[House Hearing, 115 Congress] [From the U.S. Government Publishing Office] THE COST OF BEING A PUBLIC COMPANY IN LIGHT OF SARBANES OXLEY AND THE FEDERALIZATION OF CORPORATE GOVERNANCE ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTEENTH CONGRESS FIRST SESSION __________ JULY 18, 2017 __________ Printed for the use of the Committee on Financial Services Serial No. 115-31 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PUBLISHING OFFICE 28-750 PDF WASHINGTON : 2018 ____________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Publishing Office, Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800 Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001 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 STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia STEVE STIVERS, Ohio AL GREEN, Texas RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota ANN WAGNER, Missouri ED PERLMUTTER, Colorado ANDY BARR, Kentucky JAMES A. HIMES, Connecticut KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio MIA LOVE, Utah DENNY HECK, Washington FRENCH HILL, Arkansas JUAN VARGAS, California TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas DAVID A. TROTT, Michigan CHARLIE CRIST, Florida BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada ALEXANDER X. MOONEY, West Virginia THOMAS MacARTHUR, New Jersey WARREN DAVIDSON, Ohio TED BUDD, North Carolina DAVID KUSTOFF, Tennessee CLAUDIA TENNEY, New York TREY HOLLINGSWORTH, Indiana Kirsten Sutton Mork, Staff Director Subcommittee on Capital Markets, Securities, and Investment BILL HUIZENGA, Michigan, Chairman RANDY HULTGREN, Illinois, Vice CAROLYN B. MALONEY, New York, Chairman Ranking Member PETER T. KING, New York BRAD SHERMAN, California PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut ANN WAGNER, Missouri KEITH ELLISON, Minnesota LUKE MESSER, Indiana BILL FOSTER, Illinois BRUCE POLIQUIN, Maine GREGORY W. MEEKS, New York FRENCH HILL, Arkansas KYRSTEN SINEMA, Arizona TOM EMMER, Minnesota JUAN VARGAS, California ALEXANDER X. MOONEY, West Virginia JOSH GOTTHEIMER, New Jersey THOMAS MacARTHUR, New Jersey VICENTE GONZALEZ, Texas WARREN DAVIDSON, Ohio TED BUDD, North Carolina TREY HOLLINGSWORTH, Indiana C O N T E N T S ---------- Page Hearing held on: July 18, 2017................................................ 1 Appendix: July 18, 2017................................................ 53 WITNESSES Tuesday, July 18, 2017 Berlau, John, Senior Fellow, Competitive Enterprise Institute.... 12 Blake, John, Senior Vice President, Finance, aTyr Pharma, Inc.... 7 Brown, J. Robert, Jr., Lawrence W. Treece Professor of Corporate Governance, Director, Corporate and Commercial Law Program, University of Denver Sturm College of Law...................... 10 Farley, Thomas W., President, the New York Stock Exchange (NYSE). 5 Quaadman, Thomas, Executive Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce.............. 9 APPENDIX Prepared statements: Berlau, John................................................. 54 Blake, John.................................................. 59 Brown, J. Robert, Jr......................................... 66 Farley, Thomas W............................................. 81 Quaadman, Thomas............................................. 87 Additional Material Submitted for the Record Huizenga, Hon. Bill: Written statement of the Depository Trust & Clearing Corporation................................................ 98 Testimony of J.W. Verret, Assistant Professor, George Mason University School of Law, from March 11, 2010.............. 102 Testimony of J.W. Verret, Assistant Professor, George Mason University School of Law, from July 29, 2009............... 107 Waters, Hon. Maxine: Written statement of Institutional Shareholder Services Inc.. 179 THE COST OF BEING A PUBLIC COMPANY IN LIGHT OF SARBANES-OXLEY AND THE FEDERALIZATION OF CORPORATE GOVERNANCE ---------- Tuesday, July 18, 2017 U.S. House of Representatives, Subcommittee on Capital Markets, Securities, and Investment, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 10:04 a.m., in room 2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. Members present: Representatives Huizenga, Hultgren, Duffy, Stivers, Wagner, Poliquin, Hill, Emmer, Mooney, MacArthur, Davidson, Budd, Hollingsworth; Maloney, Sherman, Lynch, Scott, Himes, Ellison, Foster, Sinema, Vargas, Gottheimer, and Gonzalez. Ex officio present: Representatives Hensarling and Waters. Chairman Huizenga. The Subcommittee on Capital Markets, Securities, and Investment will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Today's hearing is entitled, ``The Cost of Being a Public Company in Light of Sarbanes-Oxley and the Federalization of Corporate Governance.'' I now recognize myself for 3 minutes to give an opening statement I find it extremely concerning that the number of publicly traded companies is approximately half of what it was just 20 years ago. Since 2000, the average number of IPOs has dwindled to 135, compared to more than 450 annually in the 1990s. It is important to note that there has not been a corresponding downtrend in the creation of new companies over this same period. According to an Ernst & Young publication in 2016, there were only 112 initial public offerings or IPOs. This should be concerning to every single member of this committee, regardless of one's political affiliation. While there are many factors as to why the number of public companies has declined, the main challenges that I continue to hear about are how difficult it is to go public and how difficult it is to remain public as a company. The Securities and Exchange Commission has estimated that the initial regulatory compliance for an IPO costs a massive $2.5 million, followed by ongoing compliance costs of $1.5 million annually. The Sarbanes-Oxley Act of 2002 (SOX), in addition to other Federal corporate governance regulations, resulted in significant costs to a company that a company must consider when making the decision to go or remain public. The extensive corporate disclosure regime that public companies must navigate is not only costly, but it also exposes potentially sensitive information that can be used by competitors, and increases a company's litigation risk. We need to balance certain information the regulators and investors need to know with what is proprietary information. I find it extremely troubling that during the tenure of former SEC Chair Mary Jo White, the SEC seemed more interested in pursuing highly politicized Federal corporate governance mandates than its core mission. Instead of working to protect investors, maintaining fair, orderly and efficient markets, and helping to facilitate capital formation, it seemed the SEC focused on exerting societal pressure on public companies to change their behavior through disclosure rules such as the conflict minerals and pay ratio rules. That, in my opinion, is not the proper role of the Securities and Exchange Commission. I look forward to working with SEC Chairman Clayton to refocus the SEC and advance a more expansive capital formation agenda. Let's continue to build upon the successes of the bipartisan JOBS Act by further modernizing our Nation's securities regulatory structure to ensure free flow of capital, job creation, and economic growth. It is time to get the Federal Government working to ensure that American businesses are able to raise the capital they need to expand, support innovation, and reward hard-working Americans. I look forward to hearing from our witnesses today. And the Chair now recognizes the ranking member of the subcommittee, the gentlelady from New York, Mrs. Maloney, for a 5-minute opening statement. Mrs. Maloney. I thank the chairman for holding this important hearing on Sarbanes-Oxley, and a series of important oversight hearings. But I also think it is important to remember why we passed Sarbanes-Oxley in the first place. It was in response to an enormous wave of corporate scandals. Huge, well-known, respected companies like Enron and WorldCom had been reporting fraudulent earnings. And when their frauds were exposed, they went from investment-grade companies to bankrupt within a matter of months, rocking our markets and losing the savings of thousands of workers I have always said that markets run more on confidence than on capital. And these scandals destroyed investors' confidence in our markets. Many investors decided if they couldn't trust the financial statements of companies like Enron and WorldCom, then they couldn't trust any company's financial statements anymore. So Congress had to step in to restore investors' confidence in our markets and in the accuracy of corporate financial statements. Sarbanes-Oxley did impose Federal corporate governance requirements on companies, but this was necessary because these corporate governance changes affected the accuracy of financial statements that were governed by SEC regulations. And the Federal Government has regulated financial statements for public companies for over 80 years. Corporate governance issues have long been split between the States and the Federal Government. Ever since the Great Depression, and the Securities Act of 1933 and the Exchange Act of 1934, certain companies have been subject to Federal regulation, so this is absolutely nothing new. Companies that have a certain number of shareholders--today the threshold is 2,000--have been subject to SEC disclosure rules for over 80 years. These companies are known as reporting companies and there are over 9,000 of them in the United States. Corporate governance issues that affect financial reporting for these SEC-regulated companies can and should be handled at the Federal level. This is especially true when a corporate governance issue affects the reliability of a company's financial statements because the most basic confidence that investors need is confidence in the accuracy of a company's financial statements. As an investor, if you are going to commit your capital to a company, you need to know at a minimum how much money the company already has, how much it is expected to make every quarter, what its normal day-to-day operating costs are, and how much it already owes to other creditors. If investors can't have a basic level of confidence in these financial statements that the numbers are accurate and any major caveats are disclosed, then they simply won't commit their capital to that company. Some of the requirements of Sarbanes-Oxley relate to corporate governance issues, such as the requirement that public companies have independent audit committees, the requirement that companies maintain effective internal controls over financial reporting, and the requirement that CEOs and CFOs personally certify the accuracy of their financial reports. We can remember the hearings we had here where CEOs and CFOs said they had no idea what the financial statements of their companies were. This was technically a federalization of a corporate governance issue. But it was necessary because these corporate governance issues affected the reliability of financial statements that were regulated under the SEC disclosure rules. The question as always is, where do we draw the line? Which corporate governance issues are best handled at the State level and which at the Federal level? This is an ongoing exercise, and I welcome the opportunity to hear the testimony today and to review the current corporate governance regime to determine if we need to draw the line in a different place. I have a letter from the Council of Institutional Investors, which represents major pension funds across our country, and I ask unanimous consent, Mr. Chairman, to submit it in the record. Chairman Huizenga. Without objection, it is so ordered. Mrs. Maloney. Thank you so much, and I look forward to this hearing. And I yield back. Thank you. Chairman Huizenga. The gentlelady yields back. The Chair now recognizes the vice chairman of the subcommittee, Mr. Hultgren from Illinois, for 2 minutes for an opening statement. Mr. Hultgren. Thanks, Mr. Chairman. I am sure that this statistic or something very similar will be cited a number of times today, but I would like to make sure to highlight it as well: The number of U.S. public listings fell from 8,025 in 1996 to 4,101 in 2012, whereas non- U.S. listings increased from 30,734 to 39,427. In other words, while new listings rose 28 percent overseas, they fell 49 percent in the United States. This is a serious problem. The evidence of regulatory burden has been mounting, and it is important that this committee fight for healthy public markets. The JOBS Act was pivotal to this work, but it was only the beginning, especially as Dodd-Frank requirements continue to be implemented and as these are compounded with existing disclosure requirements for public companies This is why I co-sponsored the Fostering Innovation Act, sponsored by Kyrsten Sinema and Trey Hollingsworth of this committee, to extend the temporary exemption for an additional 5 years for certain emerging growth companies. Chairman Huizenga's Congressional Review Act Resolution, now signed into law, nullifying the Dodd-Frank-mandated Resource Extraction Disclosure Rule from the SEC was also a key part of this committee's work to address new Dodd-Frank burdens on public companies. There is a lot more work to be done by this committee and the SEC to this effect. For example, I was pleased to see the June 29th announcement from the SEC's Division of Corporation Finance that it will be permitting all companies to submit draft registration statements for review on a non-public basis. I hope this popular JOBS Act provision contributes to a more robust public market. Personally, I have been focused on the need for reforms to the SEC's Rule 14a-8. It has clearly been hijacked to achieve social objectives, which may have some merit, but have nothing to do with investor protection or capital formation. I look forward to the recommendations coming from our witnesses on this issue and others, and I yield back. Chairman Huizenga. The gentleman yields back. Today, we are welcoming a great panel here that I think is going to give us some great insight. First and foremost, we have Mr. Tom Farley, who is president of the New York Stock Exchange. He joined NYSE in November of 2013 when ICE acquired the New York Stock Exchange and Euronext. Next, we have Mr. John Blake, who is the senior vice president of finance for aTyr Pharma. His background includes a medical device company and a semiconductor company, so he has some broad experience, and he is a certified public accountant as well. Mr. Tom Quaadman is the executive vice president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce. Mr. Quaadman also holds a degree from New York Law School. And then we have Professor J. Robert Brown, who is the Lawrence W. Treece professor of corporate governance, and director of the corporate and commercial law program at the the University of Denver Sturm College of Law. He has also been an arbiter for FINRA. And last but not least, Mr. John Berlau is a senior fellow at the Competitive Enterprise Institute. Mr. Berlau is an award-winning journalist in both the financial and political fields, and he is a contributing writer for Forbes. We welcome all of you here today. We appreciate your time, and your effort in being here. And with that, Mr. Farley, you will be recognized for 5 minutes for your opening statement. And without objection, all of your written statements will be made a part of the record. STATEMENT OF THOMAS W. FARLEY, PRESIDENT, THE NEW YORK STOCK EXCHANGE (NYSE) Mr. Farley. Thank you, Mr. Chairman. Chairman Huizenga. Thank you. Mr. Farley. Thanks for having me back. And thank you, Congresswoman Maloney, and all the members of the subcommittee. On behalf of the New York Stock Exchange, we appreciate you having us here to discuss these important issues, and in fact, thank you. We have submitted our written testimony, so I am just going to hit a few of the Cliff Notes, and in fact, try to make it shorter because your comments were all so on the mark. Great entrepreneurs and the dynamic companies that they create are the lifeblood of our economy. They create jobs. They stimulate wages. And they create investment returns for all Americans, not just a privileged few. I grew up down the street from here in Prince George's County, in Bowie, Maryland. And I witnessed firsthand the impact that these incredible entrepreneurs can have. In 1996, Kevin Plank founded Under Armour from the trunk of his car right here in Prince George's County. And the business grew with fits and starts for 10 years. But it wasn't until 2005, when they took Under Armour public, that the explosive growth really ensued. The company went public at a valuation of $600 million, and ultimately topped $15 billion. I would go home to crab feasts and holidays and there were stories aplenty about, ``Hey, I have a job, a great job at Under Armour,'' or ``I invest in Under Armour stock and I am making dough to be able to put our family in a better place.'' Or even just, ``I am wearing Under Armour clothes and I take great pride in it.'' I saw how people were able to provide a better life for themselves because of a great company like Under Armour. The fact of the matter is that story is dormant. It is dead. There has not been a story like that in 10 years. You see, young dynamic companies used to go public. In the 1980s, the 1990s, even in the 2000s, the early 2000s in the early days, think Apple and Microsoft, and more recently, Netflix, Salesforce, Google, Chipotle, and many other examples, but not one has done that since 2007--a company valued at a billion and a half or less, a U.S. operating company that has achieved evaluation north of $10 billion. Clearly, there is something something wrong there and and we should all address it. You mentioned that IPOs are down dramatically, Chairman Huizenga, but I will just reiterate that the 1990s, as you pointed out, were a great time for IPOs. In fact, the minimum number of IPOs was 350 in a given year here in the United States. In the current 10-year period, the maximum IPO number is 250, not 350. So what can we do about that? We propose that we think of it in three different ways. First, let's end regulatory mission creep. Second, let's level the playing field for listed companies, particularly vis-a-vis serial litigants and proxy advisory firms. And third, let's really focus on small to mid- sized businesses. So first, just briefly, with respect to regulatory mission creep, Congresswoman Maloney is absolutely right. Sarbanes- Oxley was put in place for a set of very good reasons and it was done in a bipartisan fashion. And the idea of Sarbanes- Oxley was, let's put these internal controls in place. The issues came about because not only did it put internal controls in place, but it required that an external auditor- for-hire come in and verify