[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]







                    OVERSIGHT OF THE SEC'S DIVISION
                         OF CORPORATION FINANCE

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

                                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

                             SECOND SESSION

                               __________

                             APRIL 26, 2018

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-89




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]










                                   ______
		 
                     U.S. GOVERNMENT PUBLISHING OFFICE 
		 
31-435 PDF                WASHINGTON : 2018                 



















                 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

                     Shannon McGahn, 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:
    April 26, 2018...............................................     1
Appendix:
    April 26, 2018...............................................    35

                               WITNESSES
                        Thursday, April 26, 2018

Hinman, William, Director, Division of Corporation Finance, U.S. 
  Securities and Exchange Commission.............................     5

                                APPENDIX

Prepared statements:
    Hinman, William..............................................    36

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn:
    Letter from Rep. Maloney to Hon. Jay Clayton, Chairman, SEC..    43
    Response letter from Hon. Jay Clayton to Rep. Maloney........    48
    Response letter from Institutional Shareholder Services Inc..    54
    Letter from Institutional Shareholder Services Inc...........    61
Hinman, William:
    Responses to questions for the record from Representatives 
      Hollingsworth and Hultgren.................................    66

 
                    OVERSIGHT OF THE SEC'S DIVISION
                         OF CORPORATION FINANCE

                              ----------                              


                        Thursday, April 26, 2018

                     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.
    Present: Representatives Huizenga, Hultgren, Wagner, 
Poliquin, Hill, Emmer, MacArthur, Davidson, Budd, 
Hollingsworth, Maloney, Sherman, Lynch, Scott, Ellison, Foster, 
Meeks, Sinema, Vargas, and Gottheimer.
    Also present: Representatives Hensarling and Royce.
    Chairman Huizenga. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time.
    This hearing is entitled, ``Oversight of the SEC's Division 
of Corporation Finance.'' We are very pleased to have Mr. Bill 
Hinman here.
    I do want to take a personal point of privilege, though, 
here a moment. I know it is take your child to work day.
    We have one special guest. One Mr. Donald, young master 
Donald, over here. Donald McGahn is joining us, and he is going 
to be heading over to the White House. So, if you have a 
judicial appointment, this isn't the right Don McGahn you want 
to get to. The one is--he will be--he will be with the other 
one a little later.
    I know from my own children over the years, it has always 
been a great opportunity. So, we are glad that we can have this 
day.
    So, I am going to recognize myself now for 3 minutes to 
give a quick opening statement. As we all know, the Securities 
and Exchange Commission (SEC) has a three-part mission. Protect 
investors, maintain fair, orderly and efficient markets, and to 
facilitate capital formation.
    Today's hearing will focus on the policies and procedures 
of the SEC's Division of Corporation Finance. CorpFin, as the 
office is better known, is responsible for ensuring that 
investors are provided with materially complete and accurate 
information in order to make informed voting and investment 
decisions. This includes disclosure requirements when the 
company initially offers its securities to the public and on a 
continuing and periodic basis.
    CorpFin also provides interpretive guidance to companies 
regarding SEC rules and forms and makes recommendations to the 
Commission on new rules and revisions to existing rules.
    The Division of CorpFin's activities and responsibilities 
include regularly monitoring and reviewing filings made under 
the Securities Act of 1933 and the Securities Exchange Act of 
1934 to ensure compliance with disclosure and accounting 
requirements, conducting a comprehensive review of the SEC's 
rules governing public company disclosure, completing 
rulemakings to implement disclosure-related provisions of the 
Dodd-Frank Act, and conducting oversight of the proxy process, 
including the activities of proxy advisory firms.
    One of my biggest concerns is the declining number of 
public companies which has led to fewer investment 
opportunities for main street investors. IPOs have historically 
been one of the most meaningful steps in the life cycle of a 
company.
    Going public not only affords companies many benefits, 
including access to the public capital markets, but IPOs are 
important to the investment public as well.
    Already, the recently enacted Tax Cuts and Jobs Act has 
strengthened our economy at the local, regional, and national 
level. By making our tax code more competitive, we have 
signaled to the world that America is, again, open for 
business, investment, and job creation.
    To build on this success, we must continue with the pro-
growth reforms that ensure the United States has the strongest, 
deepest, and most liquid markets in the world.
    Unfortunately, from a regulatory standpoint, it has become 
increasingly apparent that our capital markets are becoming 
less and less attractive to growing businesses, due to the, 
quote, unquote, ``one-size-fits-all securities regulations'' 
currently in place.
    Let us work together to reverse this negative trend of 
declining IPOs and focus on capital formation. Hard-working 
families in West Michigan and across the nation rely on capital 
markets to save for everything from college to retirement.
    By making capital formation the priority, we can maximize 
Mr. and Mrs. 401K's return on their investment, expand 
opportunity, and increase job creation and grow our economy.
    The Chair now recognizes the Ranking Member, the gentlelady 
from New York, Mrs. Maloney, for 5 minutes for an opening 
statement.
    Mrs. Maloney. Thank you. Thank you so much and thank you 
for holding this important hearing, Mr. Chairman.
    The SEC's Division of Corporation Finance is hard to 
believe the most important division in the SEC, because it is 
responsible for ensuring that investors have access to all the 
information they need to make informed investment decisions.
    They review the financial statements and disclosures that 
companies file and ensure that they are both complete and 
accurate. This is critically important because investors simply 
will not invest in a company unless they have confidence in the 
company's financial statements, understand the business model, 
and are aware of all the risks that the company faces.
    The fact that investors all around the world are so eager 
to invest in the public companies is a testament to the 
confidence investors have in the disclosure framework that 
Congress and the SEC have developed over the years.
    In my personal view, we shouldn't make significant changes 
to that disclosure framework lightly. When in doubt, we should 
err on the side of more disclosure, not less.
    But the Division of Corporation Finance has another role, 
too. It also reviews the filings that companies make for their 
IPOs, when they are offering securities to the public for the 
very first time.
    In these reviews, the SEC staff reviews the company's IPO 
filings to ensure that the company is complying with the 
Federal securities law.
    One very important provision that public companies have to 
comply with is the so-called, quote, ``anti-waiver provision'' 
which prohibits companies from waiving compliance with the 
Federal securities law.
    For example, a company can't require all its investors to 
agree not to sue them for securities fraud, or to allow the 
company to file their financial statements only once every 2 
years, rather than every quarter.
    The anti-waiver provision ensures that the basic investor 
protections in the securities law, including the right to sue 
companies for securities fraud, are guaranteed for all 
investors.
    So, I was troubled when I read an article in ``Bloomberg'' 
in January, that said the SEC staff was laying the groundwork 
for a change that would allow public companies to strip 
investors of their right to sue for securities fraud in court, 
and instead force all of those claims into secret arbitration 
proceedings.
    Last month, I led a letter to SEC Chairman Clayton which 
was signed by every single Democrat on the Financial Services 
Committee.
    The Senate has also sent over a letter strongly opposing 
any effort to allow public companies to insert these forced 
arbitration clauses into their corporate governing documents.
    I ask unanimous consent to place in the record my letter, 
Mr. Chairman.
    Chairman Huizenga. Without objection.
    Mrs. Maloney. Let us be clear about the stakes here. If the 
SEC allows companies to use these forced arbitration clauses, 
that would essentially be the end of any securities fraud cases 
in public courts. It would definitely be the end of class 
action lawsuits for securities fraud.
    So, when the next Enron or WorldCom comes around, 
shareholders who have been defrauded wouldn't be able to hold 
these companies accountable in court at all.
    The reason this issue is so important for this hearing is 
simple. If a company that is preparing for an IPO tries to 
insert the forced arbitration clause into its corporate 
governing documents, it would be the staff in the Division of 
Corporation Finance that would have to decide whether that 
forced arbitration clause violates Federal securities laws.
    For decades, the SEC's position has been that forced 
arbitration clauses violate the anti-waiver provision of the 
Exchange Act.
    So, allowing companies to use these clauses would be an 
enormous change in policy that would affect every single 
investor in our markets.
    So, I will be very interested to hear Mr. Hinman's thoughts 
on this, and will expect to hear whether he supports any 
efforts to reverse the SEC's long-standing position on the use 
of forced arbitration clauses in the bylaws of public 
companies.
    I thank you, Mr. Chairman.
    I yield my remaining seconds to my dear friend and 
colleague. I just had to get that into the record, because I 
feel it is important.
    But he deserves a lot more time than what I am yielding on.
    Mr. Sherman. Bitcoin is a security and it is an investment. 
Investment protection is your business. Obviously, initial coin 
offerings.
    The tax bill, that the Chairman refers to, says you could 
have a zero percent tax on the profit of your factory, but only 
if you move that factory to a foreign country.
    I yield back.
    Chairman Huizenga. The gentlelady's time has expired.
    If you would, actually, give me a copy of the letter. I 
have not seen the letter. All right, that will be inserted in.
    So, with that, Mr. Hinman, we welcome you here. I 
appreciate your time and attention.
    I am sorry I was being delinquent. I have 2 minutes 
remaining in which I am going to be recognizing the Vice Chair 
of the Capital Markets Committee, Mr. Hultgren, from Illinois 
for 5 minutes.
    Mr. Hultgren. Thanks, Chairman Huizenga.
    Thank you for convening this hearing today. I have been 
very pleased with the new leadership that we have seen at the 
SEC under Chairman Clayton.
    But I do value these opportunities to have the chance to 
discuss the Commission's work to promote capital formation and 
investor protection.
    My constituents have been extremely happy with the strong 
economic growth we have seen over the last year. I believe much 
of the growth is attributable to tax reform. But the common 
sense regulatory relief and reform across governments has also 
been extremely important.
    I am especially pleased that Chairman Clayton has 
acknowledged the importance of reducing burdens on public 
companies, in order to increase opportunities for all 
investors.
    One of the challenges I hear about most frequently, from 
public companies or companies interested in going public, is 
challenges with the shareholder proposal process.
    This committee has spent a significant amount of time 
exploring the damaging effects of activist investors using the 
shareholder proposal process to achieve social change. But this 
is at the detriment of investors who are simply seeking to 
build wealth. These are many of my constituents who are seeking 
to save for retirement.
    According to proxy monitor in 2017, proposals related to 
social or policy concerns, that did not relate to long-term 
shareholder value, represented over half of the proposals.
    This committee has advanced a number of legislative 
proposals to address such issues, including a number of 
provisions of the Financial Choice Act.
    I am interested in hearing about how the Commission can use 
its existing authority to revisit the shareholder resubmission 
thresholds under Rule 14a-8.
    Last March, under the leadership of acting Chairman 
Piwowar, the Commission proposed a new rule to adopt inline 
XBRL to merge traditional unstructured filing submitted by 
public companies and mutual funds with standardized machine 
readable XBRL formats into a single filing.
    At the time, Ranking Member Maloney and I wrote the 
Commission to encourage them to pursue this work to modernize 
these filings. I believe this is important to both investors 
and market surveillance by the Commission.
    I hope we will be able to discuss this and that maybe you 
can give us an update on this work.
    Thank you, again, Chairman, for holding this hearing.
    I yield back the balance of my time.
    Chairman Huizenga. The gentleman's time has expired.
    With that, today, we welcome the testimony of Mr. William, 
Bill, Hinman, Director of the SEC's Division of Corporation 
Finance.
    Mr. Hinman, you will be recognized for 5 minutes to give an 
oral presentation of your testimony, and, without objection, 
your written statement will be added into the record.
    So, with that, Mr. Hinman, you are recognized.

