. Bullard. There is no ``or else,'' unfortunately, but--
        Chairman Garrett. And there is the rub, isn't it?
        I now recognize Mr. Carney.
        Mr. Carney. Thank you, Mr. Chairman. First, let me
    apologize for not being able to hear most of the hearing up to
    this point, but I would like to ask a couple of questions about
    the two bills.
        By the way, when I speak, I don't have questions that my
    staff wrote. But when I speak, you can see Craig's lips moving
    over there, and it is actually coming from him.
        But I have interest in the ETF bill, which Congressman Hill
    has been working on, and I would like to be a part of that. And
    I have worked with Mr. Duffy a little bit on the venture
    exchange bill.
        There seems to be some consensus that making global access
    to research for ETFs makes a lot of sense. Is there anybody on
    the panel who disagrees with that? Did I miss anything?
        And so then my question would be, is there anything--it
    goes, I think, to the question that Mr. Schweikert just asked
    about how prescriptive legislation is. Is there anything in the
    draft legislation that has been developed that raises any
    concerns for any of the panelists?
        Mr. Bullard. I have highlighted in my testimony essentially
    a laundry list of issues. One is the extent to which it departs
    from the basic foundation of Rule 139.
        Of greater concern is it provides a sweeping insulation
    from private liability, which I don't think was the author's
    intention.
        But if you look at the way the bill is drafted, it
    eliminates generally liability for the research reports to the
    extent that the liability depends on there being an offer.
        Mr. Carney. Safe harbor provision. You think that there is
    an opportunity to clean that up or make it more reasonable?
        Mr. Bullard. Again, I would rather work from the point of
    view of asking the SEC to do a registered investment company
    exception.
        Because I think the current departures from Rule 139 in the
    bill would be hard to fix, and it also would remove any
    flexibility the SEC would have going forward in changing the
    rule for the benefit of ETFs down the road.
        You do something in a statute, and you have essentially
    locked it in place, and the SEC would not be able to liberalize
    it or strengthen it in the future.
        Mr. Carney. So you would argue for doing something less
    prescriptive rather than more, going back to the question from
    Mr. Schweikert?
        Mr. Bullard. Yes. Less detailed. But I think, if this is
    what you want, you tell the SEC to do it and, as Chairman
    Garrett suggests, you do have to give them a timeline.
        Mr. Carney. Do any other panelists have a different view of
    that?
        So the second issue is venture exchanges. Mr. Duffy and I
    have been talking about that for some time, and I know others
    have, as well.
        We spend a lot of time back in our districts, and I was
    talking to a woman who runs a large corporation pension fund
    and raised some concerns about--which surprised me, frankly--
    with respect to starting a venture fund exchange. Excuse me.
        What are the concerns that any of the panel might have on
    that idea?
        Mr. Quaadman. Mr. Carney, not necessarily a concern. I
    think--
        Mr. Carney. Her concern was, basically, that the
    unsophisticated investor could really be taken for a ride in a
    venture exchange.
        Mr. Quaadman. Yes. What I have in our testimony and I also
    talked about in my oral statement is that I think there needs
    to be the ability for the SEC and the exchange, when they are
    developing the system, to develop it in such a way that you
    have sufficient investor protections in place and they have
    sufficient systems in place to allow that exchange to operate.
    I think we can get at those concerns through that process.
        Additionally, as I said--
        Mr. Carney. Through the process of setting up the exchange
    itself?
        Mr. Quaadman. Through the process of setting up the
    exchange. But then the reason why we also ask for a prospective
    study on it is to take a look at it on a certain date in the
    future to see how the venture exchange is operating, if there
    are changes that need to be made, then also to see how it is
    operating in competition with the OTC markets, with the ATS
    systems, to see how that is all working. So I think we have two
    bites at the apple to take care of those concerns.
        Mr. Carney. Good.
        Mr. Burton?
        Mr. Burton. I think that maybe your constituent didn't
    fully understand the proposal, which is understandable because
    it just goes for--
        Mr. Carney. Because I explained it to her.
        Mr. Burton. The venture exchange is really a question of
    how you structure the marketplace. The individual investor can
    go buy those stocks because they are public companies on OTC
    markets over their E*Trade or Ameritrade account today.
        And the way the proposal is structured, it would also
    include the new regulation A plus securities, but they also
    have quite a bit of disclosure and probably are going to become
    tradable as well.