them, attest to them. It created a quasi-governmental organization, the PCAOB, which for 15 straight years has expanded the scope of Sarbanes-Oxley. And all these just put such a great cost on corporate America. And actually the benefits are not entirely clear. The data doesn't show clearly that we have reduced fraud or greatly inspired confidence, but what is clear is we have far fewer public companies. And so our recommendations with respect to Sarbanes-Oxley are that first, we do away with the requirement that auditors attest to the internal controls. That is something that exists today under the JOBS Act for EGCs, and we are suggesting, let's extend it to all companies. Second, let's narrow the definition of internal controls under Sarbanes-Oxley. And third, and most importantly, let's require that the PCAOB not pass new rules and regulations that could in any way burden public companies. Second, level the playing field. There are hundreds and hundreds of shareholder class action lawsuits every year, as many as 500. The preponderance of those, or a majority of those, are questionable in nature. Our recommendation is that in this country we move to a loser-pays model, much like in the U.K.: If you lose your shareholder class action lawsuit, you pay the legal fees. This would still allow a voice, which is very, very important for shareholders, even small shareholders who have been harmed. But it would limit it to the most meritorious cases. Second, let's level the playing field vis-a-vis proxy advisory firms. Let's require them to register with the SEC and be transparent about how they manage their many conflict of interests, but also how they go about evaluating companies. This is a real sore point for listed companies. Finally, reduce the burden on small to mid-sized companies. And I have 10 seconds left, so I will do that quickly. Chairman Huizenga. Or we can wait until questions. Mr. Farley. Yes, I think I will just hit it in Q&A. Essentially, we think we should extend the the emerging growth company (EGC) qualification under the JOBS Act, to not just end at 5 years, to hit any company that meets those characteristics. Thank you, I look forward to Q&A. Sorry for running over, Mr. Chairman. [The prepared statement of Mr. Farley can be found on page 81 of the appendix.] Chairman Huizenga. All right. The gentleman's time has expired. Mr. Blake, you are recognized for 5 minutes. STATEMENT OF JOHN BLAKE, SENIOR VICE PRESIDENT, FINANCE, aTyr PHARMA, INC. Mr. Blake. Thank you, Mr. Chairman, and Ranking Member Maloney. I appreciate the subcommittee's work to support small businesses and ensure they have access to efficient liquid public markets, a vital component of the biotech capital formation ecosystem As a senior vice president of finance of aTyr Pharma, a small public biotech in San Diego, I can attest to the utmost importance of public capital. Since the JOBS Act was enacted 5 years ago, we have seen more than 200 IPOs in our industry alone. aTyr undertook a successful IPO in May 2015 using key provisions of the JOBS Act. But neither going public nor being public is easy. Roadblocks exist that can divert capital away from science, reduce investor confidence, hamper long-term value creation, and distract a company from its core mission. These barriers reduce the viability of capital formation in our public markets to fund life-saving innovation. In some instances, they lead companies to stay private longer or opt for a merger rather than an IPO. In others, a company still goes public but sees its precious capital syphoned off for compliance burdens. Many smaller issuers must allocate a disproportionate amount of resources, including staff and legal costs, to operate as a public company. The attention of management is often distracted by external forces that have the potential to influence shareholders, often at odds with the goal to create long-term value and help patients. I am encouraged that the subcommittee is holding today's hearing to examine the impact of such roadblocks on smaller public companies. And I support the work you are doing to bolster America's capital markets for growing innovators. In particular, I want to thank Representatives Sinema and Hollingsworth for introducing their Fostering Innovation Act. The JOBS Act's 5-year exemption from SOX 404(b) is a perfect example of how very targeted relief has saved millions of dollars from compliance activities and instead directed those funds towards science and innovation activities that allow growing biotechs to provide benefits to patients and shareholders. This bipartisan bill builds on the success of that provision. The auditor attestation required by SOX 404(b) is very helpful to shareholders of larger organizations with complex internal control environments often spanning geographies, diverse accounting systems, and multiple product lines. However, such attestation is not useful to investors in emerging pre-revenue companies. Since many biotechs will still be in the lab when their 5-year exemption expires, the Fostering Innovation Act extends the exemption in a very targeted way. The continued cost-savings in the bill are vital because every dollar spent on a one-size-fits-all burden is a dollar diverted from the lab. I also support Congressman Duffy's Corporate Governance Reform and Transparency Act. I want to be clear that I believe proxy advisory firms play an important role in the health of our capital markets. I believe that greater transparency, accuracy, and engagement with smaller issuers can only further benefit shareholders. Proxy advisory firms' outsized influence on emerging companies can be uniquely damaging to small, growing biotechs, especially in light of conflicts of interest and opaque standard-setting processes. Their one-size-fits-all approach diverts resources and distracts company management. Mr. Duffy's bill to regulate proxy firms would be a welcome change from a status quo whereby companies contort themselves to satisfy proxy advisors. Shareholder value is also impaired by the manipulative actions of some short-sellers. I believe honest short-selling plays a necessary role in the health of our capital markets and can aid liquidity and price discovery. However, the lack of transparency around shorting has given rise to manipulative behaviors that disincentivize long-term investment in innovation. Protected by the absence of any disclosure requirements, short-sellers have discovered that the unique biotech business model enables them to easily orchestrate a short-term stock drop. Long-term biotech investing is already a risky prospect so introducing further uncertainty discourages investors and ultimately harms the viability of capital formation in our markets. I believe that there should be a short disclosure regime complementary to the existing long disclosure requirements. Short transparency would shine a light on manipulative behaviors and ensure that investors have the full range of information they need. The JOBS Act has shown the strong impact of a policymaking drive toward capital formation and away from the one-size-fits-all burdens and outsized emphasis on the short term in our industry. I applaud the subcommittee for considering further initiatives to support small business innovators, and I look forward to answering any questions you may have. [The prepared statement of Mr. Blake can be found on page 59 of the appendix.] Chairman Huizenga. Thank you. Mr. Quaadman, you are recognized for 5 minutes. STATEMENT OF THOMAS QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE Mr. Quaadman. Thank you. Thank you, Chairman Huizenga, Ranking Member Maloney, and members of the subcommittee. We appreciate the continued focus of this subcommittee on issues regarding business creation and growth. Public companies are an important source of strength, growth, innovation, and resiliency for our economy. While the United States remains the gold standard for public companies, we are entering the third decade of a decline of public companies in the United States. That number started to go down in 1996, 4 years before the tech bubble burst, and has gone down 19 of the last 20 years. In fact, the IPO markets have not recovered from the burst of the tech bubble. But the gains and great strides of the Reagan and Clinton Administrations have been wiped out. We have roughly the same number of public companies today as we did in 1982, despite the fact that the population has grown by 40 percent and real GDP has increased by 160 percent. For entrepreneurs today, staying private or being acquired are as viable options as going public. There is no one cause for this decline, but I think there is a two bucket-set of issues that we need to look at. One is benign neglect, and that is the inability of policymakers to move forward on important issues. We have a lack of proxy advisory firm oversight, a rise of a small number of gadflies who are monopolizing the shareholder process, a failure to reform proxy plumbing in 14a-8 rules. And we have a disenfranchisement of retail investors in director elections and shareholder proposal votes. The second bucket deals with intrusive intervention. From the New Deal until 2002, corporations were governed by a combination of state law and corporate bylaws. Federal security laws were for disclosure of information for investors to engage in reasonable decision-making. That system was built upon a foundation of 150 years of State laws which has allowed directors and shareholders to develop diverse governance structures to fit the needs of the business. The passage of Sarbanes-Oxley has thrown that system out of balance. To be clear, Sarbanes-Oxley was passed to address a crisis which needed to be dealt with, and there are some good things in Sarbanes-Oxley. However, putting the merits and demerits aside, the most far-ranging consequence of Sarbanes- Oxley was the federalization of corporate governance. The Dodd-Frank Act ran through that door and that trend is continuing unabated today. Special interest activists are using the boardroom to push political agendas, and the Federal Government is acquiescing. As an example, the conflict minerals rule is a use of securities laws to try and resolve a foreign affairs and human rights crisis. The Reg-K concept release, which has some very, very good things in it, has opened up the door for environmental social governance or ESG issues to enter into the boardroom. If you are an emerging growth company with $500 million in revenues today, if you were to go public it would cost you $2.5 million, or about 5 percent of your revenues. What are you going to get for going into the public capital markets? $1.5 million in recurring compliance costs. You are buying shareholder proposal fights, director fights, and increased liability. Those are the reasons why Michael Dell, several years ago, said he would want to put all those issues aside so he can manage and grow his company. This situation must be reversed. SEC Chair Jay Clayton has made these issues a priority. And we encourage all stakeholders to work with him on those issues. Congress has a role. I believe that the Duffy bill on proxy advisory firm oversight is an important step forward to rebalancing this system. The business community also has its own responsibilities. The business community must resolve issues like board diversity on its own before we have government mandates. We must also enhance the power of the States. As an example, this month, Delaware, under the leadership of Governor Carney, is going to authorize the use of block chain for proxy plumbing. The SEC has yet to read comment letters that were submitted 7 years ago on its proxy plumbing concept release. And at the Chamber we are also issuing our own constructive proposals. Yesterday, we joined with other members of the Corporate Governance Coalition for Investor Value and sent a letter to the SEC, asking the SEC to move forward on its resubmission threshold rulemaking petition to deal with the gadfly issue. Next week we are going to issue a set of 14a-8 reforms, and later this summer or early fall we are going to issue a new IPO report to build upon the successes of the JOBS Act. So Chairman Huizenga, again, thank you for this hearing, and I look forward to any questions you may have. [The prepared statement of Mr. Quaadman can be found on page 87 of the appendix.] Chairman Huizenga. Thank you very much. We are on a roll with people yielding back. Professor Brown, you are recognized for 5 minutes. STATEMENT OF J. ROBERT BROWN, JR., LAWRENCE W. TREECE PROFESSOR OF CORPORATE GOVERNANCE, DIRECTOR, CORPORATE AND COMMERCIAL LAW PROGRAM, UNIVERSITY OF DENVER STURM COLLEGE OF LAW Mr. Brown. Thank you, Mr. Chairman, Ranking Member Maloney, and members of the subcommittee. NASDAQ, in its recent Blueprint on the Capital Markets stated that, ``We have the most innovative and transparent markets in the world.'' I agree with that assessment. But what exactly does that mean? Amazon went public in 1997, raising $48 million, although confessing that profitability wasn't in sight. In hindsight, purchasing shares in Amazon may seem obvious, but back then it wasn't. Two years later, Webvan, a grocery delivery company, raised 7 times the amount of money as Amazon in an IPO. Webvan looked more like the future than Amazon. It wasn't long before Webvan was bankrupt, and Amazon was on its way to issuing 450 million shares and obtaining a market capitalization of almost a half a trillion dollars--a success of the capital markets. So to me, ``innovative'' and ``transparent'' means capital markets that encourage investors to invest without knowing whether they are investing in Webvan or Amazon. It is about investor confidence in our capital markets and willingness to take risks. In 2001, this confidence was in doubt. Enron, at one time the 10th largest company in the United States, proved to be a Potemkin village. Investors could not trust the financial statements issued by even our largest public companies. In that environment, SOX, in a remarkably bipartisan fashion, stepped in and implemented much-needed reform. SOX strengthened the role of the board, particularly the audit committee, improved the quality of audits, and increased the responsibility of top officers for financial statements through certification and providing for the clawback of their performance-based compensation if based on false financial statements. SOX went further. SOX also emphasized the importance of internal controls, the backbone of financial statements, by assigning responsibility for creating them, reviewing them, and assessing them. And all of these changes had one thing in common: They promoted investor confidence in financial disclosure. The topic of reform of the public markets has returned. Some have phrased the relevant question as, how can we lower the cost of public company status? In my opinion, that is the wrong question. SOX teaches that the most important question is, how can we enhance investor confidence in our public markets? Any proposed reform that may impair investor confidence should be viewed warily. Cutting back on auditor review of internal controls falls into that category. So does the imposition of substantial restrictions on shareholder proposals. Those who seek to restrict the use of shareholder proposals often criticize activists, those investors deemed to focus on the short term. The best way to confront those with a short- term horizon is to engage with those who take a longer-term view Shareholder proposals provide management with the collective views of shareholders, whether on governance matters such as shareholder access, or on environmental matters where this year proposals addressing environmental matters received majority support at Exxon and Occidental. Proposals can be an important component of the communication process between companies and their long-term shareholders. Substantial restrictions on the use of shareholder proposals will weaken, not strengthen, these relationships That is not to say that reform of the public markets is not important. The hallmark of the public markets is transparency, and transparency comes from disclosure. The system of disclosure needs to be updated. We need to move from an analog to a digital universe in how information is filed and accessed. We need to modernize the system of disclosure, one that was largely written in the 1980s before anyone had even heard of something called the Internet, much less social media or artificial intelligence. But I would add that the starting point of disclosure reform is not disclosure overload, but disclosure effectiveness, that is, providing investors with the information that they need to be willing to purchase shares whether in Webvan or in Amazon. Thank you, and I look forward to your questions. [The prepared statement of Mr. Brown can be found on page 66 of the appendix.] Chairman Huizenga. Thank you. And Mr. Berlau, you are recognized for 5 minutes. STATEMENT OF JOHN BERLAU, SENIOR FELLOW, COMPETITIVE ENTERPRISE INSTITUTE Mr. Berlau. Chairman Huizenga, Ranking Member Maloney, and honorable members of the subcommittee, thank you for this opportunity to present testimony on behalf of my organization, the Competitive Enterprise Institute, a Washington-based free market think tank. It is our mission to advance the freedom to prosper for consumers, entrepreneurs, and investors Despite the conversation on more recent financial regulation from laws such as Dodd-Frank, the Sarbanes-Oxley Act of 2002 still very much matters. The mandates to audit internal controls from the law's Section 404, as interpreted broadly by the Public Company Accounting Oversight Board or PCAOB, the accounting body created by this law, are still a primary concern for companies considering going public on U.S. stock exchanges. In reading through S-1s, the forms that companies file with the Securities and Exchange Commission when contemplating going public, I still always see prominent mention of the cost Sarbanes-Oxley imposes on being a public company. Auditing costs imposed by SOX are some of the biggest drains on these firms. However, some of the biggest costs SOX imposes are to middle-class American investors looking to build wealth in their investment portfolios. This is the primary reason the law should be overhauled. In the early 1990s, then-small firms such as Starbucks and Cisco Systems were able to get capital from the public to grow, and middle-class investors grew wealthy with them. Before SOX, 80 percent of the firms going public had IPOs of less than $50 million, which included Starbucks and Cisco Systems and, as Professor Brown mentioned, Amazon, which was $48 million. However, a few years after SOX, 80 percent of firms went public with IPOs greater than $50 million. This is a big change for small and mid-sized public companies, which now face additional hurdles when raising capital. However, it