                STATEMENT OF MR. WILLIAM HINMAN

    Mr. Hinman. Thank you very much, Chairman Huizenga, Ranking 
Member Maloney, and members of the subcommittee.
    Thank you for inviting me to testify on behalf of the SEC's 
Division of Corporation Finance.
    Since arriving at the SEC in May 2017, I have felt very 
privileged to work alongside the division's dedicated and 
talented staff.
    As you mentioned, Chairman, the mission of the SEC is to 
protect investors, maintain fair, orderly, and efficient 
markets, and facilitate capital formation. Our division 
oversees the review of the disclosures of companies, and we 
seek to ensure that investors have access to the important 
information they need to make informed voting and investment 
decisions.
    In addition, the division provides interpretative advice 
about securities laws and makes recommendations to the 
Commission for rulemaking in areas of disclosure and securities 
offerings. The division stands ready to collaborate with 
companies in discussing how to comply with Federal securities 
laws.
    Our reviews of reporting companies monitor and enhance 
compliance of the disclosure and accounting requirements we 
enforce. The Sarbanes-Oxley Act requires us to review the 
financial statements of reporting companies at least once every 
3 years. In addition to these mandated reviews, the division 
selectively reviews filings made for other offerings, business 
combination transactions, and proxy solicitations.
    Due to the declining number of U.S. public reporting 
companies, the division has been considering ways to make the 
public company alternative more attractive.
    To the extent we are able to attract more companies to join 
our reporting system and to do so at an earlier stage, it will 
ultimately benefit those companies, our markets, and investors.
    Companies that go through the evolution from a private 
company to a public company emerge as stronger companies with 
better disclosure.
    Investors also benefit when there are more public companies 
in which to invest. This is a high priority. We are taking 
policy and rulemaking steps in this effort. For example, in 
July 2017, the division expanded its non-public review process 
for draft registration statements.
    This expanded policy now applies to all IPOs for all 
issuers, not just emerging growth companies (EGCs). It allows 
follow-on offerings during that first year of being a public 
company to be submitted on a draft basis.
    Companies are taking advantage of that process. It saves 
them money. It allows them to better access market windows.
    Under this expanded process, we received draft submissions 
for more than 20 IPOs, and from more than 50 follow-on 
offerings from registrants that would not have qualified for 
that review process under the old rules. We are hearing that 
this is very helpful.
    Through this process, companies can avoid preparing and 
filing interim financial information for draft filings if that 
information will be superseded by the time it is made public.
    We still perform complete filing reviews. Investors still 
continue to receive the full financial information and other 
required disclosure at the time companies publicly file. We 
have also been working to assist companies in their efforts to 
comply with our rules in other areas.
    Over the past months, the Commission or the division has 
issued interpretations of the pay-ratio disclosure 
requirements, the new tax reform law, and cyber security 
disclosures.
    The division has also been focusing attention on digital 
assets and on initial coin offerings.
    As this area continues to evolve, we are striving for a 
balanced approach, one that encourages capital formation while 
maintaining a strong focus on investor protection. We also are 
keenly focused on the importance of capital formation by small 
and emerging companies.
    Congress and the Commission have taken steps, in recent 
years, to provide additional capital-raising avenues through 
Regulation A, securities-based crowdfunding, and Regulation D.
    While at the same time we are doing this, we are 
maintaining robust investor protections under those new 
exemptions.
    We continue to monitor the use of these exemptions, and we 
engage with a wide range of interested parties at meetings and 
at conferences around the United States to see how they are 
being used.
    We recognize that small companies and investors can also 
benefit from reduced regulatory complexity. We are considering 
ways to harmonize and streamline our exempt offering rules.
    Further, the division continues to work on reforms to make 
our disclosure regime more effective. Staff is working to 
finalize a recommendation for the Commission to raise the 
financial thresholds, under which more companies would qualify 
for scaled disclosures as smaller reporting companies.
    We are reviewing our disclosure requirements and 
Regulations S-K and S-X, considering other ways to improve the 
disclosure regime for both investors and companies.
    In addition to our disclosure reform efforts, we are 
looking to fulfill other rulemaking responsibilities, including 
disclosure rules related to resource extraction, conflict 
minerals, and executive compensation.
    The division is also exploring where there are rules that 
could encourage more companies to go through the IPO process. 
We are thinking about extending the test the waters provision 
that was enacted in the Jobs Act for emerging growth companies 
to a wider range of participants.
    Thank you very much for inviting me to discuss the 
division's activities and responsibilities. I look forward to 
answering your questions.
    [The prepared statement of Mr. Hinman can be found on page 
36 of the appendix.]
    Chairman Huizenga. Thank you.
    With that, I will recognize myself for 5 minutes of 
questioning.
    So, as you have talked about in this, and I can't stress 
enough my concern about the number of IPOs that are happening 
or, frankly, not happening. We have about half as many public 
companies in the U.S. as we did 20 years ago.
    I think that is detrimental to investors. The common 
investors, not institutional investors. I am very pleased to 
hear you say that the division is looking at ways to make the 
IPO market more vibrant.
    Can you elaborate a little more on the division's capital 
formation agenda and discuss your priorities for enacting and 
encouraging more companies to go and stay public?
    Mr. Hinman. Sure. Thank you for that question.
    We are doing a number of things. Some things require 
rulemaking and that is a longer process, which is one of the 
reasons we first did this broadening of the confidential review 
process.
    We have heard that companies find it much more useful to be 
able to time the public announcement of their offering closer 
to the time they actually expect to go to market. That gives 
the company less exposure to market vagaries.
    That also works in their first year as a public company 
where prior to being S-3 eligible, companies would have to file 
and wait, perhaps as much as a month before they could go to 
market.
    Now, with the confidential review process, that window is 
much shorter and they have much less exposure to market 
fluctuations during that period. That is helping people achieve 
more liquidity sooner which is good for investors. That is one 
area.
    We have been trying to streamline our guidance and make it 
more transparent to users. We have done things as simple as 
putting more of our direct phone numbers in our manuals that 
the public sees so that they can reach people more quickly on 
issues.
    Chairman Huizenga. Actual live people?
    Mr. Hinman. Actual--
    Chairman Huizenga. Not voice mail--
    Mr. Hinman. It still may go to voice mail, but it goes at 
least to the right office mailbox.
    Chairman Huizenga. Right.
    Mr. Hinman. Sometimes people pick up their line.
    Chairman Huizenga. Yes.
    Mr. Hinman. But we have, now, identified the people and the 
phone numbers and the areas you might be interested in and made 
that quite public.
    There is an area in which we have had authority for a long 
time, under Rule 3-13 of Regulation S-X, to provide waivers of 
financial statement requirements, when those statements would 
not serve investors but may be very burdensome to prepare. We 
have reduced the amount of time it takes a company to go 
through that process.
    We have encouraged companies to come to us earlier in the 
process and not wait and develop an expensive 30-page letter 
explainging why they should receive a waiver, but to talk to us 
earlier and find out where our head is on that, and see if we 
can accommodate the request or not, but to save money in the 
process.
    Of course, on the rulemaking side, we are doing a number of 
things which I can elaborate on if time permits.
    Chairman Huizenga. Great. Well, in 2011, there was an IPO 
task force that asked public company CEOs. It was 92 percent of 
them said that the, quote, ``administrative burden of public 
reporting was a significant challenge to completing an IPO.''
    I appreciate that accumulative effect of those being looked 
at.
    My colleague brought up ICOs. I want to touch on those as 
well.
    Do you believe that ICOs could be a potential solution to 
the declining number of IPOs? I want to have you touch on that. 
You can hit on this if you would like, the differences between 
an ICO and an IPO.
    But do you believe that there are any circumstances, 
instances where an initial coin offering should not be 
regulated as an offering of securities?
    Some have discussed the concept of a utility token. If you 
could maybe take the next minute and a half and touch base.
    Mr. Hinman. Sure. I think the Chairman has made a number of 
statements around the use of this new technology. We very much 
want to see our efforts not stifle innovation in that area.
    We have developed working groups that cross the divisions, 
my division and Trading and Markets, and Investment Management, 
to work with issuers who are interested in complying with our 
securities offering rules as they explore these new 
technologies.
    The issues around whether a particular coin offering may 
involve an offering of a security are somewhat complex. But the 
drafters of the 1933 Act were quite wise and added very 
flexible provisions there.
    An instrument that may be called a coin may still have the 
hallmarks of a security and need to be regulated as such or be 
offered on a registered basis or an exempt basis. We work with 
issuers that are exploring those options.
    Chairman Huizenga. Can you come up with an instance when 
they wouldn't or shouldn't be viewed as securities?
    Mr. Hinman. In theory, there is a time when a coin may 
achieve a decentralized utility in the marketplace. There are 
some coins where you wouldn't have an issuer to regulate. They 
operate on their own.
    Our rules, which look to protect investors by providing 
disclosure, generally require some centralized authority to 
make those disclosures.
    In theory, there may be coins where that lack of central 
actor would make it difficult to regulate at least the offering 
as a securities offering.
    Chairman Huizenga. OK.
    Mr. Hinman. That said, if someone is raising money and they 
have a stake in that, and they are promoting that, that is 
usually the central authority we are looking to for disclosing 
it.
    Chairman Huizenga. My time has expired.
    With that, I recognize the gentlelady from New York for 5 
minutes.
    Mrs. Maloney. Thank you.
    Mr. Hinman, as I mentioned in my opening statement, I led a 
letter to Chairman Clayton that every single Democrat signed, 
in strongly opposing any effort to allow public companies to 
use forced arbitration clauses on their own shareholders.
    If the SEC allowed this, it would, essentially, be the end 
of securities fraud cases in Federal court. It would deprive 
shareholders of their ability to hold companies accountable for 
fraud. I think we can all agree that this would be an absurd 
and wrong result.
    Chairman Clayton sent us a response on Tuesday which 
included an analysis by your division at the SEC.
    While I appreciate Chairman Clayton's and your detailed 
response and how seriously both of you looked at our letter, I 