        So I think the investor protection core of it, particularly
    the fraud rules at both the State and Federal level, but also
    the disclosure rules at the Federal level, are sound. And that
    is not really what the legislation addresses.
        It addresses the structure of the marketplace and how that
    can be changed to make smaller capitalization firms have a
    better secondary market, which will help investors, not hurt
    them, because they will have a more liquid market where they
    can sell their securities when they need to and they are more
    likely to get a better price.
        Mr. Carney. Thanks so much.
        I would love to hear your response, but I am out of time.
        I yield back.
        Chairman Garrett. The gentleman yields back.
        Mr. Huizenga is recognized now for maybe the last 5
    minutes.
        Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that.
        Mr. Kruszewski, I have a quick question for you about this
    particular bill with Ann Wagner. In going through your
    testimony, I didn't see whether you support it or oppose it, or
    SIFMA does.
        Mr. Kruszewski. Congressman--the S-3, Congresswoman
    Wagner's bill?
        Mr. Huizenga. Yes.
        Mr. Kruszewski. We did not comment on that bill. No.
        Mr. Huizenga. Any reason why?
        Mr. Kruszewski. First of all, everything that has been said
    here, from venture exchanges, to this bill, to research, is a
    recognition by this body, which I applaud, that the cost of
    capital for small companies is extremely high, and we are not
    creating the jobs we should from the job engine, which are
    small companies.
        Mrs. Wagner's bill attempts to do that. And you are trying
    to balance access to capital with investor protection. All I am
    saying is I am not sure where that pivot point is, and I am not
    prepared to discuss that today.
        Mr. Huizenga. Okay. But you are comfortable with the
    timeframes that the SEC has been dealing with and not acting on
    this?
        Mr. Kruszewski. I didn't say that either.
        Mr. Huizenga. Oh, okay. I am just curious because you seem
    satisfied, when it comes to my bill, that the SEC took 7 years
    to act on anything and we have a no-action letter.
        But, Mr. Quaadman, I would like for you to maybe comment
    transitioning to my bill, which wasn't formerly what we were
    going to be talking about with the mergers and acquisitions.
    But I know Mr. Kruszewski had decided to spend a considerable
    amount of time on it.
        I am just curious if you would like to comment on some of
    those points?
        Mr. Quaadman. Yes. As we discussed before, I think your
    bill is important because many businesses today are looking to
    be acquired, so your bill allows for that activity to occur
    more easily.
        The problem, as I raised before in the last hearing, is
    that while I think the SEC no-action relief was a good thing,
    what we have also seen in the past is that what the regulator
    giveth, the regulator taketh away.
        In the area of corporate governance, this past January, on
    the Friday night before Martin Luther King Day weekend, the
    Chair at 6 o'clock at night decided to overturn decades' worth
    of past staff practice in the Whole Foods decision.
        So the unfortunate part is, with no-action relief, it does
    not provide the necessary certainty going forward, which is
    what we think the bill does.
        Mr. Huizenga. Sorry. I appreciate that.
        And I guess that is a significant concern I have as well.
    The SEC had this recommendation listed as a priority for
    themselves for, I believe it was 7 or 8 years. It did not do
    anything with that.
        A no-action letter isn't binding on the law. There is no
    size cap today with that, is my understanding. We are talking
    about $25 million in EBITDA, but we are also dealing with $250
    million in gross sales. So it seems to me that we are limiting
    this, and I am hoping that we are going to be able to move
    through this.
        And I understand why SIFMA may be wanting to protect its
    members, shielding them from protected territory that they
    have. But there is nothing in the bill that is going to deny
    them referrals.
        Actually, that, we believe, will help the flow, as Mr.
    Weild is talking about it, trying to get deal flow happening
    that--we believe, as it gets pushed down that stream, that will
    actually allow for capital to get freed up.
        We have 10 trillion estimated dollars tied up in these non-
    public, closely held businesses that, under this legislation,
    would only apply the ability to use this if that business is
    purchased and then run by the purchaser and either wholly owned
    or either directly or indirectly controlled by that buyer. So
    it seems to me that is a bit different than the Facebook
    example that was brought up.