is middle- class investors who have been most harmed by being almost totally shut out of this early stage of growth of America's fastest growing companies. Instead, these financial opportunities are being snapped up by the accredited investor class that has the freedom to buy shares in companies that aren't weighed down with much of SOX and other mandates. Directly fingering SOX, President Obama's Council on Jobs and Competitiveness observed that well-intentioned regulations aimed at protecting the public from misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies. As a result, fewer high-growth entrepreneurial companies are going public. SOX has also had adverse consequences on the lack of job creation. As President Obama's Jobs Council and others have noted, 90 percent of a public company's job creation occurs after it goes public. This is important in comparing the public equities markets before and after SOX because when you look at those, the first thing that is apparent is that despite a recent uptick in IPOs, there are far fewer public companies today. In 2001, the year before SOX became law, there were more than 5,100 companies listed on exchanges such as NASDAQ and the New York Stock Exchange. By 2015, there were just 3,700. This is a purely American phenomenon because from 1996 to 2012, non-U.S. stock listings rose 28 percent, according to the National Bureau of Economic Research. The good news is that with the Jumpstart Our Business Startups Act (JOBS Act), Members of Congress from both parties have realized that smaller public companies should not be subject to all of the mandates of Fortune 500 companies. However, there is much more to be done, and I urge Congress to pass bipartisan initiatives to allow middle-class investors to build wealth by expanding exemptions for investment crowdfunding and creating ways for non-wealthy Americans to qualify as credited investors. And I would also urge Congress and the SEC to narrow the definition of internal controls to processes that have been proven to prevent fraud. Thank you, again, for inviting me to testify, and I look forward to any questions you may have. [The prepared statement of Mr. Berlau can be found on page 54 of the appendix.] Chairman Huizenga. Thank you very much. I appreciate that. And with that, I will recognize myself for 5 minutes for questions. First, I want to start out by saying that I wholeheartedly understand and agree that the scandals leading into Sarbanes- Oxley required action. And there is a lot of debate about the details of Sarbanes- Oxley both at the time when it was passed and now. But it seems like the time is ripe after 15 years to give it a thorough review. One of the concerns I have is that companies are staying private or, interestingly enough, we are seeing them reverting back to being private after they had been public. And I think ultimately the question is, why is this important? And it is not for the board of directors. It is not for the corporate management that we need to asking this. But I think, as Mr. Berlau just pointed out, and it is such a great phrase that I wrote it down, the ``accredited investor class,'' not Mr. and Mrs. IRA, have caught most of the uptick in the stock market recently. Why? Because we are having such a limited number of these companies going to public ownership. And that leads many of us to be saying, look, Wall Street is doing just fine--no offense Mr. Farley; I know you facilitate that, and it is needed--but this is why Main Street is struggling. And if we don't have that focus, as Mr. Berlau was just pointing out, that focus on that low, moderate, hardworking taxpayer who is trying to save up, to put kids through college, and get themselves retired, and to catch a little bit of that upswing, if we are not even giving them that opportunity, we have a duty and an obligation to remove those barriers or lower those barriers. And I think that is certainly the motivation of why we are doing this and one of the reasons why I think we can be successful, because I anticipate that we have great commonality in that. Now, Mr. Farley, in your testimony, you mentioned that over the last 15 years, compliance and administrative costs have adversely affected those IPOs. So what specifically--you had started your three points on mission creep of regulators and the level of the playing field. Small and mid-sized companies need to be the focus and maybe those EGCs, so would you care to expand on that for a moment? And then I want to move onto another question. Mr. Farley. Can you restate the question? I'm sorry, Mr. Chairman. Chairman Huizenga. Sure. Just, what specifically can Congress do as we are looking at these compliance costs and administrative costs for these public companies for which we-- it is $2.5 million, according to the SEC, to become public, and $1.5 million a year to remain public. Mr. Farley. And just quickly, I wholeheartedly agree with your comments about accredited investors. Again, I go back to, I live in New York City in the Village, but I always spend time here in P.G. County. There are a lot of accredited investors that I meet up in Manhattan. I have yet to meet one in Prince George's County who has benefited from explosive growth of a private company. What can Congress do? Just to reiterate what I said, but hopefully do it quicker, with respect to Sarbanes-Oxley, eliminate the requirement that an auditor attest to the internal controls. That is very costly, and that is something that could potentially scare a private company off from going public. In addition, narrow the definition of internal controls, or at a minimum have a review of that periodically to make sure it is not expanding. And also, similarly related, make certain that the PCAOB, with their annual or every other year pronouncements, are not expanding the scope of Sarbanes-Oxley. I would finish by saying that with respect to small companies, there are actually two things to consider: the JOBS Act works quite well; and the Emerging Growth Company (EGC) onramp that was provided is very helpful. Let's expand that. Let's not have it end at 5 years. Let's have it exist for all small companies that are public. Chairman Huizenga. Okay. I have just a moment here, and I want to move on quickly, maybe questioning the motivations of why we are wanting to refocus the SEC. And, as I said in my opening statement, disclosure rules such as conflict minerals and pay ratios have embodied sort of these special interest groups, what they want to see in these corporate disclosures from political spending and climate change and child labor, human trafficking--all important issues. But even Chair Mary Jo White sat here and said, ``That is not their strength. That is not their sweet spot.'' In fact, in 2014 the SEC, in a letter response from myself and Mr. Hensarling and Mr. Garrett at the time, said, ``Since 2011, the SEC staffers have spent 7,196 hours at the cost of $1.1 million solely to write the pay ratio rule.'' That's 7,000 hours that could have been put towards a secure market, that could have been put towards making sure that we have the investors protected. And to me, and very quickly, do any of these provisions really provide any material information to investors? That is what I want to know. Mr. Berlau, Mr. Quaadman, Mr. Farley, very quickly, and then I will expend my time. Mr. Berlau. Yes, Mr. Chairman. I don't think the internal controls, which is the costliest one that I have looked at--the problem is internal controls can be defined broadly. But even a set of--in one case, a set of office, who has the office keys can be determined as having the internal control. So I don't really think this is necessarily the kind of information that investors want to know. Chairman Huizenga. Mr. Quaadman? Mr. Quaadman. Yes. To the disclosures you were talking about, they don't provide material information for investors. They actually cause problems within the boardroom. Just one example, pay ratio. The City of Portland has now passed a tax based on the pay ratio disclosure. So they are now going to tax that pay ratio. And that proposal is beginning to follow around the soda tax. So I think it also shows how those disclosures can be used in harmful ways as well. Chairman Huizenga. And Mr. Farley, quickly? Mr. Farley. The sad reality is that as we expand disclosures dramatically, it actually makes them less approachable for the everyday investor. In fact, you referred to a 20-year period, Chairman Huizenga, where the number of public companies went down by half. The median word count of the average disclosure doubled during that period, and there have been studies that show they are less understandable than they ever have been. Chairman Huizenga. I am well over my time. I appreciate that, and thank you for the indulgence. With that, the Chair recognizes the ranking member of the full Financial Services Committee, Ms. Waters of California, for 5 minutes. Ms. Waters. Thank you very much. I appreciate this discussion. And Professor Brown, I heard you loudly and clearly when you basically agreed with Ken Bertsch, the executive director of the Council of Institutional Investors, who wrote, ``The number of U.S. IPOs has little to do with overregulation, and the U.S. capital market for emerging companies is vibrant.'' But thank you for your comments on that subject. But I really want to talk about activist investors. Republicans continuously claim that special interest groups and activist investors are abusing the SEC shareholder proposal rules to advance their own goals at the expense of the company and its management. However, it is my understanding that shareholder proposals may serve an advisory role and are mostly successful at encouraging dialogue between shareholders and management. Is that your understanding as well, and do you believe that proposals can have a significant, positive impact on companies? Mr. Brown. Thank you for that question. I know I spoke loudly. I come from a family of 7 kids, and if you didn't speak loudly, you weren't heard. So I may overdo that sometimes. The discussion in here about what information is important to shareholders, I can tell you one way to figure that out: Look at what shareholders are voting for. When you look at these shareholder proposals, an enormous number of them in the governance area get majority support from shareholders. And when you look at the ones on environmental proposals, I think as I mentioned in my remarks, two of them got majority support at Exxon and Occidental. That is no small feat. So what these votes are telling you is shareholders want this information. We can debate in here how important we feel it is, but these returns that are coming in on these shareholder proposals are telling you what shareholders want. And more and more of these social policy kind of proposals, they are averaging around 30 percent. So it is not a majority on average, but that is a lot of shareholders who still want it. And then I would just add finally, that these proposals are almost always advisory. They are not commands. They don't tell the board, you must do something. They just say, here is our opinion on this issue, and they leave it to the board to decide what to do with that information. They are providing the board with information. And I think as a fiduciary, as a director, that is information that you want to hear. Ms. Waters. Thank you very much. And as you stated in your testimony for this hearing, ensuring investor confidence in the accuracy of financial statements was a critical component of SOX. Can you describe some of the most significant factors affecting the reliability of financial statements prior to the Sarbanes-Oxley Act? Mr. Brown. I think that SOX did a remarkable job in restoring faith in financial statements. And they did it through strengthening gatekeepers. They did it through creating a regulator which, by the way, was very creative. It was a nonprofit corporation. It wasn't a typical bureaucracy. I think they did it by encouraging officers to want to have more accurate information by having to certify the financial statements. So, SOX took a lot of steps. But I also want to emphasize improvement in internal controls. This is the backbone of financial statements. If you can't have controls in place to make sure you are recording your transactions properly, you are not going to have accurate financial statements. If you take an auditor at the Big Four down to the Monacle for a couple of drinks and you ask them, what do you think about this whole review of the internal controls? Some of them might admit that the review of the internal controls can be more important than the audit itself in making sure that the financial statements are accurate. Ms. Waters. Thank you very much. I yield back. Chairman Huizenga. The gentlelady yields back. With that, the Chair recognizes the vice chairman of the subcommittee, Mr. Hultgren, for 5 minutes. Mr. Hultgren. Thanks, Mr. Chairman. And thank you all so much for being here. I appreciate your testimony, Mr. Quaadman. It's good to see you again. I appreciate you being here, and I appreciate you testifying today. I would like to hear a little bit more from you about the damaging effects of SEC's Rule 14a-8 and the Chamber's renewed effort to bring about some reform that will allow public companies to focus on material disclosures. The Chamber just submitted a petition for rulemaking regarding resubmission of shareholder proposals failing to elicit meaningful shareholder support back in 2014, but it was never taken up under the prior leadership of the SEC. Section 844 of the Financial CHOICE Act proposes a number of meaningful reforms. Your testimony, I think it was on Page 9, mentions that the Chamber will soon release a set of proposals to reform SEC Rule 14a-8, and I am certainly looking forward to reviewing those. I wonder if we could get a sneak preview of those recommendations? This subcommittee has heard some important ideas for reform, such as revisiting the resubmission thresholds, with which I definitely agree. So I am eager to hear what else we can do. Mr. Quaadman. Sure. So number one, just with the resubmission threshold issue for a second, we have a very small number of what are known as gadfly investors, five or six individuals who literally submit hundreds of proposals over a period of time. And that has frustrated the rights of the majority. So if you are getting proposals that are getting very low support, it costs the company investors time and money. So the proposal that we have actually set forth there is actually based off of Chairman Arthur Levitt's proposal from the Clinton Administration SEC on how to deal with those issues. The other issue, too, in terms of 14a-8 reforms, Chair White, a few years ago, in what is known as the Whole Foods decision, basically abdicated the role of the SEC to be the gatekeeper, the umpire, as to what proposals should go forward or not. And this was after a long period of time where the SEC staff was allowing more and more political disclosures to come through. I think 30 percent is different than 70 percent. If 70 percent or 80 percent or 90 percent of shareholders don't want to have something disclosed, that means they don't want to have it disclosed. And if they don't want to have repetitive proposals going forth, this is something that needs to be addressed. So this is one of the issues that I raised in my opening statement as to the cost and burden that go along with that, which shareholders don't want. Mr. Hultgren. Yes. On a similar note, Mr. Quaadman, on page 80 your testimony mentions the importance of the SEC, the PCAOB and the FASB agreeing to a common definition of ``materiality'' in financial reporting. I wondered if you could please explain the importance for establishing a common definition? And do you have any specific recommendations for how the committee can facilitate this work? Mr. Quaadman. Yes. The Cox Commission back in 2008 had actually issued a set of very far-reaching reforms as to financial reporting. They were never acted on because of the financial crisis. One of the proposals that was at the center of that is that the SEC, the FASB, and the PCAOB have differing definitions of ``materiality,'' which actually leads to standard setting that doesn't necessarily match up. If you take a look at some of the recent PCAOB standards that they have done, the differences there between them and FASB have not made for good enforcement. So FASB, to its credit, has actually put out a proposal to have a definition of ``materiality'' that matches up with the Supreme Court definition in TSC Northway. And they have come under attack by special interest investors because they would rather have as much disclosure as possible. But when you talk to FASB, they will tell you if you go in and talk to, let's say an insurance company, an insurance company is not going to need an accounting standard around or a disclosure around inventory because they don't sell inventory. That is something that you are going to look at Macy's for. So I think to get all three entities on the same page is actually something that is going to help investors in the long run. Mr. Hultgren. Great, thank you. Quickly, Mr. Berlau, thanks for being here as well. Your testimony recommends that Congress narrow the SOX definition of internal controls to processes that have proven their effectiveness in preventing fraud. In an effort to establish some goal posts, I wonder if you could provide some examples of currently established processes of internal controls that are not effective? Mr. Berlau. There was the Wall Street Journal report of the auditor requiring the company to document who has the office keys. The problem is Sarbanes-Oxley didn't define internal controls, and then the PCAOB has its own very broad definition. And so the SEC should exercise that authority over the PCAOB that it has, but Congress should act, too, to actually ensure that this doesn't waste companies' and shareholders' time. And I can get back to you on the-- Mr. Hultgren. Great. We will follow up if that is okay? My time has expired. Thank you all very much for being here. We appreciate it. Chairman Huizenga. The gentleman's time has expired. The ranking member of the subcommittee, the gentlelady from New York, Mrs. Maloney, is recognized for 5 minutes. Mrs. Maloney. Thank you Mr. Chairman. Professor Brown, I would like to ask you about the decline in the number of IPOs in the U.S. in recent history. Some people have claimed that companies are not going public anymore because regulations have made it too onerous for public companies. Yet, as you know, 74 percent of the decline in U.S. public companies from its 1996 peak occurred prior to 2003 and the passage of Sarbanes-Oxley. And the total number of U.S.