[Senate Hearing 115-354]
[From the U.S. Government Publishing Office]


                                                     S. Hrg. 115-354


          LEGISLATIVE PROPOSALS TO INCREASE ACCESS TO CAPITAL

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                                   ON

          EXAMINING LEGISLATIVE PROPOSALS ON CAPITAL FORMATION

                               __________

                             JUNE 26, 2018

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
 
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
JERRY MORAN, Kansas                  DOUG JONES, Alabama

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                  Jonathan Gould, Deputy Chief Counsel

                 Elisha Tuku, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

                       Dawn Ratliff, Chief Clerk

                      Cameron Ricker, Deputy Clerk

                     James Guiliano, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JUNE 26, 2018

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    31

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     1

                               WITNESSES

Raymond J. Keating, Chief Economist, Small Business and 
  Entrepreneurship Council.......................................     3
    Prepared statement...........................................    31
    Responses to written questions of:
        Senator Brown............................................    73
        Senator Sasse............................................    74
        Senator Cotton...........................................    77
        Senator Rounds...........................................    78
        Senator Cortez Masto.....................................    79
Mercer E. Bullard, Butler Snow Lecturer and Professor of Law, 
  University of Mississippi School of Law........................     5
    Prepared statement...........................................    40
    Responses to written questions of:
        Senator Brown............................................    80
        Senator Sasse............................................    80
        Senator Cotton...........................................    81
        Senator Menendez.........................................    82
        Senator Cortez Masto.....................................    83
Christopher H. Daniel, Chief Investment Officer, City of 
  Albuquerque, New Mexico, on behalf of the Government Finance 
  Officers Association...........................................     6
    Prepared statement...........................................    71
    Responses to written questions of:
        Senate Banking Committee.................................    85

              Additional Material Supplied for the Record

Letters and statements submitted by Chairman Crapo...............   150
Letters and statements submitted by Senator Brown................   178
Letters submitted by Senator Toomey..............................   344
Letters submitted by Senator Scott...............................   351
Letters submitted by Senator Cotton..............................   355
Letters submitted by Senator Tillis..............................   377
Letters submitted by Senator Menendez............................   385

                                 (iii)

 
          LEGISLATIVE PROPOSALS TO INCREASE ACCESS TO CAPITAL

                              ----------                              


                         TUESDAY, JUNE 26, 2018

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. The Committee will come to order.
    Today's hearing will focus on several legislative proposals 
that will encourage capital formation and reduce burdens for 
smaller businesses and communities.
    My goal is to work with Senator Brown and other Members on 
this Committee to identify and move legislative proposals that 
achieve these aims.
    Senators Schatz, Toomey, Heitkamp, and Tillis, among 
others, have cosponsored a bill that would make it easier for 
startup companies to tap the expertise and capital of angel 
investor groups.
    Senators Toomey, Rounds, and Menendez, among others, 
introduced a bill that would provide more financing options for 
State and local governments seeking to raise money.
    Senator Tillis has introduced a bipartisan bill that 
exempts emerging growth companies from certain auditor 
attestation requirements.
    Senators Van Hollen and Tillis have cosponsored a bill that 
would encourage more public offerings by allowing all companies 
to ``test the waters'' prior to filing an IPO.
    A bill introduced by Senators Kennedy and Jones would make 
it easier for investment advisers to focus on rural business 
investment companies.
    Finally, Senators Cotton and Jones recently introduced a 
bill that will cut audit costs for noncustodial brokers.
    These bills will improve companies' access to our capital 
markets and their ability to invest in the United States, in 
turn growing and creating jobs.
    I look forward to hearing from our witnesses on these 
legislative proposals, and I now turn to Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, and welcome to our 
witnesses.
    I want to thank the Chairman for holding today's hearing 
and providing Members of this Committee the opportunity to 
discuss legislation that a number of my colleagues have worked 
on in this Congress.
    Unfortunately, some of the bills we will discuss today, and 
at Thursday's hearing, undermine investor protections and 
transparency, and they potentially create risks to financial 
stability.
    The ink is barely dry on S. 2155, the bill that rolls back 
many of the banking system protections developed following the 
financial crisis. And while Congress was working on that bill, 
the banking regulators, the newly installed banking regulators, 
many of them coming from Wall Street, began several efforts to 
weaken postcrisis safeguards. Now this Committee wants to work 
on bills that will undercut investor protections and market 
practices that have served to promote transparency. Lobbyists 
in this town just never get enough.
    Several of today's bills have their roots in the JOBS Act 
and look to make changes that will supposedly increase capital 
formation or balance the number of IPOS back to levels from the 
1990s--I am sorry, to boost the number of IPOs back to levels 
from the 1990s. I am concerned that more time is spent thinking 
about a JOBS Act 2.0 or 3.0 and finding laws that should be 
scaled back instead of trying to understand if the original 
JOBS Act actually created jobs.
    I am sure we will hear about how each of today's bills is 
vital to help small companies grow and allow investors to 
participate in that growth. What we should also talk about is 
how Congress and the SEC can do more for investor protection 
and for market stability.
    We do not spend enough time working to increase the 
public's trust in markets, but those efforts would benefit 
small companies and the jobs they create.
    Earlier this year we heard from the SEC and the CFTC that 
keeping up with virtual currencies and related fraud was a tall 
order. But we know that low-tech fraud still exists.
    Just yesterday, the Wall Street Journal reported that 
securities firms with high numbers of brokers with disciplinary 
records are selling tens of billions of dollars in private 
placements, specifically targeting seniors. We will hear more 
on Thursday about customers who are defrauded by their brokers, 
but the Journal's findings indicate a serious problem facing 
savers: the allure of deals that are just too good to be true.
    The SEC's recent settlement with Theranos shows how even 
sophisticated investors can have wool pulled over their eyes 
for years, and you read some of those names in the business 
section of the Times and the Wall Street Journal or any other 
papers, the Financial Times, and all over the last couple of 
years.
    While the SEC continues to pursue fraud cases, the fact is 
enforcement cases and related penalties are down dramatically. 
Last week I sent SEC Chair Clayton a letter expressing my 
frustrations with the recent trends in enforcement. Yesterday's 
article shows that risks to investors are increasing in these 
good economic times.
    The potential risks and potential negative consequences 
arising from today's bills are easily predictable. For example, 
a number of studies have shown that companies exempted from 
accounting requirements and auditor oversight of internal 
controls have higher rates of accounting restatements. It does 
not take a lot of imagination as to how that happens.
    Maybe if we focused on passing laws that enhance investor 
confidence instead of undermining it, if we did that, this 
would end up helping businesses, too. After all, the more 
confident investors are, the easier it is for companies to 
raise money.
    I have said before that protecting investors and 
strengthening the integrity of the markets is necessary for 
successful capital formation. And yet here we continue to 
consider bills that unwind many important safeguards, I think 
another example of collective amnesia that set in to this 
Congress. Slowly but surely, we will find that adding more 
exemptions and more carveouts has not had the desired result of 
more IPOs, but it has had a predictable result of denying 
investors key protections and eroding trust in the markets.
    I look forward to hearing from our witnesses.
    Chairman Crapo. Thank you, Senator Brown.
    Today's witnesses are Mr. Raymond J. Keating, chief 
economist of the Small Business and Entrepreneurship Council; 
Professor Mercer E. Bullard, Butler Snow Lecturer and professor 
of law at the University of Mississippi School of Law; and Mr. 
Chris Daniel, chief investment officer of the city of 
Albuquerque, New Mexico, on behalf of the Government Finance 
Officers Association.
    We welcome all of you here. As I think you have been 
advised, your written testimony has been entered into the 
record, and we encourage you each to try to be very aware of 
the clock that is in front of you. We ask you to keep your 
initial remarks to 5 minutes, if you can, and then each of the 
Senators will have a 5-minute opportunity to engage you with 
questions. And at that point you can get out a lot that you did 
not get out in your other statements.
    Also, I would ask you to recognize that the clock also runs 
on Senators, and when their questioning time is up, please try 
to bring your responses to an end promptly so we can get to the 
next Senator.
    Mr. Keating, you may proceed.

    STATEMENT OF RAYMOND J. KEATING, CHIEF ECONOMIST, SMALL 
             BUSINESS AND ENTREPRENEURSHIP COUNCIL

    Mr. Keating. Chairman Crapo and Members of the Committee, 
thank you for hosting this important hearing today on the issue 
of access to capital. My name is Raymond Keating. I serve as 
chief economist for the Small Business and Entrepreneurship 
Council, a nonprofit, nonpartisan advocacy, research, and 
education organization dedicated to protecting small business 
and promoting entrepreneurship.
    Throughout SBE Council's history, access to financial 
capital has been a core issue as it stands out as a 
foundational matter for entrepreneurs who are starting up, 
operating, or expanding businesses. However, for many 
entrepreneurs, gaining access to capital is a serious 
challenge.
    During the financial crisis, the Great Recession, and an 
underperforming recovery, capital became difficult to access 
from institutional banks and various capital market players. 
And while matters have improved in recent years, many 
entrepreneurs continue to face challenges. For example, while 
growing since the recent low hit in 2013, the value of small 
business loans outstanding remains below the high hit in 2008. 
In effect, small business loan value has experienced no growth 
for more than a decade.
    A similar trend and shortfall is seen in the number of 
small business loans with the level at the end of 2017 still 
below the 2008 level.
    On the equity side, angel investment stands out as a 
critical source for funding startups in early stage businesses, 
but here the numbers have been disappointing in recent years. 
Postrecession growth was underwhelming, and since 2014, angel 
investment has, in effect, stagnated. And while not an option 
for most startups or very young firms, venture capital 
investment is an important avenue for innovative firms to raise 
capital for growth and expansion. The trend on the venture 
capital front after the recession thankfully tends to show more 
robust growth. Finally, there has been growth in online lending 
and crowdfunding for entrepreneurs as well.
    So long after the financial crisis hit in late 2008 and the 
recession came to an official end in mid-2009, the financial 
capital story for the small business community has been mixed. 
While having recovered some, small business loans are still 
well off from where they should be. Angel investment in recent 
years largely seems stuck. Meanwhile, venture capital has 
shown, again, solid growth, while online lending and 
crowdfunding have opened new doors for many entrepreneurs 
seeking funding.
    Assorted factors contribute to these trends, including the 
underperforming recovery--excuse me, underperforming economy 
over a period of a decade and a general decline in 
entrepreneurial activity.
    Challenges among small community banks also have come into 
play given the important role that these institutions play in 
lending to small businesses. And community banking woes also 
tie back to the state of the economy, but to Government 
regulation as well, which always falls heaviest on small 
businesses.
    Reform and relief efforts to clear away obstacles and 
reduce costs for lenders, investors, entrepreneurs and small 
businesses on the financial capital front are most welcome. SBE 
Council supports most of the measure being discussed today, 
namely, the HALOS Act, the Fostering Innovation Act, the 
Encouraging Public Offerings Act, the Small Business Audit 
Correction Act, and RBIC Advisers Relief Act, along with a host 
of other reform and relief measures mentioned in my written 
testimony.
    Finally, when it comes to boosting access to capital for 
the entrepreneurial sector and thereby enhancing economic, 
income, and employment growth, SBE Council also looks in other 
areas such as taxation, and we favor, for example, reducing the 
capital gains tax and indexing gains for inflation. These 
measures, these other deregulation measures, enhance the 
returns on and incentives for investment and entrepreneurship.
    Thank you for your time and attention, and I look forward 
to your questions and further discussion.
    Chairman Crapo. Thank you.
    Professor Bullard.

   STATEMENT OF MERCER E. BULLARD, BUTLER SNOW LECTURER AND 
   PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI SCHOOL OF LAW

    Mr. Bullard. Thank you, Chairman Crapo, Ranking Member 
Brown, and Members of the Committee. It is an honor and 
privilege to appear before you again here today. I appreciate 
the opportunity.
    This hearing will address a number of bills. At the moment 
I want to focus on those that relate to capital raising by U.S. 
companies. I would like to first address the premises 
underlying these bills and a fair amount of legislation over 
the last few years.
    Capital market reforms have repeatedly been posed as 
solutions to the perceived problem of the decline in the number 
of U.S. IPOs and the number of U.S. public companies, and 
supporters often blame the decline on legislation that was 
enacted following two of the three worst downturns in U.S. 
markets since the Great Depression.
    I have significant doubts about both premises. First, it is 
not possible to make a statistically meaningful connection 
between the Sarbanes-Oxley and Dodd-Frank Acts on the one hand 
and changes in the number of IPOs in U.S. companies on the 
other. The factors are too many and too diverse. Even if one 
could establish a relationship, the relationship would 
demonstrate that each act was followed by an increase in total 
capital represented by U.S. listed companies. The gross 
proceeds from IPOs during this century have substantially 
exceeded the amount raised in preceding periods, and 2018 is on 
pace to set a new record.
    There is nothing inherently wrong with fewer IPOs and fewer 
public companies. In my opinion, these are the wrong measures. 
If Congress is concerned about the amount of capital raised in 
U.S. public markets, then it should consider the amount of 
capital raised in U.S. public markets, and in a century, the 
amount of capital raised in U.S. public markets represented by 
public companies has been a success story. The only short-term 
downturns have followed the Internet bubble and the Enron-
WorldCom scandals and the financial crisis. The upward trend in 
total capital restored after the Sarbanes-Oxley and Dodd-Frank 
Acts became law. A U.S. listing is still the preferred 
worldwide standard. Among non-U.S. companies that choose to 
list outside their home country, U.S. exchanges are the 
overwhelming favorite.
    In my opinion, capitalism is about increasing capital, not 
ensuring that regardless of the amount of capital raised, the 
capital will be more widely distributed. Capitalism is about 
the efficient allocation of capital, not ensuring that everyone 
gets a share regardless of the value of their enterprise.
    I am also concerned about the continuing salt on the 
distinction between registered and unregistered offerings on 
which the Securities Act is based. The HALOS Act would allow 
virtually any type of public entity to advertise and host a 
public event that can be attended by any person for the purpose 
of any issuer pitching an unregistered securities offering. The 
act would permit public notices that specifically advertise the 
event as a forum for marketing securities. Congress calls this 
a clarification of what does not constitute a general 
solicitation, but a general solicitation is precisely what the 
event would be.
    The HALOS Act effectively repeals offering regulation in 
the United States if that has not already occurred relative to 
the JOBS Act's permitting general solicitation and advertising 
in private offerings and $50 million Reg D offerings freed of 
State oversight.
    The effective recent legislation in bills pending today is 
to make retail investors an informational underclass. Issuers 
are allowed to file confidential registration statements while 
distributing information to large investors in road shows for 
months, with the initial public registration statement being 
made available to retail investors just 15 days before the IPO. 
Issuers can raise capital from retail investors through 
crowdfunding, interstate, and Reg A offerings based on one set 
of information while they provide additional nonpublic 
information to wealthy investors under Reg D under terms that 
may dilute retail investors' interests. If information can be 
broadly and publicly disseminated to anyone and all offerings 
are essentially public in nature, then the terms of all 
offerings should be publicly available. If all offerings are to 
be public, then all private issuers should be required to make 
certain information publicly available on an ongoing basis, 
such as the terms in which past and current offers are made to 
investors and the amount of distributions made to investors. 
Instead, issuers of unregistered securities routinely ignore 
the minimal disclosure requirements to which they are subject. 
Many if not most Reg D issuers do not file Form D, and even 
that form is only a one-time filing that provides little useful 
information.
    If ultimately any investor will be able to buy any security 
but only wealthy investors will be able to see confidential 
information and have far longer to consider an investment's 
prospects, Congress should consider what form of investor 
protection will take the place of the protections that have 
been and continue to be discarded.
    I look forward to taking your questions.
    Chairman Crapo. Thank you.
    Mr. Daniel.