        So I have 20 seconds. But having five reasons named
    Garrett, Adrian, Ally, Will, and Sieger for why I am here in
    Washington, I just wanted to applaud you for bringing your son
    here today and letting him see that there are people who are
    concerned about not just our own interests, but yours, too,
    buddy.
        We want to make sure that you have the same opportunities
    that your dad has had, your mom has had, and that those of us
    here have had. So I am glad you are here with him today.
        And my time has expired. Thanks.
        Chairman Garrett. Thank you. The gentlemen's time has
    expired. I appreciate those comments.
        I now recognize Mr. Poliquin.
        Mr. Poliquin. Thank you, Mr. Chairman.
        Thank you, gentlemen, for being here. I appreciate it very
    much.
        I represent Maine's 2nd District, which is the most rural
    district east side of the Mississippi. We have a couple of
    population centers, like Bangor and Lewiston and Auburn, that
    have about 35,000 people in them, and then we have 400 small
    towns. We have 70,000 moose and about 35,000 bear. And most of
    them vote. So it is a great place to live. If you haven't been
    there, you should get back there as soon as you can because we
    need the business now.
        This has been about the most anemic economic recovery in 80
    years. We have a lot of folks in our district who are working
    two and three jobs. Part-time jobs have replaced full-time jobs
    across the country. Millions have just given up working. And we
    have the lowest participation rate in probably 30 years. So it
    is not working.
        Now, in our district, we have tens of thousands of small
    businesses. Many of them might not be in your space. But we are
    a district in a State of small-business owners and we know
    firsthand how costly overregulation is and how it causes people
    to shut down their business and pass on their costs, if they
    are able to, to the consumers, which raises fees and reduces
    options and opportunities for our consumers.
        Now, I am looking at these bills that Mr. Hill and
    Congresswoman Wagner and Mr. Garrett and Mr. Hurt have all put
    before you folks today to comment on. They all make a lot of
    heck of sense to me.
        But what I would like to do is drill down a little bit
    more, if I may, Mr. Kruszewski. I believe you are the first
    individual who has come before this committee or a subcommittee
    of this committee dealing with fiduciary standards, a new rule
    that is now before the DOL.
        And I happen to believe that you have brokers--and there
    are about 600,000 of them across America who work for your firm
    and other places in this space--that, in my opinion, are
    regulated properly, and now they are being proposed to be held
    at the same fiduciary standards as some of the largest money
    center banks in the world.
        I would like to hear from you, sir, if I can, what you
    think that will do to the customers that your brokers serve,
    whether they have an IRA or a 401(k) or they are a husband and
    wife, they are planning for retirement, or maybe they are folks
    saving for their kids' college education.
        What does this do to you, as far as running your business,
    in the type of information, the type of counsel that you folks
    might or might not be extending to the folks on the other side
    of the transaction?
        Mr. Kruszewski. You are speaking of the DOL proposal?
        Mr. Poliquin. Yes, I am.
        Mr. Kruszewski. It has been interesting to stand here and
    testify on a bill from a business perspective--and I run a
    company where the implementation of this bill as written--and
    it is a very complex bill--would be financially very beneficial
    for most companies.
        This deals with non-managed small IRA accounts where we
    would be pretty much--we would have to, because of legal and
    other matters, charge these accounts fees. In a very simple
    way, I would tell you that--and I have done analysis--we would
    raise the cost of our small IRA investor by 75 percent.
        Mr. Poliquin. And when that happens, what does that do to
    the rate of return on those investments for those folks who are
    trying to prepare for their retirement?
        Mr. Kruszewski. It is--again, it doesn't necessarily--it
    would obviously go down by the amount of fee--
        Mr. Poliquin. Sure.
        Mr. Kruszewski. --by pure math.
        But the fact of the matter is that this is a bill that I
    think imposes additional cost and limits choice. And I find it
    somewhat ironic, when I look at it purely financially, it is
    over $100 million to my firm alone if I just applied fees to
    smaller investors that I do to my larger managed accounts on a
    percentage basis.
        So it is interesting, and I think it requires a lot of
    debate. And I think there are a lot of investors who do not
    understand the cost or, if they want to avoid the cost, then
    they are going to have to leave this model and do a do-it-
    yourself. And I think a lot of investors don't want that.
        Mr. Poliquin. Mr. Weild, you have been in this space for a
    long period of time. Tell me your thoughts with respect to
    this, sir.