-listed companies has stabilized since the 2008 crisis, ranging between 4,100 to 4,400, while the number of foreign companies listed and listing in the U.S. has increased. Isn't it true that the JOBS Act actually encouraged companies to stay private longer? In the JOBS Act we increased the threshold when companies became subject to SEC regulation from 500 shareholders to 2,000, which clearly makes it easier for companies to stay private longer. And we made it easier for private companies to sell securities to sophisticated investors, which allows them to raise capital without going public, plus the availability of capital, the low interest rates have all contributed. So isn't some of this decline in the number of IPOs an intended consequence of the JOBS Act? Mr. Brown. Thank you, Congresswoman Maloney. I don't think that there is any question that part of the explanation for the number of public companies is the vibrancy of the private markets. There is a lot of capital sloshing around in the private markets. I also don't think that there is any question that one of the reasons that the private markets are so active is because of regulatory change. I think there have been a lot of things that have facilitated activity in the private markets. You point to a couple of them in the JOBS Act. We just heard earlier in testimony why accredited investors are getting these deals and ordinary investors are not. Well, one of the things the JOBS Act did was permit general solicitations to accredited investors. They facilitated that dynamic to take place. So I agree with that. I also think that some of the concern over the public markets was because in 2016, we had a particularly low number of public offerings. But in the first 6 months of 2017, we have already had more public offerings and raised more capital than all of 2016. So I think we have to also be careful in looking at our data points in sort of assessing how these markets are doing, relatively speaking. Mrs. Maloney. Okay. And I would now like to ask Tom Farley, president of the New York Stock Exchange--thank you for keeping the name--you noted in your testimony that you were concerned about the decline in the IPOs. And what are the public policy benefits of having more companies go public rather than staying private? Mr. Farley. Sure, thank you. The public policy benefits are primarily twofold, Congresswoman. First, I give you the example of my father. Defined benefit pension plans, which, by the way, is the way the world is going generally, are going away. And so someone like my father and the millions and millions like him cannot invest in Airbnb in the private market in any meaningful way, but he can invest in a company that goes public like Under Armour in 2005. The very wealthy, they can invest in Airbnb. That, to me, is a societal issue, number one. Number two, public companies create more jobs. Anywhere from 75 to 90 percent of all jobs created by public companies, depending on the time period you look at, are created after the point they go public. And perhaps more importantly, the inflection point of job creation lifts off when they are a public company. But those are the tangible reasons why it is a public policy good. There is also the psychological element, which is the aggregate market cap is going up. The number of companies is going down. That says that only big companies find it easy to be a public company, and there is an issue with small to mid- sized companies. To have a really great free enterprise system, we want it to work for all companies. We want it to work for big companies, small companies, the real estate brokerage in Manhattan or the hair braider in Harlem. Mrs. Maloney. Okay. Very quickly, Professor Brown, as you know, companies frequently complain about Section 404(b) of Sarbanes-Oxley, which requires auditors to attest that companies have effective financial controls in place. What is your assessment of how effective 404(b) has been? Mr. Brown. I think that Section 404(b) and attestation is critical. I think that it better ensures the accuracy of financial statements. And I think accurate financial statements benefit investors. They can make better decisions. Maybe they will pay a higher price for shares because they are less concerned about financial risk or the risk that the financial statements are false. It benefits officers because they make better decisions when they understand the finances of their own company and the accuracy of their own records. And it benefits independent directors, who have a fiduciary duty to know how the company is doing. And I would just add with independent directors, it is not easy for them to go to their own company and say, hey, can you get this attestation done, because it looks like they don't trust their officers. It is better to just have that be a requirement so that the independent directors know this step is being taken and they can be more certain of the accuracy of their financial statements. Mrs. Maloney. Mr. Quaadman, very quickly, what are your thoughts on Section 404(b)? Mr. Quaadman. So 404(b) I think, one, you need internal controls for businesses to grow from small to large, but two things. One is for smaller companies, those costs need to be scalable, but number two, and there has been an ongoing issue with existing public companies where their internal control costs over the last several years, particularly amongst middle- market companies, has gone up by over 300 percent. This is partially because the PCAOB forgets that ``public company'' are the first two words in its name, and they don't bring in the public companies to talk about what critical audit issues are. And that has led to a breakdown as to what a balanced system should be. When Jim Schnurr was the Chief Accountant at the SEC, we opened up a dialogue with him, and with Chair Doty, to try and address these issues, and we did to some degree, but we are going to continue to do so. And we are actually, later this year, going to issue a proposal with some ideas as to how to actually address those issues. Mrs. Maloney. That would be very helpful. My time has expired, thank you. Chairman Huizenga. The Chair recognizes the chairman of our Housing and Insurance Subcommittee, Mr. Duffy, for 5 minutes. Mr. Duffy. Thank you, Mr. Chairman, and I want to welcome the panel. Thank you all for being here today. For many of you, I want to thank you for the kind comments you have made on our corporate Governance Reform and Transparency Act. As many of you know, we introduced this in the last Congress. Congressman Carney, now Governor Carney, and I worked closely together on this proposal. We had wide bipartisan support from across the aisle. This language is now included in the CHOICE Act. We hope that we will get good movement not just here in the House but also in the Senate. But I want to drill down a little bit with our panel and just, again, I want to hear Mr. Farley and Mr. Blake, any concerns that you have about the transparency, the competition, and the accountability of our--basically there are two proxy advisory firms that now operate today. And Mr. Quaadman, too, if you want to jump in? Mr. Quaadman. Sure. There is not a lot of transparency. Let me just put it that way. Mr. Duffy. So there is not a lot of transparency? Mr. Quaadman. Yes. Glass Lewis is a black box. And while there is some ability to, let's say, engage with ISS, that has actually been a problem as well. So I think we need to look at it in two ways. One is, and I think this is what your bill drives at and what the SEC tried to do a little bit with their 2014 guidance, is there needs to be a process for how those firms actually develop their recommendations. And those recommendations need to be linked back to the fiduciary duty and economic return of their clients. I think there are also additional problems that your bill addresses as well is the conflicts of interest of both of those firms was each of those firms have different conflicts of interest. ISS was going in the consulting business, Glass Lewis being owned by an activist investor. So I think oversight is important and I think it is a way to actually bring some rationality into proxy advice. Mr. Farley. I would just highlight that this, too, is a small company versus large company issue. We recently had about 25 listed companies gather at the New York Stock Exchange to talk about issues that were giving them difficulty, and this was one of them we discussed. And what we learned is that it is much more painful for the small companies because, for example, the proxy advisory firms will have this opaque process. They will come up with an opinion, and they will publish it at times without consulting the company or notifying them of what their process is or what their results are. And it will be published with some errors. We are all human. We all make errors from time to time. But because they haven't run it by the company that is now out in the market, and it is very difficult for a small company without a public relations machine to be able to correct that information. And so that is why we are advocating for more transparency in terms of the processes of those proxy advisory firms, as well as more collaboration from them with those companies that they are opining on. Mr. Duffy. Mr. Blake? Mr. Blake. Thank you, Mr. Duffy. I appreciate the work you are doing in this area. I have to echo Mr. Quaadman and Mr. Farley's comments. It really is an issue with the smaller issuers, especially around the transparency and the engagement that they have with the smaller issuers. Their methodologies tend not to be published and we have to go through a process to discover what the methodologies are in order to comply with them. And the resourcing, which I think your bill addresses for the proxy advisory firms to engage with the smaller issuers is very important. We want to be able to engage in a dialogue and at least explain our side of the story in terms of what our governance policies are and our executive compensation policies are. Mr. Duffy. But if you look at these two main proxy advisory firms, and we look back in 1987, institutional investors had 46 percent of our market. Now they have grown to 75 percent of the market. What role do proxy advisory firms have on corporate governance? It is substantial, isn't it? Mr. Quaadman. Yes. Mr. Duffy. And then, do they have the best interests of shareholders in mind? And does their one-size-fits-all benefit shareholders or negatively impact shareholders? Mr. Quaadman. Let me actually give you one example with that. With the passage of Dodd-Frank and through a lot of work of members of this committee, there is a provision in there on say-on-pay votes where investors and shareholders are supposed to determine the frequency of those votes, 1, 2, or 3 years. And what had happened, of course, for a proxy advisory firm, is if you have an annual vote there is a pecuniary interest in doing that. So of course the advisory firms immediately came out and said, no, there needs to be an annual vote. And of course that is exactly where it all then went. So shareholders were disenfranchised, Congress' intent was overruled, and the advisory firms profited from that. Mr. Duffy. That is right. So they made a recommendation that helped their bottom line but wasn't in the interest of the shareholders-- Mr. Quaadman. Correct. Mr. Duffy. --per your example. We get a lot of stories that come our way, but stories from one specific proxy advisory firm, ISS, we got one that came in that said, we heard this is the ISS calling one of the companies. We heard you had a negative recommendation. And this, by the way, the recommendation isn't even out yet. We heard you have a negative recommendation. Oh, by the way, do you want to buy our consulting services? And there is supposed to be a firewall between the two divisions, but when their recommendation isn't even out yet and here the offer is coming in to buy our services, that gives us some concern. That is like Vinny saying, ``Oh, I heard you were robbed last night. Do you want our protection services?'' It is outrageous and I think this is, per your testimony, ripe for reform. And I am getting tapped down right now, but I look forward to any other input you might have on how we could improve our product and get this across not just the House and the Senate, but improve corporate governance and the transparency and accountability of proxy advisors. I yield back. Chairman Huizenga. And yet somehow, the gentleman managed to get another 20 seconds. Okay. [laughter] With that, the Chair recognizes the gentleman from Georgia, Mr. Scott, for 5 minutes. Mr. Scott. Thank you very much, Mr. Chairman. The Enron scandal broke right at the same time that I first entered Congress 15 years ago. And as I recall, there was just great fear and anxiety after Enron went down. But right after that, the most startling thing happened: Arthur Andersen, a 100-year-old company, disappeared, collapsed overnight, which garnered great fear, and that was the move that Oxley dealt with, how can we quickly eliminate this fear and move to confidence? And that was done. But Mr. Farley, I have just been listening back and forth on the 404 situation, and I tend to think that you basically agree with me that Sarbanes-Oxley institutionalized transparency in financial reporting and boosted confidence in the public markets, which reduced that fear. Yet, in your testimony you highlight that Section 404 has a specific example of one part of Sarbanes-Oxley that has disproportionately impacted small and mid-sized companies. So there is some air in the middle of this because it is my understanding that Section 404 requires issuers to publicly publish the scope, the adequacy, and the truth of their internal control structure and procedures for financial reporting. It just seems to me that Section 404 is vital to instilling that confidence, to reducing that fear and transparency in our markets and getting that confidence back. To me, Section 404 seems pretty important and perhaps the premier piece of Sarbanes-Oxley that will prevent another Enron or Arthur Andersen. So I value your insight on this and could you address that error that is in there? It seems to me that on the one hand, you are saying positives about Section 404, but you come and show some weaknesses as far as the small and mid-sized firm. Would you clarify that? Mr. Farley. Yes, and as usual, Congressman, I think there is probably more agreement on this issue between you and I than disagreement. It is a tricky one. And what I mean by that is you are right. There were tremendous scandals that did undermine investor confidence. And they were really lousy. It was Enron, WorldCom, and there were repercussions for those scandals. People went to jail in both cases. In fact, there was a very tragic suicide that came about as a result of that. So there were consequences, but yet those consequences don't solve that investor confidence issue. That really dented investor confidence. So the idea of, let's put in place Sarbanes-Oxley to inspire investor confidence, that made sense at the time and it was 98 to 0. But as Chairman Huizenga said, you always want to go back and you want to--in the Senate it was 98-0--you want to go back and you want to look at these things from time to time and do you want to say did they work? And that is where I am suggesting to you and your colleagues that there are some issues. The New York Stock Exchange is not advocating we abolish Sarbanes-Oxley, nor is it advocating we abolish Sarbanes-Oxley 404. Mr. Scott. I don't want to lose my time here. Mr. Farley. Yes. Mr. Scott. Give me some examples of where it hurts the small and mid-sized firms? Mr. Farley. Sure. I had breakfast last week--I don't think he would mind my sharing this anecdote, but this happens all the time, Congressman; I could give you a list of them--with the CEO of Shake Shack, Randy Garutti. And I said, ``How is it going?'' And he said, ``It is okay, but I spend a lot of my time staying in compliance with Sarbanes-Oxley 404 a lot more than I otherwise would have thought.'' And he said, ``Look, we are a small company. You think of us as a big company with a big brand, over $350 million in revenue, which makes us a small public company. And having to implement 404, put the internal controls in place, verify that they work and have them attested to by an accounting firm is difficult for us.'' Actually, the last part he didn't go through all those specific instances, but he said complying with it and complying with all the applicable regulations are very difficult. Those sort of conversations I have over and over again, which is why we focused on small to mid-sized businesses in our testimony. Mr. Scott. Do you advocate taking some kind of legislative action to Sarbanes-Oxley to address the concerns of these small businesses? Mr. Farley. We do, in two ways. One, we are recommending that we eliminate the auditor attestation requirement for all companies. And in the absence of that for small companies, we are advocating that we extend the EGC benefits that exist today for all, without an arbitrary 5-year time duration. Mr. Scott. Thank you. And thank you, Mr. Chairman, for that extra 40 seconds. Thank you. Chairman Huizenga. I am paying for my earlier sins, yes, of allowing myself to go long. But with that, I recognize the chairwoman of our Oversight and Investigations Subcommittee, Mrs. Wagner from Missouri, for 5 minutes. Mrs. Wagner. Thank you, Mr. Chairman, and I thank you all for appearing today to discuss issues that affect the cost of being a public company, particularly around corporate governance issues and the growing trend of special interests using the Federal securities laws to advance their own agendas. This has increasingly led, as we have heard outlined by most of our witnesses, more time and resources having to be directed toward dealing with these issues which typically have nothing to do with long-term shareholder value. As a result, small businesses that are considering going public increasingly are being deterred, as Mr. Farley has spoken about, due to the unfavorable corporate governance climate. Mr. Quaadman, why do you believe, just as a 30,000-foot argument here, these special interests have been able to become more active in the corporate governance space? Mr. Quaadman. Part of it is, and this is the conversation we were having with Mr. Hultgren earlier, that the SEC to some degree has allowed it. So when they have stopped being that umpire in terms of shareholder proposals where they have allowed more of these issues to come in, that has allowed these things to seep through. I also think, as I said in my testimony, Sarbanes-Oxley sort of kicked the door open, but then Dodd-Frank rushed through. So we started to see a lot of disclosures and a lot of issues start to come in. And I think we are at the cusp now where ESG issues, so environmental, social, and governance, are now beginning to pick up steam and there have been some