do have a question for you.
    If it was actually reported earlier this year by Bloomberg 
that the SEC staff was, quote, ``laying the groundwork to start 
allowing these forced arbitration provisions.''
    I want to ask you, are you or any of the staff in the 
department of the division at the SEC actively encouraging 
companies to submit registration statements with forced 
arbitration provisions in them?
    Mr. Hinman. So, I think that the letter that you 
referenced, in response to your inquiry and the other committee 
members' inquiry, covers that point. This is something that we 
are not actively looking at, in terms of trying to bring 
something in and address this issue.
    It is a complex issue. It involves our laws and 
regulations. It involves other Federal laws, such as the 
Federal Arbitration Act and State laws.
    As the Chairman's correspondence noted, if this issue were 
to come over to my division in the context you mentioned, of an 
IPO of a U.S. company, we would not be declaring that 
registration statement effective at the division level.
    We recognize that this is an important issue, that is in 
the correspondence. We would defer to the entire Commission.
    Mrs. Maloney. Then, where did this report in Bloomberg come 
from, that the SEC was actively pursuing this course?
    Mr. Hinman. I hate to speculate where the press gets some 
ideas.
    I do know that it correlated to a conference that was held 
in California. The SEC was not in attendance because the 
Government was shut down.
    I think panel members there were speculating and I think it 
got translated into the article you read.
    Mrs. Maloney. OK, thank you.
    Last year, this committee marked up the Republicans Choice 
Act which made sweeping changes to the securities law. One 
provision of the act that got a lot of attention would have 
raised the threshold for shareholders who were allowed to put 
proposals on the public company's ballot.
    Currently, a shareholder can submit a proposal, as long as 
he or she has held either $2,000 or 1 percent of the company's 
stock for at least 1 year.
    The Choice Act would have eliminated the $2,000 threshold 
and would also have lengthened the holding period from 1 year 
to 3 years. Which means that in order to submit a proposal, 
shareholders would need to own at least 1 percent of the 
company's stock for 3 years.
    This would make it virtually impossible for ordinary 
shareholders to submit proposals at the largest companies. For 
example, under the Choice Act, for a shareholder to submit a 
proposal at Wells Fargo, he or she would have to own $2.7 
billion worth of Wells Fargo stock and hold it for 3 years.
    So, my question is, do you believe that only shareholders 
who own more than 1 percent of very large companies, like Wells 
Fargo, should be able to submit shareholder proposals to get 
voted on at annual meetings? Or do you believe that would 
unfairly restrict the ability of small shareholders to 
participate and try to influence the companies that they own?
    Mr. Hinman. In the shareholder proposal area, in general, 
we don't have a rule proposal moving forward, at this time.
    The proposal thresholds that you had mentioned are the 
current rules that we are operating under. Those are somewhat 
aged. They haven't been looked at in, I think, over 20 years, 
in terms of either adjusting those for inflation or otherwise.
    There have, from time to time, been discussions around what 
would the right threshold be? If we were to engage in 
rulemaking there, we would receive comments from a wide range 
of people and consider all of them.
    We do see the value of the shareholder proposal process and 
giving shareholders access to the proxy to express their 
opinions.
    So, we would be mindful of that as we develop whatever new 
or updated rule in this area we would come up with.
    Mrs. Maloney. Thank you.
    My time has expired. Thank you.
    Chairman Huizenga. The gentlelady's time has expired.
    The gentleman from Illinois, Mr. Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Chairman. Thank you, Director. 
Appreciate you being here.
    As a proponent of seeing all aspects of our Government 
innovate with technology, I have been closely following the way 
the Division of Corporation Finance has been trying to 
implement the use of machine readable, searchable, structured 
data formats in its operations.
    To that end, what efficiencies and productivity gains has 
the division been able to realize in analyzing filings as it 
has continued to innovate with standardized data?
    Mr. Hinman. The XBRL tagging of information does assist us, 
as we try to review companies. We now have more modern tools to 
use some of those items to screen for certain characteristics 
of a financial statement.
    So, we have found them to be of value.
    Mr. Hultgren. Great.
    On March 1st of last year, 2017, Commissioners Piwowar and 
Stein proposed a new rule to adopt inline XBRL to merge the 
traditional unstructured filings with the standardized machine 
readable XBRL formats into a single filing.
    I authored a letter to the Commission, with Ranking Member 
Maloney and Representative Issa, with whom I had championed the 
Financial Transparency Act to encourage the Commission to 
continue this work.
    I wonder if you could give us an update on where this 
proposed inline XBRL reform stands?
    Mr. Hinman. It is something we are actively working on. I 
do expect to get something out in the next 12 months, in that 
area.
    Mr. Hultgren. Great, thank you.
    Chairman Clayton has indicated that on the Commission's 
longer-term agenda is reviewing shareholder engagement in the 
proxy process. This is something that we have touched on a 
little bit already, but I want to go into a little bit 
different direction.
    The House has passed legislation sponsored by Chairman 
Duffy, that brings long-overdue transparency, supervision, and 
accountability to proxy advisory firms.
    In November, Chairman Clayton stated that the Commission 
should be, and I quote, ``lifting the hood and taking a hard 
look at whether the needs of shareholders and companies are 
being met,'' end quote.
    I have heard from a number of companies and shareholders 
that feel their current needs are certainly not being met. 
There is particular concern regarding proxy advisory firms in 
the outsized influence they seem to have in the market, yet 
they are subject to a little oversight and are susceptible to 
conflicts of interest.
    I was particularly concerned, when I was advised of a 
filing earlier this month from one pharmaceutical company, 
Abbott Labs. That proxy advisory firm they engaged with was, 
and I quote, ``aware of the flaws and inaccuracies of its 
report and has disregarded our attempts to correct them and 
proceeded to publish a flawed and inaccurate report,'' end 
quote.
    I wonder if you have any updates for the committee 
regarding when the Commission will be addressing issues like 
this? Will the Commission reopen the comment file of the 2010 
proxy plumbing concept release?
    Mr. Hinman. As you mentioned, this is an area of interest 
for the Chairman. He and I meet periodically with investor 
groups, the funds and the advisory firms themselves, to talk 
this through.
    We are still gathering information. The Chairman has 
indicated in some of the speeches informally that proxy 
plumbing is a topic of interest for developing some ideas, in 
terms of what comments to ask for in that area. This is 
certainly on the list of things that we are considering.
    In the meantime, we are applying our 2014 guidance which 
does apply more rigor to the process in watching for compliance 
in that area.
    Mr. Hultgren. Great, thanks.
    SEC's Rule 14a-8 provides an opportunity for a shareholder 
owning a small a relatively amount of the company's securities 
to have his or her proposal placed alongside management's 
proposals in that company's proxy material for presentation to 
a vote at an annual or special meeting of shareholders.
    The rule generally requires the company to include the 
proposal, unless the shareholder has not complied with the 
rule's procedural requirements or the proposal falls within one 
of the Rule's 13 substantive bases for exclusion.
    On September 22, 2016, the Capital Markets Subcommittee 
held a hearing entitled, ``Corporate Governance, Fostering a 
System That Promotes Capital Formation and Maximizes 
Shareholder Value.'' Where witnesses from the Society of 
Corporate Secretaries and the Business Roundtable provided 
compelling testimony for making updates in order to reduce 
unnecessary regulatory burdens.
    The Financial Choice Act that has been discussed, proposed 
a number of changes to Rule 14a-8, that I think would be 
valuable for public companies, investors, and our markets.
    I wonder, does the Commission plan to revisit Rule 14a-8? 
Specifically, what are your views on increasing the 
resubmission threshold under 14a-8?
    Mr. Hinman. To the extent that we would open 14a-8, which I 
mentioned, that would probably happen in the context of this 
request for more comment on the wide range of proxy issues.
    In terms of the thresholds, we would look at where they 
are. Both the initial submission threshold and the recent 
submission thresholds, where once a proposal has been voted 
down, can it be submitted again? Those two have not been looked 
at for some time.
    So, we would be very interested in public comment on those 
provisions.
    In the meantime, one of the things that we are doing is 
trying to get more input from the companies' boards on these 
topics.
    So, we put out a staff legal bulletin this past year, 
asking for the board's more in-depth analysis. That has created 
more engagement between boards and shareholders.
    Some of these proposals go away after that engagement 
happens. But it allows us to make rulings on whether it is 
something that can be excluded or not, more effectively.
    Mr. Hultgren. Thanks, Director. I know my time has expired.
    Chairman Huizenga. The gentleman's time has expired.
    The gentleman from California is recognized for 5 minutes.
    Mr. Sherman. I would like to talk about parity between 
disclosing long positions versus short positions.
    Securities law requires investors or certain investors to 
disclose their long positions 45 days after the end of each 
quarter. It would require institutions to make disclosures 
within 10 days after their position reaches 5 percent of a 
company's outstanding shares.
    But there is nothing corresponding for those taking short 
positions. I am not criticizing short positions, however there 
is an asymmetry of information.
    It is my understanding that several European countries 
require the disclosure of short positions.
    Here, in the United States, the principles that underlie 
Section 13 disclosure requirements, applicable investors with 
long positions, transparency, fairness and efficiency apply 
equally to investors with significant short positions.
    Moreover, investors with short positions can pursue 
strategies designed to invisibly drive down share prices or 
rely on regulatory processes to challenge the intellectual 
company--property of a company intending to profit from the 
uncertainty created.
    To provide transparency to other investors in affected 
companies, would you support extending the existing disclosure 
requirements for long investors, such as those on forms 13-F, 
Schedule 13-D, and Schedule 13-G, to persons with short 
positions, including any agreements or understandings that 
allow an investor to profit from a loss in the value of a 
security?
    Mr. Hinman. Thank you for the question.
    There has been some experimentation in the disclosures 
around short positions post-financial crisis. Certain 
institutions were required to disclose, in real time, their 
short positions. DERA, our economic analysis division, had an 
opportunity to look at the cost benefits there.
    Mr. Sherman. I know you have looked at it. Where do you 
stand?
    Mr. Hinman. In that provision, I think they concluded that 
there was not a good return cost benefit for real time 
reporting of all transactions.
    Mr. Sherman. This--well, long positions aren't, for the 
most part, real time. Why not throw away the disclosure of long 
position? Why require one without a cost-benefit analysis and 