 STATEMENT OF CHRISTOPHER H. DANIEL, CHIEF INVESTMENT OFFICER, 
 CITY OF ALBUQUERQUE, NEW MEXICO, ON BEHALF OF THE GOVERNMENT 
                  FINANCE OFFICERS ASSOCIATION

    Mr. Daniel. Chairman Crapo, Ranking Member Brown, and 
distinguished Members of the Committee, I am honored to be here 
today on behalf of the Government Finance Officers Association, 
GFOA, to share with you our comments in support of S. 1117, the 
Consumer Financial Choice and Capital Markets Protection Act of 
2017, and its importance to public finance. My name is Chris 
Daniel, and I am the chief investment officer for the city of 
Albuquerque, New Mexico. I also serve on the Treasury and 
Investment Management Committee of the GFOA.
    GFOA represents nearly 20,000 public finance officers from 
State and local governments, schools, and special districts 
throughout the United States. We appreciate this Committee's 
continued support for efforts to strengthen the municipal bond 
market, especially the recent enactment of legislation 
designating municipal securities as high-quality liquid assets. 
Such actions help States, local governments, and other 
governmental entities maintain access to low-cost capital, 
which is vital to infrastructure investment across the United 
States and contributes to a healthy and vibrant economy.
    Likewise, money market funds are used by Governments as our 
leading vehicle for short-term investment of public funds. The 
SEC's change of net asset value, or NAV, accounting methodology 
from stable to floating negatively impacts our ability to use 
them. S. 1117 would restore the ability of State and local 
governments to safely invest in funds that meet the parameters 
of investment policies as determined by our own State and local 
elected officials, not by the SEC.
    Let me provide the Committee with key concerns of 
Government finance officers as you consider this legislation to 
improve access to capital.
    First, money market funds are used effectively to manage 
safety and liquidity for public sector investments. According 
to Federal Reserve data, State and local governments hold over 
$190 billion of assets in money market funds. Traditionally, 
Governments have used these funds to safely invest public 
monies as dictated within an entity's own investment policy. It 
is my experience that governing bodies approve a Government's 
investment policy based on industry best practices such as the 
GFOA's and the specific needs of the entity. Most Governments 
have policies demanding that the products used in their short-
term investment portfolios have a stable NAV to maintain 
adequate levels of liquidity and safety through principal 
preservation. Requiring a floating NAV creates an unnecessary 
obstacle that has steered State and local governments into very 
low yielding U.S. Government-backed funds or other alternatives 
from what was already a safe and highly liquid market.
    Second, money market funds provide access to working 
capital to fund public services and finance infrastructure 
investment. Money market funds are key purchasers of municipal 
securities. Historically, they have been the largest purchasers 
of short-term tax-exempt debt. The original objectives of the 
floating NAV rule change were to protect investors from runs on 
money market funds, but those concerns were already effectively 
addressed with the 2010 amendments to Rule 2a-7 following the 
financial crisis. GFOA and other State and local government 
issuer groups supported those amendments.
    Despite the positive impact of the 2010 amendments, the SEC 
moved forward in adopting additional amendments to the rule in 
July 2014. Throughout that process, GFOA and public finance 
officers all over the country submitted analysis showing that a 
floating NAV would do little to deter heavy redemptions during 
a financial crisis and would instead impose substantial costs 
on State and local governments. That is exactly what happened. 
Between January 2016 and April 2018, tax-exempt money market 
fund assets under management fell by nearly 50 percent, from 
$254 billion to $135 billion, a dramatic shrinking of an 
important market for municipal debt. At the same time, 
municipalities issuing variable rate demand notes saw their 
borrowing costs increase significantly above the Federal 
Reserve's rate increases over the same period. Many State and 
local governments opted to issue higher-cost fixed-rate bonds 
because issuing variable rate debt to money market funds has 
become impractical. In both cases, higher costs are being 
shouldered by taxpayers and ratepayers.
    Public finance officers are encouraged by and support 
initiatives like S. 1117 which allow us to better serve our 
communities and provide important public services in a cost-
effective way.
    Thank you for the opportunity to speak to you today. I will 
be happy to answer any questions.
    Chairman Crapo. Thank you, Mr. Daniel. And I will start 
with you today.
    Last week Ron Crane, who is Idaho's State treasurer, wrote 
about the additional costs and reduced incomes that the SEC's 
money market and mutual fund rule is imposing on State and 
local governments. He notes that the SEC's rule has caused more 
than $1 trillion of private sector liquidity to shift away from 
funds that invest in the economic infrastructure of our 
communities and into funds that invest strictly in the U.S. 
Government debt.
    First of all, could you confirm that? And, second, can you 
talk about how S. 1117 will address those concerns?
    Mr. Daniel. Mr. Chairman, I can confirm that. State and 
local governments have a fiduciary obligation to taxpayers and 
ratepayers to preserve the public fisc. Rule 2a-7 hit local 
governments in two costly ways:
    First, by floating the NAV, our statutes and policies 
restrict investment in these instruments, and we were forced 
out of the municipal money market and prime funds into very low 
yielding U.S. Government funds.
    Second, by depleting these funds, short-term borrowing 
costs or rates on variable rate demand notes raised 
dramatically. Municipal governments like Albuquerque were 
forced into higher-cost fixed-rate debt in order to satisfy our 
working capital requirements. This solution is simply 
unsustainable.
    S. 1117 will open back up the opportunity for investment in 
these financing and investment instruments. It will put another 
tool in the toolkit, if you will, for local governments to 
invest in a safe and adequately yielding instrument while 
providing a low-cost financing mechanism for short-term 
borrowing needs. S. 1117 will permit local governments to have 
the adequate and appropriate tools for local governments, both 
and small communities alike, to invest in infrastructure and 
maintain a healthy and vibrant economy.
    Chairman Crapo. And do you think that the outcome will 
increase risk in any aspect of this sector?
    Mr. Daniel. Mr. Chairman, I do not. The 2010 amendments to 
Rule 2a-7 dramatically increased the requirements for quality, 
maturity, and the like for municipal money market funds. Since 
2010 there have been no dislocations of the capital markets 
until the SEC announced the 2014 amendments, which went into 
effect in October 2016. At that time over $1 trillion shifted 
out of prime- and tax-exempt funds to the Government funds. 
This is a market dislocation, but more important to us as 
medium and small local governments, it dried up access to 
short-term capital and caused us as investment officers to 
accept much lower return on our investments, as much as 30 
basis points, which collectively amounts to $500 million in 
investment income we had lost that could be reinvested in our 
communities for public services.
    Chairman Crapo. Well, I thank you for that.
    Mr. Keating, in your testimony you discussed trends 
regarding the availability of capital to small businesses. You 
note that small business lending has not recovered from the 
precrisis levels and angel investment has largely stagnated 
while venture capital has increased. S. 2155's commonsense 
reforms are intended to address some of this decline in small 
business lending postcrisis. What feedback have you received 
from your members about their access to capital and how it is 
impacting their ability to hire, grow, and innovate?
    Mr. Keating. Well, it depends on, again, the company, the 
industry, geographic location, and so on. But I think from what 
we have heard and from what you see in some of the polls, 
certainly small businesses are in a better position now than 
they were, say, you know, 4 or 5 years ago. However, there are 
still difficulties, and we certainly hear from members that are 
having problems in terms of getting small business loans, what 
other avenues can they go, can they go online, et cetera, et 
cetera.
    So I think that, you know, the bill that you are talking 
about that was passed and signed into law makes sense because 
it deals with--when you are talking about community banks, 
small community banks, roughly half of small business loans 
come from those institutions. So when you look at the costs 
that a whole host of--that these regulations have hit these 
banks with--and I cite a couple of studies; I can give you 
more--any movement toward reining back excessive regulatory 
burdens and costs is not only good for those small banks, but 
it is good for the small business community in general.
    Chairman Crapo. Thank you.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    I think it is important to point out that, you know, loans 
were down from 10 years ago, but up from 9 years ago as the 
economy climbed back. So it is not entirely intellectually 
honest, I do not think, to only compare to what the economy 
looked like 10 years ago, because we know we have been fighting 
back. We also know we have had economic growth every quarter, 
every month, job growth every month since the auto rescue in 
2010, and even though we had fewer jobs created in the private 
sector in 2017 than we did in previous Obama years, it is 
important to note that, I think.
    Professor Bullard, your testimony explains the incoherence 
of the capital formation policies that Congress advanced in the 
past and now seems to be considering. I would like to focus on 
the risks to investors. What happens when companies use scaled-
back auditing procedures?
    Mr. Bullard. Well, we have a lot literature on that, and it 
shows what you would expect. Companies that do not have the 
same level of auditing procedures have more restatements, but 
they also pay for it in the form of less reliable earnings, 
predictions, higher cost of private and public debt. There are 
studies that show that they have--that the auditors develop 
better information than management does internally. They also 
impose a higher standard for significant deficiencies and a 
higher standard for material misstatements. We know that the 
rate of intentional misstatements is higher for those low audit 
standards. And I think we would all understand intuitively 
obviously when you have got a cop on the watch, you are going 
to have better compliance going in, and you will detect a lot 
more miscompliance going forward. And that is what the data has 
pretty consistently shown.
    Senator Brown. So what does that mean? What are the risks 
of broadly advertising speculative early stage companies, as 
contemplated in the HALOS Act?
    Mr. Bullard. Well, we know very well not just from the Wall 
Street Journal article that came out the other day that private 
offerings have always been one of the favorites for brokers 
looking to maximize their compensation and in some cases 
committing fraud with respect to investors. And what we have 
seen over the years is the class of so-called accredited 
investors has increased exponentially. We have not really seen 
any catching up, in fact, a restriction, if anything, on the 
ability of States to enforce restrictions on offerings. And the 
key structure in the Securities Act when it was formed back in 
1933 was based on the idea of offers being regulated because, 
as a practical matter, that is really the only way to regulate 
securities offerings before they have already been sold and 
investors have lost their money.
    We have gone so far down the road through the JOBS Act that 
there really is not much left of offering regulation in that 
1930s sense, and I think that if Congress is going to continue 
down that road, it really needs to think about a different way 
of looking at securities offering regulation. If it is going to 
be democratized in the sense of any issuer, any security, any 
investor, then, you know, what I see is this growing 
informational disadvantage that retail investors have, and that 
what we need is to have broader publicization of offerings to 
make them available at the retail----
    Senator Brown. That informational disadvantage is growing, 
and HALOS and other legislation Congress might be considering 
and rules from the Administration would accelerate that?
    Mr. Bullard. Yes. It is growing the private market because 
you have Reg A filings and crowdfunding filings that are 
publicly made and filed with the SEC. And then you have 
contemporaneous Reg D offerings where the investors and the 
crowdfunding and Reg A offerings, which are the retail 
investors, have no access to that information, and particularly 
do not have access to the terms being offered. So while in 
crowdfunding, for example, the SEC is allowing issuers to sell 
something that is called a ``SAFE,'' when I think everyone in 
the rooms knows that crowdfunding securities are anything but 
safe, at the same time that issuer can offer better terms, not 
SAFEs, to Reg D investors.
    On the public front, you really have a very extreme 
informational disadvantage. We saw this in connection with the 
Facebook offering when significant information came out 9 days 
before their IPO, and broker-dealers reportedly saw their 
institutional purchase base shrink as a result, and a bigger 
piece of that pie was provided to retail investors. And what 
Congress has done is essentially formalize that process by 
allowing those institutional investors, the wealthy investors, 
to receive information typically for months while the SEC 
peruses a confidential registration statement, and then that is 
put up on the SEC's site 15 days before the offering, and that 
is the entire amount of time that retail investors have to 
review it, which is pretty strikingly contrary to the 
fundamental relationship between information and public 
offerings in the Securities Act.
    Senator Brown. Mr. Daniel, I want to ask you a question--
but my time has expired--about money market funds. I will 
submit it, and I hope you will respond to it quickly.
    Thank you.
    Chairman Crapo. Thank you.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Good morning to the 
panel. Thank you all for taking your time and making the 
investment to be here this morning.
    In 1996, the American economy peaked with over 8,000 
publicly traded company. As of today, that number is less than 
4,300, about a 50 percent drop. In 2016, we saw just 112 public 
offerings, the lowest number since the financial crisis.
    Some have suggested there is no reason to be alarmed for 
the demise of the IPO. These companies now tap private sources 
of capital, and all is well that ends well. But that may not be 
the case for those investors who are investing through their 
401(k)s. Mr. and Mrs. 401(k) are the folks that I am thinking 
about.
    Think about the lost opportunities for everyday Americans 
to create wealth if the next Boeing, Walmart, or Allstate do 
not go public, or go public later in their life cycles than 
they would have decades ago. The more expensive or burdensome 
the Government makes it for a company to go public, the less we 
will see folks take the risk. That has a negative impact on 
individual investors, retirees, and those saving for a rainy 
day.
    Mr. Keating, how has the dramatic drop in companies going 
public hurt Mr. and Mrs. 401(k)?
    Mr. Keating. Well, I think you summarized it well in terms 
of not having access to being able to invest in a whole host of 
companies, especially earlier on in the process. And I think 
when you look at--there are a whole host of things going on in 
the economy that contribute to this, you know, a recession, a 
poor recovery. We have grave concerns about the level of 
entrepreneurship in this country and why it is off.
    Senator Scott. Yes.
    Mr. Keating. So these are all factors in the equation. But 
I think also the regulatory costs, the signals, what it takes 
to go public today is very different from not that long ago, 
and I think those costs are real and significant. You know, 
again, there are studies that will back that up, and I think 
Economics 101 kind of backs it up.
    Senator Scott. How will the HALOS Act and other bills we 
are debating today reverse that trend?
    Mr. Keating. Well, I think when you go down the list, these 
are moves in a positive direction. In terms of--you know, the 
problems with regulation are multiple. You know, these efforts 
are trying to clarify regulations. They are trying to get more 
resources toward innovation and investment rather than 
unnecessary regulatory compliance, trying to streamline the 
process, for example, in terms of IPOs, reduce unnecessary 
costs, et cetera. So these are the types of move, while still 
obviously protecting investors and consumers and so on, that 
are needed to kind of bring some regulatory balance back into 
the equation.
    Senator Scott. Thank you. One last set of questions for 
you, Mr. Keating. In tax reform, it included my signature 
legislation, the Investing in Opportunity Act, the IIOA, that 
has created the opportunity zones around the country that so 
many folks were pretty excited about.
    The good news is that this legislation was championed on 
both sides of the aisle. So often we hear folks in Washington 
and other countries talk about the fact that there is no 
bipartisanship. I cannot say they are not always wrong. 
However, the IIOA is truly a bipartisan effort where folks on 
both sides of the aisle see the wisdom of bringing private 
sector capital back into the distressed communities where more 
than 50 million Americans live.
    My question to you is: Can you expand on how the capital 
gains tax deferral, which is the real motivating factor for 
folks to take a second look at those opportunity zone areas, 
how that deferral for investments made in opportunity zones 
will jump-start capital formation where it is needed the most?
    Mr. Keating. When you talk capital gains tax, you are 
talking my language. And, also, opportunity zones are--you 
know, I am an old disciple of Jack Kemp and Ronald Reagan, OK?
    Senator Scott. Yes.
    Mr. Keating. So I love the idea that the message here is 
reduce these burdens, reduce these costs, and let the private 
sector flourish. And when you are talking about capital gains, 
what is a capital gains tax? It is a tax on the return on 
entrepreneurship and investment. The more you tax it, the less 
of it you get. Economics 101. So these types of efforts like 
you are talking about with opportunity zones, other things that 
we are advocating--we regret that the overall tax reform bill 
did not reduce the capital gains tax rate. We are a big 
advocate of that. So these types of measures I think are 
crucial just to incentivize. I am economist. It is a bad 
incentive, and you want incentives for entrepreneurship and 
investment to flourish in these areas where it has not before.
    Senator Scott. I just wish we had more time. Thank you, Mr. 
Chairman.
    Chairman Crapo. Thank you.
    Senator Heitkamp.
    Senator Heitkamp. Mr. Keating, just not to belabor the 
point, there are two different perspectives on taxation of 
capital gains.
    Mr. Keating. Well, there are many perspectives.
    Senator Heitkamp. Well, I think it is difficult for someone 
like me to explain to a worker at Bobcat who puts on a shirt 
every day and gets dirty that he pays more than people living 
on trust funds. So I think it is important that we kind of talk 
about who is that person who has made these investments and 
what is their long-term contribution. I think we all want to 
give contributions to people who are actually increasing the 
productivity of this country. Unfortunately, in many cases 
capital gains--the people who are wealthy enough to have 
capital gains are the people who where the money makes the 
money and not the productivity. You know, we can get into long 
economic----
    Mr. Keating. I would like to have a chat----
    Senator Heitkamp. ----argument----
    Mr. Keating. ----sit down in your office and have a good 
chat.
    Senator Heitkamp. I do not want to take up my time. I would 
love to have that debate because I think that I do not disagree 
with the conversation you just had with Senator Scott, that 
there has got to be some way to incentivize investment and 
entrepreneurship.
    Mr. Keating. To get the productivity you are talking about.
    Senator Heitkamp. I might argue that one of the reasons why 
you see a decline is the increasing interest rates and burden 
put on young entrepreneurs by the challenges that they have, 
which includes student debt.
    I want to know in your numbers, when you are looking at 
investment, which is fascinating because I think it tells a 
story that is not well understood in the American public, do we 
have a differential--have you broken it out by rural 
communities or rural counties versus urban counties?
    Mr. Keating. I have not, but others have, and I can get you 
that information.
    Senator Heitkamp. That would be great.
    Mr. Keating. The rural, that is where we are suffering in 
terms of entrepreneurship and investment, without a doubt, and 
certain inner-city communities. But those are the areas that 
are being hit hardest that are still kind of, if you will, 
stuck in the recession.
    Senator Heitkamp. What I always tell people is--I do 
something that a lot of people here do not do, which is 
represent rural America, and I know Senator Rounds and I have 
joined on a lot of this, but rural America is--if you want to 
at rural poverty, if you want to look at stagnation in growth, 
we can talk about why that is happening. But, obviously, 
investment in rural America was a bit motivator for S. 2155. We 
think that that may bring some investment back, but I think we 
need to jump-start that investment. And so I am interested in 
your perspectives, and maybe you can come in and just talk with 
me. We will have a debate.
    Mr. Keating. I would agree with that, and also things like 
broadband in rural communities, these are all vital things that 
we----
    Senator Heitkamp. Right. We are going to debate a farm bill 
that has rural economic development.
    I want to turn to money market reforms in S. 1117. Mr. 
Daniel, I was taken by your analysis of what the SEC rules have 
cost State and local entities that live off investment income, 
and, you know, obviously the SEC has disagreed. That has long 
been the debate here. And I am wondering, when the SEC adopted 
the floating NAV rule in 2014, their analysis suggested that 
the impact on the market would be minimal. They just did not 
see that that would have a big impact. And I think you are 
arguing the market has moved since implementation of this rule 
and left some people behind that they did not think would be 
left behind, right?
    Mr. Daniel. Senator Heitkamp, that is correct. At the city 
of Albuquerque, like many of our medium- and small-size peers, 
we provide a plethora of services. We provide airport services, 
refuse, transit, cultural services, family and community 
services, and a host of other things, and some of our peers 
provide even more than that. We as finance officers consider 
ourselves enablers of those types of services.
    With capital being limited, it is vital for us to be able 
to gain as much safe investment income and to be able to 
finance through short-term debt offerings at as low a rate as 
possible to help finance these services. What has happened is 
that the decreased income from us having to shift into 
Government funds for investments by 25 basis points or more and 
the increased cost of us having to move to fixed-rate debt has 
squeezed our ability to fund these types of services.
    Senator Heitkamp. Are there other factors in this shift 
when you analyze what that--when you look at it, obviously, 
there is a concern that we have in this Committee or we would 
not be hearing this bill, to analyze this. But have you seen 
other factors that may have driven that shift like tax reform, 
like----
    Mr. Daniel. Senator Heitkamp, from my perspective the cause 
is primarily from the floating NAV rule. The 2010 amendments to 
Rule 2a-7, as stated previously, provided higher quality, lower 
maturity, and the ability to stabilize money market funds. From 
2008 until 2016, when these amendments went into effect, the 
industry was very stable. The prime funds which we were 
investing in, we consider a very safe vehicle for public funds 
investment. And so with us not having access to those, it has 
really squeezed our ability to provide public services and 
infrastructure.
    Senator Heitkamp. Obviously, we want to be good partners 
with State and local government, want to better understand this 
issue, and so thank you so much for your testimony, thank you 
all for appearing on these bills.
    And thank you, Mr. Chairman and Ranking Member, for holding 
this hearing.
    Senator Brown [presiding]. Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman. I want to thank 
Senator Rounds and Senator Toomey for letting me jump the line 
here. I have got to go preside.
    Professor Bullard, I listened to your testimony very 
carefully and was very impressed. Let me ask you sort of a 
30,000-foot question. Do you think most Americans who work in 
the financial services industry cheat their customers?
    Mr. Bullard. No, I do not think so.
    Senator Kennedy. But some do?
    Mr. Bullard. Absolutely.
    Senator Kennedy. So our job is to try to draft legislation 
to catch the cheaters and prohibit them from cheating while at 
the same time not undermining the work that the honest people 
do in financial services which is vital to our free enterprise 
system. Is that about it?
    Mr. Bullard. I agree.
    Senator Kennedy. OK. Mr. Keating, let me ask you a quick 
question about SBICs and rural investment companies. You know 
what an SBIC is, obviously.
    Mr. Keating. Yes.
    Senator Kennedy. It provides capital to small businesses, 
often in suburban and rural areas, regulated by SBA. We also 
have an investment vehicle called ``rural business investment 
companies,'' do we not?
    Mr. Keating. Yes.
    Senator Kennedy. Regulated by USDA.
    Mr. Keating. I believe so, yes.
    Senator Kennedy. Dodd-Frank Act regulated both SBICs and 
RBICs. Is that right?
    Mr. Keating. Yeah.
    Senator Kennedy. In 2015, Senator Kirk and Senator Manchin, 
with President Obama's support, passed a law by the name of--
well, I do not have it here now, but it is--here it is--no, it 
is not. Its purpose was to give some relief to the SBIC 
advisers, right?
    Mr. Keating. Yes.
    Senator Kennedy. But they did not include RBICs. Why was 
that?
    Mr. Keating. I do not know because it would seem like it 
would be a natural coupling.
    Senator Kennedy. Well, Senator Jones and I have a bill. It 
is called the ``Rural Business Investment Company Advisers 
Relief Act of 2018'', and basically it would say that we are 
going to treat advisers to SBICs, which were given some relief 
by President Obama in 2015, the same as the financial advisers 
to these RBICs because both advisers are kind of small-time. 
What do you think about that bill?
    Mr. Keating. This is one of the bills that we support here. 
The SBE Council has stated its support, and it makes perfect 
sense in terms of providing basic relief from unnecessary costs 
and burdens that these regulations should not apply to these 
small folks.
    Senator Kennedy. And I want to thank Senator Jones for all 
his hard work on this bill. If our bill passes, it is not going 
to do anything to preclude or prohibit the requirement of 
registration by most advisers to private equity funds, is it?
    Mr. Keating. As far as I know, no.
    Senator Kennedy. OK. We are just carving a little bitty 
small niche for advisers to these rural investment funds, and 
we are treating them the same way that President Obama and 
Senator Manchin and Senator Kirk and the entire U.S. Congress 
treated the advisers to the SBICs in 2015. Is that right?
    Mr. Keating. Correct.
    Senator Kennedy. OK. Have you got any other thoughts about 
this wonderful piece of legislation?
    [Laughter.]
    Mr. Keating. Well, I would echo that it is a wonderful 
piece of legislation. It goes along with what our emphasis at 
SBE Council is; let us make regulation rational across the 
board, and let us not place excessive undue burdens on small 
businesses, including rural investment advisers.
    Senator Kennedy. And I agree with you, but it is also about 
equal treatment, is it not?
    Mr. Keating. Yeah, well, I mean, that is----
    Senator Kennedy. If you and I are in similarly situated 
circumstances, the law ought to treat us the same.
    Mr. Keating. You are absolutely right, and that is one of 
those unfortunate things when you get into regulation and 
politics, that you and I might sit here and say, well, why was 
the rural community left out here, and, you know, that is one 
of those things that we economists would go back to public 
choice theory and say, well, who was lobbying and who was doing 
this and who was doing that, unfortunately. So I think equal 
treatment across the board where it makes sense here is 
perfectly logical.
    Senator Kennedy. OK. I found the name of the bill. It is 
called the ``SBIC Advisers Relief Act''. My staff had it right 
here all the time.
    Thank you, Mr. Chairman.
    Senator Brown. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    As a former mayor, one of my primary concerns on this 
Committee has been ensuring access to capital for New Jersey's 
towns and cities, particularly to ensure that there are liquid 
capital markets to help finance infrastructure and economic 
development projects all across the State. And when communities 
in New Jersey thrive, the Nation thrives. New Jersey and other 
States in the Northeast corridor contribute nearly $4 trillion, 
or 20 percent of the entire Nation's GDP. Over the last several 
years, I have heard from officials all across New Jersey with 
concerns about their access to capital, funding that they 
depend on to get the lowest-cost financing for public 
infrastructure projects, affordable housing properties, 
schools, hospitals.
    Money market funds are important to municipal governments 
for two primary reasons: one, they serve as a major source of 
investment in municipal debt, helping to finance key projects; 
and, second, local governments utilize money market funds 
themselves as both an investment and cash management option 
because of their safety and simplicity.
    The SEC's new rules requiring certain money market funds to 
change the way in which they report their net asset value has 
led to both a decreased demand for municipal debt by certain 
funds and in turn higher borrowing costs, as well as serving to 
limit the utility of a key investment vehicle for State and 
local governments. And in response to the concerns that I have 
heard from New Jersey's Association of County Administrators, 
the mayors, for example, of my State's two biggest cities, 
Newark and Jersey City, among others, I cosponsored Senator 
Toomey's legislation. Our legislation would both preserve money 
market funds as a source of liquidity and capital to meet the 
public infrastructure and investment needs of New Jersey's 
communities, and it will preserve money market funds as an 
important cash management tool for State and local officials. 
So that is the focus in which I come to this particular 
legislation with.
    So let me ask, Mr. Daniel, can you walk us through how the 
SEC's new rule has increased municipal borrowing costs and how 
those increased costs affect local government public 
infrastructure, housing, education, health projects, for 
example?
    Mr. Daniel. Senator Menendez, I would be happy to. The new 
rule has shifted investment in money market funds to Government 
funds and away from prime- and tax-exempt funds. This decreased 
demand for tax-exempt floating rate debt has forced Governments 
to either increase rates on these debt offerings, which still 
may not attract demand due to the floating NAV, or try to 
access higher-cost alternative financing. In either case, cost 
to taxpayers and ratepayers increases because expenditures in 
infrastructure, housing, education, and health projects may 
suffer diminishment.
    Senator Menendez. Let me ask you this: Do those increased 
borrowing costs remain even when controlling for the current 
interest rate environment?
    Mr. Daniel. Senator Menendez, yes, increases in the Fed 
funds rate and other money market rates necessarily rise 
concurrently, although not in tandem. Nonetheless, capital will 
still flow from floating NAV instruments, causing Government 
borrowers like ourselves to raise our issuance yields and 
borrowing costs or seek out other higher-cost financing.
    Senator Menendez. For those municipal borrowers who can no 
longer rely on money market funds as a stable source of 
capital, where are they going to fund their projects?
    Mr. Daniel. Senator Menendez, we will be forced either to 
issue higher fixed-cost bonds, which creates an asset/liability 
imbalance, or access bank capital. The problem with that is 
that we are often crowded out of low-cost bank financing. So it 
is vital that this floating NAV rule be reversed so that we can 
invest our funds at higher rates and have access to the tax-
exempt floating rate debt market.
    Senator Menendez. From a New Jersey perspective, according 
to one estimate, we have lost $2.7 billion in financing from 
certain money market funds. Financing infrastructure projects 
in New Jersey is a top priority, and this is one of our 
challenges.
    Do you think that investors who have left the municipal 
money market funds would come back to the funds if those funds 
were able to again report a fixed net asset value?
    Mr. Daniel. Senator Menendez, absolutely. Over $1.2 
trillion float out of prime- and tax-exempt funds to Government 
funds, beginning with the announcement of the 2014 amendments 
to Rule 2a-7, even before it went into effect in October 2016. 
And most of that money has not come back.
    As an investment officer for a medium-size public entity, I 
feel absolutely that investment will come back to prime funds 
because we consider them a safe vehicle for investment and tax-
exempt funds because we would consider ourselves investors in 
public infrastructure and public services.
    Senator Menendez. All right. Thank you very much.
    Senator Brown. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman--well, Mr. Ranking 
Member. I am glad we are having this hearing today. This is an 
important opportunity to continue the work this Committee has 
been doing, and I want to specifically encourage support for 
two bills that I have introduced with colleagues here. One is 
the HALOS Act, which is S. 588, and the other is the Consumer 
Financial Choice and Capital Markets Protection Act, which we 
have been discussing.
    Very briefly, on the HALOS Act, I would just stress this is 
a bipartisan bill. Senators Murphy, Thune, Schatz, and Heitkamp 
as well as myself are cosponsor of this bill. It is a narrow 
fix related to the demo days and their treatment under the JOBS 
Act. Demo days, as I think we all understand, these are events 
that are sponsored often by universities or economic 
development officials, often to which angel investors are 
invited. Entrepreneurs make a broad pitch about an idea or a 
company, and these demo days existed for decades prior to the 
passage of the JOBS Act, and they were never considered general 
solicitations. It was only after the JOBS Act that the SEC 
decided to treat demo days as general solicitations. So this is 
a very narrowly tailored bill. It makes it clear that demo days 
should not be considered general solicitations. It would not 
allow nonaccredited investors to invest in nonpublic offerings, 
but what I think it would do is help entrepreneurs access 
capital and help promising businesses to grow.
    I want to spend most of my time on the Consumer Financial 
Choice and Capital Markets Protection Act. This is another 
bipartisan bill. As Senator Menendez pointed out, he and I have 
introduced this legislation together with Senators Peters and 
Rounds, and as we have discussed, it deals with the regulatory 
treatment of money market funds.
    We have heard once again what I think we all know to be 
true: Money market funds have been a critical source of short-
term financing for businesses, for States, for municipalities. 
It is attractive to issuers. But it is also attractive as a 
place to manage surplus cash for municipalities and others.
    You know, the 2008 financial crisis obviously put enormous 
stress on our financial system. Hundreds of banks failed. Money 
market funds experienced some stress, yet only one broke the 
buck, and even then investors received 99 cents on every 
dollar. And despite that, in 2010 the SEC implemented major new 
regulations meant to enhance the safety and security of money 
market funds. There were stringent liquidity requirements, 
shorter maturity requirements, and then 2014 came along, and 
with no evidence that the 2010 reforms were somehow 
inadequate--there had been no problems in the interim--
nevertheless, there was yet another wave of new regulations 
imposed on these instruments that had exhibited no problems 
whatsoever--more stress testing, diversification requirements, 
additional disclosures, and most problematic, as we have 
discussed, one category of money market funds, the 
institutional prime- and tax-exempt funds, were required for 
the first time to have what we call a ``floating net asset 
value'' to abandon the practice of over 40 years and that all 
other money market funds continue, which is to have a stable 
net asset value.
    As we have discussed, exactly as some of us predicted, well 
over $1 trillion promptly left the prime- and tax-exempt money 
market funds. The funds largely shifted to Government and 
agency funds. And the result of that, as Mr. Daniel has very 
persuasively argued, is higher cost of funds for municipalities 
and corporate borrowers, lower return on surplus cash that 
municipalities invest, and no persuasive evidence at all that 
anything has been accomplished by way of safety and soundness.
    So what our bill does is it simply allows all money market 
funds to elect to operate with a stable net asset value, as 
most can today. It would not be required, but that option would 
be available. And it waives the mandatory liquidity fee. This 