efforts, particularly from Europe, to try and bring that over here. But I think we need to be very, very careful with it because those issues are in the eye of the beholder and very often investors just don't want them in the boardroom. Mrs. Wagner. The SEC and Congress have recently turned to the disclosure system to address social, political, and environmental issues that are irrelevant to reasonable investors' investment in proxy-voting decisions, and while important on some level, are more efficiently, and I think effectively, addressed through other means. As a result, investors today receive voluminous, complex information that is often immaterial to their investment or voting decisions. Could you please elaborate, Mr. Quaadman? Mr. Quaadman. You have to take a look at, there are various cottage industries that are beginning to form up around ESG. I took a look at one report from one group and they had two different disclosures from similar companies: one that dealt with the reduction in fuel costs; and then another dealing with a reduction of CO2. So they said, the first company that was talking about reduction in fuel costs really should have a different type of disclosure. But the thing is that first disclosure dealt with the bottom line, which is what investors care about. And that is, I think, where we are getting away from the fact that those are the issues that a long-term investor cares about. Mrs. Wagner. And let's turn to materiality. What is the current definition of ``materiality'' used by the SEC to determine what should or should not be disclosed to an issuer? Mr. Quaadman. You need to go to Justice Thurgood Marshall's decision in TSC Northway where what he basically said that you need to take the total mix of information that will allow for a reasonable investor to make a decision. And then he goes on to say it is not everything. It is just what is a reasonable amount of information to do that. Mrs. Wagner. Should it be changed or updated? Mr. Quaadman. No, it should not, because that is what investors have hung their hat on for decades. Mrs. Wagner. If the definition of ``materiality'' were to be expanded, say to require disclosures of information that might be important to any investors, what would be the practical impact or what are we saying is the practical impact? Mr. Quaadman. You can take it through its logical extension that you would want to know what the trade secrets are of Apple for their new iPhone 8, which of course is ludicrous, because then how is Apple ever going to be able to make any money off of that? And there is a group of people, particularly within the the investor advisory committee in the SEC, who are trying to push for a fraud definition of ``materiality'' which would overturn Northway and effectively everything that is disclosable at that point. Mrs. Wagner. And does expanding the scope better protect investors? Mr. Quaadman. No. No, it actually will drive investors-- Mrs. Wagner. Well, why not? Mr. Quaadman. It will drive investors and companies out of the public markets into the private markets. I think we have to take a look at while stock buybacks have been a cause celebre for some-- Mrs. Wagner. Yes. Mr. Quaadman. --it is a massive reallocation of capital away from the public company markets. We have disadvantaged one part of our capital market system for the sake of the other. And we need to have balance there. Mrs. Wagner. I agree. Thank you, Mr. Quaadman, very much. Mr. Chairman, I yield back. Chairman Huizenga. The gentlelady yields back. The Chair recognizes the gentleman from Massachusetts, Mr. Lynch, for 5 minutes. Mr. Lynch. Thank you, Mr. Chairman. I want to thank the witnesses again for helping us with this issue, and thank you, Mr. Chairman, for holding this hearing. Professor Brown, so let's go back. We have the Enron situation and WorldCom, Tyco International another one, instances where especially with Enron, Arthur Andersen was actually in collusion with Enron. That is why they went out of business. So they were hiding a lot and conducting some fraudulent practices there where investors were not able to understand truly what the financial underpinnings for that company was. And remember at the time we had just gone through energy industry deregulation and so Enron took advantage of all that deregulation and perpetrated a huge fraud, billions of dollars in fraud against the American investors. So that is why we have what we have now. Now, I understand the costs, especially for my smaller and mid-sized companies is excessive. How do we strike that balance where we want to maintain the integrity and the reliability of the financial information that we get from these companies? We want to make sure that they are being honest with us and accurate. Yet, we don't want to pummel them and cause them to have these huge massive costs. I am encouraged that I see some--there are a couple of firms out there now that have cloud-based, Internet-based accounting systems that help you with compliance. I think that DNA Technologies, which is a private company, they don't even have to comply, but they have adopted some of this cloud-based technology to make it a little bit less expensive. How do we strike that balance where we get the information that we need to make prudent investment decisions and yet try not to overwhelm, as Mr. Quaadman has said, these growing companies and give them some air to breathe? How do we strike that balance? Mr. Brown. It is a fair question. And, of course, we can see these costs. They are real. It is harder to see the benefits. They are a little bit more broad-based so it is sort of hard to analyze this. I talked to an auditor who audits smaller companies, and what he told me was--he said because of the $75 million break where when you go above it you have to do the attestation and below it you don't. He said that when we have these smaller clients we lose them at $75 million because they look at us and they say, well, you don't know how to do the attestation. I have to get a bigger firm. Mr. Lynch. Yes. Mr. Brown. So, sometimes we put in regulatory reforms and that actually increases the cost. If they could stay with their small auditor, maybe the cost structure for the attestation by that small auditor would be cheaper because there would be more competition in the marketplace. Mr. Lynch. What about the frequency of compliance? I know in some other areas, rather than have people file yearly, we allow them to file every 18 months. And their financial situation does not necessarily change that drastically over an 18-month period. Can we look at changing the interim between filing requirements to maybe reduce by a third what the cost might be to a company? Although I don't want to get away from the attestation piece where the auditor has to actually come in and say, okay, this was done properly. I think if we lose that--there is not enough accountability in the system as it is. Nobody goes to jail, nobody admits wrongdoing; there are massive payoffs and fines, but nobody admits wrongdoing. You really do need accountability. Is there a way that we can reduce the cost by spreading out the period of compliance filings? Mr. Brown. I will say also, kind of consistent with what you just said, human nature. If you are inside a company and you are responsible for internal controls, and you know somebody from the outside is going to come in and look at them, you are going to do a better job. Mr. Lynch. Yes. Mr. Brown. So there is this effect, this broad-based effect from the notion that the third parties are coming in. I think it is a risky thing to start reducing the frequency of disclosure. I think that is something that for investors, will potentially make them less interested in these smaller companies. And we don't want to create that dynamic either. Mr. Lynch. Yes, well, just I want to put this out there. I am willing to work with my colleagues across the aisle to try to figure out a way to reduce costs, and with our panelists I know we get differing opinions. I would like to maintain the integrity of our markets and the information that the public gets regarding these companies. Thank you, Mr. Chairman, for your indulgence, and I yield back. Chairman Huizenga. The gentleman's time has expired. The gentleman from Arkansas, Mr. Hill, is recognized for 5 minutes. Mr. Hill. Thank you, Mr. Chairman. I appreciate the panel being here today. I had a really fun event yesterday. I was up at the opening of the NASDAQ with a mid-cap company from my home district that was celebrating 20 years in the public markets. And they went public back in 1997. I think the market cap was in the $50 million range or so, something that many companies wouldn't do today. They wouldn't be able to absorb the kind of IPO costs of $2 million or $2.5 million or more and then the annual ongoing costs that are sort of the regulatory regime that we have today if they are not a unicorn-type company that has really low traditional maybe corporate administrative costs, and so going public is really a capital raising-only activity. I appreciated Professor Brown's comment about Amazon in that regard in terms of the last 20 years. But for a normal business, and certainly a community bank would be considered sort of a normal cost basis business, I am not sure it would be as good. On SOX, having been an independent director under SOX in a public company and looking at it, to me I like the independent director aspects of it. Professor Brown, I liked the financial reporting. I don't mind the attestation. I would tell everybody that is still redundant. We all attested to the financial statements as public company officers before we had to sign yet again another page to that effect. And I love the attitude of, let's have more saber-toothed tigers on our compensation committees--I think that is great-- instead of college roommates. I think that would be wonderful, but I don't think you can get that done through statute very effectively. So, a couple of questions that struck me probably following up on my friend, Mr. Lynch. Mr. Berlau, if you would talk a little bit about your views on 404 from the standpoint of, is there a way under AICPA rules or through peek-a-boo that we could tailor 404 rules? We talk a lot in this committee about tailoring of bank regulations between community banks and the G-SIFI giant Wall Street global banks. So instead of, like, changing reporting dates could we just have the peek-a-boo direct auditing standards change between scope on companies? What are your views on that? Mr. Berlau. Yes. I think there are several things that can be done. And it is kind of ironic that it was accounting scandals that prompted SOX, and yet it has been also been called the ``accountant's full employment act,'' because of all the work it creates for them. The word is, as you pointed out, attestation that is actually in the law Sarbanes-Oxley in Section 404. The PCAOB has--Public Company Accounting Oversight Board--has interpreted that to mean a full-blown audit and has a very broad definition of the term ``internal control.'' So I think there are things Congress can do to narrow that definition. I think the SEC should exercise the oversight that the Supreme Court gave it in Free Enterprise Fund v. PCAOB, to have it narrow the definition and also to say an attestation does not necessarily mean a full-blown audit-- Mr. Hill. Yes. Mr. Berlau. --like you audit the numbers. Mr. Hill. I think that kind of scoping would be good and sort of a common-sense approach. I know in the JOBS Act, and in subsequent bills here, we have supported raising the market cap that it is even applicable for. And I am not opposed to those ideas, but maybe a longer-term solution is that kind of scoping where either through the auditing standards or, as you say, through the level of attestation that we are requiring a public accounting firm to put their name on, which means then they are going to do an audit, which in fact means you are double auditing companies. Another suggestion, maybe Mr. Quaadman on this, what about the idea that once I have 3 years of attestation on 404 standards that maybe that attestation. I still self-certify, I still sign as an officer, but maybe that audit attestation is every other year or every 3 years, again, sort of like a bank exam scope? Mr. Quaadman. Yes. Mr. Hill. I think that is again where my friend Mr. Lynch was going with his line of questioning. What are your thoughts on that? Mr. Quaadman. I think that is an important step forward. I think it is also important to remember that the audit profession has done a lot here, too. But if an auditor is inspected by the PCAOB and there is a problem with that audit, that partner's career is over. Mr. Hill. Right. Right. Mr. Quaadman. So I think we have to remember that as well. Mr. Hill. Right. Thank you. I yield back, Mr. Chairman. Chairman Huizenga. The gentleman's time has expired. The Chair recognizes the gentleman from Illinois, Dr. Foster, for 5 minutes. Mr. Foster. Thank you. Thank you, Mr. Chairman, and to the committee and I want to say I am very impressed at the bipartisan thought that is going into this. I am a proud co-sponsor of the Fostering Innovation Act--I think our side's co-sponsor is Kyrsten Sinema--but it is an example of really the sort of sensible tweaks that should be made, because this is, in the end, a matter of balance. I would like to return for a second to the question of internal controls. We have heard arguments that these should be narrowed and things like keys to the business may or may not be worth pushing. Though you have to think about the case of Coca-Cola. If they lose their magic formula and it gets posted on WikiLeaks, there could be a big hit, because they happen to maintain that. Another area, related area, that maybe we could think about broadening and strengthening has to do with cyber security, insider threats. This is a huge deal. The market value of firms like Yahoo were just crushed because when it became public that a large fraction of their accountholders had been hacked, which hurts the market value of companies enormously. Pharma startups are regularly under cyberattack suspected from the Chinese, by companies that are trying to steal their intellectual property which is often the only thing that they have that is worth anything. And so I was wondering, particularly in the area of cybersecurity, if maybe internal controls, the definition of internal controls and the way they are audited should possibly be strengthened a little bit given the huge risk that makes to the actual valuations of companies? Does anyone have any comments on that? Mr. Blake. I am happy to jump in here. Cybersecurity was an issue that we looked at in our last round of internal control testing in our company. And really, if you look at the pronouncements on internal controls it really allows for a risk-based application of how you evaluate your internal controls, and so that is where it really centers on what you identify as key controls. Cybersecurity would fall under IT general controls in that framework. And for us as a small biotech company, our risks of cyberattack or releasing personal information are pretty limited. Even when we receive patient data, it is de-identified data. It does not have the patient's name or identifiable information. So when we evaluated that risk we actually determined that it was very low, and that we didn't need to purchase cyber insurance, for example. So from a practical standpoint, when you look at the smaller issuers, it is important to look at what types of data that they are exposed to. Mr. Foster. Any other comments on-- Mr. Quaadman. Sure, Mr. Foster, thank you. That is a great question. I think cyber is probably the most vexing and complicated issue the boards are dealing with. I think, along the lines of a year ago, and I think we need to have a dialogue between the PCAOB, COSO, the SEC, and the national security agencies and businesses on how to best address these issues. Very often with cyber, if you take a look at the traditional norm with corporate governance issues, it is to disclose. However, there are other forms or other agencies in the government that sometimes don't want businesses to disclose. So I think you are right to see if there is a way to maybe work to get proper internal controls in place, but then also to make sure that we have an appropriate regime that balances the need for the governance issues that we need to address, as well as the national security issues that we need to address as well. Mr. Farley. I agree. It's a hugely important issue. I am glad you bring it up. We wouldn't be in favor of new federally- mandated internal controls. However, we do think there is an opportunity for Congress to be very helpful in just allowing for more information sharing between the agencies and companies and companies within the same industry. Thank you for bringing the issue up Mr. Foster. All right, yes. I was just thinking if there was some--if you only have the attention to devote to the value of a company that the typical investor in a publicly held company would have, if there was just a simple standardized thing that they are not doing massively stupid and lazy stuff on cybersecurity. I don't know how that would be just because, obviously one line of code can make the best--you can have all the best systems in place and then oh, but where we didn't do this particular update and the Heartbleed bug has made us completely vulnerable. And so it is very hard to guarantee that you are never going to be vulnerable to this sort of stuff. And yet if you have a bunch of people running obsolete versions of Windows on their laptop, and these are your research scientists going home and completely making all of your core I.P. vulnerable to anyone on the Internet, it is a problem. And I'm trying to understand, if there is at least a basic set of standards that could be used to judge compliance with internal controls. Anyway it is just--and so I wanted to bring it up. Just one last question quickly, this decline in the number of publicly held companies, I was wondering if it has ever been studied whether high-net-worth people keep more of their money in privately held companies compared to middle-class investors, because what we are seeing here may simply be, my guess is that is very true, that very wealthy people put a lot more of their money through private equity venture capital and so on into nonpublic firms, and we might just be seeing a reflection of the fact the wealth is piling up at the top in this country. Is anyone aware, has that issue been studied and looked at quantitatively? Mr. Quaadman. Not that I am aware of. Mr. Foster. I urge you to have someone take a look at it. Chairman Huizenga. It sounds like you have gotten a homework assignment. The Chair recognizes the gentleman from Ohio, Mr. Stivers, for 5 minutes. Mr. Stivers. Thank