then say to the other, oh, we have decided it isn't worth 
doing?
    Mr. Hinman. I--again, I think this is something that DERA 
would need to look at before we did it, because it would have 
market effects. I haven't done that work myself.
    Mr. Sherman. Let me shift to another issue.
    The Chairman says that the decline in IPOs might be 
replaced by an increase in ICOs initial coin offerings. I think 
we missed the mark in this meeting because we think that the 
reason for security markets is to let people issue and trade 
and be securities lawyers and be government bureau executives, 
et cetera.
    The reason for security markets is to provide jobs in the 
real economy. An IPO does that.
    An ICO does the opposite. It takes money out of the real 
economy. It takes people willing to invest in risk and says, 
don't use that ability to risk. Don't use those animal spirits 
to help create a job for a person who needs one, let alone 
build a factory for thousands. Sit there and trade back and 
forth in the ICO.
    Now, it is--these are investments. They are--I think it was 
you that said a balanced approach.
    The balance we have in the real economy is, on the one 
hand, we want people to invest in new companies and factories 
and provide jobs. But on the other hand, we want to protect the 
investors. So, we have a lot of burdens on somebody who wants 
to build a new factory.
    But with the coins, there is no factory. There are no jobs. 
We have no burden on the invest--no investor protection.
    It is--when you strike a balance between those who are 
trying to create a new currency to facilitate drugs, tax 
evasion, to deprive the fed of its ability to market our 
securities and return a hundred billion dollars or so to the 
U.S. Treasury, all the balances are for total investor 
protection which could be achieved by totally banning.
    Why aren't you stopping all the ICOs which are clearly 
unregulated investments?
    Mr. Hinman. So, when I talked about taking a balanced 
approach, what we are trying to do is recognize that this new 
technology, specifically the blockchain technology that 
underlies it, may have some promise.
    Mr. Sherman. Oh, I am not saying ban blockchain. Just ban 
the ICOs.
    Mr. Hinman. OK. Some folks are finding that the ICO 
instrument allows for a different type of enterprise. One that 
is more decentralized in which they think has some value. We 
are--
    Mr. Sherman. Charlatans and scammers have always favored 
decentralized new enterprises.
    Chairman Huizenga. The gentleman's time has expired.
    Mr. Sherman. I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the Chair recognizes the gentlelady from 
Missouri, Mrs. Wagner, for 5 minutes.
    Mrs. Wagner. Thank you, Chairman Huizenga.
    Director Hinman, as you noted in your written testimony, 
your role is to support the SEC's mission to protect investors 
as well as to maintain fair, orderly, and efficient markets.
    To follow up on my colleague, Representative Hultgren's, 
questioning, there are some red flags when it come to the--in 
particular, to the two largest proxy advisor firms who, 
together, seem to control at least 97 percent of the proxy 
advisory industry.
    Director Hinman, what are the main factors hindering 
greater competition in the proxy advisory industry, do you 
think?
    Mr. Hinman. I am not an economist, so it is hard for me to 
know exactly what would hinder more competition there.
    I do know that the service they provide is basically 
collecting all of the proxies that are out there, looking 
through, and thinking about how a particular matter should be 
voted on. Once someone does all that work and there are one or 
two people supplying that, it is hard for a new entrant to come 
in.
    Mrs. Wagner. What steps is the division taking to ensure 
that all proxy advisory firm conflicts of interest are properly 
disclosed?
    Mr. Hinman. That was something that we emphasized strongly 
in our legal bulletin that came out in 2014. We, through our 
Office of Inspections, continue to look at how that is being 
complied with.
    We are seeing better disclosure than what predated that 
guidance.
    Mrs. Wagner. What steps is the division taking to ensure 
that public companies have sufficient time to respond to errors 
or flaws that are made in proxy advisory firm recommendations?
    Mr. Hinman. As I mentioned earlier, we do meet with these 
firms. We have provided feedback around the kinds of concerns 
you are raising. We have seen an increase in the level of some 
responsiveness.
    We are still monitoring it, but we do think encouraging the 
firms that are providing these services to listen more actively 
is something we can do and are doing.
    Mrs. Wagner. Switching topics. I wanted to spend some time 
talking about cyber-security attacks.
    On February 21, 2018, the SEC voted unanimously to approve 
updated interpretive guidance to assist public companies in 
preparing disclosures about cyber-security risks and incidents.
    How does this guidance expand upon the guidance issued in 
2011?
    Mr. Hinman. One of the basic differences is where it was 
issued. The original guidance was issued in my division. The 
updated guidance was approved by the full Commission and, 
therefore, has more weight.
    But, in terms of the substance, there were maybe three or 
four areas that we concentrated on and brought attention to.
    One was disclosure controls. We reminded companies it is 
very important for them to take cyber risk into account when 
they are looking at their disclosure controls, so that if an 
attack happens and when someone in the front line sees that, 
they raise it to the company's disclosure experts and more 
consideration is given to timely disclosure.
    But we also reminded companies that as that happens, to 
enforce their insider trading policies. So, now that they have 
a better sense of what is going on at the higher level, they 
are more apt to apply their insider trading policies.
    Mrs. Wagner. Given the increasing number of cyber security 
breaches, such as the Equifax breach, how does this guidance 
help to ensure that companies have the appropriate procedures 
in place to both prevent and respond to cyber-security 
incidents?
    Mr. Hinman. What we were trying to do was to emphasize this 
disclosure point.
    We also--one of the other items that is a little different 
than the old guidance was that we said, when a company has 
cyber risk as a material risk that they face, we expect to see 
disclosures of how their board is overseeing that risk.
    So, board oversight, better controls, and more compliance 
on the insider trader policies.
    Mrs. Wagner. To that point, can you walk me through more of 
the steps you believe that companies should take after they 
have discovered material cyber-security event has occurred?
    Mr. Hinman. Sure. After it has been discovered and you have 
determined it is material, and that may take a little time 
because these companies are attacked daily. One of the reasons 
we wanted this to be elevated was to make that materiality 
decision that you are referencing.
    Once that decision has been made, insiders with knowledge 
of that should not trade. The company, we would expect, would 
be moving to formulating appropriate disclosures.
    Mrs. Wagner. What disclosure forms do you think they should 
be using, in the event that they have an event related to the 
cyber security breach?
    Mr. Hinman. Sure. There are a number of ways. The most 
common we see is Form 8-K. That is something that is not just 
done quarterly or annually, but can be done at the time an 
event is occurring.
    Mrs. Wagner. My time has expired.
    Chairman Huizenga. The gentlelady's time has expired.
    The gentleman from Massachusetts is recognized for 5 
minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    If we could, I would like to stay right on the same topic 
that the gentlelady from Missouri was talking about.
    So, last year, we had an increase of about 80 percent in 
the number of cyber-attacks.
    As the gentlelady pointed out, we haven't updated this 
guidance on cyber-security protocol since 2011. So, 
exponentially increased on the number of attacks.
    But last year, if you sort out the significant cyber-
attacks on publicly traded companies, it was about 82 of those 
companies that publicly traded that had major cyber-attacks on 
their systems. Only 3 percent, only 3 percent, filed an 8-K to 
inform the shareholders that their systems have been hacked.
    So, you have 97 percent of the companies that have been 
hacked failed to file an 8-K to let their shareholders know 
that there had been a significant event.
    The problem seems to be on the definition of materiality. 
The legal counsel within the company is nervous about 
disclosing the hack, because share price will drop and there is 
vulnerability. That is an issue.
    But on the other hand, shareholders have a right to know. 
Also, if we don't do anything about that, I think this trend 
will continue.
    The companies will not improve their--there is no price to 
pay. There is no accountability. The companies will not improve 
their cyber protections, and we will just keep seeing the 
volume of these hacks continue.
    How do we get at that decisionmaking being made at the 
corporate level to encourage--you don't want to punish a 
company that is a victim of a cyber-attack. I understand that.
    But you do want to encourage them to disclose. That is 
basically the mission of the SEC.
    How do we get these companies to come forward so that we 
will know about the attacks in a timely fashion and protect the 
shareholders and also the entire system because everything is 
so interconnected?
    Mr. Hinman. Thank you for the question.
    We agree that this is an important disclosure issue and 
that the materiality judgment can be a difficult one. But we do 
expect more.
    As you mentioned, the 2011 guidance has actually been 
updated at the beginning of this year by the full Commission. 
It highlights some of the items I had mentioned.
    Beyond that, we conduct our reviews of companies. This is 
an item of review priority for us. We look at those each year. 
This is one that clearly we are looking at.
    Then, moreover, when we see a hack occur, we will often 
pick up the phone--our review teams that are familiar with that 
particular company may pick up the phone, talk to counsel, and 
ask to be walked through. Is this something that is material?
    You will see things, sometimes, reported in the press. The 
company has decided it is not material. We sometimes will ask 
them to walk us through that analysis.
    Mr. Lynch. Yes, it is still--it is still fairly 
discretionary, however. Timing is important.
    Where--what we are seeing right now is, like I have said 
before, 97 percent not filing an 8-K. Not telling people.
    There needs to be some consequences. I was hopeful that the 
new guidance would get at that issue. I am not sure if a 
legislative solution is the best way to go here. I would rather 
have the SEC do it themselves. It is not happening fast enough, 
in my opinion.
    But I appreciate your willingness to come here before the 
committee and help us with our work. I yield back the balance 
of my time.
    Thank you.
    Chairman Huizenga. The gentleman yields back.
    With that, the gentleman from Minnesota is recognized for 5 
minutes.
    Mr. Emmer. Thank you, Mr. Chair.
    Director Hinman, welcome to the committee and 
congratulations on your new position.
    You touched on it briefly during your testimony, however 
can you give more detail as to why it is so important for the 
SEC to encourage more small companies to go public and not just 
the big ones?
    Mr. Hinman. We think capital formation at all levels, and 
the small levels, is important for job creation, number one. We 
think it obviously is good for the economy.
    We are very interested in looking at our rules. Over the 
years there has been more and more added to the disclosure 
requirements. We do want to look at the scaling of those 
requirements for smaller companies.
    We do have a rule actively being considered right now. It 
has been proposed and we will try to finalize it for lifting 
the limits for who qualifies for that scaled reporting.