        In particular, when we have a government that is
    increasingly encroaching upon our small-business community and
    every facet of our lives and they are more and more dependent
    on the government, but we have a Social Security system that is
    about a $15 trillion unfunded defined benefit pension plan--
        Mr. Weild. Right.
        Mr. Poliquin. --what does this whole problem do to the
    folks who have been experienced with as far as serving their
    clients and making sure they do not run out of money before
    they run out of time?
        Mr. Weild. In our testimony, we have level participation
    rates and we have done a round trip on them. We have gone all
    the way back to where we were in the late 1970s.
        But, interestingly, the 16- to 19-year-olds are not getting
    work, which is important, I think, particularly to low-income
    communities where kids need to kind of get assimilated.
        But, also, if you look at the over 65, the scary part is
    that the one part of the economy where the level participation
    rates are going through the roof is people over 65, which means
    they can't retire. They are scared to retire. They are clinging
    on to their jobs. So this is a sign of an economy which is
    really, really incredibly unhealthy.
        And then, when you look at the Robert Litan numbers on
    startups from the late 1970s, where 15 percent of all companies
    were less than 1 year in age, and now it is down to 8 percent--
    holy mackerel, if we are not scared, we should be petrified
    right now.
        We are not getting things moving on the low end of the
    economy, and that is one of the reasons why the Venture
    Exchange Act, Congressman Scott, is, I think, so important,
    because it institutionalizes the discussion around what we need
    to do for small companies. And I think that in and of itself
    would be incredibly helpful.
        If you look at SEC committees as sort of the stepchild of
    the Division of Corporation Finance, it has always been the
    small-business area of the Division of Corporation Finance.
    They have a small-business forum every year. They make lots of
    recommendations. The recommendations tend to go nowhere. And,
    meanwhile, what we are doing is we are fiddling while the
    United States economy is burning. We have to correct this.
        Small companies fail at higher rates. And people losing
    some money, that is okay. Because, if you think about it, in
    the aggregate, it is not big numbers when 80 percent of your
    publicly listed companies, NASDAQ and New York, are under $2
    billion, but they only represent 6 percent of your aggregate
    asset value. But it is outsized in terms of its job impacts on
    the U.S. economy.
        So we need a different way of looking at these things, and
    I think that is one of the reasons why this Venture Exchange
    Act is absolutely critical to our long-term American interests.
        Mr. Poliquin. Thank you all very much. I appreciate you
    being here and participating in this process.
        Mr. Chairman, I yield back my time. Thank you, sir.
        Chairman Garrett. Thank you. And, once again, Mr. Poliquin,
    I appreciate the advertisement for Maine.
        Mr. Hill is now recognized for 5 minutes.
        Mr. Hill. Thank you, Mr. Chairman.
        I appreciate the panel being here with us. Thanks for your
    tenacity of sitting here this long.
        I want to appreciate your comments that some of you have
    made about the discussion draft that I have put forward called
    Fair Access to Investment Research.
        In my view, this is a common-sense proposal which mirrors
    other research safe harbors that have been implemented by the
    SEC and would clarify the law allowing broker-dealers to
    publish research regarding certain ETFs, allowing investors
    access to this information.
        Since I started my last brokerage firm in the late 1990s, I
    have seen this area explode--and I think that has been talked
    about today--from about 100 funds with $100 billion up to
    today's market with over 1,300 fund offerings and over $1.6
    trillion in assets.
        And that speaks to this issue, I think, handily,
    particularly whether they are managed or used in a managed
    account or whether they are bought standalone. So there are now
    6 million households that are using ETFs.
        And to the Professor's point about longevity--and I do
    appreciate being accused of dropping a nuclear bomb. I think
    Washington needs a lot more metaphorical nuclear bombs in the
    regulatory system. So thanks for the compliment.
        But looking back at the regulatory history, the Division of
    Investment Management in 1987 was asked by Charles Schwab to
    provide no-action relief in this area. It declined.
        Merrill Lynch approached the Division of Investment
    Management regarding no-action relief for open-end investment
    companies in May of 2000. The staff supported it--perhaps you
    were there then--but never took it up.
        In 2004, as a part of the Securities Offering Reform
    proposal, the Commission requested comment on whether reliance
    on proposed Rule 139 should be permitted if an issuer is an
    open-end management investment company or another investment
    company. Again, all the comments were positive. Nothing
    happened. And it is to the chairman's point. There is no ``or
    else'' in Washington, D.C.