you, Mr. Chairman. I appreciate you having this important hearing and I appreciate all the witnesses being here. And I have a couple of questions for Mr. Quaadman. First, under the JOBS Act and a few other changes that have happened, we have seen companies be able to stay in private hands longer and not go public, and if I am asking the wrong person this question, other people can chime in. What impact does that allowing those companies to be in private hands longer have on the company's valuation and growth potential? Mr. Quaadman. Yes, so let me just take that in a couple different ways. Number one, I thought Ernst & Young issued, and I think Chairman Huizenga raised this at the beginning of the hearing, a very thoughtful report on the decline of public companies in private markets. Look, the JOBS Act did two things: it liberalized the private markets; and it also tried to make it easier for business to go to the IPO markets. I think on liberalizing the private markets, it certainly did so. I think we need to do more work in terms of the IPO process. We have seen an explosion in the number of unicorn businesses, so those private businesses that are a billion dollars or more. I do agree with many of the other comments of my fellow panelists here that unfortunately, I think benefits accredited to investors, and it actually shuts out retail investors. So I think it is a matter of-- Mr. Stivers. And that is the next part of my question, what does it mean to the average investor who doesn't have the net worth, or other things to be an accredited investor? Mr. Quaadman. When a company goes public there is an economic growth positive that comes with it. So the Kauffman Institute looked at the IPOs from 1996 to 2010 and found that 2.2 million jobs were created. There is a wealth aspect that comes along with that, and there is also a revenue growth. So there are multiplier economic benefits that accrue with that. Mr. Stivers. Great. Does anybody else have any input there? Mr. Berlau. Yes. I think if the number of public companies keeps shrinking, you could have a very real issue of too many dollars from retail investors chasing too few stocks, which could have some negative effects. Small and mid-cap companies can be a part of a diversified portfolio because in large part because of the regulatory burden, you are depriving middle-class investors from having these in their portfolio like they could have with Amazon and with Home Depot. And I think if you liberalize the public markets, you would get some entrepreneurs who would choose that rather than if it would give them another option if they don't want to put up with venture capitalists, the high demands like you see on Shark Tank. Mr. Stivers. Sure. And Mr. Quaadman, one follow-up question. So, obviously we all care about, and I am glad that this committee is shining light on the additional burden and compliance that might discourage some companies from going public. I am curious. There seems to be a fight or a disagreement about whether private capital markets have grown as a result of Sarbanes-Oxley or independent of Sarbanes-Oxley. Do you have an opinion on that? Mr. Quaadman. I think what we have done is--look, if we are going to have an economy that is humming, we need to have both private and public markets that are operating optimally. I think what we have done is we have sort of squeezed down on the public company model in a way that has shifted resources over to the private markets, not necessarily because the private markets were all that more attractive, but because we have actually created some disincentives on the public company side. So I think that is what our argument would be, is that we need to have a rebalancing of that. And I do think we need to take a look at it, particularly in terms of corporate governance, of how do we get back to maybe more of a balanced system where the States in that State-competitive model have actually allowed for a lot of diverse systems that work, rather than have a one-size-fits-all system that is more European, that hasn't had the same economic benefits there. Mr. Stivers. Sure. And I think that gets to my final question of, what components of Sarbanes-Oxley represent the biggest cost or compliance challenges, especially that might be felt more acutely by smaller companies? And how can we create the balance that you are talking about that ensures the integrity and ensures that we have both public and private capital? And I have given you 12 seconds to answer, Mr. Blake. Mr. Blake. Okay. So I will go quickly here. I just want to echo some of the comments that were made about 404 and Sarbanes-Oxley. It certainly served its objectives in restoring investor confidence, but in terms of saving costs, especially for the smaller issuers, the 404(b) requirement for auditor attestation is exactly the right solution in terms of relief of cost and when striking that balance. I want to remind everyone that under the guidelines, officers of the company--I sign off on the 302 certification that says we have effective internal controls. We are also under the application of 404(a). Mr. Stivers. Is there a level of company at which we should make that divide, change that level of where, especially for the medium-sized company? Mr. Blake. Certainly. Mr. Stivers. And I know I am out of time, Mr. Chairman. Mr. Blake. Certainly. The emerging growth companies under the JOBS Act, the relief for an additional 5 years would be a great place to start. Mr. Stivers. Thank you. I yield back the balance of my nonexistent time, Mr. Chairman. Chairman Huizenga. The gentleman yields back. With that, the Chair recognizes the gentleman from Connecticut, Mr. Himes, for 5 minutes. Mr. Himes. Thank you, Mr. Chairman. And thanks very much for the interesting discussion; I really appreciate it. I have been interested in this for a long time. I was a supporter and helped with the JOBS Act, and I think it has done some pretty good things. Some of our worst fears have not materialized. But at the time, I was very, very concerned with the way facts were presented and the way analysis was done, because this is important. And so I just want to highlight one fact, which is we talk about declines in numbers of publicly traded companies. Almost all of the decline that we have seen since the dot- com bubble, 1995-1996, 75 percent of the decline actually in the number of public companies occurred prior to the passage of Sarbanes-Oxley. In other words, the dot-com peak was 8,000 and some 3,000 companies went away as a result of the deflation in that bubble prior to Sarbanes-Oxley. We have seen a fairly slow decline since then, which I guess is worthy of consideration. But I have two questions, and by the way my numbers come from an Ernst & Young report. This is not the ``Democratic Research Service'' producing this. Section 404(b), we hear a lot about it, very interesting question--another fact, since 2005, just to use that as a baseline, the number of public company material financial statement restatements has gone down 90 percent from 460 restatements in 2005 to 51 restatements in 2016. And the net income involved in those restatements has gone down from $6 billion of aggregate net income restated in 2005 to $1 billion. That is pretty dramatic. And that has to be a big deal. I am going to ask that as a question. When the number of restatements--I am an investor and I have much more confidence, not just in the number of restatements that are likely to occur, but in the dollar value--that is 404(b). Is that not really worth something? And I am not pointing that at anybody. I am just saying there is some real value there. Mr. Brown. In my opinion, it is. And I would add to that statistic that in the first 2 years after 404(b) was put in place, there were 1,000 restatements each year, I think when 404(b) was put in place, I think when we had this attestation requirement for the first time. So for the first time, third parties are coming in to the company and saying, let me see how you do this. We found a lot of mistakes. And then what happened was, after these procedures were put in place and they were there for longer and longer, the number of restatements went down. I think that is a good piece of evidence of why investors should have greater confidence in our financial disclosure system. Mr. Himes. Okay. Mr. Blake? Mr. Blake. So, two points. One is I think we should also take into consideration what investors care about. And our shareholders have never asked me in any one-on-one meeting or any setting, for that matter, if we are 404(b)-compliant. What they care about in our setting is our cash balance, our cash runway, and what we are going to do in terms of our clinical development plans. Mr. Himes. Do you have net income? Mr. Blake. No. Mr. Himes. Okay. You don't have net income. I cited a net income figure. I was in the business for a long time. Investors care about net income. Mr. Blake. Absolutely. Mr. Himes. I am not going to argue with you. I take your point. I actually think there is some balance here. But I am struck by that, $6 billion in net income restatements prior to Sarbanes-Oxley down to $1 billion. There is some value there. Mr. Blake. Yes, absolutely, and I wholeheartedly agree with you that 404(b) serves a purpose for larger organizations. I have been at an earnings-driven company, and it is important if you have a large footprint geographically with complex accounting systems, lots of lines of code that need to be evaluated, personnel. I have a staff of five in accounting in my organization. I have been in organizations where there are over 4,000 finance staff. So there is a big difference in the level of internal control audit necessary for that company versus us. Mr. Himes. Okay. Thank you. I have one other question that just really interests me. We haven't talked a lot about something that I hear. I have a lot of private equity in my district. I hear this from private equity folks, and I certainly hear it from public- company CEOs, which is the incredible focus of the investor, the public market investor, on quarter-by-quarter earnings and the disincentive that puts on somebody like you, Mr. Blake, making a 3-year investment that may look pretty tough next quarter and the quarter thereafter. So my question is, is there anything we can do about that? And as public policymakers, is there anything we should do about that? Mr. Berlau. Yes, Congressman Himes, I can, and it is a very good question. I think we should give public companies the option of, if they want to, doing it like they do in Europe and do it every 6 months instead of every quarter and let investors decide. There is, I think, data to show that it does make companies more short-term-oriented. Mr. Himes. Is there a public policy rule there? Yes, Mr. Quaadman? Mr. Quaadman. No, I was just going to say, Congressman Himes, Tom Donohue gave a speech in 2005 asking companies to move away from quarterly earnings guidance because there are studies that CFOs and company management are going to start to make decisions that don't make long-term economic sense for a company in order to hit that target. So I think if we are going to foster long-termism, that is something that needs to be addressed. Mr. Himes. Thank you. And I thank you, Mr. Chairman, and I yield back. Mr. Stivers [presiding]. Thank you. The Chair will recognize the gentleman from Minnesota, Mr. Emmer. Mr. Emmer. Thank you to the Chair. And thanks to the panel for being here today. It is interesting. I haven't been here all that long, but I think on this issue, this should not be a partisan issue at all. This is really an American issue. And when it comes to domestic economic policy, like so many things that we deal with here in Congress, we seem to have a problem with the well-intentioned, bipartisan, one-size-fits- all law that was passed for purposes that, again, are not partisan. Everybody wants full disclosure. Everybody wants people to enter the marketplace and be able to participate on a level playing field, no matter how big that individual or company is or how small. But it seems that the law that was passed for well- intentioned purposes, now we have some experience with it, it is showing us that there are some issues. And people have to acknowledge, and I think we are, on both sides of the aisle, acknowledging that this is important. But it is not just about the economic growth that we get from a company when it goes public. And I think one of you testified, maybe it was you Mr. Quaadman, about how the majority of the jobs are created after a company goes public. It is not just the jobs that follow. This is about, to me, the modest or small or beginning investor. It is about them getting the opportunity to participate and potentially prosper in the marketplace. We heard testimony today about the decline of public companies in this country. I think the statement has been that today we have half as many public companies as we did some 20 years ago In Minnesota, we are still home to 17 Fortune 500 companies. We have a history in our State of inventors, of innovators, of visionaries. Some argue that we haven't been launching our new ideas, our start-up companies into public offerings the way we should be There was a May 2015 article in our Minneapolis Star Tribune that was entitled, ``Star Tribune 100: Signs Point to a New Round of Companies Going Public.'' According to that article, this was the only IPO of a Minnesota company in 2015. And it had been the first since 2009, so almost 6 years Now, it said in that article that the biggest difference between the Star Tribune 100 in 2015, and the Star Tribune 100 ten years earlier was, ``There are fewer small companies with between $50 million and $200 million in annual revenue rising through the ranks.'' Now a year later, and remember the headlines said, ``more public offerings looks like more public companies are in the offing,'' a year later, in May of 2016, our Star Tribune reported on a company called Tactile Systems as being the first Minnesota company in a year to try to go public. And that article pointed out that we only had 7 companies in Minnesota between 2011 and 2016 that made public offerings or went public. John Potter, a partner in Minneapolis' office of PricewaterhouseCoopers, and an expert on mergers and acquisition activity, was quoted in that article. And he was saying that there is no shortage of companies with the size, scale, and value, but they have found capital elsewhere. So Mr. Quaadman, I will start with you, and maybe Mr. Berlau, you can weigh in. This is a matter of marketplace fairness. Where does the beginning investor enter if these start-up companies are staying private and they are getting it from wealthy investors as opposed to somebody who is trying to enter the marketplace? Mr. Quaadman. Yes. That is a problem we have been talking about this morning where I think those investors have been shut out. I think there has been a prevailing thought that while they invest in mutual funds or they invest in other vehicles, then they sort of get the benefits that way. Well, if those retail investors want to be able to benefit from a company going public, they should be able to do so And I believe that Chair Clayton actually raised this as an important priority of his in his New York Economic Club speech last week. And this is an issue that he wants to tackle. There is one other issue I want to just sort of throw out there, but this is probably the subject of another hearing. We also have a big problem on the other end where there has been Census Bureau data. There is an interesting study by the Economic Innovation Group about how dynamism is failing on the other end, that we are no longer creating businesses at the very start. And that has not recovered since the 2008 financial crisis. So we have it on the one end where we are not creating public companies anymore. We are actually declining. We are also not creating new businesses at that rate. And it is a problem because if you take a look at the Fortune 100 today, 20 of the Fortune 100 were started from 1975 to 2000. Mr. Emmer. Right. Mr. Quaadman. So we are no longer creating that backfill, and we are actually losing the innovative edge we have always had. Mr. Emmer. Thank you. Chairman Huizenga. The gentleman's time has expired. With that, the gentleman from Minnesota, Mr. Ellison, is recognized. Mr. Ellison. Thank you, Mr. Chairman, and Ranking Member Maloney. I am here to recognize that maybe the decline in publicly traded companies could be a problem for reasons that people on both sides of the aisle have identified. But I am not yet persuaded that Sarbanes-Oxley is the reason. I am here to give you guys a chance to convince me otherwise. I am looking at this chart up here, and according to this chart, as you can see, if you look at, say, the 1990s and up until, say, 2000, so that is a steady decline upward when it comes to the ROI for U.S. companies. You see a drop there in 2000, right before 2002, which is the dot-com bubble. But then you see after Sarbanes-Oxley is passed, it goes back up again until the mortgage collapse. And then it sort of starts going back up again, and then we have seen that steady decline. My point is this would suggest to me that maybe Sarbanes- Oxley is not the problem. If it is a problem that we need more publicly traded companies, shouldn't we fix the thing that is causing the problem? Next slide, please? Now, I am curious about this. I was wondering whether or not mergers was one of the problems. Whether and how, sort of just other potential reasons because I would like to help fix the problem. But I would like to know exactly what is the heart and soul of why we have seen this drop, because I buy your argument that if John and Jane Doe need be able to go--it is easier for them to invest in a publicly traded company than some private equity thing which they are never going to hear of or get invited to be a part of. So based on this chart, the last one, and whatever else you know, why is Sarbanes-Oxley the cause of the drop in publicly traded companies? And by the way, I want you to know on the front end, as a proud, bleeding heart liberal, I did vote for the JOBS Act because it was proven to me that smaller startups might need to be able to get reduced costs so that they can onramp a little cheaper to be an IPO. Do you want to take that one on, Mr. Blake? Mr. Blake. Sure. So at least my view is that Sarbanes-Oxley is not the single cause-- Mr. Ellison. Thank you. Mr. Blake. --of the decline in the delisting or incentives to go public. However, it is one of the components to it. And it certainly is a barrier to entry, so to speak, from a compliance cost perspective, especially for a small company wanting to-- Mr. Ellison. Right, Mr. Blake. But it does have the benefit of stopping some of the harms that led to it. Mr. Blake. Absolutely. Mr. Ellison. Look, I