is essentially a withholding on withdrawn money that went into 
effect in 2014. All the other myriad and very extensive 
regulations imposed in 2010 and in 2014 would remain in place. 
They would still be very, very heavily regulated, but there 
would be this important change that would allow these funds to 
go back to the way things had been for 40 years.
    Mr. Daniel, here is my question for you. We have discussed 
various aspects of this. Could you just explain to us why 
having a stable net asset value is so important and why that is 
so much preferred by investors such as yourself and your 
colleagues over the floating net asset value?
    Mr. Daniel. Senator Toomey, our statutes and investment 
policies as public investment officers prohibit us from 
investing in floating NAV vehicles. They also prohibit us from 
investing in a vehicle that would have a liquidity fee 
associated with it. Therefore, we are being forced into these 
Government funds as investments.
    Would you repeat the last part of your question, please?
    Senator Toomey. That was the main gist of it. I wanted to 
understand why you find a stable NAV more appealing, and I 
think your answer is you just do not have any choice in the 
matter, right? You are restricted and required to invest in 
something that does not have a liquidity fee and something that 
has a stable net asset value.
    Mr. Daniel. Senator Toomey, that is correct. And, of 
course, we are more inclined to invest in prime funds rather 
than Government funds because of the higher yield, and we 
consider those prime funds to be very safe vehicles for 
investment.
    Senator Toomey. Thanks very much. I see my time has 
expired, Mr. Chairman. I would just remind my colleagues we 
have seen what has happened as a result of this misguided 
policy. Over $1 trillion have left the nongovernment money 
funds. Borrowing costs are higher. Returns on surplus cash are 
lower. The time has come to pass this legislation.
    Thanks, Mr. Chairman.
    Chairman Crapo [presiding]. Thank you.
    Senator Jones.
    Senator Jones. Thank you, Mr. Chairman, and thank you to 
the witnesses for your attendance here today.
    I want to kind of go back to a bill that Senator Kennedy 
talked about. Briefly, it is one that Senator Cotton and I have 
introduced concerning the small business--you know, it is the 
Small Business Audit Correction Act, and I think it is pretty 
clear that everyone on both sides of the aisle in Congress 
always take investor protection very seriously, and we should 
never take it lightly. But I also recognize that sometimes 
rules can kind of spread and have meanings that catch up small 
businesses when they were not intended. I think our bill is a 
perfect example of trying to give some relief to small 
businesses, small firms which are privately held, noncustodial 
broker-dealers who do not handle client funds, and that are in 
good standing, and going to exempt those firms from the 
rigorous PCOAB audits.
    So, first, I would like to ask you, Mr. Keating, it 
sometimes can seem like a small issue, but can you just give us 
a sense of what regulatory costs like that can mean for a small 
firm, especially, you know, a noncustodial type business?
    Mr. Keating. Well, I think in general, you are right, it 
can seem small, but when you look at this type of requirement 
and you look at other regulations, this is one of the things 
that we have to fight on a constant basis, because it is not 
just the additional costs of this regulation, but it is on top 
of everything else along the way.
    So when you look at small firms, again, they do not have, 
you know, the legal department down the hall to handle these 
types of things. You are right, they often serve as a surprise 
because that legal department is not down the hall. So there 
are a whole host of things here. It is uncertainty, it is 
costs, and ultimately it is what would you be doing with those 
resources otherwise.
    Senator Jones. Right, and it is important to note, again, 
that these are noncustodial. They do not handle client money, 
so they are not auditing any kind of money coming through like 
that.
    Mr. Keating. What is nice about all these bills that we are 
talking about that we support today is they are commonsense 
carveouts. That is why I think they are bipartisan, which is, 
again, a wonderful thing. Somebody mentioned before we do not 
see too much bipartisanship, but they are commonsense carveouts 
that small businesses certainly would----
    Senator Jones. All right. Mr. Bullard, I would like to 
follow that up with you, though, and especially in light of 
earlier comments to Ranking Member Brown about the need for 
audits, and sometimes the problems that we see when we exempt 
and carve out industries and companies from having those. I 
recognize that. As a lawyer, I have seen that all too many 
times.
    I also know that the Accounting Institute, American 
Institute of CPAs, has kind of consistently said that this 
might not be needed for these firms, but I would like to get 
your thoughts on this particular bill if you are familiar with 
it and what you think about it.
    Mr. Bullard. This is the exemption for broker without 
custody?
    Senator Jones. Yes.
    Mr. Bullard. I think that there may be other reasons--there 
are a lot of reasons why an entity might be subject to public 
accountant oversight. But if they do not have custody, that 
resolves the securities law issue. And I agree that unless 
there is some other public policy concern, there is no reason 
to require that they have a public accountant.
    Senator Jones. All right. Great. Well, thank you for that, 
and I appreciate Senator Cotton's work with me on that. And so 
let us go back to the one that Senator Kennedy talked about a 
little bit, Mr. Keating, you know, the bill on the RBIC 
Advisers Relief Act. Can you just kind of comment a little bit 
more broadly on the policy challenges for rural businesses 
looking for their capital to grow?
    Mr. Keating. Well, I cannot--yes and no. I mean, in terms 
of rural businesses in general, when you are talking about 
access to capital, which is what this is ultimately for, there 
are just far fewer options. When you look at--you know, we 
talked about banks briefly--the dropoff, dramatic, in the 
number of community banks, that has hit rural America very, 
very hard. And it is not just the dropoff in the number of 
existing banks, but there are very few banks coming in; new 
banks are not being developed.
    So all of these things come into play, and I think the 
rural community is just limited in terms of the realities of 
rural America, so why would we want to, you know, treat this 
particular issue differently in the rural community and leave 
those additional costs and burdens when we have dealt with it 
on other fronts?
    Senator Jones. Right. That is great. Well, thank you both 
for those answers. And, Mr. Chairman, I appreciate everyone 
being here. Thank you.
    Chairman Crapo. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman. First of all, let 
me say thank you to you for holding this meeting today. I think 
it is very important as we have a number of different ideas 
being discussed, that we have a public discussion like this and 
really vet it.
    I think there is an agreement among at least two of you, 
Mr. Keating and Mr. Daniel, as to the acceptability of the 
Consumer Financial Choice and Capital Markets Protection Act 
that Senator Toomey is sponsoring and I am a cosponsor of.
    Mr. Bullard, in reading your testimony, you identified 
first that when the original changes to this which was made 
back in--right after the recession, you had indicated that you 
thought that it was a mistake to have made the changes and the 
further regulations which restricted or made it more difficult 
for municipals to actually be able to access the money markets. 
But then you went through an analysis of the concerns that you 
had right now, and I think in all fairness, we have not really 
heard about those. I think this is a move in the right 
direction.
    But you had some suggestions out there about concerns that 
you felt were appropriate to lay out. Can you talk a little bit 
about these limitations or restrictions that you fear the bank 
regulators would put on that we should be aware of or that 
might very well be areas that should be addressed as well in 
other legislation? Then I am going to ask our other two members 
here their thoughts about other items that should also be 
addressed besides the bills that are here in front of us today, 
other ideas that you have that you are wondering either why we 
have not done it or that we should modify within the existing 
bills. Mr. Bullard, would you like to just talk about that for 
a minute.
    Mr. Bullard. Sure. That is correct that I testified against 
the SEC rules primarily because money market funds had 
demonstrated an astonishing level of safety, especially having 
had two break a dollar, one not even a retail fund, over about 
40 years, at the same time thousands of banks failed. But I 
think one of the concerns Vanguard and BlackRock have and one 
reason they are probably opposing this is, of course, that 
these rules were adopted in response to the Dodd-Frank Act, 
which gave banking regulators, in my view, far too much 
authority over what I would call risk-based markets. Banking 
regulation and banks are designed with the socialization of 
risk in mind, and when you put them in charge and the SEC 
realizes that FSOC is controlled by banking regulators, they 
will bend to banking regulators' will. So I cannot even fully 
blame them for what happened. But it was, I think, inevitable 
that there would be massive dislocation and expense. That has 
already occurred. Since then I think that there have been 
mitigating effects on the municipal business, but I think that 
is probably a close call. But I am concerned about that 
BlackRock-Vanguard concern, which is if you reintroduce 
floating rate NAV funds, frankly Federated will roll out a lot 
of funds. That will be a competitive disadvantage for the large 
money market fund managers. They will have to go back into the 
business, and then the next time a money market fund breaks, 
the banking regulators will have a lot less power to save the 
industry and, frankly, I would expect Congress to go back and 
end up maybe taking the same steps that dislocates the industry 
again.
    I think the interesting point of view is we have been 
through this once. We do not want to go through it again. Just 
leave us alone.
    But, you know, the free market guy in me says there is more 
capital that is out there looking for purchasers in a 
demonstrated, successful way to create essentially a cash 
vehicle for retail investors, and that should be an available 
option.
    Another concern is really a specific SEC concern. One 
reason the Reserve Fund failed is the SEC was not monitoring 
the funds that had the greatest risk of failing. It also had 
this no-action process whereby a fund that was about to break a 
dollar, which had happened hundreds of times previously, was to 
call up an office in the SEC, and a guy picks up the phone and 
says, ``OK, you are fine,'' and because that process was 
fumbled by the staff, in my opinion, and because it was such an 
ad hoc system in the first place, that contributed to the 
Reserve Fund failure. It was a primary element of their defense 
when the founders were sued, and I think that has to be 
corrected.
    And then, finally, I think that it is a mistake--as much as 
you can tell, I am probably not the biggest friend of banking 
regulators--to overly hamstring their Depression era authority 
to emergency situations, use their lending authority for 
nonbanks. I think that this bill would further hamstring them, 
and I think that is a mistake.
    Senator Rounds. Thank you. And I am out of time, Mr. 
Chairman. I would just ask for the record if I could ask each 
of our other two gentlemen to respond. You have heard the 
discussion here on the part of Mr. Bullard, but I most 
certainly think it would be fair to ask you to respond to that 
and to point out your differing points of view to the argument 
that he has made.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you. And as I will explain to the 
witnesses at the end of the hearing, there will be follow-on 
questions, and we ask you to respond to those, and you are 
welcome at that time to respond to this one and others.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. And thank you for 
holding this hearing.
    I want to talk a little bit about the HALOS Act that I know 
that a number of my colleagues have cosponsored. I am taken by 
some of Mr. Bullard's comments. As a former venture capitalist, 
I have thought of a lot of events that right now that have been 
prohibited that I did not feel at all fell into kind of the 
normal solicitation category. I even think about the fact that 
I think the effect of some of the regulations now--sitting on 
the Intelligence Committee, I look at the enormous threats we 
face in the cyberdomain and we are technically even holding 
hack-a-thons now where we try to explore different, better 
techniques on providing cybersolutions that could fall astray.
    And so what I am wondering--and this is directed to you, 
Mr. Bullard, and you, Mr. Keating, if you would like--is that 
there have been a couple of amendments added in the House, 
because I am not looking at something here to try to give an 
unfair advantage to one set of investors over retail investors. 
But there were two amendments added, one that would have 
required that attendees of demo days receive an SEC-prescribed 
risk disclosure that clarified that simply attending a demo day 
would not put them into that--would not mean that they passed 
the preexisting relationship test, that would still stand in 
terms of their ability to look at any of the companies or ideas 
that were put up; the other would have prohibited those who 
sponsor these so-called demo days from compensating companies 
and investors that were participating and making sure that none 
of the companies that were participating--making sure that all 
the companies that were participating were operating companies, 
that none of them were bankruptcy. Knowing your reluctance in 
this area, did that move it in the right direction? Are there 
other things that could be done? And I would like to hear from 
you as well on this, Mr. Keating.
    Mr. Bullard. As I noted earlier, if we are going to move in 
that direction--and I think the JOBS Act already put us well 
down that path; the HALOS Act frankly simply extends that 
further--then we need to rethink what is the substitute for 
that central regulation of offerings that was really the basis 
of the Securities Act. And the obvious substitute would be 
something like you describe, which is if you are going to go 
out publicly and talk about raising capital, you need to make 
basic information available. And the first step would be what 
you describe, which is: Is this really an operating company? 
Does it have some kind of financial statement? And to make 
that, speaking partly as a researcher, publicly available in 
what I would hope would be a very efficient, cheap filing 
system so that we could get that data, and I----
    Senator Warner. So it is not giving the attendee some 
advantage over other potential investors.
    Mr. Bullard. That is also part of the reason. The big 
informational disadvantage is, I think, more in the public 
market where you have got months-long road shows going on with 
institutional investors and mutual funds, and then 2 weeks 
before an offering, the retail investors get their first look 
at an IPO registration statement, and the SEC continues to let 
them make material amendments. I think they would let them do 
it up to the day before the offering. And we saw what happened 
with the Facebook fiasco, and I think that, you know, we need 
to think about how we are going to resolve that issue. But, 
again, that is assuming that we have moved to a different 
model, which I think we have done, but we continued to impose 
an irrational way of describing the model, which is clarifying 
general solicitation as opposed to recognizing that general 
solicitation is what we have allowed, and to think about what 
the substitute would be.
    Senator Warner. Mr. Keating.
    Mr. Keating. I would have to take a closer look at those 
amendments, but in general, I would not have a problem with 
them. What we are talking about here is going to angel 
investors. I mean, that is in the title of the legislation. So 
I think when we are talking about understanding who we are 
going to and what the purpose of these demos are, I think it 
makes---I think the legislation makes perfect sense.
    Senator Warner. And as somebody who has been very active in 
trying to set up angel investor networks, particularly in rural 
and more disadvantaged communities, I think there is an 
enormous value there. I do think we need to consider some of 
Mr. Bullard's concerns. I would point you to both of those 
amendments in the House that were included, and I would also 
make the point that I think no one would want to restrict, for 
example, the ability to have hack-a-thons that are advancing 
that may have as a secondary value some opportunity into 
investment.
    I have got 20 seconds left, and I just want to make this on 
a pitch basis. You know, Senator Heitkamp raised about capital 
gains. I would argue that some of the greatest abuses in our 
Tax Code are people converting ordinary income into capital 
gains on a short-term basis and that one of the greatest 
challenges that modern American capitalism faces right now is 
this enormous focus on short-term over long-term value 
creation. And I would hope, Mr. Chairman, we could come back at 
some point and hold a hearing that would examine a differential 
capital gains rate for longer-term holds that would look at 
different countries, their long-term stock exchanges, even look 
at additional voting power based upon holding shares, different 
reporting standards. I think this quest for short-term 
quarterly based profits will ultimately destroy the kind of 
great American business paradigm that was created post- World 
War II. As a matter of fact, I would argue that we would not be 
able to create the same kind of economic growth engine in 
today's market, and the examples of tech companies that still 
are able to do that are because there is a different class of 
stock for the founders that allow them not to have the 
pressures put on that are put on other corporate enterprises.
    Thank you for letting me go a little extra. Thank you, Mr. 
Chairman.
    Chairman Crapo. Thank you, Senator Warner. And I am aware 
of your work on the short-termism issues. I think it is a 
critical issue that we do need to pay more attention to.
    Senator Cotton.
    Senator Cotton. Thank you, Mr. Chairman. Thank you, 
gentlemen, for your appearance today.
    I would like to say a few words about the topic Senator 
Jones addressed, the bill that we have introduced, the Small 
Business Audit Correction Act. The bill would correct one of 
the unintended consequences of Dodd-Frank, specifically the 
massive increase in audit costs for small noncustodial broker-
dealers. This is a big problem.
    In hindsight, I think it is clear that Congress overshot 
the mark trying to prevent another Bernie Madoff-style scandal 
when it extended the Public Company Accounting Oversight Board 
audit requirements to these small noncustodial broker-dealers. 
As a result, public company audit rules for gigantic firms now 
apply to firms that do not hold customer assets and could not 
even pull off a Madoff scam if they wanted to in the first 
place.
    Now, this requirement might seem harmless or obscure, but, 
in fact, it has increased costs for small broker-dealers a lot. 
One Arkansas broker told me that his audit costs have gone from 
$6,000 to $30,000, and he has only five employees, and his 
offices are much smaller than the room in which we now sit.
    That is not an isolated incident to Arkansas either. I 
would venture that every Member of the Banking Committee has 
constituents just like mine. And when you think about it, this 
is a classic square peg into a round hole problem. As one 
Board-registered audit firm wrote in a letter, ``The Board 
audit requirement makes sense for public companies like Apple 
and broker-dealers that carry customer funds or securities like 
Morgan Stanley because the investing public and markets are 
potentially at much greater risk from these companies. 
Conversely, the Board requirements make no sense for privately 
held, small noncustodial firms that do not carry customer funds 
or securities, companies like mine. Currently a three-person 
small business is held to the same standards are Merrill Lynch. 
This is not right, fair, or reasonable.''
    As he wrote, ``In other words, it is the big guys, the 
custodial firms that should be receiving the Public Company 
Accounting Board audit, not these little guys.''
    Both the SEC and the Board have said that they have no data 
to suggest that this requirement has created a healthier or 
safer investment environment. In fact, even Board-registered 
audit firms whom you would think would be in favor of this 
requirement are speaking out against it. But it should not be a 
surprise they are losing business as small brokers die out.
    That is why my legislation with Senator Jones would make a 
simple change. It would exempt the small privately held, 
noncustodial firms in good standing from this Board requirement 
and allow them to file their financial statements according to 
GAAS standards they used just a few years ago.
    It is true regulators like the SEC and FINRA could relieve 
some of this compliance burden themselves, but they could also 
reverse that decision later on. I think our small broker-
dealers deserve the regulatory certainty that will only come 
from a change in the law.
    I think this is simply common sense, and I know it has 
widespread support. We have heard from many organizations who 
have sent letters of support, and as far as I know, there are 
no organized groups opposed.
    So, to sum up, I believe these unnecessary regulations are 
crushing our small broker-dealers and holding back economic 
growth, particularly in States like Arkansas. If we pass our 
bill, we can help lighten the load a little bit and allow more 
Americans to invest their money with small local broker-dealers 
if that is their choice.
    I address the question first to you, Mr. Keating. Do you 
feel that these small noncustodial firms, perhaps more 
importantly their customers, would benefit from returning to 
this kind of rightsized audit standard?
    Mr. Keating. Yeah, I would agree with you 100 percent. I 
think you laid it out very well, and I think this legislation 
makes sense, and I think any kind of scaling to fit the size of 
the business has to be thought about when we are moving ahead 
with legislation and when folks like the SEC are moving ahead 
with what they are--you know, in terms of the regulatory 
burdens they put on things. And that speaks of just a larger 
regulatory issue of can we--you know, we need some 
institutional reforms in addition to fixes like this so we do 
not have to come back and keep doing this, you know, cost-
benefit analysis. There is a bill in the House, 78, where the 
SEC would be required to do cost-benefit analysis and look at 
the impact on small businesses and market liquidity and so on.
    So I think this makes perfect sense, and I think we need 
tot make the next step and say how do we stop the overshooting 
that you talk about.
    Senator Cotton. And, Professor Bullard, do you share that 
opinion?
    Mr. Bullard. I share the opinion on the bill, yes.
    Senator Cotton. Thank you. My time has nearly expired. I do 
hope this Committee can mark up our legislation and then move 
it to the floor for a vote, as well as some of the other 
meritorious bills we have passed. As our witnesses have made 
clear today, too, I think this is another good example of 
working together in a bipartisan fashion. I know we do not have 
unanimous support for this legislation, but that is pretty rare 
around here. But we do have healthy support from both Democrats 
and Republicans, and I want to thank the Chairman and the 
Ranking Member for trying to move ahead with additional and 
important legislation in this Congress.
    Chairman Crapo. Thank you.
    Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Thank you for 
having this bipartisan hearing. I want to thank you for the way 
you conduct all of your hearings. You are a model for the 
regular order, and we really appreciate it. I will just add 
gently that we look forward to our hearing on credit bureaus 
and credit reporting agencies. Senator Kennedy and a number of 
Senators on both sides of this dais are anxious to dig into 
this issue, so we have several more months of legislative work 
to do, including during August. That would be an appropriate 
time to consider those issues.
    Mr. Keating, you know that startups have created around 20 
percent of total job creation every year, and these demo days 
are really a critical aspect of it. There is some confusion in 
terms of how to maintain compliance, especially as you get 
further and further from centers where venture capital exists.
    Can you talk about the role of demo days for startups in 
terms of surviving their earliest moments?
    Mr. Keating. Well, yes, in the sense that specifically I 
can talk about the importance of angel investment. You know, 
when you look at the stages of a startup, you are going to your 
own savings first. Then you go to family and friends, and the 
natural next step are angel investors. Who are angel investors? 
Well, there are networks of them, of course, that have 
developed especially recently, which are wonderful, but they 
are usually, you know, professional people that are looking for 
investment opportunities. Perhaps they have started up their 
own businesses and are looking to help others as an investor-
mentor scenario. This is not unusual in the angel community. 
And when you look at the numbers, they are a vital source, you 
know, because there are a whole host of companies that cannot 
go to banks. I taught MBA students entrepreneurship and 
innovation for 10 years, and you can talk about what you take 
to the bank. But you know what? More often than not, you have 
to be a little more established to get that bank loan. So angel 
investors are critical there, and any kind of ability to reach 
out and simply communicate to them--and, again, with all the 
safeguards in place, and I think Senator Toomey laid it out 
pretty well, that, you know, it is not like we are reinventing 
something new here with this legislation; we are going back to 
the way it was before--makes perfect sense.
    Senator Schatz. Can you just talk about the--it seems to me 
that part of the problem is this operational difficulty. If you 
are trying to set up a demo day or if you are trying to 
participate in a demo day, the SEC says that they will evaluate 
each one on a case-by-case basis, and that is difficult if you 
are a three-person startup because you have got to lawyer up 
and interact with the Securities and Exchange Commission when 
you are still sort of scaling your tech, figuring out your 
pitch, and all the rest of it.
    So can you talk about the importance of going away from a 
case-by-case analysis and to a sort of statutory framework that 
allows everybody to comply and to have confidence in the 
system, but not to disadvantage especially rural or sort of 
nontech hubs?
    Mr. Keating. Well, maybe the others can put some meat on 
the bone, but you put it well in terms of when you are 
developing your business, the idea that you are going to go to 
a regulatory agency and it is going to be a case-by-case basis, 
you know, really? So the idea that you have a statutory set way 
of doing this obviously is preferable.
    Senator Schatz. Professor Bullard.
    Mr. Bullard. I would like to correct one thing. This is not 
a traditional practice by any means whatsoever. You are not 
permitted, except under the already approved general 
solicitation private offering rule, to go do these offers of 
securities, to do a pitch, giving terms and price and number. 
And you are not allowed to publicly advertise it. I mean, let 
us be honest. That is a huge change in the law. But the JOBS 
Act went a long way down that road.
    Also, I hear references to HALOS, but there is nothing in 
the bill that prevents anyone from attending, and based on my 
experience at the University of Mississippi, they are attended 
by anyone who wants to. So there is no restriction to HALOS. 
This is not the HALOS Act. This is being able to have, you 
know, public demonstrations regarding both the operations of 
the business and its securities offerings.
    Senator Schatz. Well, I will offer a thought, and then I 
will end with Mr. Daniel's comments. You know, it is not just 
the ability to track investment, but if you are--say the island 
of Maui, right, the majority of the population in the State of 
Hawaii is in Honolulu, but Maui has a thriving tech community. 
But part of the reason that they would want to do something 
like a demo day is not just to officially solicit investment, 
but also to find partnerships, to find new business 
opportunities that sort of are outside of the Securities and 
Exchange Commission purview, and also just to communicate to 
the broader public that there are some pretty exciting things 
happening on Maui. So part of it is just give a permission 
structure to economic development organizations, universities, 
you know, dual-use companies to kind of get into this without 
thinking to themselves, ``I am going to get sideways with the 
SEC before I even have a going concern.''
    Mr. Daniel.
    Mr. Daniel. Senator Schatz, one of our critical missions at 
the city of Albuquerque is providing economic development for 
our community and our State without having to have taxpayers 
and ratepayers shoulder that additional economic development. 
That is why it is so key that we reverse the 2014 Rule 2a-7 
reforms and return to a stable net asset value investment 
opportunity for prime- and tax-exempt money market funds.
    Senator Schatz. Thank you.
    Chairman Crapo. Thank you.
    Senator Tillis.
    Senator Tillis. Thank you, Mr. Chairman. Thank you for 
holding this hearing. And I think if you listen to the comments 
of colleagues on both sides of the aisle, you have done a good 
job of putting together for consideration measures that 
generally have support from both Republicans and Democrats.
    I became a partner at Pricewaterhouse in 1996, and in 1996 
we saw explosive growth because of Y2K. The world was going to 
end. You needed to prepare your systems and processes to deal 
with Y2K.
    And then came Enron and Sarbanes-Oxley, and I saw explosive 
growth again. Because of the additional audit requirements, the 
Big Four firms that I was with at the time, all the other 
accountancies, just exploded. On the one hand, that sounds good 
if you are a partner. But on the other hand, you know that is 
an expense of using other service areas within Pricewaterhouse 
who really want to invest in projects to grow improved 
productivity. So you are moving--if you are in the health care 
or sciences field, you go from science to compliance, moving 
money away from building the future value of your company, and 
to just making sure you do not get penalties.
    The banking reform act that the Chair did such a great job 
of getting through this Committee and getting to the 
President's desk I think provided much-needed relief for the 
lower base of what I call the ``banking ecosystem,'' the 
community banks, the smaller regional banks.
    I think what we are trying to talk about today are what I 
would consider to be modest proposals to take regulatory 
burdens off of some of the newer companies, the smaller 
entities. That is why I have sponsored the Encouraging Public 
Offerings Act and the Fostering Innovation Act that are being 
discussed today, having discussed today. And, Mr. Chair, 
without objection I would like to submit letters of support on 
the Fostering Innovation Act from organizations representing 
virtually everybody on this Committee.
    Chairman Crapo. Without objection.
    Senator Tillis. And we have bipartisan support for the 
bill.
    This is, I think, a fairly straightforward bill which 
provides a very narrowly tailored exemption for SOX 404(b) for 
emerging growth companies that are now in their 6- to 10-year 
phase.
    Mr. Keating, I do not know if you have had an opportunity 
to take a look at the bill, but do you have any concerns or 
comments you would like to make with respect to that bill?
    Mr. Keating. Just simply that I think there is a certain--
you know, when you are talking about the limited aspect of 
this, it does not surprise--limited aspect but limited market 
that we are talking about here, it makes perfect sense. So I 
think the exemption makes sense. I think, again, you are 
talking about--what did you use, compliance rather than 
science? I am going to steal that if that is OK. I am sure it 
has been around.
    Senator Tillis. I stole it from my staff.
    Mr. Keating. But the idea that, you know, we want these 
resources for innovation and growth. We do not want them for 
unnecessary----
    Senator Tillis. Well, you see it in the biotech industry, 
and it is one that is growing nationwide. In North Carolina, we 
clearly have a critical mass there. It does not make sense to 
me. And I think that the way we have drafted the bill that it 
is tailored in a way that we are just simply removing a 
regulatory burden, but we have clear insights in what is going 
on with the companies, and hopefully we are going to get 
support from that. I do appreciate Members on both sides of the 
aisle.
    On the Encouraging Public Offerings, that is actually two 
pieces. One is just codifying some of the administrative 
changes the SEC made last year, and then providing some other 
options for trying to--now I am going to the ecosystem. We do 
not have a very healthy flow of public offerings in the United 
States, and it is really counter to what we are seeing in most 
other, what we would consider to peer or near-peer economies.
    Do you believe that there is something beyond just the 
regulatory hurdles that are doing that? Or are their economic 
underpinnings that would make some countries doing relatively 
better with IPOs than what we are seeing in the United States? 
Mr. Daniel.
    Mr. Daniel. Senator Tillis, I am not prepared to comment on 
that particular issue, but on behalf of GFOA, we will certainly 
get back to you with our response.
    Senator Tillis. That is OK. I just want to give everybody a 
chance to talk at least once.
    [Laughter.]
    Senator Tillis. Mr. Bullard.
    Mr. Bullard. I guess I would take a different view that I 
articulated earlier, which is not only has there been steady 
and enormous growth in the amount of capital in our public 
markets, the proceeds raised in IPOs have zigzagged essentially 
the same way since the mid-1990s, before which gross proceeds 
were very low. And I also note that if you look at the growth 
of capital among U.S.-listed companies, we have grown 
substantially more and been far more resilient since the crisis 
than the best comparison, which would be European markets.
    Senator Tillis. So you think that it is structurally--the 
current state is structurally sound?
    Mr. Bullard. I do. I think we have vibrant markets that are 
still the envy of the world.
    Senator Tillis. I wonder why--or how does that square--and 
this is my final comment, but it may be Congress needs to be 
better educated. But if I am not mistaken, this bill got passed 
out of the House 60-0 in Committee and 419-0 in the House. So 
maybe we need to dig into that and understand why that looks 
like there is fairly broad--nothing gets passed out with a 0 on 
the other end of the vote. So it would be very interesting to 
maybe dig down on that, and we could possibly submit some 
questions for the record to get your insights on that.
    Thank you, Mr. Chair.
    Chairman Crapo. Thank you, Senator Tillis.
    That concludes the questioning here today, and the hearing 
will come to a conclusion. I want to again thank our witnesses 
for bringing us your expertise and being willing to share it 
with us. As the discussion here showed today, there is a lot of 
intense interest in these issues.
    For Senators who wish to submit questions for the record, 
those questions are due on Tuesday, July 3, and I encourage the 
witnesses, if you receive questions, to please respond as 
promptly as you can.
    Again, I thank you all very much for being here. This 
hearing is adjourned.
    [Whereupon, at 11:34 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Today's hearing will focus on several legislative proposals that 
will encourage capital formation and reduce burdens for smaller 
businesses and communities.
    My goal is to work with Ranking Member Brown and other Senators on 
this Committee to identify and move legislative proposals that achieve 
these aims.
    Many of the bills we will discuss in today's hearing have been 
considered in the House of Representatives earlier this Congress.
    Of those that the House has considered to date, all have passed the 
House Financial Services Committee with bipartisan support and some 
have passed the full House, including one with a vote of 419 to 0.
    Many of my colleagues on this Committee are also interested in 
these issues and have introduced Senate companions to many of these 
bills as well as taking the lead in introducing bipartisan bills in the 
Senate.
    Senators Schatz, Toomey, Heitkamp, and Tillis, among others, have 
cosponsored a bill that would make it easier for start-up companies to 
tap the expertise and capital of angel investor groups.
    Senators Toomey, Rounds, and Menendez, among others, introduced a 
bill that would provide more financing options for State and local 
governments seeking to raise money.
    Senator Tillis has introduced a bipartisan bill that exempts 
emerging growth companies from certain auditor attestation 
requirements.
    Senators Van Hollen and Tillis have cosponsored a bill that would 
encourage more public offerings by allowing all companies to ``test the 
waters'' prior to fling an IPO.
    A bill introduced by Senators Kennedy and Jones would make it 
easier for investment advisers to focus on rural business investment 
companies.
    Finally, Senators Cotton and Jones recently introduced a bill that 
will cut audit costs for noncustodial brokers.
    These bills will improve companies' access to our capital markets 
and their ability to invest in the United States, in turn growing and 
creating jobs.
    I look forward to hearing from our witnesses on these legislative 
proposals.
                                 ______
                                 