    Mr. Emmer. When Chairman Clayton came before this committee 
in the fall, I asked him about the concept of venture exchanges 
and whether or not the creation of a lower-tier equity market 
to facilitate the secondary trading of shares of smaller 
companies, where liquidity challenged securities would entice 
more early stage IPOs.
    Do you have any thoughts on this matter?
    Mr. Hinman. Sure. I am not the trading and markets expert. 
Our colleagues in the Division of Trading and Markets actually 
are focused on the issue. In fact, they had a roundtable 
earlier this week, I believe, to discuss some of the issues 
smaller companies face in terms of developing liquidity in 
their shares and in smaller company trading.
    Venture exchanges, ideas like that where liquidity is 
enhanced and an exchange is used to do that certainly would 
provide more liquidity.
    I think, again, the Trading and Markets folks are very 
interested in exploring those ideas and that is why they are 
holding these roundtables.
    Mr. Emmer. Wonderful.
    I want to change gears just a little bit. I find that 
people tend to fear what they don't know. If people who started 
sailing the oceans at the time of Columbus would have believed 
that the world was flat, we never would have had the great 
discoveries of the new world.
    The typical attitude, too, that I get from so many elected 
officials who have no idea what they are talking about--they 
are ignorant on a topic--is that everyone who is involved in 
the area that they maintain their greatest ignorance. That 
everyone who is participating in that area is either bad or 
dishonest. Therefore, the elected official must rush in and 
help people from these.
    I find this a lot when we talk about initial coin 
offerings. We are talking about blockchain technology. There is 
a lot of ignorance about how special this area is.
    Given your division's jurisdiction, as it relates to crypto 
currencies and initial coin offerings, do you have any 
circumstances that come to mind that might render a token sale 
as something other than a securities offering?
    Mr. Hinman. The initial sale--it is quite hard to have an 
initial sale without having a securities offering which is why 
the Chairman has noted that the initial sale of these may 
require compliance or exemptions.
    Mr. Emmer. Let me ask you a question about that. Is it 
possible that a utility token would not be a security, because 
it is not done for capital formation?
    Mr. Hinman. It is certainly possible that there are tokens 
that would not have the hallmarks of a security.
    Over time, many of these fundraisings are intended to 
develop networks where a token may be used to buy a good or 
service.
    That is its only use. It doesn't have much utility--
    Mr. Emmer. No, I understand. But there is a difference.
    Mr. Hinman. There are other senses.
    Mr. Emmer. If you can just--this is the difference. I get 
this all the time. People are suggesting that everything that 
is done in this area involves a currency or something like a 
currency or security.
    But, in fact, a security--or a utility token is nothing 
more than a card, if you would, that would allow you access to 
a certain platform so that you can participate.
    Is it possible, in your jurisdiction, that that may not 
qualify as something that is a security offering?
    Mr. Hinman. We certainly can imagine a token where the 
holder is buying it for its utility and not as an investment. 
In those cases, especially if it is a decentralized network in 
which it is used and there are not central actors that would 
have information asymmetries where they know more than the 
investors in those tokens.
    Mr. Emmer. Can I--I have to get this in before my time runs 
out.
    You have stated that, quote, ``sponsors of offerings 
conducted through the use of a distributed ledger or blockchain 
technology must comply with the securities law,'' close quote. 
You also stated, quote, ``Investors need the essential facts 
behind any investment opportunity, so they can make fully 
informed decisions.''
    How can we improve the regulatory clarity for entrepreneurs 
here in the United States so that their contribution to 
something that may not be a security will not see enforcement 
actions by the SEC?
    Chairman Huizenga. I will allow a quick reply.
    Mr. Hinman. One of the things we are doing is meeting with 
the participants who have these ideas, that think that they may 
have a token that shouldn't be regulated as a security, to work 
through with them how that may be structured.
    Mr. Emmer. Wonderful. I will follow up in writing. I have a 
bunch of other questions.
    Thank you for your patience, Mr. Chair.
    Mr. Hinman. The gentleman's time has expired.
    With that, the gentleman from Georgia, Mr. Scott, is 
recognized for 5 minutes.
    Mr. Scott. Thank you, Chairman Huizenga.
    I am very, very pleased to have Mr. Hinman here, because 
you are in the crucible of what we really refer to as wealth 
building in this country. You are the SEC Director of the 
Division of Corporation Finance and capital formation and 
public offerings.
    There are basically three ways we build wealth, meaning 
financial security, and stability, and that is either through a 
job, your business, but most acutely through investments.
    I want to talk to you about the fact that we have some 
alarming news. My excellent staff has done some research that I 
want to bring to your attention. Important research. One, they 
have informed me that during the past 20 years, the number of 
new companies deciding not to go public has increased 
dramatically.
    As a matter of fact, they inform me that in 1997, we had 
474 companies that went public, while only 108 went public in 
2017. That is astounding. So, with this in mind, I wanted to 
ask you about this expanded use of nonregistered offering 
exemptions.
    Because I truly believe that it makes sense to expand our 
security laws to make it easier for our businesses, especially 
our startups, that we rely on. Small business startups are 
still the driving force.
    From that comes the necessary resources to make those 
investments through the public and private offering. One other 
thing I want to tell you is that I agree with you, when you 
said this in your testimony. You said, it is far more efficient 
for retail investors to invest in companies through our public 
markets rather than our private markets.
    Now, that, to me, is very profound. As a matter of fact, I 
think it gives us a nobility of purpose why you are here.
    You went further. You said, the SEC is conducting a look-
back review of the impact Regulation Crowdfunding and 
Regulation A on capital formation and investment protection.
    So, my question is this. I am very interested to know, 
first of all, what you think about the points I have made. 
Also, how this look-back is going with you.
    I am curious to know if the SEC is including in its look-
back a measure of whether our capital markets are operating 
efficiently, from the standpoint of retail investors.
    Mr. Hinman. Thank you for the question and the comment on 
your observations around the decline in numbers of public 
companies or companies deciding to do IPOs. We share that 
concern.
    We do think, as you mentioned I said in my testimony, that 
public companies are terrific vehicles for the smaller investor 
to invest in. There is more liquidity because of our 
regulations. There is more transparency.
    So, we do share a concern that those numbers are declining, 
in terms of the number of investment options retail investors, 
in particular, may have.
    In terms of the various ways that our rules are working 
together to, hopefully, encourage people to join the public 
reporting system, you mentioned crowdfunding and Regulation A.
    I think Regulation A, at the time it was expanded by 
Congress, the thought was, this is perhaps, a bit of a roadmap 
to becoming public. It's still very early days, in terms of 
experience of Regulation A.
    We have seen some Regulation A issuers get used to the idea 
of providing disclosure and having it reviewed by the SEC. Some 
of those issuers have matured to the point where they have been 
listed.
    Not all those are great successes in the same way. Not all 
IPOs are great successes. We are monitoring the developments 
under Regulation A carefully. Same with crowdfunding. With 
crowdfunding, we see a lot of activity on the coasts. We see 
less in the middle of the country. We think it would be 
terrific to have more activity there.
    We are looking at ways to stimulate portals interest in 
folks across the country, not just on the coast.
    Mr. Scott. Thank you very much, Mr. Chairman and Mr. 
Hinman.
    Chairman Huizenga. The gentleman's time has expired.
    The gentleman from New Jersey, Mr. MacArthur, is recognized 
for 5 minutes.
    Mr. MacArthur. Thank you, Chairman.
    Director, thank you for being here.
    Forgive me if I work on fields that have already been 
plowed. But I had to step out for a few minutes, so I don't 
know what you have been talking about.
    In the Chairman's opening remarks, he mentioned that 
primary goals are protecting investors, facilitating orderly 
markets, encouraging capital formation.
    One of the concerns I have is we have a lot fewer initial 
public offerings than we used to. We have to consider, why is 
there less interest in the public markets?
    One of the things I have observed is that companies engaged 
in interstate commerce, that are traded on public exchanges, 
have a very difficult situation in both State and Federal 
actions that target them for civil fraud. Not criminal fraud 
but civil fraud.
    So, for example, an overzealous State attorney general 
might not have a case that rises to the burden of proof to 
prove civil fraud. They will accuse a company anyway and that 
company can get raked over the coals for something that doesn't 
even have any intent.
    This is not unique to one State alone. It is not even 
unique just to the States.
    For example, CFPB raked their company, in my district, over 
the coals and ended up losing their actions. But the company 
lost a billion dollars in market value which hurt all of their 
main street investors.
    States like New York, California, Connecticut have gone 
after companies and decimated share-holder value.
    That hurts main street investors. It is hard for those 
companies to recover. The moment there is an accusation of 
anything, they have to disclose it because they are publicly 
traded companies.
    So, I just wanted to ask you if you could comment on the 
problem. How you see it. The fact that these publicly traded 
companies engaged in interstate commerce all across the country 
are subjected to 50 different standards on civil fraud.
    Could you talk about the problem from your perspective? Do 
you see any solutions? I would be happy to hear those, too.
    Mr. Hinman. Sure. So, to go to the broader point of fewer 
public companies, one of the reasons--this is one of them. I 
think there are a number of reasons why fewer companies are 
choosing to go public.
    There is the Federal regulatory burden. There are the State 
regulatory burdens. There is simply more money available in the 
private sector right now as well. So, the need to seek public 
funding is lower than it would have been in the past.
    So, there are all these different factors going on all at 
the same time. So, to pick one out and to try and weigh it in 
the equation is difficult.
    The point you are raising is not something I have a view on 
as a Federal regulator. The ability to change that landscape 
would be one of Federal statute. That is a Federal preemption 
question, really, that you are getting to, if you were trying 
to make a more uniform anti-fraud landscape for public 
companies.
    Mr. MacArthur. Do you see it as a problem?
    Mr. Hinman. I certainly--
    Mr. MacArthur. As part of the--as part of the issue.
    Mr. Hinman. I certainly see that some companies bear that 
in mind as they decide to go public. It is not a positive 
factor.
    Mr. MacArthur. I agree with you that it is not the only 
issue. I didn't mean to imply that it was.
    But I know, as a former businessman, it certainly weighed 
into my mind. Just the difficulty of the environment.
    You mentioned there is more capital available in other 