will tell you, regulations are going to stop some things and maybe even good things. But they are going to hopefully prevent some really bad things, too. Mr. Blake. That is right. Mr. Ellison. And so-- Mr. Blake. And just to provide some color, so what does an internal control environment look like at a company like ours? I am the sole check signer for the entire company. I sign every single check. And so we have a footprint, as I mentioned, of five accounting staff. And then the investors ask us about three financial metrics. Certainly, I am not suggesting that the financial statements are not important. But I am suggesting that the relative importance of 404(b)is probably much lower than-- Mr. Ellison. Mr. Farley, could you take about 30 seconds to answer my question, if you can? Because I do want to see if Professor Brown or Mr. Quaadman wants to get in or Mr. Berlau? Mr. Farley. I will do it very quickly. Mr. Ellison. Yes. Mr. Farley. A number of comments have been made today about the benefits of Sarbanes-Oxley. I agree. And a number of comments have been made about the difficulty with complying with Sarbanes-Oxley and the high cost, and I agree with that as well. So we are not suggesting--I don't think anyone has suggested, let's do away with Sarbanes-Oxley. It is just a good time to look at it and say, is it having an impact? And the mergers line that is so big on there? Mr. Ellison. Yes. Mr. Farley. Companies are merging because two companies complying with Sarbanes-Oxley is twice as expensive as one. Mr. Ellison. Yes. Mr. Farley. And so that is part of what is driving it. Mr. Ellison. Mr. Brown, do you have any take on this? Mr. Brown. Yes. Mr. Ellison. Is this where, if we say that the drop in publicly traded companies is a problem, what does Sarbanes- Oxley have to do with fixing the problem? Mr. Brown. Yes. I think Sarbanes-Oxley had a positive effect. But I want to just say what you are raising, which I think is the most critical issue, I think there is lots of agreement in this panel, in this room, that if there is a regulatory thing out there that is harming the markets and not benefitting investors, we should get rid of it. We all agree with that. We want liquid, innovative markets. But what I am afraid of is, like 404(b), we could pull that out or reduce its use or something and learn, in fact, it doesn't increase the number of public offerings, but it does reduce our confidence in our financial statements. So part of what you are asking is, is SOX the problem? So I think we really need to work hard at identifying what, if anything, is the problem before we take steps to fix it. Mr. Ellison. I agree. I think that is all the time I have. Thank you, gentlemen. Chairman Huizenga. The gentleman's time has expired. The Chair recognizes the gentleman from New Jersey, Mr. MacArthur, for 5 minutes. Mr. MacArthur. I thank the Chair. And thank you all for being here. Mr. Quaadman, the Chamber represents what, 2 million, 3 million businesses? Public? Private? Mr. Quaadman. Both. Mr. MacArthur. Big? Small? Mr. Quaadman. Both. Mr. MacArthur. All industries? Mr. Quaadman. Yes. Mr. MacArthur. Is it fair to say you are agnostic about capital structures? That whether they are public or private is all good by the Chamber as long as American business is prospering and growing and thriving, it is all good by the Chamber? Mr. Quaadman. And that is why I had mentioned in an earlier answer that we need to have balance. If we are going to have an efficient economy, we need to have both private and public capital markets operating efficiently. Mr. MacArthur. And I agree with that. So this question keeps coming up, why a 50 percent decline in public offerings over a period of time. I can think of two major advantages, major, major advantages to being public, or to investing in a public company as opposed to private. One is liquidity. That is a big deal for people. You want to buy a new car or send your kid to college or buy a home or do whatever, it is nice to be able to sell that stock quickly and get your cash and do what you want to do with it. So liquidity is a big, big issue. And valuation gets a pop from liquidity. Maybe a third. I don't know. I have seen lots of different statistics. So being able to get money and being able to have it be worth more, get that stock being worth more, are two major motivations for public offerings and public investment. And yet, despite those major incentives, it is going the other way. Mr. Quaadman. Yes. Mr. MacArthur. And so I think it is a fair question to ask what in the regulatory environment might be driving that? Is there anything else that you can think of that would be driving it, in terms of major themes, not nets, but major themes that would be driving this trend? Mr. Quaadman. I think you need to take--and this is what I was talking about earlier in my opening statement. You need to take a look at the basket of issues there. So if you take a look at the disclosures, you take a look at some of the financial reporting issues or some of the incongruities that exist with the PCAOB. You take a look at other issues, even financing issues. What it has done is it has loaded down the best system we have ever created that still works well for existing public companies. If you are large, existing public companies, you can engineer and spend your way out of it. But what it does at the end of the day is it creates barriers of entry for businesses to go public. And that is why, even though the decline in public companies has been small, the IPO market has never really recovered from the tech bubble bursting. So I think Sarbanes-Oxley is a component of it. But it is one of many different reasons that, when they interact, cause those barriers of entry. Mr. MacArthur. So it is a cumulative effect. Mr. Quaadman. Correct. Mr. MacArthur. I would ask you this, and then maybe Mr. Farley as well. Mr. Berlau suggested in his opening remarks that it is really the investor of moderate means who suffers the most because people who are accredited investors always find a place to put their money And they find investment opportunities that maybe are not available to investors of moderate means who now don't have the same capacity to access these liquid, higher valuation markets. Would you both agree that--or Mr. Blake, too, you can weigh in--it is investors of moderate means who seem to suffer the most from that? Mr. Brown. Yes. Mr. Quaadman. Yes. And when I was talking benign neglect in my opening statement, it was really that the SEC has ignored retail investors. Mr. Blake. Yes, and I would also agree. And you can argue that the accredited investors have access to those private company valuations that get that pop when they achieve liquidity and valuations in public markets. Mr. MacArthur. I think one thing I am hearing this morning that is striking me is there is maybe no one piece of Sarbanes- Oxley that is driving this or at least that is driving it so clearly that you could put a marker there. But there is a cumulative effect of this environment we have created that makes it difficult for private companies to want to go into that. And it is robbing investors of moderate means of opportunity. And maybe I will finish with this, one thing that strikes me is, Sarbanes-Oxley creates a framework where companies have to put information out there and then have to explain it. There is an adage in politics: When you are explaining, you are losing. I think it is even more so with business because they are forced to explain things that are very, very difficult to get into. And every explanation raises more and more questions. I guess I would end with, it seems to me after listening to testimony, that it really is incumbent on us to try to lift some of this burden from our business environment. I yield back. Chairman Huizenga. The gentleman's time has expired. The gentlelady from Arizona, Ms. Sinema, is now recognized. Ms. Sinema. Thank you, Mr. Chairman. My first question is for Mr. Blake. Under the JOBS Act, emerging growth companies are exempt from certain regulatory requirements for 5 years after their initial IPO. And one of the requirements that emerging growth companies are exempt from is Sarbanes-Oxley's Section 404(b) which, of course, requires public companies to obtain an external audit on the effectiveness of their internal controls for financial reporting. In an effort to ensure that costly regulations don't stand in the way of success for biopharma and other companies on the cutting edge of scientific and medical research, Congressman Hollingsworth and I recently introduced the Fostering Innovation Act, which is our bipartisan legislation that temporarily extends the Sarbanes-Oxley Section 404(b) exemption for an additional 5 years, just for a small subset of emerging growth companies. And as you know, these companies have an annual average revenue of less than $50 million and they have less than $700 million in public float. So my question for you, Mr. Blake is, in your opinion, if enacted, how would this very narrowly targeted legislation benefit emerging growth companies, specifically biopharma companies, as they work to develop life-saving medicines? Mr. Blake. Thank you, Ms. Sinema, for that. And we, of course, support the Fostering Innovation Act. It would have a very real impact on our bottom line. Every dollar saved on compliance costs can be repurposed for hiring a scientist, putting it into an experiment in the lab, or adding more patients to our clinical trials. And just to give you a flavor of what that compliance cost would be for our profile, I think it is very targeted legislation that would affect the profile of companies that we live in. We will still be in the lab, beyond the 5-year exemption in clinical trials. The costs probably would increase anywhere from $100,000 to $250,000, from my estimates. Our current audit fees are approximately $270,000. That could go up anywhere from 50 percent to 80 percent. We would increase our internal control consulting fees by approximately $50,000. So if you start to look at this, it could be over 5 years of that exemption and a $1.25 million cost savings. And that is very real in terms of running clinical trials. And then if you look at the 200 companies in our space that have gone public under the JOBS Act and aggregate that savings over 5 years, that could be hundreds of millions of dollars in compliance cost savings that would actually be directed towards helping patients. Ms. Sinema. Thank you. And Mr. Blake, a follow-up question. For the very specific subset of emerging growth companies targeted by the Fostering Innovation Act, the reporting requirement is costly and, I believe, unnecessary because management is still required to assess internal controls. A number of the emerging growth companies, by definition, have limited public exposure. But if the company or a majority of its shareholders determine that an audit was beneficial, would they be able to obtain an external audit on the effectiveness of their internal controls for financial reporting under this legislation? Mr. Blake. Yes. Absolutely. It is certainly optional. And that is the way the proposal is written. If any stakeholder-- that could be a shareholder, that could be a lender--would like the auditor attestation, you could certainly incrementally request that of your auditors and pay for it. Ms. Sinema. Thank you, Mr. Blake. I have a question now for Mr. Quaadman. As part of the JOBS Act, Congress directed the Securities and Exchange Commission to amend Regulation A to allow small companies to raise up to $50 million in offerings, exempt from full SEC registration. These amendments, known as Regulation A-Plus, exclude certain potential issuers, including Exchange Act reporting companies. As a result, thousands of companies that already meet the SEC's high disclosure requirements are ineligible to use Regulation A-Plus to cost-effectively raise the funds they need to grow and hire. In your opinion, would it be beneficial for SEC reporting companies to be able to access Regulation A-Plus? Mr. Quaadman. Yes. And first off, I thank you and Mr. Hollingsworth for introducing that bill. We support anything that is going to drive more liquidity to smaller companies. So we think this would be a positive step in the right direction. And we also support other issues such as pieces of legislation such as venture exchanges as well. Ms. Sinema. Wonderful. Thank you, Mr. Chairman. And thank you Mr. Quaadman. I yield back. Chairman Huizenga. The gentlelady yields back. With that, the Chair recognizes the gentleman from Ohio, Mr. Davidson, for 5 minutes Mr. Davidson. Thank you, Mr. Chairman. And thank you to our witnesses. I have really enjoyed your testimony. And it is an honor to talk with you today. Prior to coming to Congress, I built a small group of manufacturing companies and ran into some of these challenges. As you look at what you are up against with the prospect of capital structure out there, it seemed that the government had an increasingly important role to play in what was a pretty small company. I think we had about seven people in the accounting group when I left. And so the kinds of controls that would be applied are very different. I am encouraged by some of the dialogue I have heard here just talking about Reg-A. Reg-D, however, draws this line between accredited investors and sophisticated investors. And for the average guy, at the end of the day, it is their money. So I am just curious, what is the premise? What have you seen in terms of market participation by people who aren't considered accredited investors? What is the important distinction there--Mr. Farley, maybe, as an operator of an exchange? Mr. Farley. I don't have an answer. Mr. Davidson. No answer? Mr. Quaadman. I will take a crack at that. I think this committee has actually done, I think, a lot of good work in looking at where the lines in terms of a credit investor should be. And I think what we want to do is we want to be able to look at it in such a way that there are only going to be certain financial products that some people are going to be able to handle. And they should be the only ones to invest in it. I think one of the things that Mr. Schweikert, when he was a member of this subcommittee, actually put on the table, which I thought was a good debate was, do we need to move those lines? And I think we need to do that. One of the issues that we have also raised with the SEC in terms of the JOBS Act implementation--and this is why I do think economic analysis is an important tool, is for the SEC to also do an analysis 3 years out, after the regulations have been put in place to actually see how it is working, if there are issues, as you are sort of raising. Where there are problems do we need to address them or not? Or do we maybe need to liberalize things a little more? Mr. Davidson. Yes, thank you. And so you highlight Congressman Schweikert's bill. I am passionate on the same topic, things that--it seems to me that it is really just the main effect of these accredited investors, sophisticated investor definitions are to create deal flow for bigger people. The reality is that if we still believe in capitalism, which is what we are trying to access, then we believe it is people's money. I don't know that any of you are subject matter experts on lottery systems, but we don't stop people from spending money on lottery tickets. And clearly the risk of losing your capital in the lottery is much greater. So, what are some of the reforms that you look at that could draw the line? If you have a Ph.D. in physics and you are developing the product and the intellectual property but you just graduated, you are not going to meet the current thresholds of accredited investors. Are we trying to protect that guy from owning shares of a company? Mr. Quaadman. Yes. I think where we need to start, and this also goes to Mrs. Wagner's question about materiality, is we need to start with TSC Northway and its progeny, the Supreme Court cases and other cases where the courts have talked about the basic skills that an investor needs. And I think if you take a look at that and then you sort of look at the income levels but also the educational levels, that is where we really need to start to look at who is it that we have left outside the box that maybe should be inside the box? Because I think what we have also done is we have been looking at investors in some ways in terms of a 1970s or 1980s model. And I think we have much more of a sophisticated investor base than we used to have, and I think we need to recognize that. Mr. Davidson. Correct. And just as an example, charter financial analyst, somebody could finish that. They know as much about materiality as we can assess anyway in terms of exams and credentials. But currently they would also potentially be excluded from this. So these are things that I hope we can expand to and I hope we can do it in a bipartisan way. But I guess the last piece I would talk about is with respect to cause and effect. I don't think it got enough attention in your answer. What is driving mergers? Well, the cost of compliance, not just Sarbanes-Oxley, but it is rationale. So to look at the fact that well, there is more merger activity and say, Sarbanes-Oxley is not a cause, you are looking at the regulatory hurdle being there as maybe one of the factors to be able to say that, gee, this is the root cause. But the reality is, as I think you alluded to, capital is going to find a return. We hope that it finds a return here in the United States of America. And I hope to participate with my colleagues in doing that. Mr. Chairman, I yield back. Chairman Huizenga. The gentleman yields back. The gentleman from California, Mr. Sherman, is recognized. Mr. Sherman. Thank you. The gentleman from New Jersey has unfortunately left, but he argued that when you are explaining, you are losing, which is a campaign adage, therefore we shouldn't force companies to disclose what they would have to explain. It is true that is a campaign adage, but I would hope that the level of honesty and disclosure that we find in the public markets for securities is not designed to parallel the level of honesty in disclosure we find in successful political campaigns. So he says when you are explaining, you are losing. No. When you are disclosing, investors are winning. When you are explaining, investors are winning. Now, there is a thinking here in Washington that if people are eating more pepperoni pizza, it must be because somebody dropped a bill or passed a regulation. Not everything is Washington. Yes, there has been some decline at times in the number of public companies. Maybe that is because the people running companies are tired of the tyranny of the quarterly report, the hostile takeover, and the high frequency trading. I have talked to so many businesspeople who say, look, I have a