                PREPARED STATEMENT OF RAYMOND J. KEATING
      Chief Economist, Small Business and Entrepreneurship Council
                             June 26, 2018
    Chairman Crapo and Members of the Committee, thank you for hosting 
this important hearing today on the issue of access to capital. The 
Small Business and Entrepreneurship Council (SBE Council) is pleased to 
submit this testimony.
    My name is Raymond Keating and I serve as chief economist for the 
Small Business and Entrepreneurship Council (SBE Council), a nonprofit, 
nonpartisan advocacy, research, and education organization dedicated to 
protecting small business and promoting entrepreneurship. For nearly 25 
years, SBE Council has worked on a range of private sector and public 
policy initiatives to strengthen the ecosystem for healthy startup 
activity and small business growth.
Small Business and Access to Financial Capital
    Throughout SBE Council's history, access to capital has been a core 
issue. Of course, financial capital--whether equity or debt--stands out 
as a foundational matter for entrepreneurs who are starting up, 
operating or expanding businesses. However, for many entrepreneurs, 
gaining access to capital has long been a challenge.
    During the financial crisis, the Great Recession and an 
underperforming recovery, capital became increasingly hard to access 
from institutional banks and various capital market players. And while 
matters have improved in recent years, many entrepreneurs continue to 
struggle with accessing the capital they need to compete and grow.
    Small Business Loans. Consider the trends in bank small business 
loans (less than $1 million) over the past decade or so, as displayed 
in Charts 1 and 2.
    Chart 1 shows that the value of small business loans outstanding 
hit a high of $711.5 billion in 2008, and subsequently fell for 5 
straight years. Growth resumed in 2014, and has continued since. But 
recovery to the 2008 high is yet to occur, never mind factoring in any 
additional growth. In fact, the 2017 level of $623.1 billion came in at 
less than the 2006 level. So, small business loan value has experienced 
no growth for more than a decade, and consider that these numbers are 
nominal, so inflation is not even factored in, which would make the 
picture bleaker.
    The small business share of commercial and industrial loan value 
outstanding registered, for example, 33 percent in 1995, 35 percent in 
2004, 30 percent in 2007, and in early 2010, it registered 31 percent. 
However, the subsequent decline has been rather stark, falling to 20 
percent by mid-2015 and remaining at that level since. Looking at 
nonfarm nonresidential loans, the small business share came in at 52 
percent in 1995, and had declined to 39 percent in 2007. And at the end 
of 2017, the small business share further declined to 20 percent.
    As for the number of small business loans, these rose steadily up 
to 2008 (hitting 27.1 million in 2008 compared to 6.3 million in 1995), 
and subsequently declined into early 2011 (coming in at 21.3 million) 
and then working to recover, climbing back to 26.4 million in mid-2017. 
However, there was a falloff in the second half of 2017, retreating to 
just below 26 million. Again, the level at the end of 2017 remained 
below the 2008 level.