        And if you think we like to have prescriptive legislation
    directed at our independent regulatory agencies, you are
    mistaken. The problem is, in this society, we have no choice
    now because we have no responsiveness from our independent
    regulatory agencies, whether they are subject to the
    appropriation process or not.
        So I do appreciate your comments. I thought they were very
    helpful, and I appreciate them. And I think that addresses
    maybe Mrs. Maloney's point.
        But one other I would add is that this safe harbor is still
    pursuant--these firms are still subject to FINRA's Rule 2711,
    governing research. And, of course, these are all subject to
    the antifraud provisions of the Commission and Rule 10b-5.
        So, this is not some grand-sweeping, out-of-the ordinary
    proposal. With that, I would maybe, if you would like, Mr.
    Bullard, to respond to that again, add your thoughts?
        Mr. Bullard. Sure. I think you said that it mirrors the
    existing approach. And there is a paragraph in my testimony
    that gives six or seven examples of how it goes further, one of
    which is that it allows issuers to issue the reports. It is not
    limited to broker-dealers publishing them. And under 139,
    issuers aren't allowed to publish anything. So that is one
    major difference.
        Another, as I think you mentioned, is it doesn't affect the
    antifraud provisions. It actually is a carve-out that would
    prevent the SEC from bringing Section 17 enforcement action
    because of the limit on liability.
        And I don't think those were necessarily intended by the
    rules, and it is obviously something that happens when
    Congress, dealing with the full breadth of the world of
    legislation, tries to rewrite an SEC rule.
        I cannot defend the SEC. When I was there, I saw this. And
    it is one of the reasons I left, is that it is an agency that,
    unlike a lot of other Federal agencies, has five or six tiers
    rather than having, as a lot of entities do, an assistant
    director who oversees a lot of people.
        So there are structural reasons why the SEC has problems.
    They haven't really taken any steps to fix them. And I can't
    defend their not having an adopted rule.
        I would still, though, stand by the recommendation to give
    a mandate a try, and if it doesn't work in a year, then come
    back and bang them on the head.
        And I agree with most of what you said. My core area of
    expertise is the investment company area, and it is distressing
    to see they haven't taken any steps on this.
        Although, in their defense, exchange traded funds are a
    creation of the SEC, as are money market funds, as are 12b-1
    fees. So there are a lot of examples of the SEC's
    responsiveness having in the past been a benefit to both
    investors in the industry.
        Mr. Hill. Thank you, Mr. Bullard.
        I yield back.
        Chairman Garrett. Thank you.
        So, with unanimous consent, I am going to yield to Mr.
    Scott for an additional question or two.
        Mr. Scott. Thank you very much, Mr. Chairman.
        I am very interested in the subject, and I certainly
    commend Mr. Garrett on the legislation. But I do think we need
    to really exhaust these concerns that we have about a loss of
    consumer and investor protections in the area.
        The reason I am acquainted somewhat with this is as a
    student at the Wharton School of Finance, we did a student
    project at that time. And this is why I commend Mr. Garrett,
    because access to capital is a very serious problem,
    particularly in the minority community with minority African-
    American-owned businesses. And we put together a forum, a
    venture capital effort, then, to help those companies in the
    Philadelphia area.
        So my question, going back to that, is that if, for
    example, the new venture exchanges have permissive or what we
    call de minimus listing standards and the securities traded on
    these exchanges become exempt from the State blue sky laws,
    does that give rise to any investor protection concerns? And
    particularly, Mr. Bullard, I would like for you to answer that
    question and Mr. Kruszewski--you represent SIFMA, correct, the
    financial institutions?
        I think that to help Mr. Garrett have smooth sailing with
    his bill, we really definitely need to clear the air on this
    low hurdle of a great concern that consumer protections may be
    deflated. Could you answer that question first, Mr. Bullard,
    Mr. Kruszewski, anybody else, too?
        Mr. Bullard. Okay. I guess I would separate the investor
    protection between the exchange-provided protection and the
    exemption from State regulation.
        Frankly, to answer the question asked, I think by Mr.
    Carney earlier, the exchanges already let you take your
    investors to town. And we accept that they have very low
    listing standards and that a lot of them will fail and that
    there will be potential investor abuses.