long-term plan and I don't want to have to justify my quarterly numbers. Then you look at the 2008 crash and I say, I don't want to be part of that. So there are a lot of reasons to stay private that have nothing to do with Sarbanes-Oxley, a bill that was passed 15 years ago in this House--432 to 3. And I understand why we spend a lot of time in this room attacking Dodd-Frank. Dodd was a Democrat. Frank was a Democrat. This was Oxley's bill. I am surprised that this is the focus, but-- Chairman Huizenga. Will the gentleman yield? Mr. Sherman. If you will give me some more time, sure I will-- Chairman Huizenga. I have been pretty generous with the gavel. But-- Mr. Sherman. Yes. Chairman Huizenga. --the intent of this hearing is to explore after 15 years of a, as I had--and I know you weren't here when I had acknowledged this, and the ranking member had talked about this. There was a very difficult time that prompted this response. The question that I and others have is, okay, 15 years into it, and when we are seeing some other things there may have been circumstances that have changed, why would we not explore that? So please don't misinterpret this as we are trying to repeal and replace Sarbanes-Oxley the way that some have argued that Dodd-Frank should be. Mr. Sherman. I couldn't--I agree with you. Any bill can be improved. I am not just referring to this hearing. I have seen Sarbanes-Oxley beat up again and again, but any bill can be improved. I was here when Sarbanes-Oxley was written and we were not on Mount Sinai. It did not come to us in golden tablets. And even Dodd- Frank, which after all has two Democratic authors, did not come to us on golden tablets. Any bill can be improved, and I am glad that is the focus of these hearings. Looking at Dodd-Frank, 74 percent of the decline in U.S. public companies from the peak in 1996 occurred to prior to 2003 when Sarbanes-Oxley was passed. The total number of U.S. companies has stabilized since 2008, ranging from 4,000 to 4,400, while the number of foreign companies listing in the United States has increased. And I think it is the foreign companies that give us the test here. Over the last 20 years, 90 percent of foreign companies choose to list in their home market. That makes sense. But there are some companies that say they want to list somewhere other than their home country. Where do they pick? Of those companies that decide to list outside their home market, the U.S. is the favored venue with almost twice the listings of its closest competitor. So what does this tell us? Companies abroad who could list in Moscow or Panama, or if they think the regulations are too tough, there there is St. Kitts, they have all chosen the Sarbanes-Oxley choice by a 2:1 ratio over the chance to have no regulation or very little regulation. Apparently companies choosing, choose the system where investors have the protection and can invest in confidence. And of course there are only two U.S. companies that have chosen to list abroad in 2016. Then the other reason we have seen a decline in public companies is private capital is more available. We have had a growth in venture capital. We have had low interest rates, and in this room we wrote the JOBS Act to make it easier to stay private, and now we are here criticizing the fact that more companies aren't public. As the gentleman from Connecticut pointed out, financial statement restatements have declined to almost one-tenth of their frequency in the years immediately following the passage of the Act in 2005. There were 459, or the gentleman from Connecticut says 260, restatements, last year 51. So I want to focus then not on the cost of these internal control reviews, but on the benefits. Professor Brown, a new study from the University of Washington and Georgetown University of 5,300 smaller companies that are exempt from 404(b) found that they saved $338 million in audit costs because they were exempt, but they lost $856 million that they would have earned if they had better internal and better remediated their internal controls. Are you familiar with this, and are companies exempt from 404(b)? Do they have a bone to pick with us because by exempting them we have deprived them of this push to get the internal control that would have saved these companies $856 million according to the study? Mr. Brown. Congressman, I think that study shows how hard it is to try to quantify these things. It puts this $388 million cost, total cost on these 404(b) things, attestations. The truth is, I think they are overstating it, because what they are doing is they are looking at companies that go from exempt to non-exempt and probably they are changing auditors and probably going to a more expensive auditor so all of that cost is not necessarily the 404(b). So they may be overstating the cost. But what they are also doing is saying when you don't have good numbers you don't make as good of business decisions in your own company. And there is a cost associated with that as well, so they try to quantify that. So it may well be that by exempting companies out of 404(b), we are not doing them any favors. Mr. Sherman. Mr. Chairman, I like the focus of these hearings if it is to improve Sarbanes-Oxley, and I think that is what the focus is, and I yield back. Chairman Huizenga. The gentleman yields back. The gentleman from Indiana, Mr. Hollingsworth, is recognized for 5 minutes. Mr. Hollingsworth. I thank the panelists for being here this afternoon and I appreciate the dialogue and honest discussion about some of the challenges as well as some of the opportunities that we face. Representative Sinema and I have worked on both the Improving Access to Capital Act as well as the Fostering Innovation Act, and specifically 404(b) is talked about quite a lot here. Mr. Blake, in your understanding of our Fostering Innovation Act, is there anything that absolutely bars you from pursuing a 404(b) audit and compliance if you so elected to? Mr. Blake. Not at all. Mr. Hollingsworth. Right. Mr. Blake. If we elected to have the internal control audits performed, we could do that. Mr. Hollingsworth. So if the cost of equity capital went up significantly in not doing a 404(b), you could make the business decision to say, we should pursue a 404(b), lowering our cost of equity capital because it makes sense for our business to do so? Mr. Blake. Absolutely. Mr. Hollingsworth. All right. Apologies to Mr. Sherman, I have not read the Georgetown report, but the $338 million that was gained through savings but according to them $856 million that is lost, I guess my question for Mr. Quaadman is, is it the job of the Federal Government to sit in the boardroom of these companies and tell them what they should pursue and what they shouldn't pursue in order for them to make an economic decision that makes business sense for them? Mr. Quaadman. No. The board is going to make the decision they feel is best for the company with the business judgment rule, and the market ultimately is going to decide if they made the right decision or not. Mr. Hollingsworth. So ultimately the owners of that business, the ones who have those dollars at stake are the ones best suited to make the decision on whether they should pursue this extra level of compliance, which may, in fact, according to this study at least, serve to save them money or lower their cost of equity capital? It is not the Federal Government's job to sit in their boardroom and tell them what they should and shouldn't do with their own money? Mr. Quaadman. Yes. I think it is an issue, like--it is an issue where the board should make those decisions. Mr. Hollingsworth. Right. Mr. Quaadman. I think we need to take a very strong look at other issues such as management guidance that needs to be updated. Mr. Hollingsworth. Right. Mr. Quaadman. I think there are a number of other issues at the PCAOB that need to be addressed. Mr. Hollingsworth. Right. One last comment before we go to fostering innovation. Again, this is a narrow fix. We are not saying everybody should be exempt from 404(b). Certainly, larger and larger companies are growing more and more complicated, operating around the world. There are some safeguards that might need to be in place for them, but this is a very, very small fix focused on companies with less than $50 million in revenue and $700 million in float. And like Mr. Blake has attested to, the opportunity for them to deliver more dollars to cures and fewer dollars to compliance represents a real opportunity for a more dynamic company for the opportunity for us to realize those cures over the long run. So I continue to be supportive. In addition to that, I want to turn my attention--Mr. Ellison had presented a couple of charts here earlier and I had recognized them from a Credit Suisse report about the declining number of U.S. companies. And certainly Credit Suisse does talk about mergers being a case, but I wanted to read two or three sentences from just below those charts that were omitted. ``Overall, it appears that the benefit of listing has declined relative to the cost and only larger companies can bear the cost of being public.'' And then just after that it says, ``The cost of being public has gone up,'' which means that it makes sense only for larger companies to list. ``The population of companies eligible to list falls as the size threshold rises. Thus, the median age of companies has risen dramatically over the last 15 to 20 years.'' I think with the evidence that we have seen today it is hard to argue that those aren't accurate statements just below those charts that were presented. So I wanted to talk a little bit about how companies might be able to access capital, especially once they are public and reporting to the SEC. Mr. Quaadman and I have done some work on Regulation A- Plus, which has been talked about here. And I am just a believer in giving companies many different opportunities and avenues by which they can raise money and they can make, again, the decision that suits them best for what they want to pursue. Can you talk a little bit about Reg-A-Pluses,' I guess, the context for that and the setting by which companies might make the decision to pursue that less than $50 million offering? Mr. Quaadman. Yes, it is actually one of the great innovations of the JOBS Act is that we were restricting the ability of smaller companies to raise capital. Mr. Hollingsworth. Right. Mr. Quaadman. So with the changes that were made to Reg-A, Reg-A-Plus with the JOBS Act, we have actually liberalized that, and I think the interesting innovation that you are pursuing with Representative Sinema is to actually now extend that to listed companies as well. So I think it is going to help provide liquidity to the smaller public companies as well as smaller private companies. Mr. Hollingsworth. Again, no part of this legislation says you have to follow Reg-A-Plus rules and only offer it this way. All we are doing is providing more and more avenues for companies to be able to elect what is in their best interests and their ownership's best interest. Mr. Quaadman. Correct. It is voluntary and the marketplace will decide if that is a successful venture or not. Mr. Hollingsworth. I love it. I say it in here all the time. Sam Walton used to say, ``People choose with their feet and their wallets.'' And I just want people to have the opportunity to choose. With that, I yield back, Mr. Chairman. Chairman Huizenga. The gentleman's time has expired. The gentleman from North Carolina, Mr. Budd, is recognized for 5 minutes. Mr. Budd. Thank you, Mr. Chairman. And again, thank you to the panel. So Mr. Quaadman, as my colleagues have mentioned, we are seeing a decline in the attractiveness of equity markets for raising capital. This has a twofold negative effect: one, on the companies that can't access the market; and two, on the investors who just don't get the returns. Is the fact that more and more offerings are private actually driving the creation of two parallel markets, one lower return for the average middle-class investor, and the other for more sophisticated investors and the wealthy? I think we have talked about that today, but if you could elaborate on that? Mr. Quaadman. Yes. We have certainly seen, and this is why I said I think we have seen where for a variety of different reasons the government has sort of put the thumb on the scale of public markets and sort of kept that down a bit. And I think that has hurt the democratization of wealth in that it has not allowed for retail investors to be able to access and enjoy the benefits of an IPO. And I am very heartened to see that Chair Clayton, the new SEC Chair, has actually said that is a priority that he wants to address. Mr. Budd. Okay. So in one way, if we see these highly regulated markets and lower IPOs, that actually worsens income inequality? Mr. Quaadman. It does that and it harms economic growth overall. Mr. Budd. Okay, thank you. Mr. Blake, there is a great deal of concern on our side about frivolous shareholder proposals making it into the companies' proxy statements. So let's say that a proposal that management believes is unhelpful for the company's ability to create long-term value for its investors or its shareholders, and that makes it onto the ballot. Walk us through the process that management uses to make the case that it is unwise, that it increases cost to management? Tell us about how that affects the company's resources and focus? Mr. Blake. I can speak a little bit generally. I haven't dealt with that firsthand, but certainly the proposals that are able to get on the ballot may or may not be in the interests and long-term value creation of the company. And you certainly want to keep management's attention and mind share focused on the core aspects of the business, whether that be running clinical trials, helping patients, getting our drug approved, ultimately are the core focus of management. So any issues that are brought onto the ballot that can distract from that are bad for the shareholders. Mr. Budd. In general, how did that make it on and then once they are on and it is against the best interests of the shareholders economically, for instance, how do we get those off or how do you get those off? Mr. Blake. I don't have any firsthand experience with that process. Mr. Budd. You don't have that firsthand experience. Anybody else? Mr. Quaadman, have you had to study that? Mr. Quaadman. No, I have not. Mr. Budd. Thank you. Mr. Berlau, looking towards some of these additional disclosure requirements from the SEC in regards to conflict minerals, which we mentioned earlier, and payments to government regarding resource extraction, which we were fortunate enough to overturn with a Congressional Review Act a few months ago, does that require staff resources at the SEC to enforce? Mr. Berlau. Yes. I think it really does divert the SEC from its core mission of investor protection when it is pursuing certain social agendas, however noble they may be. The conflict minerals has also had other negative consequences. The New York Times has reported that by acting as a backdoor tariff for some of the materials like gold and tin from the Congo and adjoining areas, some companies are just avoiding the Congo and regions near it because there is no way for them track whether they might have gotten gold that has been used 5 times or tin that might have come from the Congo. So it is actually impoverishing the regions. Mr. Budd. But for the fact that the SEC actually requires resources of the SEC to enforce this? Mr. Berlau. Yes. Mr. Budd. And you would say--and then-- Chairman Huizenga. Will the gentleman yield for one second? Mr. Budd. Of course. Chairman Huizenga. We had talked about the CEO pay ratio and that the SEC's estimate is they had over 7,000 manhours put into that. The response from a couple of years earlier about conflict minerals was over 20,000 hours. And if you extrapolate 7,000 hours was over a million dollars, 20,000 hours means over $3 million of the SEC's resources were put into that one specific rule. And I yield back. Mr. Budd. Thank you, Mr. Chairman. That is very relevant, and it actually answers my next question, does it cause extra expense for companies to comply with, so the answer is obviously yes. But do you think they add to the problem of information overload for investors? Mr. Berlau. I think very much so. There are other ways. You don't have to mandate disclosure necessarily for concerned investors to find out or to engage in a dialogue with a company. It is just that the SEC's core mission should be investor protection. If you could indulge me, I wanted to--the point about whether Sarbanes-Oxley was the cause of some of the decline or how much of a factor it was, there have been companies that have actually said they are delisting or deregistering because of Sarbanes-Oxley, including British Airways and the small restaurant chain Max & Erma's. They gave that as their primary reason for delisting from American markets. Mr. Budd. Thank you very much. I am out of time, but it seems that it doesn't help companies, it doesn't help investors, obviously. And then when we refer to the conflict minerals, it does not help those developing nations. So we can see where we stand in much-needed reform for this. Thank you very much. And I yield back. Chairman Huizenga. The gentleman yields back, and thank you for your indulgence in recognizing me there briefly as well. I would like to thank our witnesses today. This has been, I think, very illuminating, very helpful as we are exploring this and doing this review of 15 years under Sarbanes-Oxley. We do have a little bit of business here. Without objection, I would like to submit the following statements for the record: a statement from the Business Roundtable; testimony of J.W. Verret, assistant professor at Antonin Scalia Law School, George Mason University, and ``The Misdirection of Current Corporate Governance Proposals.'' Testimony also by Mr. Verret, assistant professor, about, ``The Conflicts Between Institutional Investors and Retail Investors and Using Federal Securities Laws to Regulate Campaign Finance.'' And also an article by Mr. Verret, ``Federal Versus State Law, the SEC's New Ability to Certify Questions to the Delaware Supreme Court.'' Then we also have an article by Mr. Verret again, ``Uberized Corporate Law Toward a 21st Century Corporate Governance for Crowdfunding and App-Based Investor Communications.'' And then finally, a publication by J.W. Verret, ``Chapter 16, Ending the Specter of Federal Corporate Law.'' So without objection, those will be submitted. 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. And with that, again, thank you, gentlemen, for your time and your effort in being here, and our hearing is adjourned. [Whereupon, at 12:36 p.m., the hearing was adjourned.] A P P E N D I X July 18, 2017 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]