    Angel Investment. On the equity side, angel investment stands out 
as a critical source of funding for start-ups and early-stage 
businesses. But here, the numbers have been disappointing in recent 
years.
    According to numbers from the Center for Venture Research at the 
University of New Hampshire (as seen in Chart 3), moving past a big 
drop in angel investment in 2002, coinciding with the aftermath of the 
2001 recession (as well as the post- ``tech bubble''), growth resumed 
from 2003 through 2007, with angel investments increasing from $15.7 
billion in 2002 to $26 billion in 2007. Subsequently, though, there was 
a large decline in 2008 and 2009 during the recession. Postrecession 
growth was underwhelming, growing from $17.6 billion in 2009 to $24.8 
billion in 2013. Since then, however, angel investment has stagnated--
in fact, actually declining some, coming in at $23.9 billion in 2017.


    As for the number of deals (again, according to the Center for 
Venture Research at the University of New Hampshire), they grew from 
36,000 in 2002 to 57,120 in 2007. After a brief falloff in 2008, growth 
then resumed, eventually rising to 73,400 in 2014. So, while total 
angel investment dollars declined and then recovered some from 2007 to 
2014, the number of deals grew robustly, pointing to angel investors 
being active in more deals at lower investment levels. Unfortunately, 
over the last 2 years--during 2016 and 2017--angel investment dollars 
declined slightly, and over the last 3 years--2015, 2016, and 2017--the 
number of deals dropped notably, from 73,400 in 2014 to 61,560 in 2017. 
The 2017 deal level of 61,560 came in at about the same level as in 
2010 (61,900 deals).
    Venture Capital. While not an option for most start-ups or very 
young firms, venture capital investment is an important avenue for 
innovative firms to raise capital for growth and expansion. The trend 
on the venture capital front after the Great Recession tends to show 
more robust growth, even with a decline from the second quarter of 2015 
to the fourth quarter of 2016. Since then venture capital investment 
has bounced back nicely, and over the longer run, growth has been solid 
since the end of the recession--moving from $4.8 billion in the second 
quarter of 2009 to $21.2 billion in the first quarter of 2018.


    Online Lending and Crowdfunding. Finally, the growth of online 
lending and crowdfunding for entrepreneurs must be highlighted. SBE 
Council President and CEO Karen Kerrigan noted the following in her 
recent testimony (June 21, 2018) before the U.S. House of 
Representative's Committee on Financial Services:

        There's been improvement in the online lending space as some of 
        the Nation's largest ``FinTech'' small business lending 
        platforms are quietly helping many entrepreneurs with their 
        capital needs. A May 31, 2018, study, ``The Economic Benefits 
        of Online Lending to Small Businesses and the U.S. Economy'' 
        reported that just five of the largest lending platforms funded 
        nearly $10 billion in online loans from 2015 to 2017, 
        generating $37.7 billion in gross output, creating 358,911 jobs 
        and $12.6 billion in wages in U.S. communities. The study found 
        that 24 percent of these borrowers are microbusinesses with 
        less than $100,000 in annual sales and two-thirds have less 
        than $500,000 in annual sales. So online lenders are definitely 
        filling an important niche, and small business borrowers are 
        becoming better educated about this type of financing.

        The Jumpstart Our Businesses Startup Act (JOBS Act) included 
        solid reforms that have helped boost Initial Public Offerings 
        (IPOs) and deliver many startups the funding they need through 
        regulated crowdfunding (Title III crowdfunding). It took the 
        Securities and Exchange Commission (SEC) four long years to 
        develop and implement the rules around regulated crowdfunding, 
        which is why it has taken longer than expected to get traction 
        through this promising funding approach. Regulation 
        crowdfunding is quietly funding companies and doing what its 
        supporters, like us, hoped it would. To date, there are nearly 
        1,000 active campaigns (about 600 of those are fully funded), 
        where $132 million has been committed from 133,883 backers 
        (investors). The average raise is $247,456. A wide array of 
        sectors are represented, with application software companies 
        leading the pack followed by beverages (alcoholic), computer 
        hardware, entertainment, and the auto industry.

    To sum up, long after the financial crisis hit in late 2008 and the 
Great Recession came to an official end in mid-2009, the financial 
capital story for the small business community has been mixed. While 
having recovered some, small business loans are still well off from 
where they should be. Angel investment has largely stagnated. 
Meanwhile, venture capital has shown solid growth, while online lending 
and crowdfunding have opened new doors for many entrepreneurs seeking 
funding.
Regulatory Burdens
    Regarding the trends noted above, assorted factors have come into 
play, including the underperforming economy over a period of a decade 
and a decline in entrepreneurial activity. Challenges among small 
community banks also come into play given the important role these 
institutions play in lending to small businesses. And community banking 
woes also tie back to the state of the economy, but to Government 
regulation as well, which, again, always falls heaviest on small 
businesses, including small banks.
    In a May 2016 analysis, I noted the following:

        Consider key points from two recent reports on the state of 
        community banks. A study published in February 2015 by the 
        Harvard Kennedy School's Mossavar-Rahmani Center for Business 
        and Government, titled The State and Fate of Community Banking 
        and authored by Marshall Lux and Robert Greene, looked at the 
        role of community banking in the marketplace, as well as the 
        impact of Dodd-Frank financial regulation law on these small 
        banks.

        The authors note that ``community banks provide 51 percent of 
        small business loans,'' and quote William Grant, then chairman 
        of the Community Bankers Council of the American Bankers 
        Association, pointing out, ``The cost of regulatory compliance 
        as a share of operating expenses is two-and-a-half times 
        greater for small banks than for large banks.''

