[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
                           
                           
                           
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
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
                             
                             
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