mechanisms, like private equity and such.
    But there is a reason more capital is being attracted into 
that space, too. It is because the public markets are less 
attractive.
    Mr. Chairman, I am happy to yield my remaining time to you, 
if you have any other comments or questions.
    Chairman Huizenga. Thank you. Yes, I will take that.
    We are going to go on a slightly different direction from 
what you were having.
    I want to touch base on something that Chair Clayton and 
CFTC Chairman Giancarlo stated. That they, along with their 
counterparts at the Department of Treasury and Federal Reserve, 
may come to Congress in the coming months, regarding ICOs.
    I am curious what you believe the role for Congress might 
be in that? Is there concern that the Congressional regulatory 
intervention will chill the ICO market?
    Mr. Hinman. In terms of what is going on in the landscape 
right now, I think Treasury, through the FSOC committee, is 
trying to gather views from the various regulators, CFTC and us 
principally. But also the banking regulators, everyone that 
participates in FSOC.
    People that have your customer concerns, anti-money 
laundering concerns, our securities law concerns, commodities 
concerns, to look at the overall regulatory touch here. To see 
if there are gaps and to see if there are ways to improve the 
environment.
    One thing we are trying to do is provide as much guidance 
as we can to the marketplace, so we don't have a chilling 
effect.
    But it is still something that is being worked on by all 
the agencies, and we are trying to coordinate to make sure we 
don't stifle innovation.
    Chairman Huizenga. All right. Thank you. Time has expired.
    With that, the gentleman from North Carolina, Mr. Budd, is 
recognized for 5 minutes.
    Mr. Budd. Thank you, Mr. Chairman. Thank you, Director 
Hinman, for your service. The first time out, you are doing a 
good job.
    Chairman Huizenga. Thank you.
    Mr. Budd. So, thank you.
    I want to talk this morning about SEC efforts to facilitate 
capital formation and efforts to increase investment 
opportunities here at home.
    Obviously, this is an issue of importance to me. I have led 
H.R. 3903, the Encouraging Public Offerings Act, along with my 
friend, Representative Meeks from New York. That would expand 
testing the waters.
    So, a lot of us on the committee were pleased to see the 
SEC expand the use submitting of confidential draft filings of 
last year, just from emerging growth companies to all 
companies.
    In that vein, do you plan on extending the use of testing 
the waters from these emerging growth companies to all 
companies as well? What steps are the division taking to help 
facilitate pre-IPO communications between businesses and 
investors?
    Mr. Hinman. Thank you for that question.
    As you point out, the test the waters exemptions from 
Section 5 have been available for the emerging growth 
companies. We have put on our agenda expanding that. It seems 
to be working well.
    There are parameters in which those test the waters 
activities take place. We think investors are protected by 
those. As I said in my opening remarks, this is something that 
we think could make a difference, and we will explore it very 
carefully.
    Mr. Budd. So, just to clarify, you said it is on your 
agenda. Is there any timeline for expanding that?
    Mr. Hinman. I don't think we have it on a specific timeline 
right now. But it is something that we would like to move 
forward.
    I don't think it will take an inordinate amount of time to 
duplicate what we have done for the EGCs for a broader group of 
folks.
    Mr. Budd. Very good.
    So, in a speech earlier this year, you stated that your 
intent is to put emerging growth companies and non-EGCs on as 
level a playing as possible. Can you please elaborate on this 
and how the division aims to ensure that this is a level-
playing field?
    Mr. Hinman. One of the primary things would be looking at 
the EGC opportunity to test the waters and broadening that.
    There had been, prior to the revisions we made in the 
policies, certain advantages the EGCs had, in terms of 
confidential filings, which we have spoken about, that has been 
extended to all.
    Then, as we expanded confidential filings, beyond what the 
EGCs had available, we made sure that both the EGC group and 
others were allowed to file confidentially for their first 
year. So, we kept them on the same level playing field.
    Mr. Budd. Very good. I appreciate your time. Chairman, I 
yield back.
    Chairman Huizenga. The gentleman from North Carolina yields 
back.
    The gentleman from New York, Mr. Meeks, is recognized for 5 
minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    Let me ask you a question, Mr. Hinman. Over the years, we 
have seen an increase in the amount of public companies with 
dual-class share structures, including many of the largest tech 
companies in Silicon Valley, like Google, Facebook, Snapchat.
    These structures can create benefits for a company by 
allowing founders to guide a company's success after going 
public. But substructures also pose a risk for shareholders who 
are less able to hold boards and CEOs accountable for their 
failures.
    The SEC's Investor Advisory Committee recently proposed 
ways of improving disclosures related to dual-class shares.
    So, my question to you is, what is your personal opinion of 
those recommendations and the risk associated with dual-class 
share structures?
    Mr. Hinman. Thanks for the question.
    You are right, the Advisory Committee did ask us to look at 
those disclosures. I had independently talked with our 
disclosure teams about the disclosures that we are able to 
receive, when a company has a dual-class or a unique structure.
    We are looking for robust disclosure there, so investors 
understand not just the voting ratios, but things like the life 
of the arrangement, whether it has a sunset. We are looking for 
disclosure of those provisions.
    The Advisory Committee did not ask us to ban those, in part 
because the SEC really doesn't have jurisdiction on this topic, 
to ban or allow. We are a disclosure agency.
    State law generally governs whether a dual class is allowed 
or not or how it may be limited. We look to the State law to 
see whether these are allowed.
    But if they are allowed, we are then focused on disclosure. 
Our jurisdiction in this area has been limited by case law and 
by the statutory structure.
    Mr. Meeks. So, you don't believe that the SEC has any plans 
for considering and/or adopting the recommendations?
    Mr. Hinman. Again, what we can do is focus on the 
disclosure. Because it is case law, that has limited our 
ability to legislate one share one vote. That was done many 
years ago in a business roundtable case which the SEC did not 
prevail on.
    We see our focus now as one of disclosure.
    Mr. Meeks. Let me jump to the other issue in my last 2 
minutes.
    Earlier this year, New York's controller announced that the 
State's pension fund would oppose reelection of all directors 
of boards that lacked women representation.
    New York was unable to make a similar action with respect 
to boards that lacked racial or ethnic diversity, because the 
SEC's board diversity rule has not yielded robust disclosures. 
This has been a constant problem and complaint of my office and 
investors that we have talked to nationwide.
    In October, when Chairman Clayton was here, we asked 
whether or not the agency would adopt the proposal from the 
SEC's Advisory Committee on small and emerging companies that 
requires companies to specifically list their race, gender, and 
ethnicity of their board members.
    Chairman Clayton made no commitments to adopt these 
recommendations. Merely stated that the Division of Corporation 
Finance, your division, will monitor compliance with the 
current rules.
    So, what has been your division's assessment of compliance 
with the agency's board diversity rule? Have diversity 
disclosures been adequate, considering shareholder demands for 
more information? Will the Division of Corporation Finance 
eventually provide a public recommendation to the SEC on 
whether it should adopt proposals to improve the rule?
    Mr. Hinman. To start with your last question, the answer 
would be, yes, we will. It is on the Chairman's rulemaking 
agenda. This is a topic that both he and I view as highly 
important.
    The old policy in this space has been subject to some 
criticism that it doesn't get enough useful disclosure. Our 
division has been looking at how that policy has been complied 
with.
    Some companies, notwithstanding the fact that the 
disclosure doesn't require specific items, such as gender, 
race, or ethnicity, to be disclosed, had been providing that 
disclosure. Sometimes in graphic forms, tables.
    We have been looking at how people are approaching the 
issue. We have talked to some of those issuers to find out what 
has their experience been in preparing those kinds of 
disclosures?
    One thing that we have discovered is that there is some 
sensitivity to their board members' privacy issues, in terms of 
self-identifying on some of these topics. So, we would want to 
take that into account as we develop any new rules here.
    But we are gathering information on this. It is on the 
rulemaking agenda. It is important to both myself and the 
Chairman.
    Mr. Meeks. Thank you very much.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the gentleman from Maine, Mr. Poliquin, is 
recognized for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman, very much. Thank you 
very much, Mr. Hinman, for being here.
    I represent rural Maine. We have a huge Congressional 
district geographically with lots of hard-working folks and 
small savers with 401Ks and IRAs and 529 plans for their kids 
to go to school and to plan for their own retirement.
    So, I am very concerned about small savers and small 
investors in Maine and throughout America, Mr. Hinman.
    Now, there is a bill that I originated called--well it is 
1312, H.R. 1312, which deals with the annual government 
business forum that you folks host every year.
    You get together and you get all these great ideas from 
folks on the public side and the private side, to see if there 
are ways that we can improve the enhancement of capital 
formation in our economy.
    The bill, sir, which is included in Mr. Crapo's bill over 
in the Senate, simply requires the SEC to make sure they take a 
look at every recommendation, evaluate them and act upon them.
    Are you familiar with that bill, sir?
    Mr. Hinman. I have heard of it, yes.
    Mr. Poliquin. OK. Do you, right now, go through the process 
of making sure the recommendations from that annual business 
forum are evaluated by the SEC?
    Mr. Hinman. Certainly. I personally participated in that 
forum in Texas this year. We see the reports, my staff in the 
small business office receives that and helps compile it and 
helps to get it out. We take all the recommendations under 
consideration. We are always looking for good ideas.
    Mr. Poliquin. That is great.
    Since you have personal knowledge of this, Mr. Hinman, I 
appreciate that very much.
    We just want to make sure that folks that go through the 
effort, like you in your former life, do not let these 
recommendations which could help our economy grow and thrive 
and companies raise more capital.
    They just don't sit on the shelf somewhere, but they are 
actually evaluated and looked at. Make sure that that 
information is useful to everybody.
    OK. I would like to move on a little bit to data security 
here, sir.
    On Tuesday, the former Yahoo company paid about $35 million 
in a penalty because you folks determined they misled 
investors, when it comes to a hacking that took place that 
disclosed the personal data of hundreds of millions of accounts 
around the world.
    Are you comfortable that the SEC has the metrics in place 
such that public companies know, in fact, when they should 
disclose material events like this?
    Mr. Hinman. We do think we have given very good guidance in 
this space. We don't use bright line metrics, in part because 
those bright lines sometimes will result in over-inclusive 
disclosures or under-inclusive.