        My main objection is that the venture exchange would
    operate outside of the system that the SEC has currently been
    authorized by Congress to administer. It is that by removing
    all of reg ATS and all of reg NMS, which are not principally
    investor protection provisions, but do include some, Congress
    is essentially undoing its own work and creating something that
    becomes another breed where you would definitely see new
    investor protection concerns arising.
        On the State registration side, I just haven't seen out of
    Congress a coherent approach of when, if ever, they think a
    State view is appropriate. Now, if Congress just wants to
    eliminate States altogether, that is one thing.
        But to arbitrarily have cutoffs as to when the States are
    allowed to regulate small offerings, especially when it is
    flatly consistent with what I understood to be the deal when
    the JOBS Act was on a bipartisan basis approved, I think is
    inappropriate.
        Mr. Scott. Okay. Mr. Kruszewski?
        Mr. Kruszewski. Yes. I would just say that I think it is
    very important at the highest level to separate investor
    protection from the liquidity and the market access that we are
    trying to achieve.
        I don't think this bill in any way--or I should not say in
    any way--to the extent that you increase liquidity and capital,
    you have more companies that potentially can fail. And that is
    part of capitalism. So I am not going to suggest that.
        But this cannot be about investor protection. It is not.
    This is about in many ways undoing some of the things that have
    destroyed the ecosystem for small companies. And many of the
    rules that were put in place have destroyed the ability to do
    this.
        I represent many companies that we have to sell that could
    be job-creating machines because they do not have access to the
    capital markets out of certain of their growth funds or their
    growth stages. And so, I believe this is a very important
    issue. And it is not an investor protection issue. It is a
    liquidity issue and a trading issue for small companies.
        Mr. Scott. And both of you are very comfortable that the
    SEC has the resources available to monitor these new exchanges
    and the securities traded on them?
        Mr. Bullard. No. I don't believe that it does.
        Mr. Kruszewski. They are already trading. Many of these are
    already trading. I don't understand that comment. They are
    already trading. We are talking about providing a marketplace
    that supports the growth and formation of small companies and,
    by an extension, jobs in this country.
        Mr. Quaadman. The complexity of the markets really came
    from all the legislation and all the rulemaking that created
    Reg ATS and NMS and decimalization and the proliferation of
    trading venues. There are over 50 trading venues, and that in
    and of itself has put the SEC on this treadmill of trying to
    keep up with the sheer volume of complexity.
        These markets will actually be much simpler--and,
    interestingly, Congressman Scott, if you listen to the language
    coming out of the SEC, the SEC is now openly questioning the
    wisdom behind one-size-fits-all markets. There is definitely an
    interest on the part of the Commission in reexamining this
    along the lines of what I think this bill does.
        Mr. Scott. Thank you for your courtesy, Mr. Chairman.
        Chairman Garrett. Thank you.
        So, I will leave it at that. And maybe Mr. Weild's final
    comment was the comment that we can take away on this, is that
    this simply--although it would be changing the law, the simpler
    that you can make something sometimes actually inures to both
    the benefit of the marketplace, but also inures to the benefit
    of the investor as well.
        If it is clear exactly where I am trading and what I am
    trading, it is good for him and it can also be good for the
    agency as well, that they don't have the complexity in these
    other areas and continually fighting in these other areas as
    well.
        And, also, the other takeaway earlier in your comments
    was--well, that actually is Mr. Bullard's comments--that there
    was nothing in NMS really--not nothing--but nothing really
    about NMS was really about investor protection, and that is
    really what we are not--we are not talking about those issues
    as well here. That was Mr. Weild's comment. We are really not
    talking about those here.
        At the end of the day, if and when we have a final draft on
    this, maybe we just sort of restate that, to restate that our
    intention here is not to be focusing on those areas to ensure
    that all current investor protections are in place and they
    will continue to be in place for these stocks that are already
    trading. How we word all that, we just want to make sure that
    message comes through.
        So, with that, we were expecting one other Member, but he
    is not here. So he misses his chance. But he doesn't miss it
    entirely.
        As we come to the conclusion of today's panel, I thank the
    members of the panel for being here.
        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 very much appreciate the education and the
    insight from your various perspectives on the various bills
    that we had today.
        And, with that, this hearing is adjourned. Thank you.
        [Whereupon, at 3:55 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                  May 13, 2015

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