        As for the Dodd-Frank impact, the authors note, ``Community 
        banks (defined as banks with less than $10 billion in assets) 
        withstood the financial crisis of 2008--with sizeable but not 
        major losses in market share--shedding 6 percent of their share 
        of U.S. banking assets between the second quarter of 2006 and 
        mid-2010 . . . But since the second quarter of 2010, around the 
        time of the Dodd-Frank Wall Street Reform and Consumer 
        Protection Act's passage, we found community banks' share of 
        assets has shrunk drastically--over 12 percent.'' They go on to 
        observe: ``Interestingly, community banks' vitality has been 
        challenged more in the years after Dodd-Frank than in the years 
        during the crisis.''

        And at another point, they state: ``[C]ommunity bank 
        consolidation trends have almost doubled since the passage of 
        Dodd-Frank, relative to the Q2 2006 and Q2 2010 time frame, 
        which includes the crisis period.'' The authors added: ``As the 
        GAO reports, regulators, industry participants, and Fed studies 
        all find that consolidation is likely driven by regulatory 
        economies of scale--larger banks are better suited to handle 
        heightened regulatory burdens than are smaller banks, causing 
        the average costs of community banks to be higher.''

        As noted in a March 2015 report from the Federal Reserve Bank 
        of Richmond, the sizeable decline in the number of community 
        banks from 2007 to 2013--shrinking by 41 percent--was not only 
        about community bank failures, but about ``an unprecedented 
        collapse in new bank entry.''


        It is noted: ``This collapse in new bank entry has no precedent 
        during the past 50 years, and it could have significant 
        economic repercussions. In particular, the decline in new bank 
        entry disproportionately decreases the number of community 
        banks because most new banks start small. Since small banks 
        have a comparative advantage in lending to small businesses, 
        their declining number could affect the allocation of credit to 
        different sectors in the economy.''

        Potential issues include the state of the economy and Federal 
        Reserve policymaking: ``An important factor in bank 
        profitability is the net interest margin, or the spread between 
        deposit rates and lending rates. The Fed's policy of keeping 
        the Federal funds rate near zero since 2008 has pushed lending 
        rates down, which has kept the net interest margin relatively 
        small. Adams and Gramlich [of the Federal Reserve Board of 
        Governors] estimate that this low interest rate environment 
        coupled with weak demand for banking services accounts for as 
        much as 80 percent of the decline in bank entry in recent 
        years. However, a literal interpretation of their model would 
        predict that even if the net interest margin and economic 
        conditions recovered to 2006 levels, there still would be 
        almost no new bank entry, suggesting that other factors are 
        also important for explaining the recent decline.''

        The authors write: ``Banking scholars also have found that new 
        entries are more likely when there are fewer regulatory 
        restrictions. After the financial crisis, the number of new 
        banking regulations increased with the passage of legislation 
        such as the Dodd-Frank Act. Such regulations may be 
        particularly burdensome for small banks that are just getting 
        started.''

        The Richmond Fed report concludes: ``If de novos [i.e., newly 
        formed banks] are absent due to the low interest rate 
        environment and weak economic recovery, then entry should 
        increase as the economy improves and the Fed raises interest 
        rates. If regulatory costs are the driving force behind low 
        entry rates, then future entry will depend on how those costs 
        change over time.''

    Writing in the American Banker in October 2017, Camden R. Fine, 
then-president and CEO of the Independent Community Bankers of America, 
echoed some of these points. He explained:


        Community banks are highly capitalized, so they're better 
        prepared than their larger competitors for economic crises. And 
        as local institutions, they reinvest in their communities and 
        channel loans to their depositors' neighborhoods . . . 
        promoting localized growth that radiates out to the broader 
        economy. Community banks have been instrumental in helping the 
        Nation recover from the financial crisis and economic downturn, 
        yet their numbers continue to dwindle, declining by roughly 
        1,500 since 2009. As the only physical banking presence in 
        nearly one in five of the Nation's 3,000 counties, this 
        lifeline to many American families is at risk.

        The mere trickle of de novo banks entering the market 
        exacerbates the problem. The number of bank applications has 
        plummeted from more than 100 per year before the crisis to just 
        a handful since 2009 . . . posing tangible risks to financial 
        services access and economic growth in communities overlooked 
        by larger institutions.

        Regulatory burden plays no small part in the growing 
        consolidation. A new survey from the Federal Reserve and 
        Conference of State Bank Supervisors found that community bank 
        compliance costs have increased by nearly $1 billion in the 
        past 2 years to roughly $5.4 billion, or 24 percent of 
        community bank net income. Of the respondents who said they 
        considered an acquisition offer in the past year, virtually all 
        (96.7 percent) said regulatory costs were a very important, 
        important or moderately important reason. Further, the Federal 
        Reserve Bank of Richmond has found that regulatory costs play a 
        key role in the recent dearth of applications to form new 
        community banks.
Efforts To Expand Access to Financial Capital
    Reform and relief efforts to clear away obstacles and reduce costs 
for lenders, investors, entrepreneurs and small businesses on the 
financial capital front are most welcome. For example, SBE Council 
supports the following bills being discussed today:

    S. 588 Helping Angels Lead Our Startups Act or the HALOS Act--This 
bill clarifies that startups and entrepreneurs can showcase their ideas 
and businesses at events designed to connect them with potential 
investors. It clarifies the rules about ``demo days'' and similar 
events hosted by universities, Government, accelerators and other 
entities that help entrepreneurs network, make connections, and 
identify funding for their enterprises. As noted in the joint statement 
released by the Senate bill's sponsors: ``In order for startups to 
secure capital and grow their businesses, entrepreneurs often attend 
`demo days.' or conferences to showcase their business model in front 
of investors like `angel investors' and venture capitalists. It is 
estimated that angel investors provide 90 percent of outside equity to 
help grow these young businesses. Unfortunately, recent regulations now 
require excessive hurdles for angel investors, deterring them from 
participating in demo days. The HALOS Act would preserve important 
investor vetting processes without forcing startups to jump through 
unnecessary hoops to get the investments they need to grow and create 
new jobs.'' U.S. Senator Chris Murphy (D-CT) stated, ``I'm 
reintroducing the HALOS Act because the most important thing we can do 
to help local entrepreneurs is knock down road blocks and make it 
easier for angel investors to put capital behind them.''

    S. 2126 Fostering Innovation Act of 2017--Sensibly extends an 
exemption allowed for in the JOBS Act to growing companies whose 
business models require more regulatory flexibility, and thus will 
enable greater success. Extends the JOBS Act's SOX 404(b) exemption for 
an additional 5 years for former emerging growth companies (EGCs) that 
maintain a public float below $700 million and average annual revenues 
below $50 million. As Senator Gary Peters (D-MI) has observed, ``This 
bipartisan, commonsense legislation would cut red tape for emerging 
biotechnology companies so they can focus their resources on the 
critical research and development that will provide innovative 
treatments and save lives.''

    S. 2347 Encouraging Public Offerings Act of 2018--As U.S. Chris Van 
Hollen (D-MD) has pointed out, ``Many emerging businesses find that the 
process of going public is too complex and expensive.'' Given that 
reality, this bill would streamline the process by allowing an issuer 
communicate with potential investors to ``test the waters'' in terms of 
gauging interest in a contemplated securities offering, either before 
or after the filing of a registration statement, and allowing an issuer 
to submit a confidential draft registration statement to the Securities 
and Exchange Commission for review prior to public filing or within one 
year after the initial public offering or registration. U.S. Senator 
Thom Tillis (R-NC) correctly observed, ``IPOs give companies crucial 
access to our capital markets, and yield the potential to create 
thousands of jobs. When private companies consider going public, we 
should be doing everything possible to make this process easy and to 
encourage it, without jeopardizing investor protections.''

    S. 3004 Small Business Audit Correction Act of 2018--As is clear 
from the data and a wide array of studies, regulatory burdens fall 
heaviest and with greatest consequence on small businesses. This 
legislation would redress the Dodd-Frank requirement that all 
investment brokers and dealers, no matter their size, must hire a 
Public Company Accounting Oversight Board (PCAOB)-registered audit firm 
to conduct audits that use complex guidelines designed for larger, 
public companies. As noted in the statement from Senators Tom Cotton 
(R-AR) and Doug Jones (D-AL), ``This requirement is devastating for 
small investment firms . . . These firms are closing at an alarming 
rate, in part due to skyrocketing audit costs required by a rule that 
is illogical for firms that don't hold customer assets. The Small 
Business Audit Correction Act would exempt privately held, small 
noncustodial brokers and dealers in good standing from the requirement 
to hire a Public Company Accounting Oversight Board (PCAOB)-registered 
audit firm to meet their annual SEA Rule 17a-5 reporting obligation and 
would instead reinstate the previous regulatory audit requirements.''

    S. 2765 RBIC Advisers Relief Act of 2018--This bill would reduce 
unnecessary costs by amending the Investment Advisers Act of 1940 to 
exempt investment advisers who solely advise certain rural business 
investment companies.

    In addition to these pieces of legislation, several other measures 
would expand access to capital for entrepreneurs and small businesses. 
In SBE Council's ``2018 Policy Agenda for Entrepreneurs and Small 
Businesses--Issue Two: Access to Capital'', assorted additional pro- 
small-business measures were highlighted, including:

    H.R. 477 Small Business Mergers, Acquisitions, Sales and Brokerage 
Simplification Act of 2017--H.R. 477 reduces regulatory costs 
associated with the sale and purchase of small, privately held 
companies. Current law forces broker dealers to register with the 
Security and Exchange Commission (SEC), the Financial Industry 
Regulatory Authority (FINRA), and one or more States at substantial 
costs. This results in higher transaction costs for many entrepreneurs 
who want or need to sell their business.

    H.R. 2201 Micro Offering Safe Harbor Act--H.R. 2201 would exempt 
from registration requirements with the Securities and Exchange 
Commission (SEC) offerings made only to the entrepreneur's friends and 
family, to less than 35 purchasers, and when $500,000 or less is 
raised. The offering would be exempt from State registration and 
qualification rules, thus reducing costs and complexity. H.R. 2201 
would appropriately scale SEC rules and regulatory compliance for our 
Nation's small businesses, which in turn will provide another practical 
option for entrepreneurs to raise the capital they need to start or 
grow their firms.

    H.R. 78 SEC Regulatory Accountability Act--H.R. 78 requires the SEC 
to assess the costs and benefits of regulatory actions and the impacts 
on small businesses, investor choice, and market liquidity. The bill 
also requires an exploration of regulatory alternatives, including the 
option of not regulating, to maximize the net benefits of SEC 
rulemakings. Having SEC periodically review its regulations is 
critically important as cumulative and outdated regulation put U.S. 
capital markets at a competitive disadvantage.

    Other Bipartisan Proposals on the Move--There is movement in the 
U.S. House on several bipartisan bills that are also strongly supported 
by SBE Council. For example, the ``Main Street Growth Act'', H.R. 5877, 
would allow for the creation of venture exchanges, which would provide 
a tailored trading platform for small issuers and emerging growth 
companies (EGCs). The ``Modernizing Disclosures for Investors Act'', 
H.R. 5970, requires the SEC to provide a report to Congress with a 
cost-benefit analysis of EGCs' use of SEC Form 10-Q and recommendations 
for decreasing costs, increasing transparency, and increasing 
efficiency of quarterly financial reporting by emerging growth 
companies. Both of these bills advanced out of the Financial Services 
Committee unanimously. Another bill also recently reported out of the 
committee, the ``Helping Startups Continue to Grow Act'', H.R. 6130, 
would provide for a 5-year extension of certain Security Exchange Act 
exemptions and reduced disclosure requirements for companies designated 
as EGCs and will continue to remain as such but for the 5-year 
restriction on EGCs. Under Title I of the JOBS Act, the IPO ``on-ramp'' 
for EGCs provides exemptions and provisions that make sense given the 
size and development of these small firms. The scaling of rules and 
exemptions from certain disclosure requirements for EGCs have reduced 
compliance and regulatory burdens, which have benefited these promising 
small firms. Each of these bills work to modernize and streamline 
rules, or make important fixes, which will make the capital markets 
work better for small businesses and improve U.S. capital formation.

    Mobilizing More Capital to Startups and Small Businesses--As noted 
in my testimony, regulated (Title III) crowdfunding is beginning to 
gain traction in the marketplace. Refining some of rules would help 
many entrepreneurs tap into this promising funding option. Some of the 
reforms supported by SBE Council include raising the amount that can be 
raised (which is currently $1 million), allowing issuers to ``test the 
waters,'' allowing for special (or single) purpose vehicles, providing 
simplified rules for advertising, legal clarity for platforms, and 
removing the caps for accredited investors, among other changes.
    Congress is updating thresholds across many areas of the law, and 
the same needs to be done with Section 1224 Small Business Stock, which 
allows investors to deduct losses taken on investments in C Corp 
startups. Qualified Small Business tax (loss) treatment under Section 
1244 of the I.R.S. code (QSB 1244) was passed as part of the Small 
Business Investment Company Act of 1958, the spirit of which was to 
mobilize more capital into innovate startups. The current thresholds 
were last updated in 1978, which are: the first $1,000,000 of outside, 
individual taxpayer(s) (angel investors) capital receives 1244 
treatment; $100,000 per year of 1244 losses deductible against ordinary 
income (for joint tax returns); $50,000 per year of 1244 losses 
deductible against ordinary income (for single filers). The Consumer 
Price Index has risen 363 percent since 1978. If the above thresholds 
were inflation adjusted, the levels would be: $3,630,000 of outside 
investors' capital would qualify for de-risking under 1244; $363,000 
per year of 1244 losses could be deductible for joint filers: $181,500 
per year for single filers. These changes would be consistent with the 
laudable changes recently made to the QSB 1202 laws, which now provide 
for the first $10M of profits that qualify under 1202 to be excluded 
from taxes.
    This change can help up-and-coming entrepreneurial ecosystems 
outside Silicon Valley as well as Opportunity Zones where many new 
investors and family offices are interested in impact investing.

    Capital Gains Tax Relief. Finally, it must be noted that capital 
gains tax relief is needed to boost access to capital for the 
entrepreneurial sector of our economy, and further enhance economic, 
income, and employment growth. One key measure would be reducing the 
capital gains tax rate--such as from the current rate on individuals of 
23.8 percent to 10 percent or 15 percent--while also indexing gains for 
inflation so that the real capital gains tax rate does not climb higher 
than the stated nominal rate. In the end, the capital gains tax raises 
diminishes the returns on and disincentivizes investment and 
entrepreneurship. Reduce the capital gains tax substantially, and that 
would be good news for the risk taking that drives the economy forward.
    Thank you for your time and attention. I look forward to your 
questions and further discussion.
                                 ______
                                 
                PREPARED STATEMENT OF MERCER E. BULLARD
 Butler Snow Lecturer and Professor of Law, University of Mississippi 
                             School of Law
                             June 26, 2018