    If someone is on one side, it still might be material to an 
investor. But they would say, oh, we didn't have to disclose 
because we didn't meet the metric. We don't want to flood the 
market with things that are just noise.
    So, the bright line tests don't seem to work that well in 
this space. We have used, basically, principle based guidance 
and have elaborated on that in a 30-page Commission-level 
guidance document most recently.
    Mr. Poliquin. I just want to make sure that you folks are 
giving every due consideration for investors, small investors, 
who have taken a position in a company.
    Then, at the same time, making sure that you don't overly 
burden companies with this. So, it seems like you are moving 
down that path.
    On a third issue, quickly, sir, if I may, is that there 
seems to be, over the years, the threshold for small groups of 
political activists to take $2,000 positions in companies in 
order to push a specific agenda at a shareholder annual 
meeting, is something that is a concern to companies that are 
thinking about going public.
    I wonder if you have any input on that. I know the number 
of companies that have gone public over the years has dropped 
precipitously.
    Also, I notice that Mr. Clayton, in his speech last 
November, said he had a concern about this threshold.
    Do you have any feelings at the SEC where those thresholds 
may or may not be adjusted to make sure folks do have a voice, 
if they own part of a public company? But, at the same time, is 
not so disruptive and costly for the company, that they hurt 
small investors who actually bought shares in the company also.
    Mr. Hinman. We are certainly looking at the right balance 
there. You point out the issues in terms of that you want to 
make sure that shareholders still are able to have a voice, and 
you don't want to overburden a company with trivia.
    Those thresholds haven't been looked at in quite some time. 
I mentioned earlier today that we do have an interest in 
looking at that.
    The Chairman is going to be seeking more comment in the 
space. He has, as he mentioned in the speech, expressed 
interest here. I expect that will continue.
    Mr. Poliquin. Great, thank you.
    With indulgence, Mr. Chairman, please.
    The State of Maine, Mr. Hinman, has a 2.6 percent 
unemployment rate. I think it is the lowest in the country. 
Clearly, lower taxes for our families and small businesses. It 
is having a dramatic effect.
    I know you folks are responsible for making sure public 
companies disclose this good news of more growth and more 
hiring and for their companies.
    Are you comfortable where there is a right balance between 
making sure they report this great news to their shareholders, 
but, at the same time, not overburdening them with the more 
costly regulations that would be hurtful?
    Mr. Hinman. We are very focused on that.
    Mr. Poliquin. Thank you, sir. Thank you, Mr. Chairman.
    Chairman Huizenga. The gentleman's time has expired.
    The gentleman from Minnesota, Mr. Ellison, is recognized 
for 5 minutes.
    Mr. Ellison. Thank you, sir.
    Director Hinman, when do you expect to finalize the 
Executive Compensation Rule, Section 953(a), which requires 
companies to detail the relationship between CEO pay and 
profits?
    Mr. Hinman. That rule is on the Chairman's agenda. We don't 
have a date certain. There isn't in the statute, unlike some of 
the other Dodd-Frank provisions, a mandated date.
    He has indicated he wants to go through all the executive 
compensation rules of Dodd-Frank in order. That is one we will 
get to. But he hasn't set a date for us, yet.
    Mr. Ellison. When do you expect to finalize the clawback 
rule so that CEOs who jack up their incentive pay to increase 
profits only to have those profits paying, have their incentive 
pay clawback?
    Mr. Hinman. That is part of that package, so it would be 
the same approach.
    Mr. Ellison. Any date on that? You can give us a range, 
like next year, like next month? I understand you may not know 
the exact date. But if you can give us some sense because the 
public would like to know, my constituents want to know.
    Mr. Hinman. Right. I would say it would not be in this 
fiscal year. The short-term agenda is pretty packed. We are 
trying to achieve everything that is on there.
    I would think it would be some time after this fiscal year.
    Mr. Ellison. When do you think you will finalize the 
incentive-based compensation guidelines for our large financial 
institutions?
    Mr. Hinman. That is part of that package of three 
compensation-related initiatives. It fits into that same 
category. I think the Chairman wants to look at those together 
and take them in order.
    Mr. Ellison. OK. Do you think they will come all out 
together at the same time or you don't know?
    Mr. Hinman. I think he will likely ask us to do these in 
sequential order.
    Mr. Ellison. OK.
    Mr. Hinman. That is up to the Chairman. I haven't heard 
what the order would be or whether there would be a possibility 
of soliciting comment collectively.
    Mr. Ellison. All right.
    I just want to give you a little context for my question. 
One of the lessons that I think we have learned from the great 
recession just 10 years ago, which I still remember very well, 
is that CEO pay incentives were actually encouraging--CEOs to 
encourage, engage in activity, I think put a premium on risk-
taking.
    If we had a better incentive structure, more risk 
assessment, create an oversight at the corporate level, we may 
not have engaged in some of the things that really hit our 
economy hard.
    So, when pay is tied to short-term profits, CEOs will take 
risks that prioritize quick returns. When Congress rolled Dodd-
Frank, Congress included a number of provisions to ensure CEO 
pay was no longer promoting excessive risk-taking.
    The SEC is charged with propagating the rules here. It has 
been 8 years since Dodd-Frank, and we still have the final 
rules.
    I am not blaming you, personally. But I think that it has 
been plenty enough time. I am disappointed to hear that we are 
not going to be having those rules in this fiscal year. I think 
that there has been more than ample time.
    By the way, the delay has been costly. We have seen some 
serious banking crises that could have been avoided, in part 
with better CEO pay regulations.
    Look at Wells Fargo, for example. They were trying to pump 
up profits every quarter by creating fake accounts. I know a 
lot of workers got fired by the people who directed and 
designed the program. I think the CEO got away with a $173 
million severance package or something like that.
    Anyway, New York State controller, Thomas DiNapoli, sent a 
letter to Wells Fargo shareholders last week, in advance of 
their annual meeting, asking for Wells to disclose their 
payments in the policies.
    I will tell you what he said in that letter. He said, 
incentive pay practices have been identified as contributing to 
the multiple crises at Wells Fargo.
    Investors need to know whether the company is taking steps 
to identify employees' incentive-based compensation. It could 
spur conduct. It puts the bank, its customers, and investors at 
risk.
    I will say, the economy, if widespread enough. I don't 
believe in beating up our witnesses unless they have it coming. 
I don't think you do.
    But I will say, I hope you take back to the people you work 
with that 8 years is plenty enough. This is a serious thing. It 
is the law. It has to get handled quickly.
    I don't think the American people can afford to wait much 
longer. I think, until these rules are finalized, CEOs are 
still getting pay packages that misalign their shareholders 
with their own compensation. I don't think that is right.
    So, thank you.
    Chairman Huizenga. The gentleman's time has expired.
    The gentleman from Indiana, Mr. Hollingsworth, is 
recognized for 5 minutes.
    Mr. Hollingsworth. Good morning. I really appreciate you 
being here.
    I will be brief. I want to focus on a very narrow topic 
that is really important to me, and important to constituents 
back home, and, frankly, important to America as a whole.
    It really has to do with some of our emerging growth 
companies, and specifically those involved in biotech. The 
economists can tongue in cheek remark that all is required for 
one to get a drug approved in this country is superhuman 
persistence over 10 years and $2 billion.
    Many of these companies are very early stage. Many of these 
companies are very small, in terms of the number of employees, 
even if their market cap is relatively large. Just waiting on 
approval of drugs, waiting on approvals to be able to get 
through the process.
    One of the things I continue to hear from them is concern 
about 404(b) compliance and the cost of 404(b) compliance.
    We have heard testimony in this very room about companies 
that are on the cutting edge of new technology. Cutting edge of 
new biology and be able to finally cure diseases that ail 
millions of Americans. But are spending more and more of those 
dollars that they have raised on compliance instead of the 
search for cures.
    I know that a 2011 SEC study noted that those companies 
with a public float between 75 million and 250 million, spend 
on average, $840,000 a year on compliance with 404.
    Really, what I wanted to ask you was if there is any look 
at the cost of 404(b) on very, very small companies that are 
public, and the benefits of 404(b) for those very small 
companies that are public. Whether we can better align those 
two to ensure that we are enabling and empowering them to do 
more of what they do best, serve their customers research 
technology development products instead of more and more 
compliance.
    Mr. Hinman. Thank you for the question.
    We are looking at that very carefully. As I think you 
probably know, today, we draw the line at $75 million market 
cap, right below that 404(b) attestation is not required.
    We are doing some things, scaling disclosures up to the 
$250 million market cap. That is something where the SEC, in a 
proposed rule, decided we would not move the 404(b). We 
suggested we would not move the 404(b) threshold along with the 
rest of those requirements.
    We are taking a fresh look at that. The life science 
industry, as you mentioned, makes a fair point that this is 
costly for them. They have lots of terrific ways to spend 
money.
    At the same time, we want to protect investors. We want to 
have, perhaps, a more sophisticated test in this area. So, we 
want to adjust that market cap.
    We also might look at revenues. If you are a low-revenue 
company but a higher-market cap, you probably have some 
promising product in the pipeline. You don't have the revenues, 
but people value you highly.
    You probably also have a simpler set of financial 
statements. Where the requirement is to do a full attestation, 
maybe that is not money well spent.
    We haven't analyzed that yet. In terms of looking--having 
DERA look at it. Is there a better way to draw the lines here? 
That is something we are quite interested in doing. Your life 
science industry colleagues have suggested that we do that, and 
I think that is a good idea.
    Mr. Hollingsworth. Mr. Hinman, you have stolen all of my 
thunder because that is exactly where I was going, in the hope 
that we would have a more sophisticated test.
    Some of these biotech companies have a billion dollars in 
float, but they have seven employees and they are outsourcing 
their drug trial process. This is expensive to go through.
    We heard some testimony from individuals that were in that 
same camp. We earn $10 million a year from licensing a few 
things. But we have a billion-dollar float while we wait to go 
through this process.
    We certainly don't believe that we should be held to the 
same levels as a larger, more operating entity with many more 
employees, many more moving parts, many more subsidiaries, et 
cetera.
    So, I really appreciate the fact that you brought that up 
and want to look at a more sophisticated and thorough test to 
better understand what companies can benefit.
    Just one last point, since you stole most of my thunder in 
the middle here, is nothing that you would do, I imagine, would 
say you are absolutely barred and restricted from getting any 
