[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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