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

              PREPARED STATEMENT OF CHRISTOPHER H. DANIEL
Chief Investment Officer, City of Albuquerque, New Mexico, on behalf of 
              the Government Finance Officers Association
                             June 26, 2018
    Chairman Crapo, Ranking Member Brown, and distinguished Members of 
the Committee on Banking, Housing, and Urban Affairs, thank you for 
holding today's hearing on legislative proposals to increase access to 
capital. My name is Chris Daniel and I serve as the Chief Investment 
Officer for the City of Albuquerque, New Mexico. My remarks here today 
are in my capacity as a representative of the membership of the 
Government Finance Officers Association (GFOA). GFOA represents nearly 
20,000 public finance officers from State and local governments, 
schools, and special districts throughout the United States.
    GFOA is dedicated to the professional management of governmental 
financial resources by advancing fiscal strategies, policies and 
practices for the public benefit, including issues related to issuing 
tax exempt bonds and investing public funds. We appreciate this 
Committee's continued support for efforts to strengthen the municipal 
bond market, especially the recent enactment of legislation designating 
municipal securities as high-quality liquid assets. Such actions help 
States, local governments and other governmental entities maintain 
access to low-cost capital, which is vital to infrastructure investment 
across the United States and contributes to a healthy and vibrant 
economy. On behalf of the GFOA and its members, I appreciate the 
opportunity to provide comments at this hearing in support of S. 1117, 
the Consumer Financial Choice and Capital Markets Protection Act of 
2017.
    This morning I will describe how money market funds have been 
utilized effectively to both manage liquidity for public sector 
investments and provide a reliable source of working capital to fund 
public services and finance infrastructure investment and economic 
development. I will also describe the impact of the U.S. Security and 
Exchange Commission's (SEC) change of net-asset-value (NAV) accounting 
methodology for money market mutual funds (MMMF) from stable to 
floating.
    State and local governments access the capital markets and issue 
short term debt for a variety of reasons. This important legislation 
would allow State and local governments to continue this access and 
investor appetite for short term debt issuance without increasing costs 
for taxpayers or creating risks to the financial system For Governments 
like the City of Albuquerque, variable-rate debt has been a very low-
cost method of financing as compared to issuing fixed-rate bonds. GFOA 
has published best practice guidance on the use of variable rate debt 
by Government issuers to ensure that it is used appropriately. Also, 
variable rate debt issued by State and local governments has 
historically been a reliable low risk investment type for money market 
fund sponsors. Money market funds themselves are key purchasers of 
municipal securities--historically, they have been the largest 
purchasers of short-term tax exempt debt. Therefore, the impact of SEC 
Rule 2a-7 of the Investment Company Act of 1940, as amended in 2010 and 
2014, on Governments is real and it affects not only large governmental 
entities, but also small communities throughout the country.
    Additionally, money market funds are a widely used cash management 
and investment tool for State and local governments. According to 
Federal Reserve data, State and local governments hold over $190 
billion of assets in money market funds. \1\
---------------------------------------------------------------------------
     \1\ See https://www.federalreserve.gov/releases/z1/20180607/
z1.pdf, p. 84.
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    While we have supported and continue to support initiatives that 
both strengthen money market funds and ensure that investors are 
investing in high-quality securities, we applaud Senators Toomey, 
Manchin, Rounds, and Menendez for introducing legislation which focuses 
on addressing the unintended consequences of the SEC's 2014 Amendments 
to Rule 2a-7 that require institutional, nongovernment MMFs to price 
their shares at a floating net asset value (NAV), by allowing those 
funds to return to a fixed NAV.
    The original objectives of the floating NAV rule were to protect 
investors in money market funds by preventing runs that hamper access 
to short-term capital, shield taxpayers from future financial bailouts, 
and promote general market stability. Those objectives were effectively 
addressed in the 2010 Amendments to Rule 2a-7. GFOA supported those 
amendments which dramatically increased the credit quality of the 
assets held in MMFs, required money market funds to have a minimum 
percentage of their assets in highly liquid securities so that those 
assets can be readily converted to cash to pay redeeming shareholders, 
and increased transparency by requiring funds to regularly calculate 
their portfolios' per-share values at market prices.
    Despite the success of the 2010 reforms, the SEC adopted additional 
amendments to Rule 2a-7 in July 2014. Among other things, those 
amendments require institutional prime- and tax-exempt funds to use a 
floating NAV. The SEC's reasoning for the 2014 Amendments was that a 
floating NAV would provide investors with a more frequent and accurate 
assessment of the value of a fund's assets. Under previous rules, 
institutional prime- and tax-exempt MMFs were allowed to round their 
share price to $1.00, so long as the actual value of a share does not 
fall below $0.9950 (``known as breaking the buck''). The SEC's change 
from fixed to floating was predicated on the belief that investor 
awareness of the actual value of the fund's assets will make investors 
less likely to redeem shares in times of economic distress.
    Throughout the rulemaking process, GFOA and public finance officers 
throughout the country submitted analysis showing that a floating NAV 
would do little to deter heavy redemptions during a financial crisis 
but would, instead, impose substantial costs on State and local 
governments. That is exactly what has come to fruition.
    The 2014 Amendments have dramatically shrunk an important market 
for municipal debt. Between January 2016 and April 2018, tax exempt 
MMFs assets under management fell by nearly 50 percent, from $254 
billion to $135 billion, \2\ as MMF investors, including Government 
investors, preferred or were required to hold stable-NAV Government 
MMF's comprised of Treasury and/or U.S. Agency securities. The lack of 
investor appetite for floating-NAV tax-exempt MMMF's resulted in 
municipalities issuing variable rate demand bonds seeing their 
borrowing costs nearly double the Federal Reserve's rate increases over 
the same period. Many State and local governments determined that 
issuing variable rate debt to MMFs was excessively costly, and opted to 
issue higher cost fixed-rate bonds. These increased costs are 
shouldered by taxpayers and ratepayers.
---------------------------------------------------------------------------
     \2\ https://www.sec.gov/divisions/investment/mmf-statistics/mmf-
statistics-2018-04.pdf, p. 4.
---------------------------------------------------------------------------
    In addition to the impact that the 2014 Amendments had on 
Governments finding investors for their short-term debt issuances, 
there are also implications for the investments that State and local 
governments use to protect public funds. Many Governments have specific 
State or local statutes and policies that require them to invest in 
financial products with a stable NAV. The policy reason for this is to 
ensure that public funds are appropriately safeguarded.
    It is important to emphasize that MMFs with a stable NAV, 
particular prime MMFs, are required to meet the highest liquidity and 
credit quality standards, which is why they are a commonly used vehicle 
by State and local governments for managing operating cash. This 
important legislation would lift an unnecessary obstacle that has 
steered State and local entities into very low yielding U.S. Government 
backed funds or other alternatives from what was already one of the 
safest sources for earning market returns on the management of cash, 
short of FDIC-insured bank accounts.
    By allowing all MMFs--prime, tax-exempt and Government funds 
accessible to both retail and institutional investors--to offer a 
stable NAV, S. 1117 would allow State and local governments to once 
again utilize suitable investments as defined by State and local 
elected officials, rather than by the SEC. The disruptions to the 
short-term capital markets caused by the SEC's floating-NAV rule are 
real and irrevocable short of restoring the stable NAV. The legislation 
fixes that problem, and does so without undermining the other important 
reforms that have made MMFs resilient to the kind of market disruptions 
that occurred in 2008. GFOA is working with a coalition of stakeholders 
to advance S. 1117 and we have submitted our most recent letter of 
support for the record. Thank you again for considering this important 
legislation. We look forward to working with you and supporting your 
efforts to help State and local governments on this and other 
regulatory and financial matters of mutual interest.
        
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                    FROM RAYMOND J. KEATING

Q.1. In response to questions on the Helping Angels Lead Our 
Startups (HALOS) Act, S. 588, you stated that, ``[w]hat we are 
talking about here is going to angel investors. I mean, that is 
in the title of the legislation. So I think when we are talking 
about understanding who we are going to and what the purpose of 
these demos are, I think it makes--I think the legislation 
makes perfect sense.''
    Please explain how the limitation you described, ``[w]hat 
we are talking about here is going to angel investors'', is 
required under the bill. In addition, please explain if you 
believe there is any stated requirement that the event sponsors 
outlined in section 3(a)(2)(A) of the bill must verify any 
information with respect to an attendee at an event that would 
be covered by the bill.

A.1. This legislation would revise Regulation D, as noted in 
the CRS summary of S. 588, as pertaining ``to events with 
specified kinds of sponsors, including `angel investor groups' 
unconnected to broker-dealers or investment advisers,'' in 
cases where, in part, ``the sponsor does not provide investment 
recommendation or advice to attendees, engage in investment 
negotiations with attendees, charge certain fees, or receive 
certain compensation.'' In the end, it is critical to keep in 
mind that these events, often referred to as ``demo days,'' are 
geared toward the ``accredited investors'' who can purchase 
securities under the Section 506 exemption. However, at the 
same time, these events allow entrepreneurs and startups to 
interact with accredited investors, such as angel investors, 
while not soliciting investors to purchase an equity stake. 
Given these straightforward cases and limitations, this 
legislation lifts unwarranted burdens and costs placed on 
entrepreneurs and startups regarding ``demo days.''

Q.2. The Small Business Audit Correction Act, S. 3004, would 
allow certain brokers or dealers defined under the bill to use 
auditors that are exempt from Public Company Accounting 
Oversight Board registration and supervision.
    How many brokers or dealers do you believe would be covered 
by the definition in the bill?
    Does that definition in the bill capture brokers or dealers 
in one or more of the following categories: active high-
frequency trading or principal trading firms, sophisticated 
market-maker firms, private placement brokers, dealers in the 
to-be-announced (TBA) for mortgage-backed securities market, 
and alternative trading system routing brokers, in addition to 
retail customer facing brokers or dealers?

A.2. As noted in my testimony, ``This legislation would redress 
the Dodd-Frank requirement that all investment brokers and 
dealers, no matter their size, must hire a Public Company 
Accounting Oversight Board (PCAOB)-registered audit firm to 
conduct audits that use complex guidelines designed for larger, 
public companies.'' S. 3004 would provide relief to small 
investment firms overburdened by this requirement. As for the 
questions about coverage and definition, the Financial Services 
Institute in its letter of support for S. 3004 noted the 
following points:

        ``Currently, the Dodd-Frank Act requires all investment 
        brokers and dealers, irrespective of size, to hire a 
        PCAOB-registered audit firm to conduct audits using 
        significantly more complex guidelines designed for 
        larger, public companies. We believe this legislation 
        will provide much-needed regulatory relief to small 
        broker-dealers by exempting them from the most onerous 
        audit requirements.''

        ``The broker-dealer community in the financial services 
        industry consists of large companies, midsized firms, 
        and small businesses. As of November 2017, the small 
        business community consisted of 3,425 firms all 
        employing 150 registered reps or fewer. Ten years ago, 
        there were approximately 1,000 more of these small 
        businesses in our industry than there are today, but 
        the crush of regulatory burdens, including the PCAOB-
        registered audit firm requirement, has led to their 
        demise. The remaining small firms are feeling this 
        impact especially hard as fees rise due to the smaller 
        pool of audit firms. The impact is felt throughout the 
        country as these Main Street businesses struggle to 
        remain viable.''
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                    FROM RAYMOND J. KEATING

Q.1. As policymakers how should we strike the right balance 
between encouraging firms to go public and improving the 
private capital markets?
    Are the private capital markets currently high-functioning? 
If not, where are the biggest potential areas for improvement?
    I'm concerned about the increasingly uneven geographic 
distribution of growth. As the Economic Innovation Group has 
found, economic growth is largely clustered in the most 
prosperous areas, instead of evenly distributed across areas 
like the Great Plains and the Midwest. Would increasing access 
to equity and crowdfunded debt improve the geographic 
distribution of new firms?
    When do new and smaller firms tend to rely upon access to 
equity or crowdfunded debt instead of a traditional bank loan? 
For example, some have suggested that technology-based firms 
rely more upon equity while main street companies like 
restaurants more rely upon bank loans. What are the biggest 
hurdles new and smaller firms have--regulatorily or otherwise--
in accessing equity and crowdfunded debt?
    Is there currently sufficient clarity about the conditions 
under which an offering by a small business issuer would 
qualify as a ``transactions by an issuer not involving any 
public offering'' under Section 4(a)(2) of the Securities Act? 
Are small businesses able to acquire such clarity without 
paying a meaningful amount in legal fees?
    Representative Emmer's bill, H.R. 2201, the Micro-Offering 
Safe Harbor Act would ``exempt certain micro-offerings from: 
(1) State regulation of securities offerings, and (2) Federal 
prohibitions related to interstate solicitation.'' Such 
offerings could be worth up to $500,000, have 35 participants, 
and involve and instance where the ``purchaser has a 
substantive preexisting relationship with the issuer.'' How 
would you evaluate this legislation? If you have concerns with 
this legislation, how would you ideally address them?
    How viable is conducting an offering under the SEC's 
Regulation Crowdfunding, particularly for new and smaller 
businesses? What about for businesses that are not located in 
the top five largest cities? What about for smaller offering 
sizes? If smaller offering sizes tend to be less viable, how 
large must an offering be to be viable?
    Would there be merit to increasing the offering limit for 
Regulation Crowdfunding issuers, from $1 million? Why or why 
not? If so, what should the limit be? For example, the 2017 SEC 
Government-Business Forum on Small Business Capital Formation 
recommended raising the limit to $5 million.

A.1. In the following, I hope to at least provide a few 
thoughts of value on your various questions.
    First, regarding how should ``strike the right balance 
between encouraging firms to go public and improving the 
private capital markets,'' in the end, it's not an either/or. 
Nor should it be that policymakers ``encourage'' firms to go 
public. Instead, policymaking should be focused on establishing 
the best possible policy climates for public and private 
capital markets to flourish, and thereby allowing entrepreneurs 
and investors to make decisions about, for example, staying 
private or going public, based on economic, business, industry 
and market assessment, rather than according to costs imposed 
by Government.
    Second, I think it is fair to say that the U.S. has among 
the most high-functioning private capital markets across the 
global economy. Impediments largely come from outdated or 
intrusive governmental policies, including unnecessary and 
costly regulations, such as via various aspects of Sarbanes-
Oxley and Dodd-Frank, and areas of high and/or multiple layers 
of taxation. On July 17, the U.S. House passed the JOBS and 
Investor Confidence Act (JOBS Act 3.0), which is a solid 
package of reforms to modernize some securities laws, and 
improve capital access and capital formation, particularly for 
entrepreneurs and small businesses. The biggest potential areas 
of improvement at this point are areas where there is a 
bipartisan consensus to make changes, and those reforms and 
solutions are represented within JOBS Act 3.0. Hopefully, the 
Senate will also act, and then we can build on JOBS Act 3.0 
improvements from there.
    Third, the geographic challenges in terms of growth are 
quite troubling. A variety of factors can come into play, 
including shifts in views on entrepreneurship; State and local 
government costs, impediments and obstacles to risk taking 
(please see SBE Council's Small Business Policy Index and Small 
Business Tax Index, which break out dozens of measures and 
rankings by State); access to markets; as well as access to 
capital issues, including the decline in small community 
banking, as noted in my testimony. I would very much agree that 
increasing access to crowdfunded equity and debt would improve 
the geographic distribution of new firms, though understanding, 
again, that other factors also are in play. These other factors 
include access to broadband and migration patterns. SBE Council 
is working on many fronts--including education and boosting 
entrepreneurship among the general population, as new business 
formation remains weak--to improve opportunities and appeal 
within rural areas that have been ``left behind'' by the 
recovery.
    Fourth, I think, in general, it is a fair assessment that 
technology firms tend to rely on equity financing more so than 
do certain Main Street businesses like restaurants, and that 
largely would be due to the fact that equity investors 
generally have a better chance to make a notable return in 
tech, justifying the risk involved, as opposed to restaurants 
and similar business with traditionally tighter margins and 
bank loans (or debt-based crowdfunding) tending to make a 
better fit. As for the development of crowdfunding equity and 
debt markets, again, these are clear plusses for firms seeking 
either equity or debt financing. In fact, a review of the firms 
that have used Title III equity crowdfunding to date shows that 
firms of all types are using Regulation Crowdfunding, and doing 
so successfully.
    Because it took the SEC 4 years to write the rules around 
Title III crowdfunding, this approach to raising capital is 
still fairly new. However, early adopters across industries 
have been successful in raising funds. For example, according 
to Crowdfund Capital Advisors, 715 firms have successfully 
raised a combined $137,565,606 from 133,006 investors. The 
average amount raised is $238,534. That might not sound like 
much compared to the millions of dollars that early stage 
companies often raise, but for the small businesses that need 
this capital to grow, it is very important indeed. The top 
industries that have successfully tapped into regulated 
crowdfunding include: applications software (132 firms), 
beverages (81 firms), entertainment (70 firms), personal 
services (67), consumer products (60), computer hardware (50), 
retail (50), restaurants (49 firms), autos (37), baking (31), 
and advertising (28). There are more regulatory complexities 
involved with equity vs. debt-based crowdfunding. As noted 
below, there are various reforms that will help more 
entrepreneurs and startups leverage crowdfunding if these costs 
are lowered, which would improve the appeal of equity 
crowdfunding as significant time and resources by the issuer is 
put into a campaign and they cannot access those funds if the 
target amount or goal is not reached. One of the biggest 
hurdles at this point is education--that is educating both 
small businesses and investors about this opportunity. In this 
regard, SBE Council has been at the forefront of small business 
education. For example, we recently teamed up with SCORE to 
host a webinar about how to raise capital via regulated 
crowdfunding and more than 2,000 individuals registered for the 
event. So there is great interest, across industries and in 
every corner of the U.S., and SBE Council believes that we are 
in the very early stages of what will become a mainstream 
method for raising capital, including in rural areas where new 
Opportunity Zones will hopefully play a big role in mobilizing 
capital to these areas and crowdfunding can be used as an 
efficient conduit for doing so.
    SBE Council supports H.R. 2201, the Micro Offering Safe 
Harbor Act: ``H.R. 2201 would exempt from registration 
requirements with the Securities and Exchange Commission (SEC) 
offerings made only to the entrepreneur's friends and family, 
to less than 35 purchasers, and when $500,000 or less is 
raised. The offering would be exempt from State registration 
and qualification rules, thus reducing costs and complexity. 
H.R. 2201 would appropriately scale SEC rules and regulatory 
compliance for our Nation's small businesses, which in turn 
will provide another practical option for entrepreneurs to 
raise the capital they need to start or grow their firms.'' At 
this point we do not have any major suggestions regarding H.R. 
2201, except perhaps to strengthen transparency via simple 
reporting and compliance.
    Sixth, and finally, again as detailed in my written 
testimony: ``[R]egulated (Title III) crowdfunding is beginning 
to gain traction in the marketplace. Refining some of rules 
would help many entrepreneurs tap into this promising funding 
option. Some of the reforms supported by SBE Council include 
raising the amount that can be raised (which is currently $1 
million), allowing issuers to `test the waters,' allowing for 
special (or single) purpose vehicles, providing simplified 
rules for advertising, legal clarity for platforms, and 
removing the caps for accredited investors, among other 
changes.'' SBE Council fully supports lifting the amount of 
capital that can be raised. The current limit, $1.07 million in 
a 12-month period, is restricting the use of regulated 
crowdfunding (Title III) although there has been the successful 
use of parallel offerings via Title III and Title II 
crowdfunding. SBE Council is currently working with all the 
major crowdfunding platforms on this very issue and we feel 
that the limit should be raised to $20 million. To date, there 
has been no fraud associated with regulated crowdfunding and 
the $20 million limit would fill a big void in the marketplace 
for small businesses and promising firms that require larger 
amounts of financing to scale or for expansion projects.
                                