404(b) to any of these companies.
    If they elected to say, look, it lowers our equity cost of 
capital, if we underwent a 404(b) audit attestation. They could 
still pursue that if they wanted to at any level.
    Mr. Hinman. You are absolutely right and some companies do 
that.
    Mr. Hollingsworth. The reality is they can make that as a 
business decision.
    As you well said, and have said on many occasions, 
disclosure can benefit companies as well and ensuring investors 
feel more comfortable with the asset that they own and lowering 
their equity cost of capital.
    I don't think anything I propose, anything that this 
committee has voted on, anything that I have heard from other 
testimonies says, we should bar companies from doing this at 
any size.
    But, instead, let us make it up to those companies to 
determine whether it is in their best interest, their 
investors' best interest, their products best interest to do 
this or whether it is not at a certain level or not.
    So, thank you for being here. Thank you for your testimony 
today.
    Mr. Hinman. Thank you.
    Chairman Huizenga. The gentleman yields back.
    With that, the Chair recognizes the gentleman from Ohio, 
Mr. Davidson, for 5 minutes.
    Mr. Davidson. Thank you, Chairman. Mr. Hinman, Director 
Hinman, thank you for your testimony today.
    I want to return to the topic of initial coin offerings. I 
want to focus particularly on the Howey Test.
    The Howey Test is used to determine whether an asset is 
classified as a security and, therefore, subject to Federal 
securities laws. The test was developed by the 1946 Supreme 
Court case SEC versus W.J. Howey Company.
    Do you believe the Howey Test should be--is it adequate for 
application for crypto currencies?
    Mr. Hinman. I think the principles annunciated there are 
still solid principles, in terms of the factors one would weigh 
to see if an investment contract could be viewed as a security.
    Mr. Davidson. Do you believe that it should be updated or 
changed to better incorporate what is, in fact, a security?
    Mr. Hinman. Again, I do think the basic principles there 
are the investor giving money or some consideration to a third 
party to have an enterprise take that money and generate a 
return? That feels, to me, like those are pretty flexible and 
sound hallmarks of how to judge whether an instrument is a 
security.
    Mr. Davidson. As you were speaking with Chairman Huizenga 
earlier, you know, a little concerned by the idea that the SEC 
would inherently be involved in an ICO. But you left some 
latitude to say that, perhaps, it wouldn't meet.
    When you look at the criteria. There is an investment of 
money. There is an expectation of profits. The investment of 
money is in a common enterprise and any profits come from the 
efforts of a promoter or third party.
    Some of those offerings of coins, as disclosed currently in 
white papers, are, really, almost like prepaid cards. They are 
not really securities.
    In some cases, they are assets for sure. But is it a 
security? Is it a commodity? As some migrate, is it, really, 
even a currency?
    I am encouraged by the work of FSOC to try to bridge that 
understanding. Our office is working to help provide clarity as 
to where those lines should be drawn. Because there isn't 
clarity in law or it has certainly been tested.
    In one of the ways it has been tested is with SAFTs which 
is--let me get the correct piece of this acronym. Are you 
familiar with this acronym?
    Mr. Hinman. I am, a Simple Agreement for a Future Token.
    Mr. Davidson. Right, there you go. So, this is a--because 
there is no guarantee that there are future profits to the 
holder of the token. The token would simply be able to be 
traded at some point.
    Currently, the investment wouldn't necessarily have a lot 
of value. But at some point it may and then, therefore the 
token, even in the early stages, would be able to be exchanged.
    What is your assessment of the path on SAFT?
    Mr. Hinman. The number of folks who have tried to raise 
funds through the SAFT technique have an interesting idea. They 
say that they will eventually have a network on which this 
token may be used. If that network is developed, the token may 
have more value than it does on day 1.
    People who are buying into those agreements are hoping that 
that happens, that those developers and other parties are 
actually able to do that.
    So, you have all the hallmarks there. You have, I am 
getting money to the person who is getting me the SAFT. I hope 
that they will develop this network and that it will have more 
value and give me a return.
    So, in early days, before that network exists and before 
that token has real utility, it probably is a security.
    In theory, there may be a time when the people, the 
developers go away. What you have is a token that can be used. 
To use your Howey analogy.
    In the Howey case, you had a developer putting together 
this orange grove, tending to it and making it work and selling 
interest in it.
    The court viewed that as an investment contract, because 
this developer knew how this was going to progress. He had more 
information about it than the people he was selling the 
contract to.
    Someday, in theory, he could have gone away. People could 
have come in and tended to their groves themselves or parties 
that participate in these decentralized networks, their 
equivalent could have tended to the grove and those oranges 
probably wouldn't be securities.
    I think that analogy somewhat works to say, at some point, 
you may have a token that doesn't represent investment in the 
efforts of others. In this case, the Howey Hill Service--
    Mr. Davidson. Thank you.
    As my time winds down, I would just say there is a clear 
distinction there between jurisdiction in the SEC and the 
commodities future trading Commission, I am glad FSOC is paying 
attention to it as is our office. As you can tell, as is our 
committee.
    So, I look forward to future collaboration.
    My time has expired and I yield.
    Chairman Huizenga. The gentleman's time has expired.
    Seeing now there are members on the other side, we will go 
to Mr. Hill of Arkansas for 5 minutes.
    Mr. Hill. Thank you, Chairman. I appreciate you testifying 
today. Glad to have you before the panel and also glad that you 
bring your years of private-sector experience and transactions 
to the division. That is an important skillset. So, I 
appreciate your public service.
    In my nonpublic service, a lot of that time was spent 
raising money for startup businesses and growth enterprises. 
Frequently, that used the Reg D exemption for raising those 
dollars.
    A couple of things. On the issue of the definition of 
accredited investor, I see in your testimony, the division is 
considering recommending to the Commission proposed amendments 
to expand the definition of accredited investor. So, I commend 
you for that.
    One of the most frequent frustrations, I think, in normal 
506 Reg D-type offerings was that you could offer it to the 
accredited investors and no more than 30, or whatever the 
number was, nonaccredited investors.
    But in point of fact, due to potential liability, very few 
lawyers would allow their client to offer to so many 
nonaccredited investors.
    What I found time and time again, it is the inventor. It is 
the scientist. It is the person with the PhD. It is a CPA. It 
is somebody with a CFA. It is somebody who is a registered 
broker dealer. Who wants to participate in the Reg D offering. 
They certainly have the knowledge to do that, but they are 
excluded due to the net worth test or income test.
    So, is one of the things you are considering expanding the 
definition for professional qualifications or expertise in a 
particular area?
    Mr. Hinman. It is. That expansion of the accredited 
investor definition, updating it to include folks who may be 
sophisticated but not meet financial tests. It is certainly 
under consideration as one of the items that the Small Business 
Forum observed as well.
    As I mentioned earlier, we take those comments seriously.
    Mr. Hill. Right.
    Mr. Hinman. That is something we will be considering.
    Mr. Hill. We have a lot of bipartisan support for that. I 
appreciate Mr. Schweikert of Arizona being one of the leaders 
in the House on that topic.
    My colleague from Indiana was talking about 404, and I 
really encourage you to--after the decade or so post-Sarbanes-
Oxley.
    But, really, the Commission thinks differently about it. We 
impose this internal control or regime that only maybe a 
financial institution would have on every public enterprise, 
regardless of business model and regardless of size with the 
small cap exemption that you noted.
    Really, I would love to see an economic cost benefit 
analysis of who has benefited from that.
    The purpose of it was that Arthur Andersen and Enron were 
running a black box. The transparent internal control process 
was bypassed and the shareholders couldn't determine what was 
happening.
    And, yet, 404 was fully present during AIG, I am sure. Some 
would argue AIG was a black box.
    So, I really think we ought to step back and see what is 
the real benefit of this and how can it be customized by 
industry or by size of business. Because I think it has 
probably far exceeded its benefits and burdened, particularly, 
our small-cap companies.
    So, I do support expanding of the size exempt from 404.
    I think another one of our industries that has perpetually 
come to the Commission for an exemption is the small broker 
dealer industry under 404 for a separate audit.
    I wonder your views on if you would be supportive? That is 
more of a regulatory issue for the Commission, but are you 
supportive of some industries that are heavily regulated, like 
a small B.D., small broker dealer, overseen by--of the 
Commission from being exempt from 404? Permanently, although it 
has been waived many times over the last decade.
    Mr. Hinman. The application of some of these rules to the 
broker dealer community is something that the Division of 
Trading and Markets would be better suited to address.
    So, I wouldn't want to jump into their space and I hope 
they don't jump into mine.
    Mr. Hill. Thank you for that.
    You have also talked in your testimony about materiality. 
It seems like there has been real mission creep out in public 
reporting, and that we are getting beyond a materiality 
standard.
    Do you, as a--having practiced law for all these years and 
helped many, many companies navigate the public process, do you 
support a materiality standard for our public disclosures and 
not going beyond that, unless a company wants to go beyond 
that?
    Mr. Hinman. If I understand your question correctly, I 
think you are saying companies just need to disclose what is 
material and that is it.
    We do think that a number of the specific requirements that 
are qualified by materiality, but which remind registrants to 
describe parts of their business, to do certain disclosures 
with respect to their results of operations, the MD&A, all, 
again, qualified by materiality are helpful.
    We think the issuers find that helpful to have the guidance 
that gives them the sense of what are we, as the securities 
laws experts, saying might be material.
    But we do, in general, think that a materiality standard 
should be applied to disclosures generally. We have a rule that 
says even if we haven't hit something in our overall 
requirements, please tell us what is material. In practice, I 
always focus--
    Mr. Hill. Thank you.
    I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    I see no further questions. I would like to thank our 
witness today for your time and your expertise and your 
attention to this.
    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.
    I ask our witness to please respond as promptly as able. I 
know I will be sending in a question regarding--plus. I will 
just put you on notice on that one.
    Again, thank you for your time, Mr. Hinman. We appreciate 
it.
    The hearing is adjourned.
    [Whereupon, at 11:46 a.m., the subcommittee was adjourned.]

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                             April 26, 2018

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