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                    FROM RAYMOND J. KEATING

Q.1. Regarding S. 3004, one possible objection is that, in the 
5 years since noncustodial broker-dealers have been required to 
use a PCAOB-registered auditor, the PCAOB has consistently 
found those audits to have high levels of ``deficiencies.'' The 
deficiencies are with the expensive PCAOB auditors, not with 
the broker-dealers. Some feel the deficiencies are an argument 
in favor of S. 3004, since it illustrates the ``square peg, 
round hole'' problem of applying PCAOB audit requirements 
rather than the AICPA's GAAS standards that these brokers used 
to use. So currently these small, privately held noncustodial 
brokers are being forced to choose an auditor from the PCAOB's 
list, firms that charge much higher prices, and the end product 
often has deficiencies that are (perhaps) due to the type of 
auditing standards being applied. The audits of the 
noncustodial brokers may have even higher rates of 
deficiencies, and these broker-dealers tend to be much smaller 
than custodial brokers, and thus (perhaps) even less suited to 
the PCAOB requirements.
    Are the deficiencies in these PCAOB audits evidence in 
favor of keeping the law as it is, or in favor of passing S. 
3004? What of the fact that audits of noncustodial brokers are 
even higher than for custodial firms?
    Attached is a letter from one of those approximately 480 
PCAOB-registered firms, a firm that in theory should benefit 
from the status quo, but it illustrates the issue from the 
auditor's perspective. The link below talks about the PCAOB's 
2017 report.

A.1. While circumstances and results certainly can be unique to 
each case, the costs and general results related to PCAOB 
audits of small, privately held noncustodial brokers indicate 
that the law and standards do not properly fit these entities. 
As noted in the April 2017 Wall Street Journal article you 
referenced: ``The Public Company Accounting Oversight Board 
found deficiencies in 83 percent of the broker-dealer audits it 
inspected in 2016, up from 77 percent in 2015, the board said 
in its annual report on its broker-dealer audit-inspection 
program. As has been the case in the past, nearly all of the 
audit firms conducting the audits, 97 percent, had deficiencies 
in one or more of their audits, the PCAOB said. The findings 
don't mean that the broker-dealers themselves have any 
operational problems, just that the PCAOB believes that most of 
the audits that assessed them were flawed or inadequate.'' 
Again, as stated in my testimony, SBE Council supports S. 3004 
and its focus on properly aligning regulation with the 
realities of small businesses.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
                    FROM RAYMOND J. KEATING

Q.1. During the Banking Committee's hearing on Legislative 
Proposals to Increase Access to Capital, Professor Mercer 
Bullard from the University of Mississippi School of Law 
expressed the following view on S. 1117, the Consumer Financial 
Choice and Capital Markets Protection Act of 2017. Could each 
of you please comment on Mr. Bullard's views?

        Mr. Bullard. Sure. That is correct that I testified 
        against the SEC rules primarily because money market 
        funds had demonstrated an astonishing level of safety, 
        especially having had two break a dollar, one not even 
        a retail fund, over about 40 years, at the same time 
        thousands of banks failed. But I think one of the 
        concerns Vanguard and BlackRock have and one reason 
        they are probably opposing this is, of course, that 
        these rules were adopted in response to the Dodd-Frank 
        Act, which gave banking regulators, in my view, far too 
        much authority over what I would call risk-based 
        markets. Banking regulation and banks are designed with 
        the socialization of risk in mind, and when you put 
        them in charge and the SEC realizes that FSOC is 
        controlled by banking regulators, they will bend to 
        banking regulators' will. So I cannot even fully blame 
        them for what happened. But it was, I think, inevitable 
        that there would be massive dislocation and expense. 
        That has already occurred. Since then I think that 
        there have been mitigating effects on the municipal 
        business, but I think that is probably a close call. 
        But I am concerned about that BlackRock-Vanguard 
        concern, which is if you reintroduce floating rate NAV 
        funds, frankly Federated will roll out a lot of funds. 
        That will be a competitive disadvantage for the large 
        money market fund managers. They will have to go back 
        into the business, and then the next time a money 
        market fund breaks, the banking regulators will have a 
        lot less power to save the industry and, frankly, I 
        would expect Congress to go back and end up maybe 
        taking the same steps that dislocates the industry 
        again.

        I think the interesting point of view is we have been 
        through this once. We do not want to go through it 
        again. Just leave us alone.

        But, you know, the free market guy in me says there is 
        more capital that is out there looking for purchasers 
        in a demonstrated, successful way to create essentially 
        a cash vehicle for retail investors, and that should be 
        an available option.

        Another concern is really a specific SEC concern. One 
        reason the Reserve Fund failed is the SEC was not 
        monitoring the funds that had the greatest risk of 
        failing. It also had this no-action process whereby a 
        fund that was about to break a dollar, which had 
        happened hundreds of times previously, was to call up 
        an office in the SEC, and a guy picks up the phone and 
        says, ``Okay, you are fine,'' and because that process 
        was fumbled by the staff, in my opinion, and because it 
        was such an ad hoc system in the first place, that 
        contributed to the Reserve Fund failure. It was a 
        primary element of their defense when the founders were 
        sued, and I think that has to be corrected.

        And then, finally, I think that it is a mistake--as 
        much as you can tell, I am probably not the biggest 
        friend of banking regulators--to overly hamstring their 
        Depression era authority to emergency situations, use 
        their lending authority for nonbanks. I think that this 
        bill would further hamstring them, and I think that is 
        a mistake.

A.1. SBE Council has not taken a position on S. 1117, so I 
would be unable to answer this question--at least at this point 
in time.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
          SENATOR CORTEZ MASTO FROM RAYMOND J. KEATING

Q.1. In the past year, we have had two high-profile chronic 
liars that defrauded investors. Elizabeth Holmes from Theranos 
sold a false blood testing system and raised $700 million from 
wealthy investors. Martin Shkreli is serving a 7-year prison 
sentence for lying about returns to his investors. Shkreli 
specialized in buying drugs, like Daraprim, a 62-year-old life-
saving drug that helps newborns and people with HIV, and then 
raising the price from $13.50 to $750 a pill. Both Holmes and 
Shkreli ran private companies. As private firms, they did not 
have strong oversight from State regulators or from the 
Securities and Exchange Commission. Elizabeth Holmes' firm, 
Theranos, bilked investors of more than $700 million dollars. 
Martin Shkreli was sentenced to 7 years in prison for lying to 
his investors.
    Of the six capital formation bills we considered which of 
these are going to help investors distinguish good-faith pipe 
dreams from fraudsters like Elizabeth Holmes and Martin 
Shkreli?
    Which bills do you think would make it easier for 
fraudsters to rip off investors?

A.1. The capital formation bills under consideration during the 
hearing entitled ``Legislative Proposals to Increase Access to 
Capital'' were meant to redress unwarranted burdens and costs 
facing entrepreneurs and small businesses seeking to raise 
financial capital in order to grow by better serving customers, 
and thereby also aiding economic, income and employment growth. 
There is nothing in these bills that would further open the 
door to fraud. The bills provide commonsense relief while still 
protecting investors. In the end, of course, private markets 
and assorted laws provide various means to protect investors 
and consumers from fraud, and where fraud is perpetrated, 
lawbreakers are pursued by the proper authorities, with the 
expectation of being caught and prosecuted accordingly. 
Unfortunately, there will always be some people who attempt to 
defraud or rip off others. Thankfully, technology has helped to 
boost transparency, as well as communications between investors 
and the public so that schemes are uncovered and put to an end 
more quickly.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM MERCER E. BULLARD

Q.1. Your testimony discussed the Fostering Innovation Act, S. 
2126 and raised concerns with exempting additional companies 
from the requirements of section 404(b) of the Sarbanes-Oxley 
Act (SOX).
    Last week, the SEC approved its final rule on the smaller 
reporting company definition, which also impacts the 
application of SOX section 404(b).
    Are you concerned that the SEC rule change expands the 
number of companies exempt from SOX section 404(b)? Given the 
rule is S. 2126 still necessary?

A.1. Response not received in time for publication.

Q.2. Does the Helping Angels Lead Our Startups (HALOS) Act, S. 
588, propose any limits on the type of investors or persons 
that may attend a ``demo day''?
    In addition, please describe any requirements to evaluate 
attendees that would be imposed on entities that could serve as 
an event sponsors, as outlined in the section 3(a)(2)(A) of the 
bill.

A.2. Response not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                     FROM MERCER E. BULLARD

Q.1. As policymakers, how should we strike the right balance 
between encouraging firms to go public and improving the 
private capital markets?
    Are the private capital markets currently high-functioning? 
If not, where are the biggest potential areas for improvement?
    I'm concerned about the increasingly uneven geographic 
distribution of growth. As the Economic Innovation Group has 
found, economic growth is largely clustered in the most 
prosperous areas, instead of evenly distributed across areas 
like the Great Plains and the Midwest. Would increasing access 
to equity and crowdfunded debt improve the geographic 
distribution of new firms?
    When do new and smaller firms tend to rely upon access to 
equity or crowdfunded debt instead of a traditional bank loan? 
For example, some have suggested that technology-based firms 
rely more upon equity while main street companies like 
restaurants more rely upon bank loans. What are the biggest 
hurdles new and smaller firms have--regulatorily or otherwise--
in accessing equity and crowdfunded debt?
    Is there currently sufficient clarity about the conditions 
under which an offering by a small business issuer would 
qualify as a ``transactions by an issuer not involving any 
public offering'' under Section 4(a)(2) of the Securities Act? 
Are small businesses able to acquire such clarity without 
paying a meaningful amount in legal fees?
    Representative Emmer's bill, H.R. 2201, the Micro Offering 
Safe Harbor Act would ``exempt certain micro-offerings from: 
(1) State regulation of securities offerings, and (2) Federal 
prohibitions related to interstate solicitation.'' \1\ Such 
offerings could be worth up to $500,000, have 35 participants, 
and involve and instance where the ``purchaser has a 
substantive preexisting relationship with the issuer. . . . '' 
\2\ How would you evaluate this legislation? If you have 
concerns with this legislation, how would you ideally address 
them?
---------------------------------------------------------------------------
     \1\ https://www.congress.gov/bill/115th-congress/house-bill/2201
     \2\ https://www.congress.gov/bill/115th-congress/house-bill/2201
---------------------------------------------------------------------------
    How viable is conducting an offering under the SEC's 
Regulation Crowdfunding, particularly for new and smaller 
businesses? What about for businesses that are not located in 
the top five largest cities? What about for smaller offering 
sizes? If smaller offering sizes tend to be less viable, how 
large must an offering be to be viable?
    Would there be merit to increasing the offering limit for 
Regulation Crowdfunding issuers, from $1 million? Why or why 
not? If so, what should the limit be? For example, the 2017 SEC 
Government-Business Forum on Small Business Capital Formation 
recommended raising the limit to $5 million.

A.1. Responses not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                     FROM MERCER E. BULLARD

Q.1. Regarding S. 3004, one possible objection is that, in the 
5 years since noncustodial brokerdealers have been required to 
use a PCAOB-registered auditor, the PCAOB has consistently 
found those audits to have high levels of ``deficiencies.'' The 
deficiencies are with the expensive PCAOB auditors, not with 
the broker-dealers. Some feel the deficiencies are an argument 
in favor of S. 3004, since it illustrates the ``square peg, 
round hole'' problem of applying PCAOB audit requirements 
rather than the AICPA's GAAS standards that these brokers used 
to use. So currently these small, privately held noncustodial 
brokers are being forced to choose an auditor from the PCAOB's 
list, firms that charge much higher prices, and the end product 
often has deficiencies that are (perhaps) due to the type of 
auditing standards being applied. The audits of the 
noncustodial brokers may have even higher rates of 
deficiencies, and these broker-dealers tend to be much smaller 
than custodial brokers, and thus (perhaps) even less suited to 
the PCAOB requirements.
    Are the deficiencies in these PCAOB audits evidence in 
favor of keeping the law as it is, or in favor of passing S. 
3004? What of the fact that audits of noncustodial brokers are 
even higher than for custodial firms?
    Attached is a letter from one of those--480 PCAOB-
registered firms, a firm that in theory should benefit from the 
status quo, but it illustrates the issue from the auditor's 
perspective. The link below talks about the PCAOB's 2017 report 
(https://www.wsj.com/articles/inspectors-again-find-problems-
in-how-broker-dealers-are-auditedpcaob-says-1503074899).

A.1. Response not received in time for publication.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR MENENDEZ FROM MERCER E. BULLARD

Q.1. Do money market funds benefit the public by providing an 
efficient means of intermediating short-term cash investments 
with short-term financing needs of State and local governments 
and businesses?
    In your testimony, you state, ``[t]he counterargument that 
the MMF rules are needed to reduce systemic risk has never had 
a sound factual basis.'' Can you explain this statement?
    In your testimony, you state, ``I do not have faith in the 
SEC's ability to manage money market fund risk,'' however, you 
also recommend that the SEC should conduct an analysis on the 
impacts of the legislation before it is enacted. If you do not 
have faith in the SEC's ability tomanage money market fund 
risk, why do you believe the agency is equipped to conduct an 
empirical analysis of the legislation's impact?
    During the hearing, in response to a question from Senator 
Rounds, you said, ``I think one of the concerns Vanguard and 
BlackRock have and one reason there [sic] probably opposing 
this is of course, these rules were adopted in response to the 
Dodd-Frank Act which gave banking regulators in my view, far 
too much authority over what I would call risk-based markets.'' 
\1\
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     \1\ https://plus.cq.com/doc/congressionaltranscripts-534822773
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    In fact, a memorandum written by the Investment Company 
Institute (ICI) states, ``Although FSOC's recommendations 
regarding money market funds and SIFI designation do not appear 
to be an active threat under the Trump administration, some ICI 
members have raised concerns that overturning the SEC's reforms 
by legislation may reenergize bank regulators and financial 
reform activists. These members wish to avoid spurring FSOC-
under a future administration to return to its examination of 
the industry and possibly to seek to apply ill-suited, bank-
oriented measures to money market funds, other regulated funds, 
or fund advisors.'' \2\
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     \2\ ICI Memo, January 5, 2018.
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    Is it your opinion that if S. 1117 is enacted, large asset 
managers such as Vanguard and BlackRock will be more vulnerable 
to designation as nonbank systemically important financial 
institutions by future administrations?

A.1. Responses not received in time for publication.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
          SENATOR CORTEZ MASTO FROM MERCER E. BULLARD

Q.1. In the past year, we have had two high-profile chronic 
liars that defrauded investors. Elizabeth Holmes from Theranos 
sold a false blood testing system and raised $700 million from 
wealthy investors. Martin Shkreli is serving a 7-year prison 
sentence for lying about returns to his investors. Shkreli 
specialized in buying drugs, like Daraprim, a 62-year-old life-
saving drug that helps newborns and people with HIV, and then 
raising the price from $13.50 to $750 a pill. Both Holmes and 
Shkreli ran private companies. As private firms, they did not 
have strong oversight from State regulators or from the 
Securities and Exchange Commission. Elizabeth Holmes' firm, 
Theranos, bilked investors of more than $700 million dollars. 
Martin Shkreli was sentenced to 7 years in prison for lying to 
his investors.
    Of the six capital formation bills we considered which of 
these are going to help investors distinguish good-faith pipe 
dreams from fraudsters like Elizabeth Holmes and Martin 
Shkreli?
    Which bills do you think would make it easier for 
fraudsters to rip off investors?
    Some say start up culture encourages a ``fake it till you 
make it'' hustle when pitching investors.
    Do you see Elizabeth Holmes and Martin Shrkeli as 
indicative of the perils of this ``fake it till you make it'' 
ethos that makes investing in start-ups risky or are they just 
unique and terrible exceptions?
    Professor Bullard, in 2012, Congress passed the JOBS Act 
into law. It made it easier for companies to raise capital.
    Do you have any concern that these one-off bills represent 
a piecemeal approach that may interact with one another in 
unforeseen ways?
    Rather than the piecemeal approach taken with these bills, 
might a comprehensive review of the requirements of, and 
interactions between, the Securities Act of 1933 and the 
Securities Exchange Act of 1934 be more desirable?
    Professor Bullard, on May 3, the United States Court of 
Appeals for the Second Circuit in Manhattan overturned for the 
second time the conviction of Jesse C. Litvak, a former trader 
at Jefferies & Co., for misstating the price at which his firm 
had acquired residential mortgage backed securities and then 
resold them to investors.
    The appeals court said Mr. Litvak had no duty to the firm's 
customers, who were all sophisticated investors, to provide 
truthful information. The court said that sophisticated 
investors should not rely on statements from traders.
    In two other cases--U.S. vs. Weimert in Chicago and a case 
against David Demos, former managing director at Cantor 
Fitzgerald--financial services employees who misled investors 
by providing false information were not convicted because the 
judges found that misleading other parties about prices and 
terms is not criminal.
    What is the impact for prosecutors when judges refuse to 
hold financial executives accountable for misstatements to 
sophisticated investors?
    The Murdoch's, DeVos's, and other millionaires lost a 
hundred million dollars or more when they invested in Theranos. 
Should wealthy people follow the ``buyer beware'' approach when 
they invest in start ups? Can ``sophisticated investors'' be 
defrauded?
    The accredited investor criteria was set in 1982: a million 
in wealth or $300,000 in couple income. It has not been 
increased since then. What level do you think the wealth and 
income level should be increased to? Do you think having a 
wealth and income threshold as the test is appropriate? Should 
there be some kind of test or access for knowledgeable experts 
who might have less wealth/income?

A.1. Responses not received in time for publication.

RESPONSES TO WRITTEN QUESTIONS OF THE SENATE BANKING COMMITTEE 
                   FROM CHRISTOPHER H. DANIEL

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              Additional Material Supplied for the Record
           LETTERS AND STATEMENTS SUBMITTED BY CHAIRMAN CRAPO

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           LETTERS AND STATEMENTS SUBMITTED BY SENATOR BROWN

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                   LETTERS SUBMITTED BY SENATOR SCOTT

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                  LETTERS SUBMITTED BY SENATOR COTTON

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                  LETTERS SUBMITTED BY SENATOR TILLIS

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                 LETTERS SUBMITTED BY SENATOR MENENDEZ

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